Stronghold Digital Mining Inc (SDIG) 2022 Q1 法說會逐字稿

Good evening, and welcome to Stronghold Digital Mining's conference call for the first quarter ended March 31, 2022. My name is Carl, and I'll be your operator this afternoon. Before this call, Stronghold issued its results for the first quarter 2022 in a press release, which is available in the Investors section of the company's website at www.strongholddigitalmining.com. You can find the link to the Investors section at the top of the home page.

Joining us on today's call are Stronghold's Co-Chairman and CEO, Greg Beard; and CFO, Matt Smith. Following their remarks, we will open the call for questions.

Before we begin, Jeff Grampp from Gateway Group will make a brief introductory statement. Mr. Grampp, 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 strongholddigitalmining.com.

Some statements we're making today may be considered forward-looking statements under securities law and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the Securities and Exchange Commission. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.

We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables 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 uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption of Risk Factors in our 10-K. You may get Stronghold Securities and Exchange Commission filings for free by visiting the SEC website at sec.gov, 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 a 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. Sir, please proceed.

All right. Thank you, Jeff, and good evening, everyone, and thank you for joining us on our first quarter 2022 earnings call. For today's call, we're 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. And also forgive us, we are recording this. This is not a recording. This is us live. And so if 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 go to strongholddigitalmining.com, and they're under the IR section, you can see these slides.

So I'm now on Slide #3 called Stronghold at a Glance. So there's 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 runup in power prices, coupled with the decline in Bitcoin pricing, have highlighted vertical integration's relevance and value.

Additionally, to extinguish any doubt regarding our liquidity, we have taken recent steps that we will walk through on this call. We addressed much of our Q1 operating performance on our earnings call in March. While we have faced difficulties associated with miner 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 capacity along with our data center and power operations.

During the quarter, we mined 438 Bitcoin, averaging a hash rate just under 1 exahash 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 have mined over 250 Bitcoin in the second quarter through May 13, with over 100 in the first 13 days of May.

We also continued our environmentally beneficial mission by reclaiming approximately 279,000 tons of coal refuse during the quarter. Our hash rate capacity as of May 12 was approximately 3 exahash per second, and we have contracted miners to bring us to a hash rate capacity of approximately 4.2 exahash per second by year-end. This assumes that we do not receive any additional MinerVa miners.

Cryptocurrency volatility has been a major headline in the last few weeks, as I'm sure everyone is keenly aware. We have seen several peers scale back near-term and long-term growth projections that were oftentimes predicated on the availability of external capital to fund growth. As you will 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 halving event in 2024.

Now turning to Slide 4, titled Vertical Integration Mitigates Bitcoin Downside Risk. When we created Stronghold, we aimed to build a company that will provide material upside exposure to Bitcoin but would also be capable of persevering through downside scenarios and volatility, hence, our vertically integrated strategy. We believe that this is an underappreciated component of our business, especially at times when 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 Bitcoin. We believe this differs from most other Bitcoin miners that actually suffer under higher power prices.

Slide 4 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 $1 per megawatt hour basis. 20,000 to 30,000 Bitcoin implies approximately $90 to $135 per megawatt hour. The blue line shows the average forward 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 $22,000. So we effectively have a floor on Bitcoin at $22,000. What this means is that if Bitcoin falls below $22,000 on average, we will pivot to selling power to the grid, which distinguishes us from most other miners.

In addition to this downside 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 midpoint 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 over the 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 could generate about $35 million to $65 million of adjusted EBITDA over the next 12 months, even if we don't mine any Bitcoin. And with Bitcoin in the $25,000 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 be able to generate without selling power.

One final note. These figures do not represent any guidance in any form. We prepared this to illustrate the comparison among the 3 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 economics.

Now moving to Slide 5 to discuss recent updates. Improvements in our Scrubgrass power plant are progressing on schedule. The 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 renegotiated more favorable terms for this joint venture while the delays were being addressed. At the time of our fourth quarter call, the joint venture had 4 of 24 data center pods operational. And as of May 13, there are now an additional 14 pods commissioned. We expect the remaining data center containers to be operational within the next 2 months.

Lastly, on April 14, we announced the appointment of Matt Smith as our CFO. Matt has served as the Chair of the Audit and Compensation Committees on our Board since January. So he's very familiar with Stronghold, 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 utility sectors. We value Matt's deeply analytical mindset and management capabilities and have 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 6 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. The transaction is structured as a note 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 miner fleet 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. In 3 transactions, we sold approximately 2,600 miners with hash rate capacity of 332 petahash per second for approximately $17 million, approximately $10 million in cash and a reduction in contracted go-forward CapEx of approximately $7 million.

The bottom of the page lays out a bridge to our pro forma liquidity of approximately $61 million. As of May 12, we had approximately $17 million in cash and Bitcoin on our balance sheet. Adjusting for our private placement and miner 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 association with our forward sale of Bitcoin, we get to 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.

Thanks, Matt. So Slide 7 reviews our progress on the 2022 objectives we laid out during our March earnings call. Our Panther Creek data center is nearly fully commissioned with expected completion at the end of May, and we have overall been very satisfied with the operations at Panther Creek. JV data center commissioning at Scrubgrass is on track after some initial delays that we discussed previously. We are also progressing on several initiatives to improve the uptime of our data centers with sources of downtime identified, which we will discuss in more detail momentarily.

We have made significant progress at Scrubgrass 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 on potential power assets, we do not plan to make any -- a power plant acquisition in the immediate future.

Now on Slide 8, 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 3 exahash per second of capacity, but only 2.3 exahash are operational today. Over the coming months, through a combination of installing delivered miners, upgrading electrical equipment and repair and select identified miners, we expect our installed hash rate capacity will be much more in line with our total hash rate capacity.

Now turning to Slide 9. This is largely unchanged from what we communicated last quarter. We entered the first quarter of 2022 with a hash rate capacity of approximately 2.4 exahash per second, and we are at approximately 3 exahash per second as of May 12. More importantly, we remain on track to hit our year-end target of 4.1 exahash per second of installed capacity, which is based on the capacity of our current data centers.

Our hash rate in the second quarter is negatively impacted by a switchgear failure at the Panther Creek data center that occurred on April 20, 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 exahash per second, and we estimate that the impact of this downtime, net of revenue generated from selling power to the grid, was approximately negative $1.4 million. Normal mining operations resumed on April 30, and we have ordered backup switchgear and similar equipment to hold an 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 earmarked for joint venture data center containers into our proprietary StrongBoxes given the previously discussed commissioning delay. As joint venture data center containers are being commissioned, we must take miners off-line to move them into these JV containers. This should be fully resolved in the next 1 to 2 months.

I will now hand the call back over to Matt for a review of our first quarter results.

Thanks, Greg. 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 0.9 exahash per second and mined 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 26,000 miners delivered with a hash rate capacity of approximately 2.4 exahash per second. Also, during the quarter, in line with our environmental mission, we removed approximately 279,000 tons of coal refuse from the environment and returned approximately 179,000 tons of beneficial ash to use to remediate these toxic piles.

I will now turn the call back over to Greg for some final remarks.

All right. Thanks again, Matt. Wrapping up here on Slide 11. We are making notable progress on improving our operations and continuing to build Stronghold 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 in Bitcoin and power markets. We also have significant scale based on our 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 in Stronghold.

Thank you, everyone, for taking the time to dial in. We're now ready to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Lucas Pipes with B. Riley Securities.

I wanted just to -- I wanted to first ask about the utilization rate. Greg, I think you mentioned 2.3 out of 3 is kind of the current utilization rate. And then when I looked at quarter-to-date production, April, May, backed into utilization rate kind of mid-60s or so. So I wondered like if it was between 65%, 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 other factors are keeping it at these levels?

Yes. I think we had a slide in the presentation. I think it's Slide #8, that should highlight what we're publicly disclosing about that delta and the timing in which to get them back online. I would say the 2 biggest components are just installing miners that are delivered but not yet plugged in. So we have 2,000 S19j Pros that like we're in the process of plugging in. Also, just moving miners from our pods into the JV data center, that takes a little bit of time to do that, not months and months, but a couple of weeks to get that moved. So that's part of the bridge.

And then we had -- we had trouble with a certain batch of PDUs. And we are either repairing or replacing those PDUs. And that's happening in the next month, like repair is happening sort of daily, and then we're receiving new ones as well. And then we also have miners that have problems with the power supplies, miners that are offline for a variety of diagnosable reasons. And we're working on getting those. I would say, Tier 1 repairs we can do within a month, but hey, if it's a -- if we'd have a warranty repair, it will take longer.

But I think 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 miner inventory. And I think as you sort of get towards the end of the year, if we find that we have a miner that won't run, expect us to unplug it, put it on the shelf and replace it with a miner that would otherwise be excess inventory for us. So hopefully, Lucas, that helps answer your question.

This is super helpful. So kind of as you add more miners and go from 3 to 3.3 at the end of this quarter, should we assume that there's a similar ramp on that incremental 0.3 exahash between now and the end of June?

Yes, I think you can assume that. But we should give you as a -- as one of the -- as a coverage analyst, sort of our expected delivery dates for miners that we have ordered that are arriving, and that should help you actually build the growth assumption of the model.

I appreciate that. And then I wanted to ask a clarification question. With the JV, what is roughly going to be the split between kind of gross and net? And Slide 8 or 9 for that matter, are those gross or net numbers? And what's the best way to think about it as we think about kind of the bottom line for the mining operation?

Yes. So Tom Tyree is one of the VPs in finance. You may have him.

Lucas, so the ultimate split on the JV will be 35% to the JV. The numbers that are presented here are gross, and the JV will ultimately represent, I think, just under 1.4 exahash. So that's how I run the math.

And that's 1.4 exahash end of this year, so December 31?

Well, yes, but that will be -- I would think about it that way, starting in Q3.

Got it. Super. And I'll ask one final question for now. Greg, you commented on the industry and you're an integrated player and PJM power prices are very robust, and that brings a lot of advantages. And so with that said, what do you think about the M&A environment out there? Could an integrated structure hold appeal for some of your peers that may not be as fortunate?

Yes. Obviously, our view is the -- is today and has been that there will be consolidation in the industry. And I think I said we thought that it would be years before the relevance and advantages of being vertically integrated would be so apparent. As you're seeing, 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 that we can be -- we're now putting ourselves in a position of being on offense. And my hope is that the public market begins to value us in that way. So that's really the -- we created these slides just to really emphasize what we have known all along, but the belief was it wouldn't -- and so the hope was that it wouldn't be relevant. But clearly, with the rise in power pricing and then the decline of Bitcoin, the power of being vertically integrated is relevant now because I'd just ask, hey, what happens to most Bitcoin miners if Bitcoin goes down below 20,000 and the same market where power prices are double what people probably underwrote? Like it's a -- most of the market is extremely strained and doesn't have access to liquidity, doesn't have access to capital markets.

So our view in terms of taking a -- we just did this private placement. We sold miners that weren't in our model for the year. And we're doing it just to be super -- to be back -- to be aggressive and to take advantage of market dislocations that are coming. So I think just any time you see market dislocation like we're seeing it and 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.

Our next question comes with Chase White with Compass Point.

So in general, 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.

Yes. So MinerVa, we sort of debate amongst ourselves, hey, how are we going to handle MinerVa questions? So the last time we talked about it, we said, hey, just presume that we get nothing. And -- but if you were to hypnotize me, hey, we're going to get something. And so, so far, hopefully, just keeping your models that 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 like litigate and to show up in a court room with MinerVa is when the communications with MinerVa stop and when they quit trying to fix the problem. But so far, they're answering the phone, trying to fix the problem, and it is far, far from fixed. But so far, the results are better that what I've guided to. So hopefully, the next time we talk, we'll say, hey, we've got slightly more.

The reason that I don't want to be as forthcoming and tell you with precision everything we've received is 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 and everything that we talked about to try to fix this issue. But at this point, I'm comfortable saying presume nothing, and we've got -- and that's so far, the answer is slightly better than that.

Chase, it's Matt. I just want to follow up. On Slide 9, I think it's 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 hash rate 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 sustainability of the fleet. And then obviously, 6%, MinerVa is a materially smaller problem than it represented for us at any point since issues getting the miner surfaced. So hopefully, that's helpful.

No, appreciate and understood on not being able to give all of the details. And how many Bitcoin have you guys sold this year? And what's kind of the game plan going forward in terms of monthly sales?

We'll see if I can give you the precise answer in seconds here. If we can't, what's your next question while we dig the answer to that one now, if you have one?

Well, just around hosting revenues versus prior quarters. I mean it looks like there was a pretty substantial decline. I'm just trying to understand what drove that.

We basically 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 yes, you should really have -- I think it's safe to say, just presume nothing for hosting. It will have roughly a megawatt of hosting on a go-forward basis. But the -- and the other customers are gone at our request.

Chase, just to follow up on that, the answer to your first question. So far, year-to-date, we've sold 635 Bitcoin. And obviously, when you're working through a capital cycle like we came out of gate with, with the growth that we've projected, you want to sell Bitcoin to cover your CapEx. But obviously, as we've now really looked to get front-footed with the liquidity situation, we'll be thoughtful about how we sell our Bitcoin. But the answer is 635 year-to-date.

Is that through kind of like through like May 12 or whatever date you guys are giving? Or is that -- and does that include the [data center] that you sold forward?

That's through the 13th. And it excludes the 250 that are currently restricted on the other side of the hedge.

Our next question comes from the line of Mike Grondahl with Northland Securities.

I'm just trying to understand at the plant level, sort of Panther Creek and Scrubgrass, how did those run maybe during the March quarter compared to where you thought they'd run? How is that -- how are you expecting it for 2Q? And when do they kind of hit 100%?

Yes. So Panther Creek, I think as we disclosed, Panther Creek as a power plant is running well. And as we've described in the past, when we bought Panther, we -- at the same time, we were installing the data center. 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. As a data center, it's a brand-new data center. And we had one sort of break-in issue with the data center where we had a piece of switchgear failed. That was a high-quality company that made that part, but the -- I think we got one bad switch, and that took our data center offline for 10 days.

But that's going to be an unusual circumstance. So I think Panther, the data center, we expect, apart from sort of the break-in event, as a power plant, it's been operating well and as expected. And these plants have long operating histories. And it's simply once you have the systems working -- in good working condition and people hired and trained, there's no reason why you can't duplicate the prior uptime success at these plants.

Scrubgrass is not the same as Panther because it had -- it did not benefit from the investment in systems, in power plant systems when we were installing the data center. And it had been running for the past few years, mostly in a few months a year at the peaking facility. So we're now -- and as we've disclosed, we're now making those sort of final power upgrades now. We're seeing the performance of Scrubgrass improve as you expect, as those upgrades are completed. I think we've got just about 3 different projects left that we are completing, and they should be done in the third quarter.

And so we -- I would expect to see operational performance at Scrubgrass that looks similar to that of Panther later this year as we make those investments. We're focused on that. The -- but as a -- we can share with you data that just shows that these plants, over 20 years of time, were designed to run baseload. They really weren't designed to run as peakers. They're designed to run baseload, actually perform better as baseload and -- because they're not expanding and contracting.

If you were to come see it in person, these are giant facilities with a tremendous amount of steel. So we can share with the operational data that would tell you that utilization around 90% would be expected. And I think we're expecting the same. Does that answer your question? So in Q2, I think the uptime, we're just saying, hey, it was better than in Q1, materially better. And it should be better as the year progresses certainly at Scrubgrass. But Panther, I wouldn't describe as lacking to date.

If you don't mind too that the plant running or not running, 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. So if the -- that's just an algorithm that we run to determine that if a plant trips offline, does it -- are power prices low enough to justify buying power from the grid to keep the data center energized.

Got it. Slide 8, the 0.3 exahash, repairing miners with identified issues, is there any common themes with the miners or the issues that you've had with them?

I would say a common thing is the power supply. Yes. And then maybe fan failures.

Our next question will come from Jacob Roberts with TPH.

I was wondering if you -- just the commentary on being in a position to move to offense, which is great to hear, trying to balance that with the slide in your disclosure that you're no longer in the purchasing market and kind of taking a break from an additional power asset. So I'm just wondering if you could expand on what that offensive push is from here and what -- and kind of how you're thinking about that?

Yes. So I can expand on that. So I think it's -- in hindsight, buying miners in essentially the forward market and paying for them today and taking all that risk on where Bitcoin pricing would be, I think most people that have done that probably regret that decision. And so I think 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 forward market buying miners today and then taking risk as what Bitcoin pricing and margins will be in the future. It's much easier to -- and sort of I would describe this as a right way risk to say that, hey, if prices for Bitcoin suffer, the hardware market for Bitcoin should suffer with it and will probably create opportunities to buy hardware at a discount to where you could buy it in the forward market for hardware.

I think that's our belief. And having the liquidity to do that is an advantage. And then 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, say, too much leverage in what's a volatile power market and volatile Bitcoin mining market. That -- I think, we don't want to put ourselves in a bad position by doing that.

So I think what we're -- I think by being opportunistic -- that would be, I would call opportunism is a synonym for being on our front foot and having a potential to be more aggressive. And so, hey, if the market gets tougher, we know that just the design of our peers is such that they are going -- they're 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 will inevitably lead to opportunities coming our way if the markets suffer.

And by the way, if they don't, hey, we're all in a position to benefit just as much as anybody else. 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've been defensive, 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 a growth rate that, while we hope it might come with a high margin, it might not. So I think we're in a better position just to ensure future liquidity and ensure future margin health by not promising to make expenditures when pricing is a mystery.

Fair enough. I appreciate that.

Yes. And I think -- I mean, we're going through this period of extraordinary investment by the industry. And if you model out the 15 or 20 public miners that we modeled out, there's an extraordinary network hash rate growth expectation embedded in those numbers. And there's also leverage to go with those when you model out how the EBITDA progresses if you just take flat Bitcoin from here or more even higher Bitcoin, but you model out the network hash rate that is anticipated.

And so I think when we talk about being front-footed or maintaining maximum financial flexibility, it's -- it could go a number of ways, and we want to be prudent, but we want to be -- get through this period and be able to strike in accretive ways.

And I would just point to our model, obviously, with the liquidity that we demonstrated this evening, I mean, to all intents and purposes, the IPO market is closed. The secondary market is closed. Our peer bonds are notably trading in the 20s 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 getting through this, we'll call it, next 6 months of committed CapEx, which was obviously reduced this evening when we talked about the miner sale mitigating or offsetting some of that CapEx, you look into '23, and without giving any explicit guidance, you can see where free cash flow starts to be a material part of the conversation. You can see where deleveraging starts to take place. And so I think when we talk about 2023 maintaining maximum financial flexibility to strike, that may mean what Greg referred to. It could also mean that if our shares remain as depressed, that we could have flexibility to force the market to look at us in a different way, without giving any details.

And so I think we would look at that. And if you think about the denominator of your shares and your assets are the numerator, you can acquire miners, you can acquire power plants by reducing that denominator. And I'll sort of leave that there. But as we get into 2023, we look forward to having those conversations with you guys.

Great. I appreciate that. And kind of maybe on that topic, if you guys -- I'd like to you guys maybe opine on -- obviously, the last 2 weeks, the price for Bitcoin have been pretty volatile, pretty low and you really haven't seen 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 the remainder of this year, into 2023, on the bigger picture side of things?

Yes. I think obviously, the network hash rate is not adjusted daily. And so I think we could still see an adjustment in network hash rate. But if you have equipment that you've ordered and paid for and it delivered, it's -- and you have a plug for it, it is still -- Bitcoin mining economics are still good. So unless you're paying more than -- and depending on which machine it is, the latest and greatest machines will still be profitable unless you're paying exorbitant prices for your power.

And so you'd expect them to still be plugged in, and a lot of hash rate was ordered and paid for. So I think the question will be is can -- but at the same time, a lot of hash rate was ordered and was not paid for. So I think there will -- we expect to see the implications of like the financing markets being closed on both the debt and the potential of the debt and debt on the equity side, that's going to ripple through.

So what's going to happen when Bitmain and MicroBT don't get the final payment that's due for those deliveries? Will they sell them to someone else? Will they take that order for themselves and plug it in? But that machine presumably that exists and its economic and you have expected to be plugged in. So at the same time, there's probably a lot of equipment that was running like -- and financed, for example, that we should expect to see come offline.

So any time -- 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 we will see older, less economic machines come off-line. 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 in these businesses.

So I think our view is it's kind of, hey, presume the worst and design yourself for a crypto winter, coupled with a flat global hash rate or a moderately growing one and just make sure that you have the liquidity and position to survive. And that should ultimately make us all the survivors better off. So as painful as it is, we think our model just puts us 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 -- and if the financing markets were open and margins weren't in question.

Our last question will come from Chris Brendler with D.A. Davidson.

Congrats on the progress here. I wanted to start with the other side of your business, this power business, really interesting details there. And I agree, I didn't think we'd see this flexes downside protection anytime soon, but it's nice to have. But it sounds like 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. Like is this going to be a temporary spike where it would normally just settle back down? Or do you think you can sort of sustain these kind of prices for the next couple of years?

That question is opined on every day in the forward curve of the natural gas market, which 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 in our presentation are transactable prices. So we have not hedged power prices today. But maybe in 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 around Bitcoin mining. If we sell forward all of our power, then we may not be able to use it in 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 power companies -- you tell me what's the right cash flow multiple to put on the power business, but it's not 2x cash flow. It's probably 5 to 10x 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 power business that has a massive option on Bitcoin or as a Bitcoin business with a massive option and downside protection from having a power asset associated with it. So right now, we're getting sort of the lowest view of both, and that seems to be unfair in our minds.

Yes. No, I think it's going to be interesting to watch. I think the execution is the most important thing at this point in terms of showing investors that you can pivot and then also showing that you have the uptime. So it sounds like first quarter is a little more challenging from an uptime perspective than you were expecting, but by the end of the second quarter, are we thinking that Scrubgrass will be running the same levels as Panther? Or is there still like some uncertainty around that?

Yes. So give us until the end of the third quarter. That's where all the upgrades are being done. Like I would just say, the last delivery of parts that we need, given the supply chain constraints around the world, we're expecting like the last delivery of the last process to be made in July. It just gives us a little bit of time to install that sort of final system and get it running right. So late third quarter, certainly by the end of the year, Scrubgrass should have uptime that we are proud of that looks like it's passed. I think I keep mentioning, it doesn't -- if the plant isn't running, we can still run the data center. So it's not -- that's another thing that's sort of lost. Like, okay, hey, guys, you failed to have plant uptime of 90%, that does not mean the data centers will be 90%. They should be higher.

Okay. Great for those improvements. 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?

I would say, we haven't given specific details on every bit of the MinerVa's ongoing saga. But we're just saying that it is better than -- if the last quarter we asked you to presume that MinerVa delivered no refunds and no miners, we're doing better than that. So that's kind of what we're saying.

You were a little muffled there. Are you asking about REX or MinerVa? It actually -- it was unclear.

I was asking about MinerVa and what do you think of the new deliveries. The other question was decision to sell the miners and realize that you're long on miners. Is that more related to the third plant? Or is that related to the decision to potentially pivot more towards selling power? Or is it just to raise cash?

You know what, I think 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. And we're going to be able to say that. And we don't want to have miners -- I think if the MinerVas were all delivered, we would have -- without closing the next power plant, we would have about 2 exahash of additional miners like on the shelf. And we don't want to have excess miners on the shelf. We're better off with additional liquidity instead of just a warehouse full of miners not running.

So I think ultimately, we're going to be generating a lot of cash. We had equipment financing that we'll pay down, and we'll grow at an appropriate rate using our free cash flow. Or if the world sort of melt -- if the world melts down around us, and we're relatively strong versus our peers, hopefully we can use that to an advantage. And we think just by selling some miners now puts us in a better position to take advantage of that.

Yes. Makes sense. But you don't expect to be -- like a regular course of business now to be selling, you're not going to be long of miners and MinerVa comes up with a miracle.

Yes. I think we're guiding to 4.2 exahash by the end of the year. And we might guide to having a modest level of excess inventory just to handle a situation like if some miners fail, we don't want to have empty slots. But don't expect us to have hundreds and hundreds of extra petahash on the shelf in storage.

Right. Okay. So just -- I would just like -- congratulations on this transaction to raise equity capital. I just wanted to know if it's possible, are those new investors to the story? Or are they already existing investors? And you mentioned that the power downside portion was a big part of that successful transaction, is there any way we 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.

Yes. In the case of the private placement that we successfully completed yesterday, each of the investors are existing investors and had been -- there were some reverse inquiries and some interest that had 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 again, not to overstate the word, but 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 front-footed again. And so it made sense to take advantage of this opportunity to raise when no one else can access capital and do it in a way that really gets liquidity off people's minds given it had been a question that we've been fielding often.

As far as the downside protection and quantification, I think I'd point you back to that slide that we produced tonight for the first time that's more illustrative than guidance. But if you think about that kind of mid- to low 20s Bitcoin price and what we are able to do that others are not, we can stop hashing and sell power in the grid on the strip and generate meaningfully sustainable EBITDA. And I think that's the important takeaway. And so being financially disciplined, making sure we're looking at the horizon, that's a key element of what we're trying to present.

And then I would just add that if you have underutilized miners that are sitting on your shelf and Bitcoin is still relatively hard to go out and hedge on a long-dated basis, the first thing you should do before you get illiquid and sort of Bitcoin hedge is to sell miners that you're not going to plug in for a while, you're not going to receive for a while. And so we're always going to be trying to be savvy about asset management. And you should look forward to us trying to do that and retain flexibility for the foreseeable future. And that reverse worked the other way when MinerVa was delayed and we pounced on some secondary market miners to upgrade our hashing fleet as we are working 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.

Congrats.

At this time, this concludes our question-and-answer session. I'd now like to turn the call over back to Mr. Beard 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, with this additional information, the investment community can begin to think about us a little bit differently and a little more favorably than maybe what was being understood about us before. And we actually 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. Operator?

Thank you again for joining today's Stronghold conference call. You may now disconnect.