Q1 2022 Stronghold Digital Mining Inc Earnings Call
Okay.
Ladies and gentlemen, this is the operator today's conference call is scheduled to begin momentarily until that time your lines will replace an old turnkey for patients.
Once again this is the operator today's conference call is scheduled to begin momentarily until that time your lines will be placed in whole. Thank you for patience.
[music].
Good evening and welcome to stronghold digital Mining's conference call for the first quarter ended March 31, 'twenty 'twenty T. My name is Carl and I'll be your operator this afternoon before.
Before this call stronghold issued its results for the first quarter 2022 any press release, which is available in the investors section of the company's website at Triple double you Dot stronghold digital dining dot com you.
You can find the link to the investors section at the top of the homepage.
Joining us today on joining us on today's call our strongholds co chairman and CEO , Greg Beard, and CFO , Matt Smith.
Following their remarks, we will open the call for questions before we begin Jeff Graham from between group will make a brief introductory statement.
Mr. Graham. Please proceed.
Thank you.
Good evening, everyone and welcome today's slide presentation, along with our earnings release and financial disclosures were posted on our website earlier today and can be accessed on our website at stronghold digital mining dotcom.
Some statements, we're making today may be considered forward looking statements under securities laws 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 disc.
Closures in the reconciliation tables to applicable GAAP measures in our earnings release carefully as you consider these metrics.
We filed today, our quarterly report on Form 10-Q, with the Securities and Exchange Commission, which sets forth detailed disclosures and descriptions of our business as well as the uncertainties and other variable circumstances, including but not limited to risks and uncertainties identified under the caption risk factors in our 10-K, you may get stronghold Securities and Exchange Commission filings for free by visiting the S. E T website at S.
C Dot Gov.
Don't hold Investor Relations website at IR Dot stronghold digital mining dot 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 website now I would like to turn the call over to strongholds co chairman and CEO , Greg Bier. Sir. Please proceed.
Alright, Thank you, Jeff and good evening, everyone and thank you for joining us on our first quarter 2022 earnings call for todays call were going to reference a slide presentation that is available through the webcast.
And on the IR portion of our corporate website like I'll encourage you strongly to have a look at it because we are going to refer to it and some of the things I'm going to say are much more easily understood. If you have the slides in front of you also forgive US we are recording this it's just a matter of recordings as us lives and so we mess up we may pause and restate things but.
This is our first attempt at this one.
So starting on the first slide and again just to go to a stronghold digital mining dot com and they're under the IR section you can see the slides so I'm not I'm now on slide number three called stronghold at a glance.
So theres an overview with some introductory comments.
As a reminder, we are an environmentally beneficial vertically integrated public bitcoin miner with some of the lowest power cost in the industry. We didn't expect the importance of the vertically integrated business model to be as apparent for another year, but the recent run up in power prices, coupled with the decline in bitcoin pricing.
Has highlighted vertical integrations relevance and value. Additionally.
Additionally to extinguish any doubt regarding our liquidity we have taken a recent steps that we will walk through on this call.
The address much of our Q1 operating performance on our earnings call in March while we faced difficulties associated with minor deliveries and data center commissioning. The first quarter represented progress as we generated approximately $29 million in revenue nearly a 70% sequential increase from last quarter as we ramped mining.
<unk>, along with our data center and power operations.
During the quarter, we mined 438, bitcoin, averaging a hash rate just under one <unk> per second in line with the guidance, we communicated on our fourth quarter earnings call.
We are further scaling up our bitcoin mining operations as we've mined over 250 bitcoin in the second quarter through may 13th with over 100 in the first 13 days of May.
We also continued our environmentally beneficial mission a reclaiming of approximately 279000 tons of coal refuse during the quarter.
Our hatchery capacity as of May 12 was approximately three <unk> per second and we have contracted miners to bring us to a hatchery capacity of approximately four point to Axa has per second by year end.
This assumes that we do not receive any additional at Minerva miners.
Crypto currency volatility has been a major headline in the last few weeks and I'm sure everyone is keenly aware.
We have seen several peers scaled back near term and long term growth projections that we're oftentimes predicated on the availability of external capital to fund growth.
As you'll hear we have taken steps to shore up liquidity, including raising a private placement and strategically selling excess miners.
We expect to be a self funded business on a go forward basis, putting us in a position of strength for future opportunities that may arise, especially as we look out to 2023 and the having event in 2024.
Now turning to slide four titled vertical integration, Medicaid Bitcoin downside risk.
When we created stronghold, we aim to build a company that will provide material upside exposure to bitcoin, but would also be capable of persevering through downside scenarios volatility, hence our vertically integrated strategy. We believe that this is an underappreciated component of our business.
Especially at times and markets had more bullish pricing sentiment and downside protection was less of a concern.
But by owning our own power assets and being tied to the grid, we have the flexibility to both buy from and more importantly sell to the grid to be clear our business remains focused on bitcoin mining, but there will be periods of time, when the economics of selling power to the grid are superior to those from mining.
Believe we believe this differs from most other bitcoin miners that actually suffer under higher higher power prices.
Slide four demonstrates the impact and potential benefit of selling power to the grid on the chart. The gray shaded region represents bitcoin mining revenue on a dollar per megawatt hour basis.
20000 to 30000 dollar bitcoin implies approximately 90 to $135 per megawatt hour.
The Blue line.
Shows the average for power pricing for our zones of the grid over the next 12 months these exceed $100 per megawatt hour on average, which implies a bitcoin price of approximately $22000.
So we effectively have a floor on bitcoin at $22000. What this means is that if bitcoin falls below $22000 on average, we will pivot to selling power to the grid, which distinguishes us from most other miners. In addition to this down.
Type of protection, we plan to capture additional value through selling to the grid by taking advantage of the seasonal and volatile nature of grid pricing.
As you can see on the chart when the Green line moves above the mid point of the Gray shaded region, we sell power to the grid.
The ability to blend power sales and bitcoin mining demonstrates the value of the vertically integrated business model in the context of the bitcoin market that we have observed.
Past few weeks, it's natural to think about what the business looks like in a prolonged market downturn.
At current forward power prices, we think we would generate about $35 million to $65 million of adjusted EBITDA over the next 12 months, even if we don't mind any bitcoin.
And with Bitcoin and the $25000 range, we believe that our ability to sell power to the grid could give us the ability to generate an additional 25% more adjusted EBITDA over the next 12 months than we would otherwise why is be able to generate without selling power.
One final note. These figures do not represent any guidance and 94, we prepared this illustrate the comparison among the three presented scenarios and we had to make various simplifying assumptions to ensure apples to apples comparisons in summary.
While we currently anticipate our power generation to continue to be largely allocated to our bitcoin mining operations with only spare generation capacity being sold to the grid if opportunities present themselves to achieve better economics in the power markets, we expect to pivot to take advantage of such economic.
Alex.
Now moving to slide five to discuss recent updates.
Our improvements are scrub grass power plant are progressing on schedule and forced outage rate has dropped as select upgrades and repairs have been completed.
And average April power output was 20% higher than the first quarter average the plant has been successfully supplying power to both our bitcoin mining operations and the grid.
Our joint venture data center commissioning is in full swing after the initial delays were discussed last quarter.
As you will recall, we have re negotiated more favorable terms for this joint venture while the delay is were being addressed at the time of our fourth quarter call. The joint venture had four of 24 data center pods operational and as of May 13th.
There are now an additional 14 pods Commission, we expect the remaining data center containers to be operational within the next two months.
Lastly on April 14th we announced the appointment of Matt Smith as our CFO , Matt had served as the chair of the audit and compensation committees on our board since January so he's very familiar with strong hold of the team and the financials, Matt previously founded deep basin capital and has more than 20 years.
Of investment experience in the energy clean Tech power and utilities sectors, we value mats deeply analytical mindset and management capabilities and I've been very impressed with how he has hit the ground running with the team with that I'll turn it over to Matt to discuss our financial position.
Thank you Greg.
And good evening everyone.
We're going to look at slide six regarding our improved liquidity profile. Thank you all for joining our earnings call I'm looking forward to interacting with you on a more frequent basis.
We've taken a few recent steps to bolster our liquidity and we believe that we are now very well positioned yesterday, we executed a definitive agreement to raise cash proceeds of $27 million through a private placement.
Transaction is structured as a no.
Plus warrants.
And the note will convert into preferred equity if among other terms our market cap reaches 400 million by September 30 of this year.
The note has a coupon of 10% and upon conversion that drops to an 8% coupon.
Additionally, we've been working to optimize our minor sleep when we made the decision to lower our growth trajectory in order to focus on returns and financial flexibility.
This freed up some miners to be sold without impacting our guidance and.
And three transactions, we sold approximately 2600 miners with Ashford capacity of 332 <unk> per second for approximately $17 million.
Approximately $10 million in cash and a reduction in contracted go forward capex of approximately $7 million.
Bottom of the page lays out a bridge to our pro forma liquidity of approximately 60 61 million.
As of May 12, we had approximately $17 million in cash and bitcoin on our balance sheet.
Adjusting for a private placement and minor sale proceeds we get to a pro forma cash and bitcoin balance of approximately $54 million.
With the spare capacity under our equipment finance agreement and backing out 7 million that will be repaid in associate in association with our for sale Bitcoin, we get to the total liquidity of approximately $61 million, which when combined with anticipated cash flow puts us back on offense with increased financial flexibility.
I'll now turn it back over to Greg.
Yes.
Thanks, Matt So slide seven reviews, our progress on the 2022 objectives, we laid out during our March earnings call.
Our Panther Creek datacenter is nearly fully commissioned with expected completion at the end of May.
And we have overall been very satisfied with the operation to Panther Creek.
<unk> data center commissioning its scrub grass is on track. After some initial delays that we discussed previously we are also progressing on several initiatives to improve the uptime of our datacenters with sources of downtime identified which we will discuss in more detail momentarily. We have made significant progress with scrub grass and remain on.
Track to complete the necessary upgrades to have the plant working consistently at full load in the second half of 2022 as we expect upgrades to be largely complete by early Q3.
We have always been focused on return on capital and generating per share value for shareholders.
As such we are deemphasizing growth given macro conditions and cost of capital in the current environment.
Accordingly, we are not actively in the market for new miners.
And while we are still engaged in potential power assets, we do not plan to make any a power plant acquisition in the immediate future.
Now on slide eight.
Operational improvements, we'd like to discuss.
That we're making to close the gap between our hash rate capacity and our actual hash rate right. Now we have three extra hash per second of capacity, but only 2.3 Axa hasher operational today over the coming months through a combination of installing delivered miners upgrading electrical equipment and repairing select.
Identically minors, we expect our installed hash rate capacity will be much more in line with our total hatchery capacity.
Now turning to slide nine this is largely unchanged from what we communicated last quarter. We entered the first quarter of 2022 with hash rate capacity of approximately two point for <unk> and we are at approximately three <unk> per second as of May 12.
More importantly, we remain on track to hit our year end target of $4, one <unk> per second of installed capacity.
Which is based on the capacity of our current data centers.
Okay.
Our hash rate in the second quarter is negatively impacted by a switch gear failure at the Panther Creek datacenter that occurred on April 20th, resulting in 10 days of mining downtime when we instead sold power to the grid.
At the time Panther Creek was operating at approximately 1.2 <unk> per second and we estimate that the impact of this downtime net of revenue Janet readied from selling power to grid was approximately negative $1 4 million.
Normal mining operations resumed on April 30, and we have ordered backup switch gear and similar equipment to hold on in inventory in order to avoid a similar downtime event in the future.
Additionally, we have observed modest downtime associated with the commissioning of the joint venture data Center recall that we had placed batches of miners earmark for joint venture datacenter containers into our proprietary strong boxes, given the previously discussed commissioning delay as joint venture datacenter containers are being commissioned.
We must take miners offline to move them into these JV containers. This should be fully resolved in the next one to two months.
I will now hand, the call back over to Matt for a review of our first quarter results. Thanks.
Thanks, Craig Slide 10 provides a high level overview of our first quarter results, which were in line with our expectations. We met our guidance of averaging nine exit cash per second in mind 438, bitcoin during the quarter.
Revenue for the first quarter was about 29 million, a nearly 70% sequential increase and adjusted EBITDA totaled approximately $3 8 million I would note that during the quarter, we recorded a $12 million noncash impairment associated with our Minerva equipment deposits.
While we continue to have active discussions with Minerva about future deliveries and other options to receive the value contractually owed to us we felt taking the impairment was the appropriate and conservative treatment given the continued delays and uncertainties related to future deliveries.
At the end of the quarter, we had approximately 26000 miners delivered with a hash rate capacity of approximately 2.4 exit hash per second.
Also during the quarter inline with our environmental mission, we removed approximately 279000 tons of coal refuse from the environment and returned approximately 179000 tons of beneficial ash to used to remediate these toxic piles.
I will now turn the call back over to Greg for some final remarks, alright. Thanks again, Matt wrapping up here on slide 11, we are making notable progress on improving our operations and continuing to build strong hold to be a leading bitcoin miner and power operator.
Our vertically integrated business model provides us with low cost and flexibility to opportunistically create both value and bitcoin and power markets.
We also have significant scale based or a contracted growth and the financial capitalization to execute upon our goals. We are on track to achieve our key 2022 objectives and remain highly aligned with shareholders as the management team has a majority ownership and strong.
Thank you everyone for taking the time to dial in we're now ready to take your questions operator.
Thank you at this time I would like to remind all participants in order to ask a question. Please press star one again that is star one to ask that question.
And if your question has been answered you May press the pound key to withdraw yourself from the queue, we'll pause for just a moment to compile the Q&A roster.
Okay.
Our first question comes from the line of Lucas pipes.
With B Riley Securities. Please ask your question.
Thank you so much and good afternoon, everyone.
Hi, I wanted to go to.
I wanted to first ask about the utilization rate Craig I think you mentioned 2.3 out of three is kind of the current utilization rate and then when I looked at.
Quarter to date production APRA.
April may I backed into utilization rate.
60, <unk> or so.
So.
I'm wondering like if were between 65% to 75% or so utilization rate could you break down kind of.
The difference what percent would come from.
Would be closed after you've made the switch to the JV for example, what what what other factors are keeping it at these levels. Thank you very much.
Yeah. So I think we had a slide in the presentation I think it's slide number eight.
That should highlight what were what were publicly disclosing about that delta.
And the timing in which to get them back online I would say a.
The two biggest components are just installing miners that are delivered but not yet plugged in so we have 2000 S 19 J pros.
That like we're in the process of a plugging in also just moving miners from our pods into the JV datacenter.
That takes a little bit of time to do that but you're not that months and months, but a couple of weeks to get them moved to that that's a part of that bridge.
And then we had a.
We had a we had trouble with a certainties.
<unk> to us.
And where we are either repairing or replacing those PD used in that that's happening in the next month.
Like their payers are happening sort of daily and then we're receiving.
New ones as well and then we also have miners that have.
Problems with our power supplies miners that are offline for a variety of diagnosis Bowl reasons.
And we're working on getting those.
I would say tier one repairs, we can do.
And and.
And within a month, but hey, if it's a we'd have a warranty repair it will take longer but I think what's what's important to note as you're sort of building out the model.
We still have more miners showing up than what we have room for anyway, which is why we've sold some of this.
What I would describe as excess amount of inventory.
And I think as you as you sort of get toward the end of the year. If we find that we have a minor that won't run expect us to unplug. It put it on the shelf and replace it with a minor that would otherwise be.
Excess inventory for us so hopefully hopefully Lucas that helps answer your question.
This is a this is super Super helpful.
So kind of as you add more minor some golf some three to 3.3 at the end of this quarter should we.
Assume that Theres, a similar ramp on that incremental 0.3 ex ash between now and the end of June .
Yeah, I think you can assume that but we should give U S. A as one of the as a coverage analyst is sort of our our expected delivery dates for miners that we have ordered that are that are arriving.
And.
And that should help you accurately build the.
The growth assumption of the model.
I appreciate that and then.
I wanted to ask.
That's good.
Clarification question.
With the JV.
Sure.
What what is what is roughly going to be the split between kind of gross and net and.
Slide eight or nine for that matters are the others gross to net numbers and what's the best way to think about it as we think about kind of the bottom line foot floor for the mining operation.
Yeah. So Tom Tyrese is one of the piece <unk> Financiero may have him hey.
Hey, Lucas use answers huh.
<unk>.
Yes, so the ultimate split on the JV will be.
35% to the JV is the numbers that are presented here are gross and the JV will ultimately represent.
Now Inc.
Just under one point for access.
So that's how I run the math.
And that's one point Forex at end of this year. So December 31.
Well, yes, but that will be.
I would think about it that way starting.
Is that starting in Q3.
Got it.
<unk>.
Thank you very much for that and I'll ask one final question for now.
Greg you commented on the industry and you are an integrated player and PJM power prices are very robust and that brings a lot of advantages.
So with that said.
Uh huh.
But what do you think about the M&A environment out there.
Could an integrated structure old appeal for some of your peers that may not be as fortunate. Thank thank you very much.
Yeah.
Obviously, our view is the.
Is today and has been that there will be consolidation in the industry.
And I think I said that we thought that it would be years before the relevance and advantages of being vertically integrated would be so apparent.
Whereas you're seeing where we're trading at a big discount to where power companies would trade and we have a giant bitcoin option embedded in us.
And so I think hopefully what will happen is.
Is is that we can be we're now putting ourselves in a position of.
Of being on offense.
And my hope is that the public market begins to value us in that way.
So that's really the the we crave. These slides just to really emphasize what we have known all along but.
The they believe was it wouldn't further hope it wasn't it wouldn't be irrelevant until you know the having clearly with the right power pricing and then kind of bitcoin.
The power of being vertically integrated is relevant now because I'll just ask a what happens to most.
Coin miners, if bitcoin goes down in a.
Below 20000.
And in the same market, where power prices are are double wide what people probably underwrote like it's it's a most of the market is extremely strained.
And doesn't have access to liquidity doesn't have access to capital markets.
Our our view in terms of taking a you know we just did this private placement.
We sold we sold miners that that work in our in our model for the year and we're doing that just to be super to be back to.
It to be aggressive and to take advantage of market dislocations that are that are common.
So I think just anytime you see market dislocation like we're seeing it and we expect expect M&A activity and I think you would hope from us like Hey, those that are.
In a position of strength can be leaders in that.
Greg I really appreciate the color and to you and the team all the best of luck.
Thank you thanks Lucas.
Our next question comes with Chase White with Compass point.
Please proceed.
Thanks, guys.
So in general you know, what's the latest thinking on resolving the Minerva issues like are there any creative ways to fix the situation or at least get some value out of it.
And I have a follow up after that thanks.
Yeah. So I'm wondering are we sort of debate amongst ourselves hey are we going to handle Minerva questions. The last time, we talked about it we said hey, just.
Just presume that we get nothing you know and and but if you were to Hypnotize me, Hey, where can get something.
And so so far hopefully just keeping your models and we're getting nothing but so far we've gotten more than nothing.
And so I think from our vantage point, the right time to litigate and too.
Now show up in a courtroom with Minerva is is when the communications with Minerva stop.
And when.
They quit trying to fix that problem, but so far he the rents on the phone trying to fix the problem and it is far far from fixed, but the but but so far the results are better than what I've guided to so hopefully the next time, we talk will say hey, we've you know we've got into.
Slightly more.
The reason that I don't want to be absolutely forthcoming and tell you with precision everything we've received as I don't want to and I think from a commercial standpoint, it's just a bad idea.
To disclose everything that would put a different kind of pressure on minerva with their other customers. So I think it's just not it's not a good idea to.
Disclose every conversation in every.
Everything that we've talked about to try to fix this issue, but at this point I am comfortable saying presume nothing and we've got and that so far the answer slightly better than that.
Hey, Chase, it's Matt I, just wanted to follow up on slide nine I think.
It is clear to us there's a misperception about the quality of our fleet overall and so we wanted to make sure to drive home another point, which is.
Today Minerva represents about 11% of our of our.
Ashbury capacity, but as we exit 2022.
That's down to 6% and so the company has been hard at work behind the scenes to really improve the overall quality and.
Standalone with the fleet and then obviously.
6% Minerva as a materially smaller problem then it represented for us at any point since since since.
No.
Issues getting the monitor surface.
That's helpful.
No. It does I. Appreciate then understood on not being able to give all of the details and.
How many how many pick one have you guys sold this year and what's the kind of the game plan going forward in terms of.
Monthly sales.
I'll see if I can give you the precise answer in seconds here. If we can't what's your next question will dig to answer that one out.
If you have one.
Well just around hosting revenues versus prior quarters, I mean, it looks like there was a pretty substantial declines I'm just trying to understand what drove that.
What we basically have either bought out or canceled.
All but one of our hosting contracts.
And so and that we did that because we wanted to.
Use that capacity ourselves.
And so you should you should really have I think it's safe to say just just presume nothing for hosting us that we'll have roughly a megawatt of hosting on a go forward basis, but.
And the other the other the other customers are gone at.
At our at our request.
Just to follow up on that the answer to your first question.
So far year to date, we sold 635 bitcoin.
And obviously when when Youre walking through a capital cycle like we what we came out of gate with.
With the growth that we projected.
You want to sell bitcoin to cover your Capex.
But obviously as we've now really look to get front footed with the liquidity situation.
We'll be thoughtful about how we are so sorry, a bitcoin, but the answer is 635 year to date.
Is that through kind of like.
May 12th or whatever data you guys are getting or is that.
And does that include that simply that you sold forward.
That's through the 13th.
Got you and exclude it excludes the 250.
That are currently.
Restricted on the other side of it on their sort of hedge.
Gotcha.
Very helpful. Thank you.
Our next question comes.
From the line of Mike Grondahl.
With Northland Securities. Please proceed.
Hey, Thanks, guys.
I'm just trying to understand at the.
Plant level sort of Panther Creek and scrub grass.
How did those run maybe.
Maybe during the March quarter, compared to where you thought they'd run.
How is that how are you expecting it for <unk> and when do they kind of hit a 100%.
Yeah. So so Panther Creek I think as we disclosed Panther Creek as a power plant is running well and again as we described in the past when we bought Panther.
At the same time, we aren't talking the datacenter, we made about $4 million in plant upgrades and the plant was offline to do that and so as a plant it's run very well at the data center, It's a brand new data center and <unk>.
And then we had we had.
One sort of breaking issue with the data center, where we had a pizza switch gear.
Fail that was a.
I I quality company that made that part but the.
We got we got one bad bad switch and that took our data center offline for for 10 days that that's going to be an unusual circumstance.
So I think Panther and the data center, we expect.
From sort of a break in.
Event.
As a power plant it's been operating.
Well and as expected and then these plants have have long.
Operating histories.
And it simply you know once you have the systems.
And working in good working condition and people hired and trained they there's no reason why you can't do.
Duplicate the prior uptime success at these plants.
Scrub brass has is not the same as Panther because it had it did not benefit from.
The investment in systems and power plant systems, when we were installing the datacenter and it had been running for the past few years, mostly in a few months a year as a peaking facility.
We're now and as we've disclosed we're now making those.
Final power upgrades now we're seeing the performance of scrubbed brass improve.
As you would expect as those as that.
Upgrades are completed I think we've got just a.
Three about three different projects left.
That we're completing.
And they should be done.
In the third quarter, and so we I would expect to see.
Operational performance at scrubbed bras that looks similar to that of Panther.
Later this year.
As we make as we make those investments that we're focused on that.
The.
But as a.
Yes.
We can share with you data that just shows that these plants.
Over a over 20 years of time.
We're designed to Ron Baseload.
It really weren't designed to run as speakers or design run based on the extra performed better as base load.
And because they're not they're not expanding and contracting.
If you were to come see it in person needs. These are giant facilities.
With a tremendous amount of steel.
So we can share with the operational data that would that would tell you that.
Utilization around 90% would be expected and I think we were expecting the China does that.
That answer your question so in Q2 I think.
I think the uptime, we're just.
Saying, hey, it was better than in Q1 and are materially better and it should be better as the year progresses.
Certainly, it's scrubbed grasp by Panther I wouldn't describe it as lacking to date.
Keep in mind too that we put up.
The plant running or not running well.
We're still connected to the grid and if it makes economic sense. If the plant is offline, we can still buy power from the grid to power the data center.
If the.
That's just a an algorithm that we run to determine if a plant trips offline does it.
Power prices low enough to justify buying power from the grid to keep a datacenter energized.
Okay.
Got it.
Slide eight.
The three extra hash repairing miners with identified issues is there any common themes.
With the miners are the issues that you've had with them.
I would say a common thing if the power supply.
And then maybe fan fan failures.
Okay. Thank you.
Sure.
Thank you.
Yeah.
Our next question will come from Jacob Jacob Broberg.
With T. P. H. Please proceed.
Hey, good afternoon guys.
Okay.
Okay. Jacob wondering I was wondering if you.
Just the commentary on being in a position to move to offense, which is great to hear you know.
Trying to balance that with the.
That's why in your disclosure that you're no longer in the purchasing market and kind of.
Taking a break from from digital power asset. So I'm just wondering if you could expand on what that up and to push it from here.
And then kind of how youre thinking about that.
Yeah, So I I.
I can't I can expand on that so I think it's in hindsight.
<unk> site.
Buying miners in the essentially the forward market and paying for them.
Now today, and taking all of that risk on on where big quite pricing would be.
I think I think most people that have done that probably regret that decision and so I think we don't we don't want to be in a position to sort of expand on that and so we don't want to be in the four market buying miners today, and then taking risk as a web based upon pricing and margins will be in the future.
It's much easier to two and sort of I would describe as right way risk.
To say that if if if.
If prices for bitcoin.
Suffer.
The hardware market for bitcoin.
Should suffer with it and we will probably create opportunities to to buy hardware at a discount to where you can buy it in the foreign market for hardware I think that that's that's our belief.
And having the liquidity to do that is an advantage.
And then on the on the power asset side, Hey, we're never going to stop looking like power and energy is.
A core strength of ours, and we absolutely are continuing to evaluate in that market, but I think we're just going to be really careful as to how we finance.
The purchase of a power plant today.
And taking on.
They too much leverage in what they in a volatile power market and volatile bitcoin mining market.
That Oh, no I think we don't want to put ourselves in a bad position by doing that.
So I think I think what we're you know I think by being opportunistic.
And that would be I would call opportunities opportunism is a synonym for being our front foot and have the potential to be more aggressive.
And so if the market gets tougher we know that just the design of our of our peers is such that they are going they are probably they can't really survive an extended downturn in this market.
Whereas because we have optionality between bitcoin and power we can.
And that that will inevitably lead to opportunities coming our way.
If the market's suffer and by the way if they don't hey were flooded positioned to benefit just as much as anybody else. That's the that is the power of our model. So.
I think it's really the answer is how do we be aggressive like hey number one.
Put yourself in a position a great liquidity position to survive a downturn should it happen and that's going to let us be aggressive as opposed to like how we felt in the past quarter and we'd been defensive.
And.
You know at which is reflected in the stock price.
Which we're trying to remedy.
By doing this private placement and by not sort of aggressively showing at a.
A growth rate that while we hope it might be.
Come with it a higher margin it might not and so I think we're in a better position just to two.
To ensure future liquidity and ensure future margin health by not.
Promising too.
<unk> expenditures.
When pricing is a mystery.
Fair enough.
You bet.
Yeah, and I think we're.
We're going through this period.
No extraordinary investment by the industry and if you if you model out there.
The 15 or 20 public miners that we model out.
There is an extraordinary network cash rate growth expectation embedded in those in those numbers and there is also a leverage to go with those when you when you model out.
How the EBITDA progresses, if you just take swap it going from here.
Or or model, even higher bitcoin you model out the network hash rate goes that is anticipated.
So I think what we're when we talk about being front footed or maintaining maximum financial flexibility.
<unk>.
It could go a number of ways and we want to be.
We want to be.
Prudent, but we want to be.
Yes.
Get through this period and be able to strike.
And in accretive ways.
And I would just point to.
You know our model, obviously with the liquidity that we demonstrated this evening.
I mean do all intensive purposes.
The IPO market is closed the secondary market is closed our peer bonds.
Notably trading in the Twenty's from a yield perspective.
And we were grateful to have some investors see the merit of the integrated model.
And frankly most of the focus was on the earnings potential of the power business.
As a mitigating factor to the downside and so when we think about.
Of getting through this we'll call. It next six months of committed Capex, which was obviously reduced this evening when we talked about the monitor sales mitigating or offsetting some of that capex.
You look into 'twenty, three and without giving any explicit guidance.
Can see where free cash flow starts to be a material part of the conversation you can see we're deleveraging starts to take place and so I think.
When we talk about 2023, maintaining maximum financial flexibility to strike.
That may mean, and that May mean, what Greg referred to it could also mean that if.
If our shares remain this depressed that we may.
We could have flexibility too.
Forced the market's going to look at us in a different way and without going into details and so I think we we would look at that and.
If you think about the denominator of your shares and your assets are in the numerator.
You can you can acquire miners you can acquire power plants by reducing the denominator and I'll just leave it there, but as we get into 'twenty 'twenty three we look forward to having those conversations with you guys.
Great I appreciate that and kind of maybe on that topic.
I'd like to hear you guys, maybe opine on obviously the last two weeks for price.
For bitcoin have been pretty volatile pretty low.
When you really haven't seen it.
Any reaction on the network hash side of things and so I was just wondering if you guys could maybe talk about what that maybe means to you or what that could mean for.
For the remainder of this year into 2023 on the on the bigger picture side of things.
Yeah, I think I think.
We said Hey network hash rate is not adjusted daily.
And so I think we could still we could still see an adjustment in network cash rate.
But if you have equipment that you've ordered and paid for and it delivered.
And Andrew have a plug for it it is still a bitcoin mining economics are still good so unless you are paying.
More than depending on which machine it is.
The latest and greatest machines will still be profitable.
And lesser paying exorbitant prices for your power.
And so you would expect them to still to still be plugged in and a lot of a lot of hatch rate was ordered.
And.
And and.
And paid for so I think the question will be is as can but at the same time here a lot of hazard rate was ordered and was not paid for.
I think there will we expect to see.
The implications of.
The financing markets being closed on both the debt and the potential of the debt and depth on the equity side.
That's going to ripple through so hey, what's going to happen when.
<unk> don't get the.
The final payment that's due for those deliveries.
Well, they sell them to someone else.
Well they take it out in order for themselves and plug it in but you know that that machine, presumably the exists and as economic and you are expected to get plugged in.
At.
At the same time, there was probably a lot of equipment that was running like <unk>. For example that we should expect to see come offline.
So.
Anytime there is absolutely a relationship between.
Mining economics, and global hash rate, it's not an instant correlation but it will be felt and I think I think we will see.
Order less economic machines come offline.
And I would say probably a bigger implication is how we're modeling out.
Next year's hash rate growth given that once the capital has gone.
It's much much tougher to grow on these businesses.
So.
I think our view is.
It's kind of a presumed the worst in design yourself for a crypto winter coupled with you know a.
A flat global hash rate or a moderately growing one.
And just to make sure that you have the liquidity and positioned to survive.
And that should ultimately make us all the survivors better off so as painful as it is.
We think our model this puts us in that in that well, it's not as fun to go through and witness I think we might ultimately end up better off and if things. If he kept then if the financing markets were open and margins.
The warrant in question.
So long answer sorry, yeah.
Words.
Our last question will come from Chris Brown with <unk>.
D. A davidson. Please proceed.
Hi, Thanks, and congratulations on the progress here I wanted to start with.
The.
The other side of your business is power business.
Really interesting details there and I agree that we didn't think we'd see this.
Flex us downside protection anytime soon but it's nice to have but it sounds like you know very significant increase in the power revenue side.
Much bigger than it has been given what's going on in the world I just wanted to know.
Just a sense of how sustainable that is or is this going to be a temporary.
Spike where it would normally just slow back down or do you think he didn't sustain these kind of prices for the next couple of years.
Hey, there.
That question has a pine on every day and the and the forward curve of the of the natural gas market was really translates into the forward curve of the power market.
And so I think the answer to that is as the market is speaking the forward prices that we have on our presentation.
Our transactional prices.
So we have not hedged power prices today, so I haven't been there may be a future call, where we say hey, we've hedged some portion of future power revenue, but in a way that takes away some of our optionality.
Yeah.
Around bitcoin mining if we if we sell forward all of our power then we may not be able to use it my bitcoin I guess, we could always unwind the hedge but I think we want to keep bitcoin pricing optionality, while still letting the market know.
That we could hedge and transact and lock in power pricing.
And the temptation to do that is that a.
Power companies, you're telling me is the right cash flow multiple to put on.
The power business, but it's not.
Two times cash flow, it's probably five to 10 times cash flow, depending on the market and the growth rate. So.
I think we're just trying to encourage people to think about us as a as a power business that has a massive option of bitcoin.
Whereas a big point business with a massive option and downside protection from having a power asset associated with it but right now we're getting sort of the lowest.
Of bolt and that seems to be unfair and are in our minds.
Yeah, No I think it's going to be interesting to watch I think execution is the most important thing at this point or is showing investors that you can pivot and then also showing that you have the uptime. So it sounds like you know first quarter is a little more challenging.
From a time perspective than you were expecting but.
By the end of the second quarter or are we thinking that congrats will be running at the same levels as panther or is there still like some uncertainty around that yes.
So give it give us until the end of the third quarter to say that so all of the upgrades are being done and I would just say hey, the last delivery of parts that we need just given the supply chain concerns around the world. We're expecting that the last delivery of the last process to be made in July .
So it just gives a little bit of time to install the lab that sort of final system.
And get it running right so.
A late third quarter, certainly by the end of the year scrub grass should have uptime.
That we are proud of that looks like its past.
Okay.
It keeps on getting it doesn't if the plant is running we can still run the data center. So it's not I mean, that's another thing that sort of loss like Okay, Hey, Hey, guys. You failed to have plant uptime of.
90% that does not mean, the datacenters will be 90% they should be higher.
Okay.
Looking for those improvements on.
On the rig side.
Just to be clear did the Minerva situation sort of status quo. Since we last spoke at the end of March or has it gotten a little worse or a little better.
Yes.
I would say we haven't given we haven't given specific details on on every bit of the Minerva.
Ongoing saga, but we're just saying that it is better than the last quarter. We asked you to presume that Minerva delivered no refunds and no minors.
We're doing better than that so that's kind of what you're saying.
Okay and then the team.
Over a year ago, you were a little muffled there.
Were you asking about about Rex or Minerva.
It was unclear.
So I was asking about my Nirvana.
Okay.
The other question was.
The decision to sell the miners and.
Realize that your long lenders is that more related to the third plant or is that more related to the decision to potentially pivot more towards selling power.
Or is it just to raise cash.
Yeah.
You know what having it's a blend it's a blended answer I think it puts us in a better position with liquidity, where we can now say that we don't need any additional like outside financing to fund our business.
I think that's a powerful thing to say I'm going to be able to say that and we don't want to have minors.
I think if the maneuvers are all delivered.
We would have without without closing the next power plant, we would have about two axa hash of additional minor like on the shelf.
And.
We don't want to have.
Access miners on the shelving, we were better off with additional liquidity instead of just a warehouse full of miners not running.
So I think he ultimately.
We're going to be.
Generating a lot of cash.
We have equipment financing that will pay down and we will grow at an appropriate rate using our free cash flow.
Or if the world sort of milk, if the world melts down around us.
And we're relatively strong versus our peers and hopefully can use that to an advantage and.
And we think just by by selling some miners now puts us in a better position to take it to take advantage of that.
Yes, it makes sense, but you don't expect to be like a.
Regular course of business that we should be selling you know it can be long.
I don't know it's miners in the nerve it comes out with a miracle.
No we.
I think we're guiding to for two <unk> by the end of the year.
And we might guide to having a modest level of excess inventory just to handle a situation like hey, if some of our miners fail. We don't want to have empty slots, but don't expect us to have.
Hundreds and hundreds of extra pet a hash.
On the shelf and storage.
Right Okay.
So I would just say congrats.
Congratulations on this transaction to raise equity capital just wanted to know if it's possible that those new investors to the story or they were already existing investors.
You mentioned that the power.
Downside protection was a big part of that successful transaction.
Is there any.
Anybody who sort of benchmark like the downside I guess, it's kind of hard to do but.
It seems like there is some decent downside protection, given where power prices are today.
During the case of the the.
Private placement that we successfully completed yesterday.
Each of the investors are existing investors and.
It had been.
Some reverse inquiries and there had been some some interest.
Come up in recent past and we just.
In order to.
Early in my time at the company. My initial focus has been on liquidity and and again not to overstate the word getting on offense and.
In order to get on offense and work on all these opportunities from a self help perspective.
We want folks to feel Frontloaded again so.
It made sense to take advantage of this.
<unk>.
Opportunity to raise when no one else can access capital and do it do it in a way that really gets liquidity off People's minds, given given it has been a question that we've been fielding often.
As far as the downside protection quantification.
I think I think I'd point, you back to that slide that.
We produced Tonight for the first time.
It's more illustrative guidance, but but but if you think about that kind of mid to low twenty's.
Corn price.
And what we are able to do that others are not.
We can stop hashing and sell power into the grid on on the strip.
<unk> generated.
Meaningfully sustainable EBITDA and I think that's the important takeaway so.
Being financially disciplined.
Making sure. We're we're we're looking at the horizon.
Key element of what we're trying what we're trying to present and then I would just I would just add that if.
If you have underutilized miners that are sitting on your shelf.
And in Bitcoin still relatively hard to go out and hedge on a long dated basis. The first thing you should do before you got illiquid.
Sort of bitcoin bitcoin hedge is to sell miners that youre not going to plug in for a while youre not going to see for a while and so we're always going to be trying to be savvy about asset management.
And you should you should look forward to us.
Trying to trying to do that and retain flexibility.
For the foreseeable future.
Does that reverse it worked the other way when Minerva was delayed and we pounced on on some some secondary market miners.
To upgrade our upgrade our passion fleet as we were walking through the winter and so I think the asset management goes both ways.
And you should expect we're going to be as prudent.
And thoughtful as we can be about that.
It makes total sense, thanks, a lot Matt congrats.
At this time. This concludes our question and answer session I'd now like to turn the call over back to Mr. Byrd for his closing remarks.
Great I just want to thank everyone for listening to the first quarter earnings call.
We know it's a tough time in the market, but hopefully.
This additional information.
The investment community can begin to think about us a little bit differently and a little more favorably than and maybe what was being understood about us a four and we have we obviously look forward to.
Showing continued operational improvements.
Quarter over quarter, and hopefully we'll have good things to say.
When we speak again, thank you.
Thank you operator for joining.
Thank you again for joining today's stronghold.
Conference call you may now disconnect.
Okay.
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Okay.
<unk>.
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