Q2 2023 Stronghold Digital Mining Inc Earnings Call
Yeah.
Good morning, and welcome to stronghold digital mining conference call for the second quarter ended June 30 of 2023. My name is Norman and I'll be your operator. This morning before this call stronghold issued results for the second quarter 2023, and our press release, which will be available in the invest.
This section of the company's website at Www Dot stronghold digital mining Dot com.
You can find a link to the Investor section at the top of the.
Joining us today on the call are strong host chairman and Chief Executive Officer, Greg Bier, and Chief Financial Officer, Matt Smith.
Following their remarks, we'll open the call for questions before we begin Alex Captain from Gateway will make a brief introductory statement.
Mr. Carlson. Please go ahead.
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 dot stronghold digital mining dot com.
Some statements, we're making today may be considered forward looking statements.
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 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 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 variables circumstances.
Clothing, 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 three 2023.
Our subsequently filed quarterly report on Form 10-Q.
You May access strongholds Securities and Exchange Commission filings for free by visiting the SEC web site at Www Dot <unk> Dot Gov.
Or strongholds 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, Chairman and CEO , Greg Baird Greg.
Good morning, everyone and thank you for joining us on our second quarter 2023 earnings call for todays call were going to reference that associated slide presentation that is available through the webcast and on the Investor Relations section of our corporate website.
During the second quarter stronghold continue to take proactive steps to execute on our strategic growth plan, expanding our hatch rate capacity to approximately $3 six <unk> with the expectation of reaching our full for Axa hash of capacity by September 1st.
Further positioning the company for long term sustainable success with increased revenue and cash flows 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 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, scrub grass and Panther Creek with aggregate power capacity of 165 megawatts today, we have over 40000 miners delivered or under contract.
We 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 extra cash.
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 having 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 one six axa hash of hash rate capacity through purchase and hosting agreement with incremental spending of only $15 million, which equates to approximately $10 per terra hash or high hash rate high efficiency miners. These miners include.
Over 6000 macro beauty and 50 and MTS miners.
<unk> 4008.
<unk> $13 46, and 2012 46 miners associated with the Cana and Bitcoin mining agreement and.
And 2000 additional purchased a $13 46 miners, we expect that all of these matters will be installed by September one.
Puts us on track to reach our data center capacity at <unk>, 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.
Terminated 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 minor additions.
Starting with our purchase of macro beauty miners on the left we initially purchased 5050 miners in April and then we purchased over 1000 more <unk> and MTS miners in July the <unk>.
Total cost was approximately $12 million.
<unk> price has pulled back from where it was at the time of these deals.
Just on a seven half 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 <unk> price, we would expect returns well in excess of our cost of capital.
Moving to the Cana and Bitcoin mining agreement and the purchase of Kanon miners on the right. We recently entered into a two year bitcoin mining agreement with canon.
For for a $13 46, and a $12 46 miners in.
In July we subsequently expanded this agreement by 2013 46 miners and simultaneously purchased another 2013 46 miners from Keenan for approximately $3 million.
These miners are objectively among our best performers and our air cooled strong box 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 Makena and transaction.
Assuming a seven cent half price and $45 per megawatt hour cost of power and somewhat similar to the purchases of micro BG miners. The forecasted return profile is exceptional.
Looking at the cannon and macro <unk> 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.
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 and forecast and triple digit Irr's and paybacks around one year.
This forecast and return profile is stronger than any that we've seen historically even back in 2021, when corn prices approached $70000.
Moving to slide six.
We currently have approximately $3 seven X a hash of hash rate capacity and expect to reach our current data center capacity at <unk> by September one.
With a contracted hash rate capacity of four point to exit <unk>, we will look to optimize hash rate energy efficiency and slots and we remained focused on our new location for our third site, where we plan to utilize the 25 megawatts of end to end data center equipment and 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 and highly compelling price points with capex of $10 per Terra has this year a significant improvement from $60 <unk> for 2021 in 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.
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 eight.
Cryptocurrency and self mining $3 1 million from crypto currency hosting.
$7 million from the sale of energy and $6 million from capacity sales.
We mined 626, bitcoin during the quarter, representing approximately 43% of growth.
Impaired to the fourth quarter of 2022, and 1% sequential growth from the first quarter of 2023 despite bitcoin network hash rate 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.
Reconciliation for those figures is included in the appendix.
On the environmental side during the quarter, we removed approximately 140000 tons of coal refuse from piles and returned approximately 81000 tons of beneficial use cash to remediate. These toxic co pilots.
This important work continues underscore one of our core value propositions of being in 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 ended on June 32023, and August seven 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.
Asian to effect, a reverse stock split which.
Primarily to increase our per share market price of the 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 opportunistically.
And funding the Companys growth if it is compelling to do so.
You can find more details regarding our latest share count and 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 research methodologies.
Here, we show enterprise value, which is the value of equity and debt less cash and Bitcoin holdings.
Added by current hash rate capacity and bitcoin production the.
The primary drivers of revenue in our industry.
We're looking at these metrics stronghold currently trades at close to a 60% discount compared to our peers.
This is surprising to us.
We believe our valuation discount will narrow over time, as we remained well positioned relative to our peers.
I will now turn the call back over to Greg for closing remarks.
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 date, our current data center capacity at <unk> in the coming weeks and we have dramatically improved our cost profile and balance sheet.
<unk> 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.
Thank you.
Okay.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced.
Please standby will be compile the Q&A roster.
One moment for your first question. Please.
Question comes from the line of.
Chase White with Compass point research your line is now open.
Thanks, Good 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 be mostly.
In <unk>, but just love some color on that.
Yes, sure Hey, Jay Good morning, and thanks for listening so I think what we want to make sure everyone. Understands is that we have said well we need to spend to get to our four SaaS 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 equipment. So I think that's important to note is that hey, we may put additional capital, but it will be associated with growth.
Thinking of modeling in.
A capital spend related to mining.
No that Youre, then modeling a number beyond four thats a hash.
Yes of course, they sometimes we make investments in the plants and.
And so we could have.
And we've got a plan.
Outages later this year that will be very short and won't be extensive say I think you can model it a little bit of capital for that but its not not all of the big numbers.
Does that help.
Yes, yes, 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 theyre already been spent.
In the third quarter.
Yes, Jason there'll be about $3 million.
For minor specifically.
Gotcha.
And I think I mean, 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.
Sure with the market.
Sure with the market, what we expect to do with any next coming growth project, which we refer to as a third site.
So.
Currently there is no additional capital expected, but if we were to go forward for the third site. We would definitely have plans on how are we going to accretively funded.
What the growth and represented for a step function in revenue and cash flow.
Payback on anything we would do but at this point in time, we haven't.
There is no additional capital plan for for miners beyond that unless we high grade over time as Greg described and just a reminder, we've.
We've provided guidance previously of $2 million to $4 million for outages this year.
We're still we did a significant outage panther in the second quarter that flow through operations and maintenance expense.
At this point in time we.
We don't plan significant outages as great as Greg said, and so we're still sticking to our $2 million to $4 million of guidance for the year.
But if we choose to take the plant offline for a few days in September .
To give it some some TLC we may still do that but we're still we still believe our $2 million to $4 million.
About guidance is good.
Got it that's helpful and then.
Next question is.
Are you able to give us any updated thoughts on incremental revenue and credential from ash sales.
Yeah, So I.
I think.
We provided.
Kind of a $1 million bogie.
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.
We will look forward to updating you closer to the end of the year or to judge judge how we did against that original hypothesis.
Got it thanks.
I think we've.
Thank you for years gone on and we have.
Done a lot of scientific testing of our Ash I think we've seen the value of it has gone our views of the value of that have gone up and not down.
Can you just sort of what 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.
Thank you one moment for our next question. Please.
Our next question comes from the line of Kevin <unk> with H C. Wainwright. Your line is now open.
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.
What I know it's early but.
I'm wondering if you can give us any feedback on the operation that can and miners that you've seen so far.
And how you plan on.
Or how you see your overall fleet efficiency progressing with the.
With the inclusion of the new miners you've bought.
Yes, hi.
Great question. So I think the answer on <unk> is that they are I would say tied for our best performing model.
We're happy with it.
For one thing deliver the miners when they say they're going to deliver them.
And their work when you plug them in and they are.
Our efficient so it's tough to.
And we have like the early read is.
Hey, uptime for these miners is in the.
Yes.
And then I think the ones that show up not working.
Turnaround incentives working what's so really happy with that that might happen.
Okay.
And relationships, which is why you've seen that we have.
Pam.
Already.
In a sense that we can create that relationship.
A.
I guess about six months ago. When we first started so I think we're in terms of overall fleet efficiency, we're trending toward 33 jewels for Taro has.
And obviously with having coming up we're hopeful that that you and others will recognize that having a again in house low cost.
Fishing fleet.
Will.
It's in a good position to do well relatively.
But I think expect that a fleet efficiency too.
<unk> trend in the right direction and the more efficient direction over time.
I think we're constantly moving.
And evaluating.
New jbs and capital efficient ways to.
Improve the efficiency of the fleet and that will not change that that activity will be an accelerating and increasingly think.
Over the next.
Seven quarters.
Yes.
Can you offer us a little more detail.
Detail on how you saw the PJM energy market, noting that enters energy sales were down significantly sequentially and year over year I'm, just kind of wondering how.
What you saw how you position yourself against what you saw and what you're expecting.
Yes, so hey.
If you were a blend of being in the power business and the bitcoin mining business. So I think 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 higher prices.
Our prices are below our cost of power, we can do the reverse and buy power from the Greg instead.
Instead of making it ourselves.
And so that gives us what we described as like 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 are you with cycle the data centers off and take advantage of those spikes.
If you were to study where power prices end up ended up this summer, we really only had three or four days.
That was above where we would achieve had we.
That's just in mind, and I think thats, probably exponentially lower than what we expected.
Sure.
And I think thats going to roll out probably the curve for the fall and the winter.
Our pricing crisis.
Summer and I think if there is anything you've learned about being in this business is that in our current expectations.
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 caused that grid to look more like <unk>.
Texas.
And then what PJM has looked like in the past. So I think we are expecting more volatility and we're expecting our model.
Of being able to.
To help the grid by supplying power when need it and pull power from the grid when it helps as well.
And there are pricing signals that are built in that.
It helps us do that.
And we're still happy with the model, but in terms of like the the short run.
This summer, we expect to sell more power at higher prices than what we did think Matt Let me add some data to talk about that as well.
Kevin come 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 was probably one of the tightest markets.
Okay.
On the back of Russia, Ukraine.
European gas tightness et cetera, et cetera exports and so when you when you roll that forward.
Model for $50 a megawatt.
<unk> evolved that Greg described because typically you get some we're probably about.
Okay.
The way through the summer so we're still hopeful that.
When when power prices are above a 100 to $120 a megawatt.
Two mines.
The coin and so are we will curtail our miners and happily sell power.
Is that.
At operation and.
And so August is still mostly ahead of us the 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 we're not.
Betting the business on higher power prices than the forward curve.
Importantly, as you look forward to 2020 for the winter the coming winter summer.
<unk>.
These future prices are expected to be higher than current prices and so I think we are.
We're looking at.
We're pleased with this.
This kind of loose natural gas market.
That has been.
Yes.
But when you go into 2024.
In April of 2024 and having.
Distinct difference between our business and the rest of the bitcoin miners.
Is that when we wake up in April and you have the having.
Our power operations, our ability to sell power in the cash flow, we can generate from that business do not have.
Unlike pick one mining where there is obviously risk around having and we've been investing accordingly, so we look forward to our prospects and.
And our business model demonstrating its differentiation as we go over the next six to 12 months.
Last question for me on this Greg but you.
You alluded to May.
Maybe some dinosaurs within the PJM grid.
And I'm curious I apologize 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 are caught and I understand there is some interest in developing peak or plants that could.
Perhaps readily address these market price swings.
And I'm wondering if you think the parallels between are caught in PJM are close there as well is there anything that you can see in your crystal ball that might change the dynamics from new construction perspective.
No you know what I'll send you it's been well reported all Sanjay look one of my favorite article the edge Wallstreet 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 PJM, given all of the planned shutdowns at the call infrastructure I think it says something like that.
660000 megawatt.
Grid network.
That is going to be experiencing more than 10000 megawatts of shutdowns.
And so.
And that's just way way too many megawatts to lose to have solar and wind replace.
And so that was in the form of a question Hey, Where's the power going to come in in a Socratic way asking hey, PJM what are you doing to manage our grid.
Given that we have all of these announcements and not enough <unk> to serve the power needs of the.
Vijay.
I think.
In Texas, we saw something a little bit different in that.
That's sort of the the biggest renewable market in the country.
Which means it's the most intermittent service in the country.
Which I would argue they are using.
Using data that says hey, that's what causing massive price swings.
In Texas, and sometimes a power the Sun is shining the wind is blowing and theres more power than can be consumed power prices actually sometimes go negative.
Same time.
When it when its cold or Super Hot in the wind isn't blowing.
People are willing to pay a lot for power if it's in short supply. So I think thats. The the unintended consequence of having a more renewable greener grid.
As more information.
The more price points and probably it probably an overall average higher price than what they baseload fossil fuel plant with that <unk> hit the Wall Street Journal article are posted on our Twitter account for for those who are listening to.
To read as well.
But I think the theme in reading it it will make you comfortable to be invested in the power business with a.
Environmentally beneficial power source like ours.
That should survive and benefit from these the slate.
How would you imagine PGM answers that Socratic question for next question. Please.
Okay.
They can't sit idle alright, that's the that's what you.
What can happen is we can't have a <unk>.
The tripling of the power price an acute 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 the other side not too right.
Alright, but then I think then we're not going to get the cleaner.
Greener plan Thats also been projected by love these.
Our owners and developers so let's say it's a.
So my expectation is it will see market, forcing prevail over a green push but hey, that's really the <unk>.
Every boardroom is asking what are we doing to get again more carbon out of the year.
So that'll be a tough it'll be a tough question.
Thank you so much for entertaining the questions gentlemen, appreciate it greatly.
Interesting.
Hello, one moment for our next question.
Okay.
As a reminder to ask a question you will need to press star one one on your telephone.
One moment for our next question.
Question comes from Lucas pipes with B Riley Securities. Your line is now open.
Yeah, Hey, good morning, everyone. This is Nick Jones on for Lucas Congrats on the progress recently here.
Last quarter, you'd noted that at scrub grass, you had 700 acres there and really.
Really only half of the transmission capacity is being used.
I think you had said that maybe the opportunity to increase.
Power Gen capacity there.
It 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.
Are you so much.
Hey, that's a.
Great questions and thanks for joining the call.
I think I think we've said.
I think we made that disclosure and it's known that we have more capacity there as Scott grafts and a lot of acreage.
Hey, we're constantly looking at opportunities to improve our business model, making more far more stable.
Asset.
And so I think you can expect I expect over the next quarter or two.
And our news on how we're going to take advantage of that.
And maybe not just on the power side I think we've also said hey, we're studying carbon sequestration.
I can say is a very good thing to have access to both transmission.
Access potentially to if youre familiar with with what it takes to put new assets online in our in network. It's about a three year wait that 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.
It has our attention. So we're 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.
Please Adam please ask again every quarter until we until we.
Came out of the 8-K and press release that we are focused on.
Got it got it.
Thanks, Greg that's that's really helpful.
Maybe just one more from my end.
Over clocking in under clocking has been kind of a popular topic. Among your peers as we approach to having just wanted to get your perspective on this at the at the minor level and really maybe reminders.
If this is kind of less important for stronghold just given your optionality on the power side.
Thank you very much yes, I think so far we have we've done a really.
Poor job at over clocking under clocking and we're aware that we can do it we have the software, but I think that's something that I think you could you could see in the coming quarters like upside to our model versus what we probably guided too.
Because we are now.
Because we now have this for X a hash of miners now installed our ore coming.
We're now focused on more than we have in the past really just focused on hey, how do we get our efficiency.
We maximized and that will include overclock under clocking and.
Probably adding some new minor control software.
A little bit more complicated for us because we are interconnected with the grid.
But yes, I think so far that's just.
I'm happy to tell you that hey, we have we are there is upside from here on the way we've been operating our assets.
Got it got it okay really appreciate all the detail today.
Continued best of luck.
Thank you very much.
As a reminder to ask a question you will need to press star one one.
And I'm currently showing no further questions at this time I would like to hand, the conference back to Mr. Gregg <unk> for closing remarks.
Great well, Hey, it's Ron.
I think the investments the interest and stronghold hopefully you've noticed that we have.
That 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.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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