Washington, D.C. 20549
Stronghold Digital Mining, Inc.
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Item 1. Financial Statements
STRONGHOLD DIGITAL MINING, INC.
The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.
STRONGHOLD DIGITAL MINING, INC.
The accompanying notes are an integral part of these condensed consolidated financial statementsstatements.
STRONGHOLD DIGITAL MINING, INC.
Stronghold Digital Mining, Inc. (“("Stronghold Inc.”" or "the Company"the "Company") was incorporatedis a low-cost, environmentally beneficial, vertically integrated crypto asset mining company currently focused on mining Bitcoin and environmental remediation and reclamation services. The Company wholly owns and operates two coal refuse power generation facilities that it has upgraded: (i) the Company's first reclamation facility located on a 650-acre site in Scrubgrass Township, Venango County, Pennsylvania, which the Company acquired the remaining interest of in April 2021, and has the capacity to generate approximately 83.5 megawatts (“MW”) of electricity (the "Scrubgrass Plant"); and (ii) a facility located near Nesquehoning, Pennsylvania, which the Company acquired in November 2021, and has the capacity to generate approximately 80 MW of electricity (the "Panther Creek Plant, and collectively with Scrubgrass Plant, the "Plants"). Both facilities qualify as an Alternative Energy System because coal refuse is classified under Pennsylvania law as a Delaware corporationTier II Alternative Energy Source (large-scale hydropower is also classified in this tier). The Company is committed to generating energy and managing its assets sustainably, and the Company believes that it is one of the first vertically integrated crypto asset mining companies with a focus on March 19, 2021. On April 1, 2021, contemporaneously with the Series A Private Placement (as defined below), environmentally beneficial operations.
The Company operates as a qualifying cogeneration facility (“Facility”) under the provisions of the Public Utilities Regulatory Policies Act of 1978 and sells its electricity into the PJM Interconnection LLCMerchant Market ("PJM") Merchant Market under an Energy Managementa Professional Services Agreement (“EMA”PSA”) with DirectCustomized Energy Business Marketing, LLCSolutions (“DEBM”CES”), effective February 1, 2015. The Company’s primary fuel source is waste coal which is provided by various third parties. Waste coal credits are earned by the Company by generating electricity utilizing coal refuse.
Construction in progress consists of various projects to build out the cryptocurrency machine power infrastructure and is not depreciable until the asset is considered in service and successfully powers and runs the attached cryptocurrency machines. Completion of these projects will have various rollouts of energized transformed containers and are designed to
calibrate power from the plant to the container that houses multiple cryptocurrency machines. Currently, the balance of $14,111,405,$11,099,409 as of June 30, 2022,March 31, 2023, represents open contracts with a vendor that havefor future completion dates scheduled for the remainder of the year.
NOTE 6 – LONG-TERMACCRUED LIABILITIES
Accrued liabilities consisted of the following as of March 31, 2023, and December 31, 2022:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Accrued legal and professional fees | $ | 886,370 | | | $ | 1,439,544 | |
Accrued interest | 2,992 | | | 1,343,085 | |
Accrued sales and use tax | 5,430,197 | | | 5,150,659 | |
Other | 793,089 | | | 959,960 | |
Accrued liabilities | $ | 7,112,648 | | | $ | 8,893,248 | |
NOTE 7 – DEBT
Long-termTotal debt consisted of the following as of June 30, 2022March 31, 2023, and December 31, 2021:2022:
| | | | | | | | | | | |
| June 30, 2022 | | Dec 31, 2021 |
$66,076 loan, with interest at 5.55%, due July 2021. | $ | — | | | $ | 3,054 | |
$75,000 loan, with interest at 12.67%, due April 2021. | — | | | 7,312 | |
| | | |
| | | |
$499,520 loan, with interest at 2.49% due December 2023. | 175,976 | | | 232,337 | |
$499,895 loan, with interest at 2.95% due July 2023. | 186,241 | | | 246,720 | |
$212,675 loan, with interest at 6.75% due October 2022. | 21,476 | | | 103,857 | |
$517,465 loan, with interest at 4.78% due October 2024. | 422,977 | | | 490,600 | |
$431,825 loan, with interest at 7.60% due April 2024. | 163,936 | | | 204,833 | |
$565,500 loan, with interest at 4.48% due January 2027. | 521,680 | | | — | |
$523,076 financing agreement for insurance with interest at 5.99% due March 2023 | 393,260 | | | — | |
$6,900,000 financing agreement for insurance with interest at 3.45% due July 2022 | — | | | 4,299,721 | |
$40,000,000 loan, with interest at 10.00% due June 2023. | 20,995,034 | | [A] | 30,734,045 | |
$33,750,000 loan, with interest at 10.00% due May 2024. | 22,140,433 | | [B] | — | |
$10,641,362 loan, with interest at 10.00% due June 2023. | 5,585,394 | | [C] | 8,176,302 | |
$14,077,800 loan, with interest at 10.00% due June 2023. | 7,389,097 | | [D] | 10,816,694 | |
$5,808,816 loan, with interest at 10.00% due April 2023. | 3,952,309 | | [E] | — | |
$6,814,000 loan, with interest at 10.00% due October 2023. | 5,297,643 | | [F] | — | |
$17,984,000 maximum advance loan, with interest at 9.99% due December 2023. Balance is what has been advanced as of June 30, 2022 | 16,315,005 | | [G] | 10,790,400 | |
$17,984,000 maximum advance loan, with interest at 9.99% due December 2023. Balance is what has been advanced as of June 30, 2022 | 17,984,000 | | [H] | 7,769,088 | |
$17,984,000 maximum advance loan, with interest at 9.99% due December 2023. Balance is what has been advanced as of June 30, 2022 | 10,790,400 | | [I] | — | |
$33,750,000 Convertible Note, with interest at 10.00% due May 2024. | 21,232,761 | | [J] | — | |
$92,381 loan, with interest at 1.49%, due April 2026. | 90,512 | | | — | |
$64,136 loan, with interest at 11.85%, due May 2024. | 64,136 | | | — | |
| 133,722,270 | | | 73,874,963 | |
Less current portions, deferred costs, & discounts | | | |
Outstanding loan | 100,986,427 | | | 50,099,372 | |
Deferred debt issuance costs | 3,145,380 | | | 2,854,787 | |
Discounts from issuance of stock | 694,944 | | | 1,042,416 | |
Discounts from issuance of warrants | 2,005,948 | | | 1,499,547 | |
| $ | 26,889,570 | | | $ | 18,378,841 | |
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
$499,520 loan, with interest at 2.49%, due December 2023. | $ | 97,779 | | | $ | 124,023 | |
$499,895 loan, with interest at 2.95%, due July 2023. | 88,694 | | | 121,470 | |
$517,465 loan, with interest at 4.78%, due October 2024. | 296,898 | | | 339,428 | |
$585,476 loan, with interest at 4.99%, due November 2025. | 472,196 | | | 513,334 | |
$431,825 loan, with interest at 7.60%, due April 2024. | 99,610 | | | 121,460 | |
$58,149,411 Credit Agreement, with interest at 10.00% plus SOFR, due October 2025. | 54,370,570 | | | 56,114,249 | |
$33,750,000 Convertible Note, with interest at 10.00%, due May 2024. | — | | | 16,812,500 | |
$92,381 loan, with interest at 1.49%, due April 2026. | 71,903 | | | 79,249 | |
$64,136 loan, with interest at 11.85%, due May 2024. | 33,018 | | | 39,056 | |
$196,909 loan, with interest at 6.49%, due May 2024. | 172,684 | | | 184,895 | |
$3,500,000 Promissory Note, with interest at 7.50%, due October 2025. | 3,500,000 | | | — | |
Total outstanding borrowings | $ | 59,203,352 | | | $ | 74,449,664 | |
| | | |
Current portion of long-term debt, net of discounts and issuance fees | 995,145 | | | 17,422,546 | |
Long-term debt, net of discounts and issuance fees | $ | 58,208,207 | | | $ | 57,027,118 | |
[A] The WhiteHawk Promissory Note has a term of 24 months. Refer to Note 14 – Stock Issued Under Master Financing Agreements and Warrants for further discussions. Refinancing Agreement
On December 31, 2021,October 27, 2022, the Company amended the WhiteHawk Financing Agreement (as defined below)entered into a secured credit agreement (the “WhiteHawk Amendment”“Credit Agreement”) to extend the final MinerVa delivery date from December 31, 2021 to April 30, 2022. Pursuant to the WhiteHawk Amendment, Equipment paid an amendment fee in the amount of $250,000 towith WhiteHawk Finance LLC ("WhiteHawk"). These fees are included to refinance an existing equipment financing agreement, dated June 30, 2021, by and between Stronghold Digital Mining Equipment, LLC and WhiteHawk (the “WhiteHawk Financing Agreement”), effectively terminating the WhiteHawk Financing Agreement. Upon closing, the Credit Agreement consisted of $35.1 million in deferred debt issuance costs.term loans and $23.0 million in additional commitments.
[B] WhiteHawk Promissory Note agreement with a term of 24 months. Refer to Note 14 – Stock Issued Under Master Financing Agreements and Warrants for further discussions. PursuantThe financing pursuant to the Second WhiteHawk Amendment, Equipment paid an amendment fee inCredit Agreement (such financing, the amount of $275,414“WhiteHawk Refinancing Agreement”) was entered into by Stronghold Digital Mining Holdings, LLC ("Stronghold LLC"), as Borrower (in such capacity, the “Borrower”), and a closing fee of $500,000 to WhiteHawk. These fees are included in deferred debt issuance costs.
[C] Arctos/NYDIG Financing Agreement (as defined below) [loan #1] with a term of 24 months. Refer to Note 14 – Stock Issued Under Master Financing Agreements and Warrants for further discussions.
[D] Arctos/NYDIG Financing Agreement [loan #2] with a term of 24 months. Refer to Note 14 – Stock Issued Under Master Financing Agreements and Warrants for further discussions.
[E] Arctos/NYDIG Financing Agreement [loan #3] with a term of 15 months. Deferred debt issuance costs of $232,353 are amortized over the termis secured by substantially all of the loan using the straight-line method.
[F] Arctos/NYDIG Financing Agreement [loan #4] with a term of 21 months. Deferred debt issuance costs of $272,560 are amortized over the term of the loan using the straight-line method.
[G] Second NYDIG Financing Agreement with a term of 24 months. Deferred debt issuance costs of $449,600 are amortized over the term of the loan using the straight-line method.
[H] Second NYDIG Financing Agreement with a term of 24 months. Deferred debt issuance costs of $449,600 are amortized over the term of the loan using the straight-line method.
[I] Second NYDIG Financing Agreement with a term of 24 months. Deferred debt issuance costs of $449,600 are amortized over the term of the loan using the straight-line method.
[J] Convertible Note with a term of 24 months. Refer to Note 32 – Convertible Note for further discussions.
Future scheduled maturities on the outstanding borrowings as of June 30, 2022 are as follows:
| | | | | | | | |
Years ending December 31: | | |
2022 remaining | | $ | 46,957,687 | |
2023 | | 81,068,319 | |
2024 | | 5,414,446 | |
2025 | | 140,785 | |
2026 | | 130,562 | |
2027 | | 10,471 | |
| | $ | 133,722,270 | |
NOTE 7 – CONCENTRATIONS
Credit risk is the risk of loss the Company would incur if counterparties fail to perform their contractual obligations (including accounts receivable). The Company primarily conducts business with counterparties in the crypto mining and energy industry. This concentration of counterparties may impact the Company’s overall exposure to credit risk, either positively or negatively, in that its counterparties may be similarly affected by changes in economic, regulatory or other conditions. The Company mitigates potential credit losses by dealing, where practical, with counterparties that are rated at investment grade by a major credit agency or have a history of reliable performance within the crypto mining and energy industry.
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable. Cash and cash equivalents customarily exceed federally insured limits. The Company’s significant credit risk is primarily concentrated with DEBM, which amounted to approximately 100% and 100% of the Company’s energy revenues for the six months ending June 30, 2022 and 2021, respectively. DEBM accounted for 100% and 100% of the Company’s accounts receivable balance as of June 30, 2022 and December 31, 2021, respectively.
For the six months ended June 30, 2022 and 2021, the Company purchased 13% and 25% of Waste Coal from two related parties, respectively. See Note 9 – Related-Party Transactions for further information.
As of June 30, 2022, the Company had entered into various Master Equipment Financing Agreements that have future delivery and installation timeframes for approximately 9 thousand miners. There can exist a risk of not achieving the expected delivery timelines as well as the timeliness of generating guaranteed targeted terahash by each miner. This risk is not quantifiable at this time. See Note 8 – Contingencies and Commitments for further information.
NOTE 8 – CONTINGENCIES AND COMMITMENTS
Commitments:
Equipment Agreements
As discussed in Note 4 – Equipment Deposits and Miner Sales, the Company has entered into various equipment contracts to purchase miners. Most of these contracts require a percentage of deposits upfront and subsequent future payments to cover the contracted purchase price of the equipment. Details of each agreement are summarized below.
MinerVa Semiconductor Corp
On April 2, 2021, the Company entered into a purchase agreement (the "MinerVa Purchase Agreement") with MinerVa for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner equipment (miners) with a total terahash to be delivered equal to 1.5 million terahash (total terahash). The price per miner is $4,892.50 for an aggregate purchase price of $73,387,500 to be paid in installments. The first installment equal to 60% of the purchase price, or $44,032,500, was paid on April 2, 2021, and an additional payment of 20% of the purchase price, or $14,677,500, was paid June 2, 2021. As of June 30, 2022, there are no remaining deposits owed. In December 2021, the Company extended the deadline for delivery of the MinerVa miners to April 2022. In March 2022, MinerVa was again unable to meet its delivery date and had only delivered approximately 3,200 of the 15,000 miners. As a result, an impairment totaling $12,228,742, was recognized on March 31, 2022. As of June 30, 2022, MinerVa has delivered, refunded cash, or swapped into deliveries of industry leading miners of equivalent value to approximately 7,200 of the 15,000 miners. Refer to Note 30 – Covenants, for a description of covenants referencing the anticipated final delivery timeframe of April 2022. The aggregate purchase price does not include shipping costs, which are the responsibilityassets of the Company and shall be determined at which time the miners are ready for shipment. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligatingits subsidiaries and is guaranteed by the Company and MinerVa to work togethereach of its material subsidiaries. The WhiteHawk Refinancing Agreement requires equal monthly amortization payments resulting in good faith towards a resolution for a periodfull amortization at maturity. The WhiteHawk Refinancing Agreement has customary representations, warranties and covenants including restrictions on indebtedness, liens, restricted payments and dividends, investments, asset sales and similar covenants and contains customary events of sixty (60) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60) days, Stronghold may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement.
Cryptech Solutions
The Company entered into a hardware purchase and sales agreement with Cryptech effective April 1, 2021. Hardware includes, but is not limited to ASIC Miners, power supply units, power distribution units and replacement fans for ASIC Miners. Total purchase price is $12,660,000 for 2,400 Bitmain S19j miners to be delivered monthly in equal quantities (200/month) from November 2021 through October 2022. All hardware must be paid for in advance before being shipped to the Company.
The Company made a 30% down payment of $3,798,000 on April 1, 2021 with the remaining 70% or $8,862,000 agreed to be paid in 17 installments. There have been 14 installments totaling $7,279,500 paid before June 30, 2022; with the outstanding amount still owed under this agreement of $1,582,500 as of June 30, 2022, representing 3 installments remaining through September 2022:
| | | | | | | | | | | | | | | | | |
| | | | | Remaining |
| | | Purchase Price | | $ | 12,656,835 | |
| | | April 2021 - 30% | | $ | (3,798,000) | |
# | Date | | After down payment | | $ | 8,858,835 | |
1 | 05/01/21 | | $ | (211,000) | | | $ | 8,647,835 | |
2 | 06/01/21 | | $ | (211,000) | | | $ | 8,436,835 | |
3 | 07/01/21 | | $ | (211,000) | | | $ | 8,225,835 | |
4 | 08/01/21 | | $ | (211,000) | | | $ | 8,014,835 | |
5 | 09/01/21 | | $ | (211,000) | | | $ | 7,803,835 | |
6 | 10/01/21 | | $ | (738,500) | | | $ | 7,065,335 | |
7 | 11/01/21 | | $ | (738,500) | | | $ | 6,326,835 | |
8 | 12/01/21 | | $ | (738,500) | | | $ | 5,588,335 | |
9 | 01/01/22 | | $ | (738,500) | | | $ | 4,849,835 | |
10 | 02/01/22 | | $ | (738,500) | | | $ | 4,111,335 | |
11 | 03/01/22 | | $ | (738,500) | | | $ | 3,372,835 | |
12 | 04/01/22 | | $ | (738,500) | | | $ | 2,634,335 | |
13 | 05/01/22 | | $ | (524,335) | | | $ | 2,110,000 | |
14 | 06/01/22 | | $ | (527,500) | | | $ | 1,582,500 | |
15 | 07/01/22 | | $ | (527,500) | | | $ | 1,055,000 | |
16 | 08/01/22 | | $ | (527,500) | | | $ | 527,500 | |
17 | 09/01/22 | | $ | (527,500) | | | $ | — | |
default.
On February 6, 2023, the Company, Stronghold LLC, as borrower, their subsidiaries and WhiteHawk Capital Partners LP ("WhiteHawk Capital"), as collateral agent and administrative agent, and the other lenders thereto, entered into an amendment to the Credit Agreement (the “First Amendment”) in order to modify certain covenants and remove certain prepayment requirements contained therein. As a result of the First Amendment, amortization payments for the period from February 2023 through July 2024 will not be required, with monthly amortization resuming July 31, 2024. Beginning June 30, 2023, following a five-month holiday, Stronghold LLC will make monthly prepayments of the loan in an amount equal to 50% of its average daily cash balance (including cryptocurrencies) in excess of $7,500,000 for such month. The First Amendment also modified the financial covenants to (i) in the case of the requirement of the Company to maintain a leverage ratio no greater than 4.0:1.00, such covenant will not be tested until the fiscal quarter ending September 30, 2024, and (ii) in the case of the minimum liquidity covenant, modified to require minimum liquidity at any time to be not less than: (A) until March 31, 2024, $2,500,000; (B) during the period beginning April 1, 2024, through and including December 7, 2021,31, 2024, $5,000,000; and (C) from and after January 1, 2025, $7,500,000. The Company was in compliance with all applicable covenants under the WhiteHawk Refinancing Agreement as of March 31, 2023.
The borrowings under the WhiteHawk Refinancing Agreement mature on October 26, 2025, and bear interest at a rate of either (i) the Secured Overnight Financing Rate ("SOFR") plus 10% or (ii) a reference rate equal to the greater of (x) 3%, (y) the federal funds rate plus 0.5% and (y) the term SOFR rate plus 1%, plus 9%. Borrowings under the WhiteHawk Refinancing Agreement may also be accelerated in certain circumstances.
Convertible Note Exchange
On December 30, 2022, the Company entered into an exchange agreement with the holders (the “Holders”) of the Company’s Amended and Restated 10% Notes (the “Notes”), providing for the exchange of the Notes (the “Exchange Transaction”) for shares of the Company’s newly-created Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”). On February 20, 2023, the Exchange Transaction was consummated, and the Notes were deemed paid in full. Approximately $16.9 million of principal amount of debt was extinguished in exchange for the issuance of the shares of Series C Preferred Stock. As a result of this transaction, the Company incurred a loss on debt extinguishment of approximately $29 million for the three months ended March 31, 2023.
On February 20, 2023, in connection with the consummation of the Exchange Transaction, the Company entered into a Hardware Purchase and SalesRegistration Rights Agreement with the Holders (the “Cryptech Purchase“Registration Rights Agreement”) whereby it agreed to, among other things, (i) file within two business days following the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, a resale registration statement (the “Resale Registration Statement”) with Cryptech Solutions, Incthe SEC covering all shares of the Company’s Class A common stock issuable upon conversion of the Series C Preferred Stock or upon exercise of the pre-funded warrants that may be issued in lieu of Class A common stock upon conversion of the Series C Preferred Stock, and (ii) to acquire 1,000 Bitmain S19a minerscause the Resale Registration Statement to become effective within the timeframes specified in the Registration Rights Agreement.
Bruce & Merrilees Promissory Note
On March 28, 2023, the Company and Stronghold LLC entered into a settlement agreement (the “B&M Settlement”) with a hash rate of 96 Terahash per second ("TH/s"its electrical contractor, Bruce & Merrilees Electric Co. (“B&M”). Pursuant to the B&M Settlement, B&M agreed to eliminate an approximately $11.4 million outstanding payable in exchange for a total purchase price of $8,592,000. As of June 30, 2022, all 1,000 Bitmain S19a miners had been paid for and received.
Bitmain Technologies Limited
On October 28, 2021, the Company entered into the first of two Non-Fixed Price Sales and Purchase Agreements with Bitmain Technologies Limited ("Bitmain"). The first agreement covers six batches of 2,000 miners, or 12,000 in total, arriving on a monthly basis from April through September 2022. Each batch has an assigned purchase price that totals to $75,000,000, to be paid in 3 installments of 25%, 35% and 40% over the six-month delivery period. On October 29, 2021, the Company made a $23,300,000 payment comprised of the 25% installment payment plus 35% of the April 2022 batch of 2,000 miners that have an assigned purchase price of $13,000,000. On November 18, 2021, the Company made an additional payment of 35% or $4,550,000 towards the April 2022 batch of miners. During the six-month period ending June 30, 2022, the Company paid installments totaling $19,996,500.
On November 16, 2021, the Company entered into the second Non-Fixed Price Sales and Purchase Agreement with Bitmain. This second agreement covers six batches of 300 miners, or 1,800 in total, arriving on a monthly basis from July 2022 through December 2022. Each batch has an assigned purchase price that totals $19,350,000, to be paid in 3 installments of 35%, 35%, and 30% of the total purchase price over the six-month delivery period. Per the second Non-Fixed Price Sales and Purchase Agreement, on November 18, 2021, the Company paid the first installment payment of 35% or $6,835,000. During the six-month period ending June 30, 2022, the Company paid 5 installments totaling $5,733,000. The Non-Fixed Price Sales and Purchase Agreement was sold in May of 2022. Refer to Note 4 – Equipment Deposits and Miner Sales.
Luxor Technology Corporation
The Company paid for three separate purchases of miners from Luxor Technology Corporation ("Luxor"). The first purchase payment was made on November 26, 2021,promissory note in the amount of $4,312,650 for 770 miners. The second and third purchase payments were made on November 29, 2021, in the amounts of $5,357,300 and $3,633,500, respectively, for an additional 750 and 500 miners. These miners were received and recorded as property and equipment.
On November 30, 2021, the Company entered into a fourth purchase agreement with Luxor to acquire 400 Antminer T19 miners with a hash rate of 84 TH/s and 400 Antminer T19 miners with a hash rate of 88 TH/s for a total purchase price of $6,260,800. These miners were received and recorded as property and equipment.
Northern Data
On December 10, 2021 the Company entered into a Hardware Purchase and Sale Agreement$3,500,000 (the “First Supplier Purchase Agreement”) to acquire 3,000 MicroBT WhatsMiner M30S miners (the “M30S Miners”) with a hash rate per unit of 87 TH/s. Pursuant to the First Supplier Purchase Agreement, the unit price per M30S Miner is $6,960 for a cumulative purchase price of $20,880,000 that was paid in full within five business days of the execution of the First Supplier Purchase Agreement.
On December 16, 2021, the Company entered into a Second Hardware Purchase and Sale Agreement (the “Second Supplier Purchase Agreement") to acquire a cumulative amount of approximately 4,280 M30S Miners and M30S+ miners with a hash rate per unit of 100 TH/s (the “M30S+ Miners”). Pursuant to the Second Supplier Purchase Agreement, the unit price per M30S Miner is $2,714 and the unit price per M30S+ Miner is $3,520 for a cumulative purchase price of $11,340,373. As of June 30, 2022, these miners were received and recorded as property and equipment.
NYDIG ABL LLC
On December 15, 2021, the Company entered into a Master Equipment Finance Agreement (the “Second NYDIG Financing Agreement”) with NYDIG ABL LLC (“NYDIG”) whereby NYDIG agreed to lend the Company up to $53,952,000 to finance the purchase of certain Bitcoin miners and related equipment (the “Second NYDIG-Financed Equipment”). Outstanding borrowings under the Second NYDIG Financing Agreement are secured by the Second NYDIG-Financed Equipment, contracts to acquire Second NYDIG-Financed Equipment, and the Bitcoin mined by the Second NYDIG-Financed Equipment. The Second NYDIG Financing Agreement includes customary restrictions on additional
liens on the NYDIG-Financed Equipment. The Second NYDIG Financing Agreement may not be terminated by the Company or prepaid in whole or in part. Refer to Note 6 – Long-Term Debt for further details.
Arctos Credit LLC (NYDIG)
On January 31, 2022, Stronghold and NYDIG ABL LLC (f/k/a Arctos Credit, LLC), amended the NYDIG Financing Agreement (the “NYDIG Amendment”) to include (i) 2,140 M30S+ Miners and (ii) 2,140 M30S Miners purchased by Stronghold Inc. pursuant to a purchase agreement dated December 16, 2021, totaling $12,622,816 of additional borrowing capacity. Stronghold paid an aggregate closing fee of $504,912 to NYDIG. The NYDIG Amendment requires that the Company maintain a blocked wallet or other account for deposits of all mined currency. In February 2022, the Company received the additional borrowing of $12,622,816 less the $504,912 in closing fees. Refer to Note 6 – Long-Term Debt for further details.
WhiteHawk Finance LLC
On June 30, 2021, Equipment LLC entered into an equipment financing agreement (the "WhiteHawk Financing Agreement") with WhiteHawk whereby WhiteHawk originally agreed to lend to Equipment LLC an aggregate amount not to exceed $40.0 million to finance the purchase of certain Bitcoin miners and related equipment (the "Total Advance"). The WhiteHawk Financing Agreement originally contained terms requiring that the 15,000 miners being purchased pursuant to the MinerVa Purchase Agreement be delivered on or before December 31, 2021. MinerVa did not deliver all of the miners under the MinerVa Purchase Agreement by the December 31, 2021 deadline. On December 31, 2021, Equipment LLC and WhiteHawk entered into the WhiteHawk Amendment to extend the final MinerVa delivery date from December 31, 2021 to April 30, 2022. On March 28, 2022, Equipment LLC and WhiteHawk again amended the WhiteHawk Financing Agreement (the "Second WhiteHawk Amendment") to exchange the collateral under the WhiteHawk Financing Agreement, which removed MinerVa miners from the collateral package.
Pursuant to the Second WhiteHawk Amendment, (i) the approximately 11,700 remaining miners under the MinerVa Purchase Agreement were exchanged as collateral for additional miners received by the Company from various suppliers and (ii) WhiteHawk agreed to lend to the Company an additional amount not to exceed $25.0 million to finance certain previously purchased Bitcoin miners and related equipment (the "Second Total Advance"). Pursuant to the Second WhiteHawk Amendment, Equipment, LLC paid an amendment fee in the amount of $275,414.40 and a closing fee with respect to the Second Total Advance of $500,000. In addition to the purchased Bitcoin miners and related equipment, Panther Creek Power Operating LLC ("Panther Creek") and Scrubgrass each agreed to a negative pledge of the coal refuse reclamation facility with 80 MW of net electricity generation capacity of net electricity generation capacity located near Nesquehoning, Pennsylvania (the "Panther Creek Plant""B&M Note") and a low-cost, environmentally-beneficial coal refuse power generation facility thatstock purchase warrant for the right to purchase from the Company has upgraded in Scrubgrass Township, Pennsylvania (the "Scrubgrass Plant"), respectively, and guaranteed the WhiteHawk Financing Agreement. Each of the negative pledge and the guaranty by Panther Creek and Scrubgrass will be released upon payment in full of the Second Total Advance, regardless of whether the Total Advance remains outstanding. In conjunction with the Second WhiteHawk Amendment, the Company issued a warrant to WhiteHawk, to purchase 125,0003,000,000 shares of Class A common stock subject to certain anti-dilution and other adjustment provisions as described in the warrant agreement, at an exercise price of $0.01 per share (the “Second WhiteHawk Warrant”"B&M Warrant"). The Second WhiteHawk Warrant expires on March 28, 2032. WhileB&M Note has no definitive payment schedule or term. Pursuant to the B&M Settlement, B&M released ten (10) 3000kva transformers to the Company continues to engage in discussionsand fully cancelled ninety (90) transformers remaining under a pre-existing order with MinerVa on the deliverya third-party supplier. The terms of the remaining miners, it does not know whenB&M Settlement included a mutual release of all claims. Simultaneous with the remaining miners will be delivered, if at all.
Contingencies:
Legal Proceedings
TheB&M Settlement, the Company experiences litigation in the normal courseand each of business. Management isits subsidiaries entered into a subordination agreement with B&M and WhiteHawk Capital pursuant to which all obligations, liabilities and indebtedness of every nature of the opinion that noneCompany and each of this litigation will have a material adverse effect onits subsidiaries owed to B&M shall be subordinate and subject in right and time of payment, to the Company’s reported financial position or results of operations.
Allegheny Mineral Corporation v. Scrubgrass Generating Company, L.P., Butler County Court of Common Pleas, No. AD 19-11039
In November 2019, Allegheny Mineral Corporation ("Allegheny Mineral") filed suit against the Company seekingprior payment of approximately $1,200,000 in outstanding invoices. In response, the Company filed counterclaims against Allegheny Mineral asserting breachfull of contract, breach of express and implied warranties, and fraud in the amount of
$1,300,000. The case was unsuccessfully mediated in August 2020. At this time, there is a discovery deadline currently scheduled for October 31, 2022. Management believes that this litigation is unlikely to have a material adverse effect on the Company's consolidated financial position or results of operations.
PJM Notice of Breach
On November 19, 2021, Scrubgrass received a notice of breach from PJM Interconnection, LLC alleging that Scrubgrass breached Interconnection Service Agreement – No. 1795 (the “ISA”) by failingobligation to provide advance notice to PJM Interconnection, LLC and Mid-Atlantic Interstate Transmission, LLC (“MAIT”)WhiteHawk Capital pursuant to ISA, Appendix 2, section 3, of modifications madethe Credit Agreement.
Pursuant to the Scrubgrass Plant. On December 16, 2021, Scrubgrass responded toB&M Note, the notice of breach and respectfully disagreed that the ISA had been breached. On January 7, 2022, Scrubgrass participated in an information gathering meeting with representatives from PJM regarding the notice of breach and Scrubgrass continues to work with PJM regarding the dispute, including conducting a necessary study agreement with respect to the Scrubgrass Plant. On January 20, 2022, the Company sent PJM a letter regarding the installation of a resistive computational load bank at the Panther Creek Plant. On March 1, 2022, the Company executed a necessary study agreement with respect to the Panther Creek Plant. On May 11, 2022, the Division of Investigationsfirst $500,000 of the FERC Office of Enforcement (“OE”) informed the Company that the Office of Enforcement is conducting a non-public preliminary investigation concerning Scrubgrass’ compliance with various aspectsprincipal amount of the PJM tariff.The OE requested that the Company provide certain information and documents concerning Scrubgrass’ operations by June 10, 2022. On July 13, 2022, after being granted an extension to respond by the OE, the Company submitted a formal response to the OE's request.The OE has not alleged any specific instancesloan shall be payable in four equal monthly installments of non-compliance by Scrubgrass. The Company does not believe the PJM notice of breach, the Panther Creek necessary study agreement, or the preliminary investigation by the OE will have a material adverse effect$125,000 beginning on the Company’s reported financial position or results of operations.
Winter v. Stronghold Digital Mining Inc., et al., U.S District Court for the Southern District of New York
The Company together with certain of its key personnel and the underwriters for the Company’s initial public offering, has been named in a lawsuit filed in the U.S District Court for the Southern District of New York captioned Winter v. Stronghold Digital Mining Inc., et al., alleging that the Company’s registration statement filed in connection with its initial public offering contained false or misleading statements in violation of the federal securities laws. On August 4, 2022, co-lead plaintiffs were appointed. Management believes this litigation is unlikely to have a material adverse effect on the Company's financial position.
NOTE 9 – RELATED-PARTY TRANSACTIONS
Waste Coal Agreement
The Company is obligated under a Waste Coal Agreement (the “WCA”) to take minimum annual delivery of 200,000 tons of waste coal asApril 30, 2023, so long as there(i) no default or event of default has occurred or is a sufficient quantity of waste coal that meetsoccurring under the Average Quality CharacteristicsWhiteHawk Credit Agreement and (ii) no PIK Option (as such term is defined in the WCA). UnderWhiteHawk Refinancing Agreement) has been elected by the terms ofCompany. The principal amount under the WCA, the Company is not charged for the waste coal itself but is charged a $6.07 per ton base handling fee as it is obligated to mine, process, loadB&M Note bears interest at seven and otherwise handle the waste coal for itself and also for other customers of Coal Valley Sales, LLC (“CVS”one-half percent (7.5%) from the Russellton site specifically. The Company is also obligated to unload and properly dispose of ash at the Russellton site.
A reduced handling fee is charged at $1.00 per ton for any tons in excess of the minimum take of 200,000 tons.
The Company is the designated operator at the Russellton site and therefore is responsible for complying with all state and federal requirements and regulations.
In December 2020, the Company notified CVS by letter that it intends to restart operations at Russellton during the first quarter of 2021. It proposed a ramp-up of tons and payments at $25,000 a month until the economics of the plant steady and return to the minimum take per the contract. Subsequent to March 31, 2021, the Company has resumed the semi-monthly minimum payments of approximately $51,000 per the WCA.
The Company purchased coal from Coal Valley Properties, LLC, a single-member LLC which is entirely owned by 1 individual that has ownership in Q Power, and from CVS. CVS is a single-member LLC which is owned by a coal reclamation partnership of which an owner of Q Power has a direct and an indirect interest in the partnership of 16.26%.
For the three and six months ended June 30, 2022, the Company expensed approximately $303,500 and $607,000, respectively, which is included in fuel expense in the accompanying statement of operations. The Company owed CVS approximately $202,333 as of June 30, 2022, which is included in Due to Related Parties.
Fuel Service and Beneficial Use Agreement
The Company has a Fuel Service and Beneficial Use Agreement (“FBUA”) with Northampton Fuel Supply Company, Inc. (“NFS”), a wholly-owned subsidiary of Olympus Power. The Company buys fuel from and sends ash to NFS, for the mutual benefit of both facilities, under the terms and rates established in the FBUA. The FBUA expires December 31, 2023. For the three and six months ended June 30, 2022, the Company expensed $540,747 and $921,112, respectively, which is included in fuel expense in the consolidated statement of operations. The Company owed NFS approximately $214,660 as of June 30, 2022, which is included in Due to Related Parties.
Fuel purchases under these agreements for the six months ended June 30, 2022 and June 30, 2021 are as follows:
| | | | | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 | |
Coal Purchases: | | | | |
Northampton Fuel Supply Company, Inc. | $ | 921,112 | | | $ | 37,810 | | |
Coal Valley Sales, LLC | 607,000 | | | 378,500 | | |
TOTALS | $ | 1,528,112 | | | $ | 416,310 | | |
Fuel Management Agreement
Panther Creek Fuel Services LLC
Effective August 1, 2012, the Company entered into the Fuel Management Agreement (the “Fuel Agreement”) with Panther Creek Fuel Services LLC, a wholly-owned subsidiary of Olympus Services LLC, which in turn, is a wholly-owned subsidiary of Olympus Power LLC. Under the Fuel Agreement, Panther Creek Fuel Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The amount expensed for the three and six months ended June 30, 2022, was $452,290 and $851,059, respectively, of which $84,632 was included in Due to Related Parties as of June 30, 2022.
Scrubgrass Fuel Services, LLC
Effective February 1, 2022, the Company entered into the Fuel Management Agreement (the “Scrubgrass Fuel Agreement”) with Scrubgrass Fuel Services LLC, a wholly-owned subsidiary of Olympus Services LLC, which in turn, is a wholly-owned subsidiary of Olympus Power LLC. Under the Scrubgrass Fuel Agreement, Scrubgrass Fuel Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The amount expensed for the three and six months ended June 30, 2022, was $236,993 and $333,617, respectively, of which $42,324 was included in Due to Related Parties as of June 30, 2022.
O&M Agreements
Olympus Power LLC
On November 2, 2021, Stronghold LLC entered into an Operations, Maintenance and Ancillary Services Agreement (the “Omnibus Services Agreement”) with Olympus Stronghold Services, LLC (“Olympus Stronghold Services”), whereby Olympus Stronghold Services will provide certain operations and maintenance services to Stronghold LLC, as well as employ certain personnel to operate the Panther Creek Plant and the Scrubgrass Plant. Stronghold LLC will reimburse Olympus Stronghold Services for those costs incurred by Olympus Stronghold Services and approved by Stronghold LLC in the course of providing services under the Omnibus Services Agreement, including payroll and benefits costs and insurance costs. The material costs incurred by Olympus Stronghold Services shall be approved by Stronghold LLC. Stronghold LLC will also pay Olympus Stronghold Services a management fee at the rate of $1,000,000 per year, payable monthly, and an additional one-time mobilization fee of $150,000 upon the effective date of the Omnibus Services Agreement. The amount expensed for the three and six months ended June 30, 2022 was $239,793 and $796,691, respectively, (excluding the one-time mobilization fee of $150,000 that has been deferred until 2022 for payment).
Panther Creek Energy Services LLC
Effective August 2, 2021, the Company entered into the Operations and Maintenance Agreement (the “O&M Agreement”) with Panther Creek Energy Services LLC, a wholly-owned subsidiary of Olympus Services LLC, which in turn, is a wholly-owned subsidiary of Olympus Power LLC. Under the O&M Agreement, Panther Creek Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The Company also pays a management fee of $175,000 per operating year, which is payable monthly and is adjusted by the consumer price index on each anniversary date of the effective date. The amount expensed for the three and six months ended June 30, 2022 was $1,137,345 and $2,025,169, respectively, of which $222,103 was included in Due to Related Parties. In connection with the equity contribution agreement entered into on July 9, 2021 (the "Equity Contribution Agreement"), the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Amended O&M Agreement”) with Panther Creek Energy Services LLC. Under the Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Amended O&M Agreement is the closing date of the Equity Contribution Agreement.
Scrubgrass Energy Services, LLC
Effective February 1, 2022, the Company entered into the Operations and Maintenance Agreement (the “Scrubgrass O&M Agreement”) with Scrubgrass Energy Services, LLC, a wholly-owned subsidiary of Olympus Services LLC, which in turn, is a wholly-owned subsidiary of Olympus Power LLC. Under the Scrubgrass O&M Agreement, Scrubgrass Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The Company also pays a management fee of $175,000 per operating year, which is payable monthly and is adjusted by the consumer price index on each anniversary date of the effective date. The amount expensed for the three and six months ended June 30, 2022 was $1,792,213 and $2,650,127, respectively, of which $573,795 was included in Due to Related Parties. In connection with the Equity Contribution Agreement entered into on July 9, 2021, the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Scrubgrass Amended O&M Agreement”) with Scrubgrass Energy Services LLC. Under the Scrubgrass Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Scrubgrass Amended O&M Agreement is the closing date of the Equity Contribution Agreement.
Management Services Agreement
On May 10, 2021, a new management and advisory agreement was entered into between Q Power, and William Spence. In consideration of consultant’s performance of the services thereunder, Q Power will pay Mr. Spence a fee at the rate of $50,000 per complete calendar month (pro-rated for partial months) that Mr. Spence provides services thereunder, payable in arrears. The previous agreement requiring monthly payments of $25,000 was terminated. Q Power will not be liable for any other payments to Mr. Spence including, but not limited to, any cost or expenses incurred by Mr. Spence in the course of performing his obligations thereunder.
The Company has made total payments of $150,000 and $300,000 for the three and six months ended June 30, 2022.
Amounts due to related parties as of:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Payables: | | | |
Coal Valley Properties, LLC | $ | 134,452 | | | $ | 134,452 | |
Q Power LLC | 500,000 | | | 500,000 | |
Coal Valley Sales, LLC | 202,333 | | | 202,333 | |
Panther Creek Energy Services | 222,103 | | | 94,435 | |
Panther Creek Fuel Services | 84,632 | | | 47,967 | |
Northampton Generating Co LP | 214,660 | | | 321,738 | |
Olympus Services LLC | — | | | 129,735 | |
Scrubgrass Energy Services | 573,795 | | | — | |
Scrubgrass Fuel Services | 42,324 | | | — | |
TOTALS | $ | 1,974,299 | | | $ | 1,430,660 | |
NOTE 10 – PAYCHECK PROTECTION PROGRAM LOAN, ECONOMIC INJURY DISASTER LOAN
On March 16, 2021, the Company received a second round Paycheck Protection Program ("PPP") loan in the amount of $841,670 that accrues an interest of 1% per year; and matures on the fifth anniversary of the date of the note. In January 2021, the Company was granted relief as forgiveness for the round 1 PPP loan in the amount of $638,800.
On June 8, 2021, the Company repaid the Economic Injury Disaster Loan (“EIDL”), received on March 31, 2020, in the amount of $150,000.
On May 25, 2022, the Company was granted relief as forgiveness for the second round PPP loan in the amount of $841,670.
NOTE 11 – COVID-19
The full impact of the coronavirus (“COVID-19”) outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the future effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity.
NOTE 128 – SEGMENT REPORTINGRELATED-PARTY TRANSACTIONS
Operating segments areWaste Coal Agreement
The Company is obligated under a Waste Coal Agreement (the “WCA”) to take minimum annual delivery of 200,000 tons of waste coal as long as there is a sufficient quantity of waste coal that meets the Average Quality Characteristics (as defined in the WCA). Under the terms of the WCA, the Company is not charged for the waste coal itself but is charged a $6.07 per ton base handling fee as componentsit is obligated to mine, process, load, and otherwise handle the waste coal for itself and also for other customers of an enterprise about which separate financial informationCoal Valley Sales, LLC (“CVS”) from the Company's Russellton site specifically. The Company is available thatalso obligated to unload and properly dispose of ash at its Russellton site. The Company is evaluated regularlycharged a reduced handling fee of $1.00 per ton for any tons in deciding how to allocate resources and in assessing performance. Our CEOexcess of the minimum take of 200,000 tons. The Company is the primary decision-maker. designated operator of the Russellton site, and therefore, is responsible for complying with all state and federal requirements and regulations.
The Company functionspurchases coal from Coal Valley Properties, LLC, a single-member limited liability company which is entirely owned by one individual who has ownership in 2 operating segments aboutQ Power LLC ("Q Power"), and from CVS. CVS is a single-member limited liability company which separate financial information is availableowned by a coal reclamation partnership of which an owner of Q Power has a direct and an indirect interest in the partnership of 16.26%.
The Company expensed $150,000 and $303,500 for the three months ended March 31, 2023, and 2022, respectively, associated with coal purchases from CVS, which is included in fuel expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as follows:of March 31, 2023, and December 31, 2022, below.
Fuel Service and Beneficial Use Agreement
The Company has a Fuel Service and Beneficial Use Agreement (“FBUA”) with Northampton Fuel Supply Company, Inc. (“NFS”), a wholly owned subsidiary of Olympus Power. The Company buys fuel from and sends ash to NFS, for the mutual benefit of both facilities, under the terms and rates established in the FBUA. The FBUA expires on December 31, 2023. The Company expensed $1,157,927 and $379,646 for the three months ended March 31, 2023, and 2022, respectively, which is included in fuel expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Fuel Management Agreements
Panther Creek Fuel Services LLC
Effective August 1, 2012, the Company entered into the Fuel Management Agreement (the “Panther Creek Fuel Agreement”) with Panther Creek Fuel Services LLC, a wholly owned subsidiary of Olympus Services LLC which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the Panther Creek Fuel Agreement, Panther Creek Fuel Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The Company expensed $478,621 and $398,769 for the three months ended March 31, 2023, and 2022, respectively, which is included in operations and maintenance expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Scrubgrass Fuel Services, LLC
Effective February 1, 2022, the Company entered into the Fuel Management Agreement (the “Scrubgrass Fuel Agreement”) with Scrubgrass Fuel Services LLC, a wholly owned subsidiary of Olympus Services LLC, which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the Scrubgrass Fuel Agreement, Scrubgrass Fuel Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The Company expensed $276,119 and $96,624 for the three months ended March 31, 2023, and 2022, respectively, which is included in operations and maintenance expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Reportable segment resultsO&M Agreements
Olympus Power LLC
On November 2, 2021, Stronghold LLC entered into an Operations, Maintenance and Ancillary Services Agreement (the “Omnibus Services Agreement”) with Olympus Stronghold Services, LLC (“Olympus Stronghold Services”), whereby Olympus Stronghold Services currently provides certain operations and maintenance services to Stronghold LLC and currently employs certain personnel to operate the Plants. Stronghold LLC reimburses Olympus Stronghold Services for those costs incurred by Olympus Stronghold Services and approved by Stronghold LLC in the course of providing services under the Omnibus Services Agreement, including payroll and benefits costs and insurance costs. The material costs incurred by Olympus Stronghold Services shall be approved by Stronghold LLC. From November 2, 2021, until October 1, 2023, Stronghold LLC also agreed to pay Olympus Stronghold Services a management fee at the rate of $1,000,000 per year, payable monthly for services provided at each of the Plants, and an additional one-time mobilization fee of $150,000 upon the effective date of the Omnibus Services Agreement, which has been deferred. Effective October 1, 2022, Stronghold LLC began paying Olympus Stronghold Services a management fee for the three- and six-months ending June 30, 2022 and June 30, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | Six Months Ended, |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) |
Operating Revenues | | | | | | | |
Energy Operations | $ | 8,829,741 | | | $ | 2,173,108 | | | $ | 19,257,731 | | | $ | 4,803,181 | |
Cryptocurrency Operations | 20,348,708 | | | 2,011,416 | | | 38,620,777 | | | 3,083,421 | |
Total Operating Revenues | $ | 29,178,449 | | | $ | 4,184,524 | | | $ | 57,878,508 | | | $ | 7,886,602 | |
Net Operating Income/(Loss) | | | | | | | |
Energy Operations | $ | (11,731,620) | | | $ | (2,570,168) | | | $ | (23,828,745) | | | $ | (3,785,805) | |
Cryptocurrency Operations | (18,123,022) | | | (467,593) | | | (35,663,263) | | | (221,239) | |
Net Operating Income/(Loss) | $ | (29,854,642) | | | $ | (3,037,761) | | | $ | (59,492,008) | | | $ | (4,007,044) | |
Other Income, net (a) | $ | (10,383,933) | | | $ | (205,248) | | | $ | (13,052,982) | | | $ | 525,079 | |
Net Income/(Loss) | $ | (40,238,575) | | | $ | (3,243,009) | | | $ | (72,544,990) | | | $ | (3,481,965) | |
Depreciation and Amortization | | | | | | | |
Energy Operations | $ | (1,326,552) | | | $ | (137,904) | | | $ | (2,582,653) | | | $ | (281,538) | |
Cryptocurrency Operations | (11,340,748) | | | (649,827) | | | (22,404,228) | | | (1,023,636) | |
Total Depreciation & Amortization | $ | (12,667,300) | | | $ | (787,731) | | | $ | (24,986,881) | | | $ | (1,305,174) | |
Interest Expense | | | | | | | |
Energy Operations | $ | (24,547) | | | $ | (27,048) | | | $ | (56,069) | | | $ | (68,306) | |
Cryptocurrency Operations | (4,484,236) | | | (28,395) | | | (7,364,166) | | | (65,777) | |
Total Interest Expense | $ | (4,508,783) | | | $ | (55,443) | | | $ | (7,420,235) | | | $ | (134,083) | |
(a)Panther Creek Plant in the amount of $500,000 per year, payable monthly for services provided at the Panther Creek Plant. This is a reduction of $500,000 from the $1,000,000 per year management fee that the Company was previously scheduled to pay Olympus Stronghold Services. The Company does not allocate other income, net for segment reporting purposes. Amount is shown as a reconciling item between net operating income/(losses)expensed $235,376 and consolidated income before taxes. Refer to consolidated statement of operations$228,598 for the three and six months ended June 30,March 31, 2023, and 2022, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll, benefits and insurance. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Panther Creek Energy Services LLC
Effective August 2, 2021, the Company entered into the Operations and Maintenance Agreement (the “O&M Agreement”) with Panther Creek Energy Services LLC, a wholly owned subsidiary of Olympus Services LLC which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the O&M Agreement, Panther Creek Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for further details.actual wages and salaries. The Company also agreed to pay a management fee of $175,000 per operating year, which is payable monthly, and is adjusted by the consumer price index on each anniversary date of the effective date. The Company expensed $910,394 and $887,824 for the three months ended March 31, 2023, and 2022, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll, benefits and insurance. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
In connection with the equity contribution agreement, effective July 9, 2021 (the "Equity Contribution Agreement"), the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Amended O&M Agreement”) with Panther Creek Energy Services LLC. Under the Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Amended O&M Agreement was the closing date of the Equity Contribution Agreement.
Scrubgrass Energy Services, LLC
Effective February 1, 2022, the Company entered into the Operations and Maintenance Agreement (the “Scrubgrass O&M Agreement”) with Scrubgrass Energy Services LLC, a wholly-owned subsidiary of Olympus Services LLC which, in turn, is a wholly-owned subsidiary of Olympus Power LLC. Under the Scrubgrass O&M Agreement, Scrubgrass Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The Company also agreed to pay a management fee of $175,000 per operating year, which is payable monthly, and is adjusted by the consumer price index on each anniversary date of the effective date. The Company expensed $1,724,112 and $857,913 for the three months ended March 31, 2023, and 2022, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll, benefits and insurance. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
In connection with the Equity Contribution Agreement effective July 9, 2021, the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Scrubgrass Amended O&M Agreement”) with Scrubgrass Energy Services LLC. Under the Scrubgrass Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Scrubgrass Amended O&M Agreement is the closing date of the Equity Contribution Agreement.
Assets, at June 30,Effective October 1, 2022, by energy operations and cryptocurrency operations totaled $57,499,986 and $297,770,158, respectively. Assets at June 30, 2021, by energy operations and cryptocurrency operations totaled $9,613,610 and $134,821,405, respectively.Stronghold LLC no longer pays Olympus Stronghold Services a management fee for the Scrubgrass Plant.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | June 30, 2021 |
| Energy Operations | | Cryptocurrency Operations | | Total | Energy Operations | | Cryptocurrency Operations | | Total |
| (unaudited) | | (unaudited) | | | (unaudited) | | (unaudited) | | |
| | | | | | | | | | |
Cash | $ | 364,653 | | | $ | 32,622,528 | | | $ | 32,987,181 | | $ | 3,060,035 | | | $ | 40,654,745 | | | $ | 43,714,779 | |
Digital currencies | — | | | 352,092 | | | 352,092 | | — | | | 1,259,215 | | | 1,259,215 | |
Digital currencies restricted | — | | | 4,779,895 | | | 4,779,895 | | — | | | — | | | — | |
Accounts receivable | 1,791,830 | | | 59,889 | | | 1,851,719 | | 416,563 | | | 360,057 | | | 776,620 | |
Due from related party | 848,150 | | | — | | | 848,150 | | — | | | — | | | — | |
Prepaid Insurance | — | | | 2,356,411 | | | 2,356,411 | | — | | | — | | | — | |
Inventory | 3,605,533 | | | — | | | 3,605,533 | | 319,821 | | | — | | | 319,821 | |
Other current assets | 1,586,133 | | | 147,774 | | | 1,733,907 | | 65,621 | | | 135,000 | | | 200,621 | |
Security Deposits | 227,369 | | | 121,519 | | | 348,888 | | — | | | — | | | — | |
Equipment Deposits | — | | | 66,472,016 | | | 66,472,016 | | — | | | 78,688,465 | | | 78,688,465 | |
Property, plant and equipment, net | 47,137,360 | | | 190,836,595 | | | 237,973,955 | | 5,536,407 | | | 13,723,923 | | | 19,260,330 | |
Land | 1,727,000 | | | 21,439 | | | 1,748,439 | | 29,919 | | | — | | | 29,919 | |
Bonds | 211,958 | | | — | | | 211,958 | | 185,245 | | | — | | | 185,245 | |
| $ | 57,499,986 | | | $ | 297,770,158 | | | $ | 355,270,144 | | $ | 9,613,610 | | | $ | 134,821,405 | | | $ | 144,435,015 | |
NOTE 13 – STOCK-BASED COMPENSATIONManagement Services Agreement
On OctoberMay 10, 2021, a new management and advisory agreement was entered into between Q Power and William Spence (the "Spence Agreement"). In consideration of the consultant’s performance of the services thereunder, Q Power will pay Mr. Spence a fee at the rate of $50,000 per complete calendar month (pro-rated for partial months) that Mr. Spence provides services thereunder, payable in arrears. The previous agreement requiring monthly payments of $25,000 was terminated. Q Power will not be liable for any other payments to Mr. Spence including, but not limited to, any cost or expenses incurred by Mr. Spence in the course of performing his obligations thereunder. Under the Spence Agreement, the Company expensed $150,000 for the three months ended March 31, 2023, and 2022.
On April 19, 2021,2023, pursuant to an independent consulting agreement the Company entered into with William Spence in connection with his departure from the board of directors of the Company (the "Board") and(the "Spence Consulting Agreement"), Mr. Spence's annualized salary of $600,000 decreased to the stockholdersgreater of $200,000 or 10% of any economic benefits derived from the sale of beneficial use ash, carbon sequestration efforts or alternative fuel arrangements, in each case, arranged by Mr. Spence. The previous Spence Agreement was terminated in connection with entry into the Spence Consulting Agreement. In April 2023, as part of the compensation pursuant to the Spence Consulting Agreement, Mr. Spence also received a one-time grant of 2,500,000 fully vested shares of the Company's Class A common stock.
Warrants
On September 13, 2022, the Company approvedentered into a new long-term incentive plan (the “New LTIP”) for employees, consultantsSecurities Purchase Agreement with Greg Beard, the Company's chairman and directors. The New LTIP provideschief executive officer, for the grantpurchase and sale of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, RSUs, PSUs, dividend equivalents, other stock-based awards, and substitute awards intended to align the interests of service providers, including the Company's named executive officers, with those of its stockholders. The New LTIP reserved 4,752,000602,409 shares of Class A common stock that may be issued or used for reference purposes or with respectand warrants to which awards may be granted. In addition, pursuant to the New LTIP, the 313,517 remainingpurchase 602,409 shares of Class A common stock, under the prior long-term incentive plan that was effectiveat an initial exercise price of $1.75 per share. Refer to Note 15 – Private Placements for additional details.
Additionally, on April 28, 2021, that20, 2023, Mr. Beard invested $1.0 million in exchange for 1,000,000 shares of Class A common stock and 1,000,000 pre-funded warrants. Refer to Note 15 – Private Placements for additional details.
Amounts due to related parties as of March 31, 2023, and December 31, 2022, were reserved and available for delivery, were assumed and reserved for issuance under the New LTIP. As of the effective date of the New LTIP, the Company now grants all equity-based awards under the New LTIP.as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Coal Valley Properties, LLC | $ | 134,452 | | | $ | 134,452 | |
Q Power LLC | 500,000 | | | 500,000 | |
Coal Valley Sales, LLC | — | | | — | |
Panther Creek Energy Services LLC | 90,483 | | | 10,687 | |
Panther Creek Fuel Services LLC | 687 | | | 53,482 | |
Northampton Generating Fuel Supply Company, Inc. | 886,135 | | | 594,039 | |
Olympus Power LLC and other subsidiaries | 758 | | | 78,302 | |
Scrubgrass Energy Services LLC | — | | | 4,087 | |
Scrubgrass Fuel Services LLC | — | | | — | |
Due to related parties | $ | 1,612,515 | | | $ | 1,375,049 | |
The Board
NOTE 9 – CONCENTRATIONS
Credit risk is duly authorizedthe risk of loss the Company would incur if counterparties fail to administer the New LTIP.perform their contractual obligations (including accounts receivable). The Company primarily conducts business with counterparties in the cryptocurrency mining and energy industry. This concentration of counterparties may impact the Company’s overall exposure to credit risk, either positively or negatively, in that its counterparties may be similarly affected by changes in economic, regulatory or other conditions. The Company mitigates potential credit losses by dealing, where practical, with counterparties that are rated at investment grade by a major credit agency or have a history of reliable performance within the cryptocurrency mining and energy industry.
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable. Cash and cash equivalents customarily exceed federally insured limits. The Company’s significant credit risk is primarily concentrated with CES. Over the course of 2022, the Company transitioned entirely to CES from Direct Energy Business Marketing, LLC. CES accounted for share-based payment awards exchanged for services at the estimated grant date fair value100% of the award.
Stock options issued underCompany's energy operations segment revenues for the Company’s New LTIP are granted with an exercise price no less than the market pricethree months ended March 31, 2023. Additionally, CES accounted for approximately 100% of the Company’s stock at the date of grant and expire up to ten years from the date of the grant. The Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options issued under the LTIP were granted with an exercise price equal to the fair market value of the Company’s stock, as determined with reference to third-party valuations as of the date of option grants, and expire up to ten years from the date of grant. Options granted under the New LTIP and the LTIP vest over various terms.
The RSUs are subject to restrictions on transferability, risk of forfeiture and other restrictions imposed by the Compensation Committee of the Board (the "Compensation Committee"). Settlement of vested RSUs will occur upon vesting or upon expiration of the deferral period specified for such RSUs by the Compensation Committee (or, if permitted by the Compensation Committee, as elected by the Participant). RSUs may be settled in cash or a number of shares of stock (or a combination of the two), as determined by the Compensation Committee at the date of grant or thereafter. As of
June 30,accounts receivable balance as of March 31, 2023, including approximately $3.7 million CES expects to receive from PJM on the Company's behalf, and forward to the Company upon receipt. During the first quarter of 2023, following an updated calculation from PJM revising the expected December 2022 1,429,407 RSUs were awarded to 146 employees withperformance assessment interval account receivable, the Company recorded a weighted average grant date fair marketdecrease in the value of $4.04 that vest over three years.
Stock-Based Compensation
Stock compensation expense was $3,152,629accounts receivable of $1,002,750 within general and $5,745,625 for the three and six months ended June 30, 2022, respectively, and $269,932 for both the three and six months ended June 30, 2021. There is no tax benefit related to stock compensation expense due to a full valuation allowance on net deferred tax assets at June 30, 2022.
The Company recognized total stock-based compensation expense during the three and six months ended June 30, 2022 and 2021, from the following categories:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
Restricted stock awards under the Plan | $ | 876,275 | | | $ | — | | | $ | 1,214,957 | | | $ | — | |
Stock option awards under the Plan | 2,276,354 | | | 269,932 | | | 4,530,667 | | | 269,932 | |
Total stock-based compensation | $ | 3,152,629 | | | $ | 269,932 | | | $ | 5,745,625 | | | $ | 269,932 | |
Incentive Plan Stock Options
The following are the weighted average assumptions used in calculating the fair value of the total stock options granted in 2022 using the Black-Scholes method.
| | | | | |
| June 30, 2022 |
Weighted-average fair value of options granted | $ | 10.21 | |
Expected volatility | 126.20 | % |
Expected life (in years) | 5.81 |
Risk-free interest rate | 1.78 | % |
Expected dividend yield | 0.00 | % |
Expected Volatility – The Company estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies.
Expected Term – The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Risk-Free Interest Rate – The Company bases the risk-free interest rate on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend – The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividendsadministrative expenses in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
The Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update 2016-09.
As of June 30, 2022, the total future compensation expense related to non-vested options not yet recognized in thecondensed consolidated statement of operations wasoperations. The Company expects to receive the approximately $18,450,130 and$3.7 million of remaining accounts receivable from PJM (via CES) during the weighted-average period over which these awards are expected to be recognized is 2.05 years.remainder of 2023.
There were 3,476,615 outstanding shares as of June 30, 2022. The following table summarizesFor the stock option activity (as adjusted) under the plans for the sixthree months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted- Average Exercise Price | | | | Weighted- Average Remaining Contract Price | | Aggregate Intrinsic Value (in thousands) |
Outstanding at December 31, 2021 | 3,379,083 | | | $ | 8.91 | | | | | 9.61 | | | $ | 30,906 | |
Granted | 97,532 | | | $ | 10.61 | | | | | $ | — | | | $ | — | |
Exercised | — | | | $ | — | | | | | — | | | $ | — | |
Cancelled/forfeited | — | | | $ | — | | | | | — | | | $ | — | |
Outstanding at June 30, 2022 | 3,476,615 | | | $ | 8.96 | | | | | 9.13 | | | $ | — | |
Shares vested and expected to vest | 3,476,615 | | | $ | 8.96 | | | | | 9.13 | | | $ | — | |
Exercisable as of June 30, 2022 | 1,020,489 | | | $ | 8.76 | | | | | 9.09 | | | $ | — | |
Exercisable as of June 30, 2021 | — | | | $ | — | | | | | — | | | $ | — | |
RSUMarch 31, 2023, and PSU Awards
A summary2022, respectively, the Company purchased 19% and 13% of the Company's RSU activity in the six months ended June 30, 2022 is as follows:
| | | | | | | | | | | |
| Number of Shares | | Weighted Average Grant-Date Fair Value |
Unvested at December 31, 2021 | 60,737 | | | $ | 24.33 | |
Vested | (15,710) | | | $ | 7.50 | |
Granted | 1,679,407 | | | $ | 4.04 | |
Forfeited | — | | | $ | — | |
Unvested at June 30, 2022 | 1,724,434 | | | $ | 4.83 | |
The value of RSU grants are measured based on their fair market value on the date of grant and amortized over their respective vesting periods. As of June 30, 2022, there was approximately $5,858,001 of unrecognized compensation costcoal from two related to unvested RSU rights, which is expected to be recognized over a remaining weighted-average vesting period of approximately 1.97 years.
The total intrinsic value of RSUs that vested and were released during the three and six month periods ended June 30, 2022 was $53,776 and $117,868, respectively. No RSUs vested during the three and six month periods ended June 30, 2021.
On April 28, 2022 the Company's Chief Financial Officer was granted 250,000 PSUs that will begin vesting in October, 2022.parties. See Note 8 – Related-Party Transactions for further information.
NOTE 1410 – STOCK ISSUED UNDER MASTER FINANCING AGREEMENTSCOMMITMENTS AND WARRANTSCONTINGENCIES
Stock Issued as partCommitments:
As discussed in Note 4 – Equipment Deposits, the Company has entered into various equipment contracts to purchase miners. Most of an Equipment Financing Agreementthese contracts required a percentage of deposits upfront and subsequent payments to cover the contracted purchase price of the equipment. Details of the outstanding purchase agreement with MinerVa are summarized below.
Arctos Credit LLC (NYDIG)MinerVa Semiconductor Corp
On June 25, 2021, SDM (i.e. "the Company") entered into a $34,481,700 ("Maximum Advance Amount") master equipment financing agreement with an affiliate of Arctos Credit, LLC (“Arctos” now known as “NYDIG”) (the “Arctos/NYDIG Financing Agreement”). As part of this agreement, NYDIG was issued a total of 126,274 shares of common stock of Stronghold Inc. The effective date of this issuance was as of the commencement date of the agreement. On JulyApril 2, 2021, the Company received 2 separate loans, against the $34,481,700, totaling $24,157,178 (net of debt issuance fees). The loans each have a maturity date of July 23, 2023, where the full outstanding principal amount of the loans is due and payable. Interest for each of the loans is set at 10% per annum. On January 31, 2022, the Company amended the master equipment financing agreement with an affiliate of Arctos Credit, LLC to allow for a Maximum Advance Amount of $37,341,978. On February 1, 2022, the Company received 2 separate loans, against the $37,341,978, totaling
$12,117,903 (net of debt issuance fees). The loans each have a maturity date of April 25, 2023 and October 25, 2023, respectively, where the full outstanding principal amount of the loans is due and payable. Interest for each of the loans is set at 10% per annum.
As of June 30, 2022, the fair value at the date of issuance (i.e.- June 25, 2021) of the 126,274 common shares or $1,389,888 is presented on the balance sheet as debt discounts that offset the net proceeds of the loans; and is being amortized using the straight-line method over the terms of the loans (refer to Note 6 – Long-Term Debt for further details). For the six months ended June 30, 2022, the Company recorded amortized costs in the amount of $347,472 related to the stock issued debt discounts. That amount is included in interest expense.
In addition, the agreement stipulates a "Standby Fee" if, prior to August 15, 2021, the Company has failed to take advances from NYDIG equal to the total agreement amount of $37,341,978. The Standby Fee is calculated as 1.75% times the remaining principal that has not been borrowed; or zero as of June 30, 2022. As a result, the Company has not paid a Standby Fee during the six months ended June 30, 2022. That amount is included in interest expense.
MinerVa Semiconductor Corp
As discussed in Note 8 – Contingencies and Commitments, the Company on April 2, 2021, entered into a purchase agreement (the "MinerVa Purchase Agreement") with MinerVa for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner equipmentminers with a total terahash to be delivered equal to 1.5 million terahash (total terahash). terahash. The price per miner was $4,892.50 for an aggregate purchase price of $73,387,500 to be paid in installments. The first installment equal to 60% of the purchase price, or $44,032,500, was paid on April 2, 2021, and an additional payment of 20% of the purchase price, or $14,677,500, was paid June 2, 2021. As of March 31, 2023, there were no remaining deposits owed.
In December 2021, the exchangeCompany extended the deadline for delivery of the MinerVa miners to April 2022. In March 2022, MinerVa was again unable to meet its delivery date and had only delivered approximately 3,200 of the 15,000 miners. As a result, an impairment totaling $12,228,742, was in the first quarter of 2022. Furthermore, in the fourth quarter of 2022, the difference between the fair value of the MinerVa equipment deposits and the carrying value resulted in the Company recording an additional impairment charge of $5,120,000.
As of March 31, 2023, MinerVa had delivered, refunded cash, or swapped into deliveries of industry-leading miners of equivalent value to approximately 12,700 of the 15,000 miners. The aggregate purchase price does not include shipping costs, which are the responsibility of the Company and shall be determined at which time the miners are ready for shipment. While the Company continues to engage in discussions with MinerVa on the delivery of the total terahash, MinerVaremaining miners, it does not know when the remaining miners will be granted 443,848 sharesdelivered, if at all. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60) days, Stronghold Inc. may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. As discussed in Note 8, not all miners have been delivered butthe 60-day period has expired, the Company is committedevaluating all available remedies under the MinerVa Purchase Agreement.
Contingencies:
Legal Proceedings
The Company experiences litigation in the normal course of business. Management is of the belief that none of this routine litigation will have a material adverse effect on the Company’s financial position or results of operations.
McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs. Scrubgrass Generating Company, L.P.
On January 31, 2020, McClymonds Supply and Transit Company, Inc. (“McClymonds”) made a Demand for Arbitration, as required by the terms of the Transportation Agreement between McClymonds and Scrubgrass Generating Company, L.P. ("Scrubgrass") dated April 8, 2013 (the “Agreement”). In its demand, McClymonds alleged damages in the amount of $5,042,350 for failure to take all future deliveries.pay McClymonds for services. On February 18, 2020, Scrubgrass submitted its answering statement denying the claim of McClymonds in its entirety. On March 31, 2020, Scrubgrass submitted its counterclaim against McClymonds in the amount of $6,747,328 as the result of McClymonds’ failure to deliver fuel as required under the terms of the Agreement. Hearings were held from January 31, 2022, to February 3, 2022. On May 9, 2022, an award in the amount of $5.0 million plus interest of approximately $0.8 million was issued in favor of McClymonds. The final delivery is after June 30, 2022; thus, the shares are deemed as not yet issued as of June 30, 2022.two
Private Placement Purchase Agreement
managing members of Q Power have executed a binding document to pay the full amount of the award and have begun to pay the full amount of the award, such that there will be no effect on the financial condition of the Company. McClymonds shall have no recourse to the Company with respect to the award.
Allegheny Mineral Corporation v. Scrubgrass Generating Company, L.P., Butler County Court of Common Pleas, No. AD 19-11039
In November 2019, Allegheny Mineral Corporation ("Allegheny Mineral") filed suit against the Company seeking payment of approximately $1,200,000 in outstanding invoices. In response, the Company filed counterclaims against Allegheny Mineral asserting breach of contract, breach of express and implied warranties, and fraud in the amount of $1,300,000. After unsuccessful mediation in August 2020, the parties again attempted to mediate the case on October 26, 2022, which led to a mutual agreement to settlement terms of a $300,000 cash payment, and a supply agreement for limestone. Subject to completion of the settlement terms, this matter has been stayed in Butler County Court and the outstanding litigation has been terminated.
Federal Energy Regulatory Commission ("FERC") Matters
On November 19, 2021, Scrubgrass received a notice of breach from PJM Interconnection, LLC alleging that Scrubgrass breached Interconnection Service Agreement – No. 1795 (the “ISA”) by failing to provide advance notice to PJM Interconnection, LLC and Mid-Atlantic Interstate Transmission, LLC pursuant to ISA, Appendix 2, section 3, of modifications made to the Scrubgrass Plant. On December 16, 2021, Scrubgrass responded to the notice of breach and respectfully disagreed that the ISA had been breached. On January 7, 2022, Scrubgrass participated in an information gathering meeting with representatives from PJM regarding the notice of breach and Scrubgrass continues to work with PJM regarding the dispute, including conducting a necessary study agreement with respect to the Scrubgrass Plant. On January 20, 2022, the Company sent PJM a letter regarding the installation of a resistive computational load bank at the Panther Creek Plant. On March 1, 2022, the Company executed a necessary study agreement with respect to the Panther Creek Plant. On May 15,11, 2022, we entered intothe Division of Investigations of the FERC Office of Enforcement (“OE”) informed the Company that the Office of Enforcement is conducting a notenon-public preliminary investigation concerning Scrubgrass’ compliance with various aspects of the PJM tariff. The OE requested that the Company provide certain information and warrant purchasedocuments concerning Scrubgrass’ operations by June 10, 2022. On July 13, 2022, after being granted an extension to respond by the OE, the Company submitted a formal response to the OE's request. Since the Company submitted its formal response to the OE's request, the Company has had further discussions with the OE regarding the Company's formal response. The OE's investigation, and discussions between the OE and the Company, regarding potential instances of non-compliance is continuing. The Company does not believe the PJM notice of breach, the Panther Creek necessary study agreement, (the “Purchase Agreement”)or the preliminary investigation by the OE will have a material adverse effect on the Company’s reported financial position or results of operations, although the Company cannot predict with certainty the final outcome of these proceedings.
Winter v. Stronghold Digital Mining Inc., by and amonget al., U.S. District Court for the Southern District of New York
On April 14, 2022, the Company, and certain of our current and former directors, officers and underwriters were named in a putative class action complaint filed in the purchasers thereto (collectively,United States District Court for the “Purchasers”), whereby we agreed to issue and sell toSouthern District of New York. In the Purchasers, andcomplaint, the Purchasers agreed to purchase fromplaintiffs allege that the Company (i) $33,750,000 aggregate principal amountmade misleading statements and/or failed to disclose material facts in violation of 10.00% unsecured convertible promissory notes (the “May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the right to purchase up to 6,318,000 shares of Class A Common Stock, of the Company with an exercise price per share equal to $2.50, on the terms and subject to the conditions set forth in the Purchase Agreement (collectively, the “2022 Private Placement”). The Purchase Agreement contained representations and warranties by the Company and the Purchasers that are customary for transactions of this type. The May 2022 Notes and the May 2022 Warrants were offered and sold in reliance on the exemption afforded by Section 4(a)(2)11 of the Securities Act, 15 U.S.C. §77k and Rule 506(b)Section 15 of Regulation D promulgated thereunderthe Securities Act, about the Company’s business, operations, and prospects in the Company’s registration statement on Form S-1 related to its initial public offering, and when subsequent disclosures were made regarding these operational issues when the Company announced its fourth quarter and full year 2021 financial results, the Company’s stock price fell, causing significant losses and damages. As relief, the plaintiffs are seeking, among other things, compensatory damages. On August 4, 2022, co-lead plaintiffs were appointed. On October 18, 2022, the plaintiffs filed an amended complaint. On December 19, 2022, the Company filed a Motion to Dismiss. On February 17, 2023, the plaintiffs filed an opposition to the defendant's motion to dismiss. On March 20, 2023, the Company filed a reply brief in further support of its motion to dismiss. The Company cannot predict when the court will rule on its motion. The defendants believe the allegations in the initial complaint are without merit and intend to defend the suit vigorously.
Mark Grams v. Treis Blockchain, LLC, Chain Enterprises, LLC, Cevon Technologies, LLC, Stronghold Digital Mining, LLC, David Pence, Michael Bolick, Senter Smith, Brian Lambretti and John Chain
On May 4, 2023, Stronghold Digital Mining, LLC, a subsidiary of the Company, was named as one of several defendants in a complaint filed in the United States District Court for aggregate considerationthe Middle District of $27 million.Alabama Eastern Division (the "Grams Complaint"). The Grams Complaint alleges that certain Bitcoin miners that the Company purchased from Treis Blockchain,
LLC ("Treis") in December 2021 contained firmware that Treis misappropriated from Grams. The Company believes that the allegations against the Company and its subsidiaries in the Grams Complaint are without merit and intends to defend the suit vigorously. The Company does not believe the Grams Complaint will have a material adverse effect on the Company's reported financial position or results of operations.
In connection with
NOTE 11 – REDEEMABLE COMMON STOCK
Class V common stock represented 38.8% and 45.1% ownership of Stronghold LLC, as of March 31, 2023, and December 31, 2022, respectively, granting the 2022 Private Placement,owners of Q Power economic rights and, as a holder, one vote on all matters to be voted on by the May 2022 Warrants were issuedCompany's stockholders generally, and a redemption right into Class A shares. Refer to Note 12 – Noncontrolling Interests for more details.
The Company classifies its Class V common stock as redeemable common stock in the accompanying condensed consolidated balance sheets as, pursuant to a Warrantthe Stronghold LLC Agreement, dated asthe redemption rights of May 15, 2022 (the “Warrant Agreement”). The May 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. The May 2022 Warrants will be exercisableeach unit held by Q Power for a five-year period from the closing.
WhiteHawk Finance LLC
On June 30, 2021, Equipment LLC entered into a $40,000,000 promissory note (the “WhiteHawk Promissory Note”) with WhiteHawk (the “Lender”). The note has a maturity date of June 23, 2023, where the full outstanding principal amount of the note is due and payable. Interest for the note is set at 10% per annum. On June 30, 2021, Equipment LLC also entered into a Stock Purchase Warrant agreement with the Lender, where Equipment LLC issued 181,705 warrants to purchaseeither shares of Class A common stock or an equivalent amount of Equipment LLCcash is not solely within the Company’s control. This is due to the Lender.
The warrants are exercisable by the Lender at any time during a ten-year term at $0.01 per share of common stock. The warrants are legally detachable and can separately be exercised.
The fair value for the warrants, asholders of the issuance date, is $1,999,396 andClass V common stock collectively owning a majority of the voting stock of the Company, which allows the holders of Class V common stock to elect the members of the Board, including those directors who determine whether to make a cash payment upon a Stronghold LLC unit holder’s exercise of its redemption rights. Redeemable common stock is recorded as equity withat the offset recorded as a debt discount against the net proceeds. The proceeds of $40,000,000 are allocated to the WhiteHawk Promissory Note and the warrants are being amortized based on the straight-line method over the twenty-four month termgreater of the note. For
the six months ended June 30, 2022, the Company has recorded amortized debt discount, related to the warrants, in thebook value or redemption amount of $499,849, which is included in interest expenses.
On March 28, 2022, Equipment LLC entered into a $25,000,000 promissory note (the “Second WhiteHawk Promissory Note”) with the Lender. The note has a maturity date of March 31, 2024, where the full outstanding principal amount of the note is due and payable. Interest for the note is set at 10% per annum. On March 28, 2022, Equipment LLC also entered into a Stock Purchase Warrant agreement with the Lender, where Equipment LLC issued 125,000 warrants to purchase shares of Class A common stock of Equipment LLC to the Lender.
The warrants are exercisable by the Lender at any time during a ten-year term at $0.01 per share of common stock. The warrants are legally detachable and can separately be exercised.
The fair value for the warrants, as of the issuance date, is $1,150,000 and is recorded as equity with the offset recorded as a debt discount against the net proceeds. The proceeds of $25,000,000 are allocated to the Second WhiteHawk Promissory Note and the warrants are being amortized based on the straight-line method over the twenty-four month term of the note. For the six months ended June 30, 2022, the Company has recorded amortized debt discount, related to the warrants, in the amount of $143,750, which is included in interest expenses.
B. Riley Securities, Inc.
On each of April 1, 2021 and May 14, 2021, Stronghold Inc. entered into a warrant agreement with American Stock Transfer & Trust Company. B. Riley Securities, Inc. acted as the Company’s placement agent in connection with the Private Placements. In connection therewith, the Company issued B. Riley Securities, Inc. (i) a five-year warrant to purchase up to 97,920 shares of Series A Preferred Stock at a per share exercise price of $8.68 and (ii) a five-year warrant to purchase up to 18,170 shares of Series B Preferred Stock at a per share exercise price of $11.01. In each case the exercise price was equal to the respective private placement per share price. B. Riley Securities, Inc. and its affiliates purchased 439,200 and 91,619 shares of Series A Preferred Stock and Series B Preferred Stock, respectively, at the same private placement per share price.
The warrants contain standard limitations and representations and are exercisable for a period of five years from the date of the Private Placements. The warrants are legally detachable and separately exercisable. The accounting for warrants on redeemable shares follows the guidance in ASC 480-10-25-8 through 25-13. Those paragraphs address the classification of instruments, other than an outstanding share, that have both of the following characteristics:
•The instrument embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation.
•The instrument requires or may require the issuer to settle the obligation by transferring assets.
As of October 22, 2021 (the closing date of the initial public offering of shares of Class A common stock), the purchase redemption rights of the Series A Preferred Stock and Series B Preferred Stock, described above, were extinguished and each of the warrants were transferred to equity with a fair value as of the initial public offering date. Each warrant can now be converted to 1 share of Class A common stock at par value of $.0001 per share. The final fair value as of October 19, 2021, of each of the warrants, was calculated using the Black-Scholes option-pricing model with the following assumptions:
Series A
The following are the Black-Scholes input assumptions for the 97,920 Series A warrants; and the changes in fair values as ofissuance, April 1, 2021, (dateand the reporting date as of issuance) and October 19, 2021 respectively:March 31, 2023.
| | | | | | | | | | | | | | | | | | | | |
| As of | | Changes in Fair Value Inputs | |
| April 1, 2021 | | October 19, 2021 | | |
Expected volatility | 100.2 | % | | 117.6 | % | | 17.4 | % | |
Expected life (in years) | 4.83 | | 4.83 | | 0 | |
Risk-free interest rate | 0.9 | % | | 1.2 | % | | 0.3 | % | |
Expected dividend yield | 0.00 | % | | 0.00 | % | | 0.0 | % | |
Fair value | $ | 631,897 | | | $ | 1,628,311 | | | $ | 996,414 | | |
On April 1, 2021, theThe Company recorded a liability of $631,897, andredeemable common stock as a debt issuance cost againstpresented in the Preferred Shares. As of June 30, 2022, the fair value of this liability is zero.table below.
Series B
The following are the Black-Scholes input assumptions for the 18,170 Series B warrants; and the changes in fair values as of May 14, 2021 (date of issuance) and October 19, 2021 respectively:
| | | | | | | | | | | | | | | | | | | | |
| As of | | Changes in Fair Value Inputs | |
| May 14, 2021 | | October 19, 2021 | | |
| | | | | | |
Expected volatility | 100.2 | % | | 117.6 | % | | 17.4 | % | |
Expected life (in years) | 4.8 | | 4.8 | | 0 | |
Risk-free interest rate | 0.9 | % | | 1.2 | % | | 0.3 | % | |
Expected dividend yield | 0.00 | % | | 0.00 | % | | 0.0 | % | |
Fair value | $ | 148,575 | | | $ | 295,970 | | | $ | 147,395 | | |
On May 14, 2021, the Company recorded a liability of $148,575, and as a debt issuance cost against the Mezzanine Equity (see Note 15 – Redeemable Common Stock). As of June 30, 2022, the fair value of this liability is zero. | | | | | | | | | | | |
| Common - Class V |
| Shares | | Amount |
Balance - December 31, 2022 | 26,057,600 | | | $ | 11,754,587 | |
Net loss attributable to noncontrolling interest | — | | | (18,119,131) | |
Maximum redemption right valuation | — | | | 21,863,763 | |
Balance - March 31, 2023 | 26,057,600 | | | $ | 15,499,219 | |
NOTE 1512 – REDEEMABLE COMMON STOCK
Private Placements- Mezzanine Equity Series A & B
On April 1, 2021 the Company entered into a Series A Preferred Stock Purchase Agreement pursuant to which the Company issued and sold 9,792,000 shares of Series A Preferred Stock in the Series A Private Placement at a price of $8.68 per share to various accredited individuals in reliance upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act, and Regulation D thereunder for aggregate consideration of approximately $85.0 million. In connection with the Series A Private Placement, the Company incurred approximately $6.3 million in fees and $631,897 as debt issuance costs for warrants issued as part of the Series A Private Placement.
Further, pursuant to the Series A Private Placement, Stronghold Inc., the investors in the Series A Private Placement and key holders entered into a Right of First Refusal Agreement ("ROFR Agreement"). Under the ROFR Agreement, the key holders agreed to grant a right of first refusal to Stronghold Inc. to purchase all or any portion of capital stock of Stronghold Inc., held by a key holder or issued to a key holder after the date of the ROFR Agreement, not including any shares of Series A Preferred Stock or common stock issued or issuable upon conversion of the Series A Preferred Stock. The key holders also granted a right of first refusal to the investors in the Series A Private Placement to purchase all or any eligible capital stock not purchased by Stronghold Inc. pursuant to its right of first refusal.
The ROFR Agreement also provided certain co-sale rights to investors in the Series A Private Placement to participate in any sale or similar transfer of any shares of common stock owned by a key holder or issued to a key holder after the Series A Private Placement, on the terms and conditions specified in a written notice from a key holder. The investors,
however, are not obligated to participate in such sales or similar transfers. The co-sale and rights of first refusal under the ROFR Agreement terminated when the Preferred Stock converted into shares of Class A common stock.
On May 14, 2021, the Company completed the Series B Private Placement. The terms of the Series B Preferred Stock were substantially similar to the Series A Preferred Stock, except for differences in the stated value of such shares in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or certain deemed liquidation events. In connection with the Series B Private Placement, the Company sold 1,817,035 shares of its Series B Preferred Stock for an aggregate purchase price of $20.0 million. In connection with the Series B Private Placement, the Company incurred approximately $1.6 million in fees and expenses and $148,575 as debt issuance costs for warrants issued as part of the Series B Private Placement.
The Company entered into registration rights agreements with the investors in the Private Placements concurrently with the closing of each Private Placement, with certain filing deadlines as defined in the agreements.NONCONTROLLING INTERESTS
On October 22, 2021 (the closing date of the IPO), the net proceeds from the 9,792,000 shares of the Series A Preferred Stock and the 1,816,994 shares of the Series B Preferred Stock were converted to shares of Class A common stock on a 1-for-one share basis at a par value of $0.0001 per share. As of June 30, 2022, these shares are no longer reported as redeemable common stock.
The following is a summary of the Series A and Series B valuations:
| | | | | | | | | | | |
| Series A | | Series B |
Proceeds | $ | 85,000,000 | | | $ | 20,000,305 | |
Transaction Fees: | | | |
B. Riley Securities | (5,100,000) | | | (1,200,000) | |
Legal and Filing Fees | (1,226,990) | | | (408,997) | |
Debt issuance costs pertaining to stock registration warrants - refer to Note 14 | (631,897) | | | (148,575) | |
Total net mezzanine equity | $ | 78,041,113 | | | $ | 18,242,733 | |
Conversion to common Class A shares | $ | (78,041,113) | | | $ | (18,242,733) | |
Remaining in net mezzanine equity | $ | — | | | $ | — | |
Class V Common Stock
In connection with the Reorganization on April 1, 2021, Stronghold LLC immediately thereafter distributed the 27,072,000 shares of Class V common stock to Q Power. In addition, effective as of April 1, 2021, Stronghold Inc. acquired 14,400 Stronghold LLC Units held by Q Power (along with an equal number of shares of Class V common stock) in exchange for 14,400 newly issued shares of Class A common stock.
Class V common stock represents 56.1% ownership of Stronghold LLC. where the original owners of Q Power have economic rights and, as a holder, 1 vote on all matters to be voted on by our stockholders generally, and a redemption right into Class A shares.
The Company classifies shares of Class V common stock held by Q Power as redeemable common stock based on its assessment of (i) the right (the “Redemption Right”) to cause Stronghold LLC to acquire all or a portion of its Stronghold LLC Units for, at Stronghold LLC’s election, (x) shares of Stronghold Inc.’s Class A common stock at a redemption ratio of 1 share of Class A common stock for each Stronghold LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions or (y) an approximately equivalent amount of cash as determined pursuant to the Stronghold LLC Agreement of Q Power, and (ii) the right (the “Call Right”), for administrative convenience, to acquire each tendered Stronghold LLC Unit directly from the redeeming Stronghold Unit Holder for, at its election, (x) 1 share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an approximately equivalent amount of cash as determined pursuant to the terms of the Stronghold LLC Agreement of the Company pursuant to ASC 480-10-S99-3A. For each share of Class V common stock outstanding, there is a corresponding outstanding Class A common unit of Stronghold LLC. The redemption of any share of Class V common stock would be accompanied by a concurrent redemption of the corresponding Class A common unit of Stronghold LLC, such that both the share of Class V common stock and the corresponding Class A common unit of Stronghold LLC are redeemed as a combined unit in exchange for either a single
share of Class A common stock or cash of equivalent value based on the fair market value of the Class A common stock at the time of the redemption. For accounting purposes, the value of the Class A common units of Stronghold LLC is attributed to the corresponding shares of Class V common stock on the balance sheet.
Class V common stock is classified as redeemable common stock in the unaudited condensed consolidated balance sheet as, pursuant to the Stronghold LLC Agreement, the Redemption Rights of each unit held by Q Power for either shares of Class A common stock or an equivalent amount of cash is not solely within the Company’s control. This is due to the holders of the Class V common stock collectively owning a majority of the voting stock of the Company, which allows the holders of Class V common stock to elect the members of the Board, including those directors that determine whether to make a cash payment upon a Stronghold Unit Holder’s exercise of its Redemption Right. Redeemable common stock is recorded at the greater of the book value or redemption amount from the date of the issuance, April 1, 2021, and the reporting date as of June 30, 2022.
The Company recorded redeemable common stock as presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non- controlling Interest (1) | | Series A | | Series B | | Common - Class V | | |
| | Preferred Shares | | Amount | | Preferred Shares | | Amount | | Shares | | Amount | | Total |
Balance - December 31, 2021 | $ | — | | | 0 | | 0 | | — | | | $ | — | | | 27,057,600 | | | $ | 301,052,617 | | | $ | 301,052,617 | |
Net loss - January 1 to June 30, 2022 | | | | | | | | | | | | | (40,702,092) | | | (40,702,092) | |
Maximum redemption right valuation | | | | | | | | | | | | | (213,110,622) | | | (213,110,622) | |
Balance- June 30, 2022 | $ | — | | | — | | | $ | — | | | — | | | $ | — | | | 27,057,600 | | | $ | 47,239,903 | | | $ | 47,239,903 | |
_______________
1Refer to Note 16 – Non-controlling Interest for further discussions.
NOTE 16 – NON-CONTROLLING INTEREST
The Company is the sole managing member of Stronghold LLC and, as a result, consolidates the financial results of Stronghold LLC and reports a non-controllingnoncontrolling interest representing the Common Unitscommon units of Stronghold LLC held by Q Power. Changes in the Company’sCompany's ownership interest in Stronghold LLC, while the Company retains its controlling interest, in Stronghold LLC will beare accounted for as mezzanine equityredeemable common stock transactions. As such, future redemptions or direct exchanges of common units of Stronghold LLC by the continuing equity owners will result in a change in ownership and reduce or increasechanges to the amount recorded as non-controllingnoncontrolling interest. Refer to Note 1511 – Redeemable Common Stock that which describes the Redemption Rightsredemption rights of the non-controllingnoncontrolling interest.
Class V Common Stock represents 56.1%common stock represented 38.8% and 45.1% ownership of Stronghold LLC, as of March 31, 2023, and December 31, 2022, respectively, granting the owners of Q Power economic rights and, as a holder, 1one vote on all matters to be voted on by the Company's stockholders generally, and a redemption right into shares of Class A shares.common stock.
The following summarizes the redeemable common stock adjustments pertaining to the noncontrolling interest as of and for the three months ended March 31, 2023: | | | | | | | | | | | |
| Class V Common Stock Outstanding | Fair Value Price | Temporary Equity Adjustments |
Balance - December 31, 2022 | 26,057,600 | | $ | 0.45 | | $ | 11,754,587 | |
Net loss for the three months ended March 31, 2023 | | | (18,119,131) | |
Adjustment of temporary equity to redemption amount (1) | | | 21,863,763 | |
Balance - March 31, 2023 | 26,057,600 | | $ | 0.59 | | $ | 15,499,219 | |
| | | |
(1) Temporary equity adjustment based on Class V common stock outstanding at fair value price at each quarter end, using a 10-day variable weighted average price ("VWAP") of trading dates including the closing date. |
NOTE 13 – STOCK-BASED COMPENSATION
Stock-based compensation expense was $2,449,324 and $2,592,995 for the three months ended March 31, 2023, and 2022, respectively. There was no income tax benefit related to stock-based compensation expense due to the Company having a full valuation allowance recorded against its deferred income tax assets.
On March 15, 2023, the Company entered into award agreements with certain executive officers. In total, the executive officers were granted 2,725,000 restricted stock units in exchange for the cancellation of 986,688 stock options and 250,000 performance share units previously granted to the executive officers. All restricted stock units were granted under the Company’s previously adopted Omnibus Incentive Plan, dated October 19, 2021. The Company evaluated this modification under ASC 718, Compensation – Stock Compensation, and determined there was no significant impact on the Company's results of operations for the three months ended March 31, 2023.
NOTE 14 – WARRANTS
The following table summarizes the mezzanine equity adjustments pertaining to the non-controlling interest from April 1, 2021 through June 30, 2022:outstanding warrants as of March 31, 2023.
| | | | | |
| Temporary Equity AdjustmentsNumber of Warrants |
Balance - April 1, 2021 (1)
| $Outstanding as of December 31, 2022 | (2,877,584)15,875,106 | |
Net losses for the three months ended June 30, 2021Issued | (2,235,219) | |
Maximum redemption right valuation (2)
| 172,774,0523,000,000 | |
Balance - June 30, 2021Exercised | $ | 167,661,249(5,002,650) | |
Net losses for the three months ended September 30, 2021 | (4,328,460) | |
Adjustment of mezzanine equity to redemption amount (3)
| 79,669,600 | |
Balance - September 30, 2021 | $ | 243,002,389 | |
Net losses for the three months ended December 31, 2021 | (8,594,196) | |
Adjustment of temporary equity to redemption amount (4)
| 66,644,424 | |
Balance - December 31, 2021 | $ | 301,052,617 | |
Net losses for the three months ended March 31, 2022 | (18,125,837) | |
Adjustment of temporary equity to redemption amount (5)
| (110,222,560) | |
Balance - March 31, 2022 | $ | 172,704,220 | |
Net losses for the three months ended June 30, 2022 | (22,576,255) | |
Adjustment of temporary equity to redemption amount (6)
| (102,888,062) | |
Balance - June 30, 2022 | $ | 47,239,903 | |
| |
1 As of the date of reorganization- refer to Note 1 – Business Combinations
| |
2 Based on 27,057,600 Class V Common stock outstanding at $6.39 issuance price as of April 1, 2021
|
3 Based on 27,057,600 Class V Common stock outstanding at $9.33 fair valuation price as of September 30, 2021
|
4 Based on 27,057,600 Class V Common stock outstanding at $11.99 fair valuation price as of December 31, 2021, using a 10-day variable weighted average price ("VWAP") of trading dates; including the closing date
|
5 Based on 27,057,600 Class V Common stock outstanding at $7.72 fair valuation priceOutstanding as of March 31, 2022, using a 10-day VWAP of trading dates; including the closing date2023
|
613,872,456 Based on 27,057,600 Class V Common stock outstanding at 1.75 fair valuation price as of June 30, 2022, using a 10-day VWAP of trading dates; including the closing date
| |
Common UnitsB&M Warrant
TheOn March 28, 2023, as part of the B&M Settlement described in Note 7 – Debt, the Company isissued a stock purchase warrant to B&M providing for the sole managing memberright to purchase from the Company 3,000,000 shares of Stronghold LLCClass A common stock, par value $0.0001 per share, at an exercise price of $0.0001 per warrant share.
May 2022 Private Placement
On May 15, 2022, the Company entered into a note and as a result consolidateswarrant purchase agreement, by and among the financial resultsCompany and the purchasers thereto, whereby the Company agreed to issue and sell (i) $33,750,000 aggregate principal amount of Stronghold LLC10.00% unsecured convertible promissory notes and reports a non-controlling interest(ii) warrants representing the Common Units of Stronghold LLC held by Olympus Power, LLC plus a corresponding numberright to purchase up to 6,318,000 shares of Class V vote-onlyA common stock of the Company with an exercise price per share equal to $2.50. The promissory notes and warrants were sold for aggregate consideration of approximately $27 million.
On August 16, 2022, the Company amended the note and warrant purchase agreement, such that $11.25 million of the outstanding principal was exchanged for the execution of an amended and restated warrant agreement pursuant to which the strike price of the 6,318,000 warrants was reduced from $2.50 to $0.01. Refer to Note 15 – Private Placements for additional details.
During the three months ended March 31, 2023, 2,277,000 of warrants issued in connection with the May 2022 Private Placement, or subsequent transactions associated with the unsecured convertible promissory notes, were exercised.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements with Armistice Capital Master Fund Ltd. ("Armistice") and Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of 2,274,350 and 602,409 shares ofClass A common stock, respectively, and warrants to purchase an aggregate of 5,602,409 shares of Class A common stock, at an initial exercise price of $1.75 per share. Refer to Note 15 – Private Placements for additional details. As part of the transaction, Armistice purchased the pre-funded warrants for 2,725,650 shares of Class A
common stock at a purchase price of $1.60 per warrant. The pre-funded warrants have an exercise price of $0.0001 per warrant share.
As of and during the three months ended March 31, 2023, the pre-funded warrants for 2,725,650 shares of Class A common stock have been exercised.
In April 2023, the Company, Armistice and Mr. Beard entered into amendments to, among other things, adjust the strike price of the remaining outstanding warrants from $1.75 per share to $1.01 per share. Refer to Note 15 – Private Placements for additional details.
April 2023 Private Placement
On April 20, 2023, the Company entered into Securities Purchase Agreements with an institutional investor and Greg Beard for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $1.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $1.10 per share (the “April 2023 Private Placement”). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 9,000,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 1,000,000 shares of Class A common stock, in each case at a price of $1.00 per share equivalent. Further, the Company. Olympus Power, LLC can exchange these Common Units along with correspondinginstitutional investor and Mr. Beard received warrants exercisable for 9,000,000 shares and 1,000,000 shares, respectively, of Class A common stock. Refer to Note 15 – Private Placements for additional details.
NOTE 15 – PRIVATE PLACEMENTS
May 2022 Private Placement
On May 15, 2022, the Company entered into a note and warrant purchase agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “May Purchasers”), whereby the Company agreed to issue and sell to the May Purchasers, and the May Purchasers agreed to purchase from the Company, (i) $33,750,000 aggregate principal amount of 10.00% unsecured convertible promissory notes (the “May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the right to purchase up to 6,318,000 shares of Class VA common stock, of the Company with an exercise price per share equal to $2.50, on the terms and subject to the conditions set forth in the Purchase Agreement (collectively, the “2022 Private Placement”). The Purchase Agreement contained representations and warranties by the Company and the May Purchasers that are customary for transactions of this type. The May 2022 Notes and the May 2022 Warrants were sold for aggregate consideration of approximately $27.0 million.
In connection with the 2022 Private Placement, the Company undertook to negotiate with the May Purchasers and to file a 1-for-one basis,certificate of designation with the State of Delaware, following the closing of the 2022 Private Placement, for the terms of a new series of preferred stock.
In connection with the 2022 Private Placement, the May 2022 Warrants were issued pursuant to the Warrant Agreement. The May 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. The May 2022 Warrants are exercisable for a five-year period from the closing.
The issuance of the May 2022 Notes was within the scope of ASC 480-10 and, therefore, was initially measured at fair value (consistent with ASC 480-10-30-7). Additionally, under the guidance provided by ASC 815-40-15-7, the Company determined that the May 2022 Warrants were indexed to the Company's stock. As a result, the May 2022 Warrants were initially recorded at their fair value within equity. The May 2022 Notes were valued using the gross yield method under the income approach. As of the issuance date of May 15, 2022, a calibration analysis was performed by back solving the implied yield associated with the May 2022 Notes, such that the total value of the May 2022 Notes and the May 2022 Warrants equaled the purchase amount. The calibrated yield was then rolled forward for changes to the risk-free rate and option-adjusted spreads to the August 16, 2022, valuation date to value the May 2022 Notes.
On August 16, 2022, the Company entered into an amendment to the Purchase Agreement, by and among the Company and the May Purchasers, whereby the Company agreed to amend the Purchase Agreement, such that $11.25 million of the outstanding principal was exchanged for the May Purchaser's execution of an amended and restated warrant agreement pursuant to which the strike price of the 6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01. After giving effect to the principal reduction and amended and restated warrants, the Company was to continue to make subsequent monthly, payments to the May Purchasers on the fifteenth (15th) day of each of November 2022, December 2022, January 2023, and February 2023. The Company was able to elect to pay each such payment (A) in cash or (B) in shares of
common stock, in each case, at a twenty percent (20%) discount to the average of the daily VWAPs for each of the twenty (20) consecutive trading days preceding the payment date.
Series C Convertible Preferred Stock
On December 30, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with the holders (the “Purchasers”) of the May 2022 Notes (as defined above) whereby the May 2022 Notes were to be exchanged for shares of a new series of convertible preferred stock, par value $0.0001 per share (the “Series C Preferred Stock”) that, among other things, will convert into shares of Class A common stock or pre-funded warrants that may be exercised for shares of Class A common stock, at a conversion rate equal to the stated value of $1,000 per share plus cash in lieu of fractional shares, divided by a conversion price of $0.40 per share of Class A common stock. BecauseUpon the fifth anniversary of the Series C Preferred Stock, each outstanding share of Series C Preferred Stock will automatically and immediately convert into Class V votingA common stock or pre-funded warrants. In the event of a liquidation, the Purchasers shall be entitled to receive an amount per share of Series C Preferred Stock equal to its stated value of $1,000 per share. The Exchange Agreement closed on February 20, 2023.
Pursuant to the Exchange Agreement, the Purchasers received an aggregate 23,102 shares of the Series C Preferred Stock, in exchange for the cancellation of an aggregate $17,893,750 of principal and accrued interest, representing all of the amounts owed to the Purchasers under the May 2022 Notes. On February 20, 2023, one Purchaser converted 1,530 shares of the Series C Preferred Stock to 3,825,000 shares of the Company’s Class A common stock. The rights and preferences of the Series C Preferred Stock are designated in a certificate of designation, and the Company has assessedprovided certain registration rights to the exchange right asPurchasers.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements with Armistice and Greg Beard, the Company's chairman and chief executive officer (together with Armistice, the “September 2022 Private Placement Purchasers”), for the purchase and sale of 2,274,350 and 602,409 shares, respectively, of Class A common stock, par value $0.0001 per share at a “Redemption Right”purchase price of $1.60 and $1.66, respectively, and warrants to cause Stronghold LLCpurchase an aggregate of 5,602,409 shares of Class A common stock, at an initial exercise price of $1.75 per share (subject to acquire all orcertain adjustments). Subject to certain ownership limitations, such warrants are exercisable upon issuance and will be exercisable for five and a portionhalf years commencing upon the date of its Stronghold LLC Units for, at Stronghold LLC’s election, one shareissuance. Armistice also purchased the pre-funded warrants to purchase 2,725,650 shares of Stronghold Inc.’s Class A common stock at a redemption ratiopurchase price of 1 share$1.60 per pre-funded warrant. The pre-funded warrants have an exercise price of Class A common stock for$0.0001 per warrant share. The transaction closed on September 19, 2022. The gross proceeds from the sale of such securities, before deducting offering expenses, was approximately $9.0 million.
The warrant liabilities are subject to remeasurement at each Stronghold LLC Unit.
Common Units represent 2.4% ownershipbalance sheet date, and any change in fair value is recognized as "changes in fair value of Stronghold LLC, where the original owners of Olympus Power LLC have economic rights and, as a holder, 1 vote on all matters to be voted on by the Company's stockholders generally, and a redemption right into Class A shares.
Changeswarrant liabilities" in the Company's ownership interest in Stronghold LLC while the Company retains its controlling interest in Stronghold LLC will be accounted for as permanent equity. As such, future redemptions or direct exchangesconsolidated statements of common units of Stronghold LLC by the continuing equity owners will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest.
operations. The following summarizes the permanent equity adjustments pertaining to the non-controlling interest from November 2, 2021 (date of issuance) through June 30, 2022:
| | | | | |
| Permanent Equity Adjustments |
Balance - November 2, 2021 1
| $ | 38,315,520 | |
Net losses | (645,359) | |
Balance - December 31, 2021 | $ | 37,670,161 | |
Net losses | (771,800) | |
Balance - March 31, 2022 | $ | 36,898,361 | |
Net losses | (961,300) | |
Balance - June 30, 2022 | $ | 35,937,061 | |
| |
1 As of November 2, 2021, the date of issuance. 1,152,000 Series A Preferred units outstanding at $33.26 per public trading share price (Nasdaq closing price)
|
NOTE 17 – EARNINGS (LOSS) PER SHARE
Basic EPS of common stock is computed by dividing the Company’s net earnings (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earningsfair value of the entity. The Company excludes the unvested RSUs awarded to its employees, officers, directors, and contractors under the LTIP from this net loss per share calculation because including them would be antidilutive.
The following table sets forth reconciliationswarrant liabilities was estimated as of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock for the three months ended June 30, 2022.
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | 2021 | | 2022 | 2021 |
Numerator | | | | | |
Net Loss (1) | $ | (40,238,575) | | $ | (3,243,009) | | | $ | (72,544,990) | | $ | (3,481,965) | |
Less: net losses attributable to non-controlling interests | $ | (23,537,555) | | $ | (2,235,218) | | | $ | (42,435,192) | | $ | (2,402,488) | |
Net loss attributable to Class A common shareholders | $ | (16,701,021) | | $ | (1,007,791) | | | $ | (30,109,798) | | $ | (1,079,477) | |
Denominator | | | | | |
Weighted average shares of Class A common shares outstanding | 20,341,061 | | 8,137 | | | 20,274,672 | | 8,137 | |
Basic net loss per share | $ | (0.82) | | $ | (123.86) | | | $ | (1.49) | | $ | (123.86) | |
(1)Basic and diluted earnings per share of Class A common stock is presented for the period from January 1, 2022 to June 30, 2022.
Securities that could potentially dilute losses per share in the future that were not included in the computation of diluted loss per share at June 30, 2022 because their inclusion would be anti-dilutive areMarch 31, 2023, using a Black-Scholes model with significant inputs as follows:
| | | | | |
| June 30, 2022March 31, 2023 |
Series A preferred units not yet exchanged for Common A sharesExpected volatility | 1,152,000132.1 | % |
Class V common shares not yet exchanged for Class A common sharesExpected life (in years) | 27,057,600 5.50 | |
TotalRisk-free interest rate | 28,209,6003.6 | % |
Expected dividend yield | 0.00 | % |
Fair value | $ | 2,846,548 | |
NOTE 18 – RENEWABLE ENERGY CREDITSApril 2023 Private Placement
Starting late in 2021On April 20, 2023, the Company entered into Securities Purchase Agreements with an institutional investor and the Company’s chairman and chief executive officer, Greg Beard, for the six months ended June 30, 2022,purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $1.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $1.10 per share (subject to certain adjustments in accordance with the Company has significantly increasedterms thereof). Pursuant to the useSecurities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of coal refuse as9,000,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 1,000,000 shares of Class A common stock, in each case at a price of $1.00 per share equivalent. Further, the plant increased megawatt capacity. The plant was relatively dormant during the comparative periods ended June 30, 2021. As a result, the Company's usageinstitutional investor and Mr. Beard received warrants exercisable for 9,000,000 shares and 1,000,000 shares, respectively, of coal refuse, which is classified as a Tier II Alternative Energy Source under Pennsylvania law, significantly increased. DEBM acts as the benefactor, on behalf of the Company, in the open market and is invoiced as RECs are realized based on this open market measured by consumer demands. The Company records an offset to fuel costs when RECs are sold to third parties.Class A common stock.
RECs offset againstSubject to certain ownership limitations, the costs of fuel operating costs were $2,068,960 and $2,601,230 for the three andwarrants are exercisable six months ended June 30, 2022, respectively, $576,205after issuance. The warrants are exercisable for five and $789,986 fora half years commencing upon the threedate of issuance, subject to certain ownership limitations. The pre-funded warrants have an exercise price of $0.0001 per warrant share and six months ended June 30, 2021 respectively.
NOTE 19 – ASPEN INTEREST (“OLYMPUS”) BUYOUT
On April 1, 2021, Stronghold Inc., using in part 576,000 shares of newly issued Series A Preferred Stock and in partare immediately exercisable, subject to certain ownership limitations. The gross proceeds from the Series AApril 2023 Private Placement, acquiredbefore deducting offering expenses, was approximately $10.0 million. The April 2023 Private Placement closed on April 21, 2023.
Additionally, as previously disclosed, the Aspen Interest.
The total consideration was a combinationCompany entered into Securities Purchase Agreements with the September 2022 Private Placement Purchasers for, in part, warrants to purchase an aggregate of 5,602,409 shares of Class A common stock, at an exercise price of $1.75 per share. On April 20, 2023, the Company and the September 2022 Private Placement Purchasers entered into amendments to, among other things, adjust the strike price of the newly issued Series A Preferred Stock valued at the issuance price of $8.68warrants from $1.75 per share or $5,000,000; plus an additional $2,000,000 in cash. A total of $7,000,000 is treated as a buyout of the Partners’ Deficits of the Limited Partner (i.e., Aspen Interest) as of April 1, 2021.to $1.01 per share.
The Partners’ Deficit of the Aspen Interest as of April 1, 2021:
| | | | | |
| Limited Partners
|
Balance - December 31, 2020 | $ | (1,336,784) | |
Net losses - three months ended March 31, 2021 | (71,687) | |
Balance - April 1, 2021 | $ | (1,408,471) | |
NOTE 2016 – SUPPLEMENTAL CASH AND NON-CASH INFORMATIONSEGMENT REPORTING
Supplementary cash flows disclosuresOperating segments are defined as components of June 30, 2022an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and 2021:assess performance. The Company's CEO is the chief operating decision maker. The Company functions in two operating segments, Energy Operations and Cryptocurrency Operations, about which separate financial information is presented below.
| | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 |
Acquisition of PP&E included in accrued expenses | $ | 43,102,870 | | | $ | — | |
Reclassifications from deposits to PP&E | $ | 3,473,096 | | | $ | — | |
Equipment financed with debt | $ | 59,537,733 | | | $ | 39,843,722 | |
Interest Paid on Equipment Financings | $ | 2,071,167 | | | $ | 134,083 | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | | |
OPERATING REVENUES: | | | | | | | |
Energy Operations | $ | 3,642,921 | | | $ | 11,109,581 | | | | | |
Cryptocurrency Operations | 13,623,294 | | | 18,272,069 | | | | | |
Total operating revenues | $ | 17,266,215 | | | $ | 29,381,650 | | | | | |
NET OPERATING LOSS: | | | | | | | |
Energy Operations | $ | (10,734,947) | | | $ | (12,097,125) | | | | | |
Cryptocurrency Operations | (3,881,166) | | | (16,834,089) | | | | | |
Total net operating loss | $ | (14,616,113) | | | $ | (28,931,214) | | | | | |
OTHER EXPENSE [A] | (32,044,449) | | | (3,375,202) | | | | | |
NET LOSS | $ | (46,660,562) | | | $ | (32,306,416) | | | | | |
| | | | | | | |
DEPRECIATION AND AMORTIZATION: | | | | | | | |
Energy Operations | $ | (1,332,873) | | | $ | (1,256,101) | | | | | |
Cryptocurrency Operations | (6,389,968) | | | (11,063,480) | | | | | |
Total depreciation and amortization | $ | (7,722,841) | | | $ | (12,319,581) | | | | | |
INTEREST EXPENSE: | | | | | | | |
Energy Operations | $ | (159,287) | | | $ | (31,522) | | | | | |
Cryptocurrency Operations | (2,224,626) | | | (2,879,931) | | | | | |
Total interest expense | $ | (2,383,913) | | | $ | (2,911,453) | | | | | |
Supplementary non-cash financing activities[A] The Company does not allocate other income (expense) for segment reporting purposes. Amount is shown as a reconciling item between net operating income (loss) and consolidated net income (loss). Refer to the accompanying condensed consolidated statements of June 30, 2022 and 2021:operations for further details.
| | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 |
Issued as part of equipment debt financing: | | | |
Warrants - WhiteHawk | $ | 1,150,000 | | | $ | 1,999,396 | |
Common Class A shares- NYDIG | — | | | 1,389,888 | |
Warrants issued as part of stock registrations- B. Riley Warrants | — | | | 780,472 | |
Series A redeemable and convertible preferred stock units- Aspen Interest buyout | — | | | 5,000,000 | |
Warrants issued as part of convertible note | 6,604,881 | | | — | |
Premium Financing | 523,076 | | | — | |
Total | $ | 8,277,957 | | | $ | 9,169,756 | |
NOTE 2117 – TAX RECEIVABLE AGREEMENTEARNINGS (LOSS) PER SHARE
Basic EPS is computed by dividing the Company’s net income (loss) by the weighted average number of Class A shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted net loss per share of Class A common stock for the three months ended March 31, 2023, and 2022.
| | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, 2023 | | March 31, 2022 | | | |
Numerator: | | | | | | |
Net loss | $ | (46,660,562) | | | $ | (32,306,416) | | | | |
Less: net loss attributable to noncontrolling interest | (18,119,131) | | | (18,897,638) | | | | |
Net loss attributable to Stronghold Digital Mining, Inc. | $ | (28,541,431) | | | $ | (13,408,778) | | | | |
Denominator: | | | | | | |
Weighted average number of Class A common shares outstanding | 43,756,137 | | | 20,206,103 | | | | |
Basic net loss per share | $ | (0.65) | | | $ | (0.66) | | | | |
Diluted net loss per share | $ | (0.65) | | | $ | (0.66) | | | | |
Securities that could potentially dilute earnings (loss) per share in the future were not included in the computation of diluted loss per share for the three months ended March 31, 2023, and 2022, because their inclusion would be anti-dilutive. The potentially dilutive impact of Series C Preferred Stock not yet exchanged for shares of Class A common stock totaled 53,930,000 as of March 31, 2023.
Subsequent to March 31, 2023, as described in Note 15 – Private Placements, the Company completed the April 2023 Private Placement, which resulted in an aggregate 10,000,000 shares of common stock and 10,000,000 pre-funded warrants issued to an institutional investor and Greg Beard, the Company's chairman and chief executive officer, in exchange for their investments.
NOTE 18 – INCOME TAXES
Tax Receivable Agreement
The Company entered into a Tax Receivable Agreement (“TRA”) with Q Power and an agent named by Q Power on April 1, 2021 (to which an additional holder was subsequently joined as an additional "TRA Holder" on March 14, 2023), pursuant to which the Company will pay the TRA participantsHolders 85% of the realized (or, in certain circumstances, deemed to be realized) cash tax savings attributable to the tax basis step-ups arising from taxable exchanges of units and certain other items.
During 2022, a taxable exchange of Stronghold LLC units, together with a corresponding number of Class V common shares by Q Power for Class A common stock of the Company, resulted in adjustments to the tax basis of Stronghold LLC’s assets. Such step-ups in tax basis, which were allocated to Stronghold Inc., are expected to increase Stronghold Inc.’s tax depreciation, amortization and/or other cost recovery deductions, which may reduce the amount of tax Stronghold Inc. would otherwise be required to pay in the future. No cash tax savings have been realized by Stronghold Inc. with respect to these basis adjustments due to the Company’s estimated taxable losses, and the realization of cash tax savings in the future is dependent, in part, on estimates of sufficient future taxable income. As such, a deferred income tax asset orhas not been recorded due to maintaining a valuation allowance on the Company’s deferred income tax assets, and no liability has been recorded with respect to the TRA because an exchange that triggersin light of the amounts owed by the Company under the TRA (i.e., the redemption of Stronghold LLC Unitsapplicable criteria for shares of Class A common stock or cash) has not occurred. accrual.
Estimating the amount and timing of Stronghold Inc.’s's realization of income tax benefits subject to the TRA is imprecise and unknown at this time and will vary based on a number of factors, including when future redemptions actually occur. Accordingly, the Company has not recorded any deferred income tax asset or any liability associated with respect to the TRA.
Provision for Income Taxes
NOTE 22 – PROVISIONS FOR INCOME TAXES
The provision for income taxes for the three and six months ended June 30,March 31, 2023, and 2022, was zero, resulting in an effective income tax rate of zero. The provisions for income taxes for the twelve months ended December 31, 2021 and six months ended June 30, 2021 were also zero, resulting in effective income tax rates of zero.The difference between the statutory income tax rate of 21% and the Company’s effective tax rate for the three and six months ended June 30,March 31, 2023, and 2022, iswas primarily due to pre-tax losslosses attributable to the non-controllingnoncontrolling interest and due to maintaining a valuation allowance against the Company’s deferred tax assets. The difference between the statutory income tax rate of 21% and the Company’s effective tax rate for the twelve months ended December 31, 2021 and the six months ended June 30, 2021 was primarily due to pre-tax losses attributable to the non-controlling interest and to the period prior to the Reorganization (i.e., prior to the incorporation of Stronghold Inc.), and due to maintaining a valuation allowance against the Company’s deferred tax assets.Prior to the Reorganization, Scrubgrass and Stronghold Power were pass-through or disregarded entities for income tax purposes such that any taxable income or loss was included in the income tax returns of their owners.Accordingly, no income tax provision was recorded in the Company’s financial statements for the three months ended March 31, 2021.
The determination to record a valuation allowance was based on management’s assessment of all available evidence, both positive and negative, supporting realizability of the Company’s net operating losses and other deferred income tax assets, as required by applicable accounting standards (ASC 740)ASC 740, Income Taxes. In light of the criteria under ASC 740 for recognizing the tax benefit of deferred income tax assets, the Company maintained a valuation allowance against its federal and state deferred income tax assets as of March 31, 2023, and December 31, 2021 and through June 30, 2022.
NOTE 23 – PREPAID INSURANCE
As of June 30, 2022 and 2021, the Company had an unamortized prepaid insurance balance of $2,356,411 and zero, respectively. The June 30, 2022 unamortized balance consists of $2,074,562 to cover directors and officers including corporate reimbursement (the "D&O Policy"); and various commercial property and risk coverages totaling $281,849.
The D&O Policy was a financed premium (refer to Note 29 – Premium Financing Agreement) in the amount of $6,890,509 less a $1,378,102 down payment. The term of the policy is 12 months and expires October 19, 2022. The monthly amortization to insurance expense is $574,209 per month. The commercial property and risk coverages vary in policy term expirations and are renewable on an annual basis.
NOTE 24 – ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
| | | | | | | | |
| June 30, 2022 | December 31, 2021 |
Legal & Professional Fees | 848,146 | | 1,457,727 | |
Payroll & Taxes | — | | 73,819 | |
Shipping & Handling | 2,800 | | 230,779 | |
Interest expense | 1,217,652 | | 79,267 | |
Sales & Use Taxes | 6,207,700 | | 2,609,664 | |
Upcharge penalties reserve | 420,126 | | 420,126 | |
| | |
Rent | 162,797 | | — | |
Accrued miscellaneous expenses | 52,937 | | 182,575 | |
| | |
Lease Expense1 | 2,594,640 | | — | |
Cryptocurrency Machines & Powering Supplies | 1,413,331 | | — | |
Total | $ | 12,920,128 | | $ | 5,053,957 | |
1 – Lease expense includes the profit shared in accordance with our Hosting Services Agreement discussed in Note 28 – Hosting Services Agreement. Lease expense is recorded in Operations and maintenance expense on the consolidated statements of operations.
NOTE 2519 – ACQUISITIONSUPPLEMENTAL CASH AND NON-CASH INFORMATION
Supplemental disclosures of cash flow information for the three months ended March 31, 2023, and 2022, were as follows:
On July 9, 2021, the Company entered into a purchase agreement, as contemplated by the letter of intent with Olympus, with Panther Creek Reclamation Holdings, LLC ("Panther Creek Reclamation"), a subsidiary of Olympus (the "Panther Creek Acquisition"). Pursuant to the Panther Creek Acquisition, the Company acquired all | | | | | | | | | | | |
| March 31, 2023 | | March 31, 2022 |
Income tax payments | $ | — | | | $ | — | |
Interest payments | $ | 2,222,350 | | | $ | 837,174 | |
Supplementary non-cash investing and financing activities consisted of the assets of Panther Creek, comprised primarily of the Panther Creek Plant. Stronghold Inc. completed the Panther Creek Acquisition on November 2, 2021. The considerationfollowing for the Panther Creek Plant was approximately $3.0 million in cash ($2.192 million after deducting 50% of land closing costs agreed to be split with the seller) subject to certain closing adjustments,three months ended March 31, 2023, and 1,152,000 Stronghold LLC Units, together with a corresponding number of shares of Class V common stock. Pursuant to the Redemption Right (as defined herein), each Stronghold LLC Unit, combined with a corresponding share of Class V common stock, may be redeemed for 1 share of Class A common stock (or cash, in certain instances).
Furthermore, on November 5, 2021, the Company entered into a Registration Rights Agreement with Panther Creek Reclamation, whereby the Company agreed to register the 1,152,000 shares of Class A common stock that may be received upon a redemption by Panther Creek. Refer to Note 16 – Non-controlling Interest for further details.
The transaction was analyzed in accordance with ASC 805 - Business Combinations to first determine whether the acquired assets constitute a business. This requires a screen test that makes a determination that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If the assets acquired are not a business, then the reporting entity should record the transaction as an asset acquisition in accordance with ASC 805-50 (using the cost accumulation model, rather than the
fair value model that applies to business combinations).
The following steps were performed to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.
Step 1. Combine the identifiable assets into a single identifiable asset: The Company has concluded that none of the assets qualify for combination into a single identifiable asset per ASC 805-10-55-5B.
Step 2. Combine the assets into similar assets: The Company has concluded that none of the assets qualify for combination as similar assets under ASC 805-10-55-5C.
Step 3. Measure the fair value of the gross assets acquired: The Company has concluded that the gross assets acquired include any consideration transferred in excess of the fair value of the net identifiable assets acquired (i.e., goodwill in a business combination), but it does not include goodwill that results from the effects of deferred tax liabilities, cash and cash equivalents, deferred taxes, or liabilities.
Step 4. Determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets: The Company compared the fair value of the single identifiable asset (or group of similar assets) to the fair value of the gross assets acquired.
Based on the above analysis, substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. As a result, the transaction does meet the screen as outlined in paragraphs 805-10-55-5A through 55-5C and treated as asset acquisition.
As discussed above in the screen test section of this overall analysis, the Panther Creek Acquisition by the Company does not meet the definition of a business combination.
The following represents the fair value of the identifiable assets and liabilities as of the acquisition date of November 2, 2021:
| | | | | |
The purchase price allocation is as follows (in thousands): | | | | | |
| Cash and cash equivalentsMarch 31, 2023 | | March 31, 2022 |
Equipment financed with debt | $ | 491— | | | $ | 30,750,688 | |
Accounts receivable - tradePurchases of property, plant and equipment included in accounts payable or accrued liabilities | 8313,716 | | | — | |
PrepaidsReclassifications from deposits to property, plant and other current assetsequipment | 4294,658,970 | | | — | |
Materials and suppliesIssued as part of financing: | | | |
Warrants – WhiteHawk | 1,559— | | | 1,150,000 | |
Land and RightsConvertible Note Exchange for Series C Convertible Preferred Stock: | | | |
Extinguishment of Wayconvertible note | 1,72716,812,500 | | | — | |
Property, plant and equipmentExtinguishment of accrued interest | 43,782655,500 | | | — | |
Accounts payableIssuance of Series C convertible preferred stock, net of issuance costs | (2,943)45,386,944 | | | — | |
Accrued expensesB&M Settlement: | | | |
Warrants – B&M | (298)1,739,882 | | | — | |
DueReturn of transformers to related partiessettle outstanding payable | (73)6,007,500 | | | — | |
Total identifiable assets and liabilitiesIssuance of B&M Note | 45,5053,500,000 | | | — | |
Total purchase consideration 1
| $Elimination of accounts payable | 45,50511,426,720 | | | — | |
1 The $45.5 million purchase price consideration consisted of $38.316 million fair value of 1,152,000 Series A Redeemable Preferred Units (registered for public sale), $2.192 million in cash (net of a purchase of plant site 50% share or $808 thousand), $501 thousand in asset retirement obligations, $218 thousand in assumed notes payable, $613 thousand in purchase related legal and professional fees, and $3.665 million related to the settlement of various existing relationship payables (partially offset by receivables).
NOTE 26 – VARIABLE PREPAID FORWARD SALES CONTRACT DERIVATIVE
On December 15, 2021, the Company entered into a Forward Sale with NYDIG Trading providing for the sale of the Sold Bitcoin at a floor price of $28,000 per Bitcoin. Pursuant to the Forward Sale, NYDIG Trading paid the Company the Initial Sale Price on December 16, 2021, times the 250 Bitcoin provided for sale.
On September 24, 2022, the Forward Sale will be settled and sold Bitcoin will be sold to NYDIG Trading at a price equal to the market price for Bitcoin on September 23, 2022, less the Initial Sale Price of $7.0 million, subject to a capped final sale price of $85,500 per Bitcoin.
On March 16, 2022, the Company executed additional option transactions. The net effect of those transactions was to adjust the capped final sale price to $50,000 from $85,500 per Bitcoin, resulting in approximately $1.0 million of proceeds to the Company.
As a result of the embedded price floor and cap mechanisms, this transaction is considered as a compound derivative instrument which is required to be presented at fair value and is subject to remeasurement each reporting period. The Company has not formally designated this instrument as a hedge and such the change in fair value is recorded in earnings as "Changes in fair value of forward sale derivative".
To determine the fair value of the compound derivative instrument, the Company uses a Black-Scholes option pricing model to assess the combined net value of the embedded call feature and the embedded put feature. The Company will continue to update the fair value of the derivative instrument until the contract is settled.
As of June 30, 2022, the Company recognized a current liability of $4.65 million, which includes the prepaid portion of $7.97 million received at the transaction date; and $3.32 million of changes in fair value of derivatives. On July 27, 2022 the Company exited the Variable Prepaid Forward Sales Contract Derivative with NYDIG Trading. As a result of the July transaction the Company delivered the restricted digital assets previously pledged as collateral to NYDIG Trading. In return, the Company received $220,000 of cash and was relieved of its derivative liability.
NOTE 27 – INITIAL PUBLIC OFFERING
On October 19, 2021, by unanimous written consent, the Board and a newly formed Pricing Committee approved the issuance and sale by the Company of its Class A common stock, par value $.0001 per share, in an initial public offering (the "IPO") to be underwritten by a group of underwriters to be named in the underwriting agreement dated October 19,
2021, by and among the Company and B. Riley Securities, Inc. and Cowen and Company, LLC, as representatives of the other underwriters named therein (the "Underwriting Agreement"). The Board unanimously approved the issuance and sale by the Company in the IPO of up to 7,690,400 shares of Class A common stock (which includes 6,687,305 firm shares and up to 1,003,095 shares of Class A common Stock that may be issued and sold to cover over allotments, if any) through the underwriters, for a price to the public per share of $19.00, less underwriting discounts and commissions of $1.33 per share, as more fully set forth in the Underwriting Agreement. Total net proceeds raised, after deducting underwriting discounts and commissions and estimated offering expenses, were $131.5 million.
NOTE 28 – HOSTING SERVICES AGREEMENT
On August 17, 2021, Stronghold LLC entered into a Hosting Services Agreement with Northern Data PA, LLC ("Northern Data") whereby Northern Data will construct and operate a colocation data center facility located on the Scrubgrass Plant (as defined below) (the "Hosting Agreement"), the primary business purpose of which will be to provide hosting services and support cryptocurrency miners. In October 2021, the final deposit owed to Northern Data was paid, and Northern Data has started delivering the 9,900 miners committed in the Hardware and Purchase Agreement dated April 14, 2021. On March 28, 2022, we restructured the Hosting Agreement to obtain an additional 2,675 miners at cost of $37.5 per terahash (to be paid five months after delivery) and temporarily reduced the profit share for Northern Data while incorporating performance thresholds until the data center build-out is complete. In addition, the Company has executed additional hardware agreements with Northern Data as described in Note 8 – Contingencies and Commitments - "Supplier Purchase Agreements".
On August 10, 2022, the Company and Northern Data terminated the provision of the restructured Hosting Agreement related to the additional 2,675 miners and the Company shall neither make payment for such additional miners nor obtain title to such additional miners.
We undertook an analysis of the accounting impacts under the FASB ASC 2016-02, Leases or ASC 842. We determined the arrangement with Northern Data meets the definition of a lease under ASC 842 and also determined the proper accounting for this lease. Based on our analysis and the quoted guidance, we will record lease expense related to the variable payments for Northern Data's profit share as Bitcoins are mined each period.
Once operational, after deducting an amount equal to $0.027 per kilowatt-hour for the actual power used, 65% of all cryptocurrency revenue generated by the miners in Northern Data's pods shall be payable to the Company and 35% of all cryptocurrency revenue generated by the miners shall be payable to Northern Data or its designee and recorded as lease expense.
NOTE 29 – PREMIUM FINANCING AGREEMENT
Effective October 21, 2021, the Company entered into a director and officer insurance policy with annual premiums totaling $6,900,000. The Company has executed a Commercial Premium Finance Agreement with AFCO Premium Credit LLC over a term of nine months, with an annual interest rate of 3.454%, that finances the payment of the total premiums owed. The agreement requires a $1,400,000 down payment, with the remaining $5,500,000 plus interest paid over nine months. Monthly payments of $621,300 started November 21, 2021 and end July 21, 2022. As of June 30, 2022, the premiums were paid in full.
Effective April 29, 2022, the Company entered into a commercial property insurance policy with annual premiums totaling $523,076. The Company has executed a Commercial Premium Finance Agreement with AFCO Premium Credit LLC, over a term of eleven months, with an annual interest rate of 5.99%, that finances the payment of the total premiums owed. The agreement requires a $44,793 down payment, with the remaining $478,283 plus interest paid over eleven months. Monthly payments of $44,793 started May 29, 2022 and end March 29, 2023. As of June 30, 2022, the unpaid balance is $393,260.
NOTE 30 – COVENANTS
On December 31, 2021, Equipment LLC and WhiteHawk entered into the WhiteHawk Amendment to extend the Final MinerVa Delivery Date (as defined therein) from December 31, 2021 to April 30, 2022. Pursuant to the WhiteHawk Amendment, Equipment LLC paid an amendment fee in the amount of $250,000 to WhiteHawk. Pursuant to the
WhiteHawk Amendment's covenants, WhiteHawk can accelerate payment of the loan if the revised final MinerVa delivery date is not achieved.
On March 28, 2022, Equipment LLC and WhiteHawk entered into the Second WhiteHawk Amendment to remove all MinerVa miners from the collateral package in exchange for other miners and to increase the Total Advance by an additional $25 million.
NOTE 31 – NON-EMPLOYEE DIRECTORS COMPENSATION POLICY
On October 19, 2021, non-employee members of the Board are eligible to receive cash and equity compensation as set forth in the Non-Employee Director Compensation Policy (the “Policy”). The cash and equity compensation described in the Policy shall be paid or be made, as applicable, to each member of the Board who is not an employee of the Company or any parent or subsidiary of the Company (each, a “Non-Employee Director”) and who may be eligible to receive such cash or equity compensation, unless such Non-Employee Director declines the receipt of such cash or equity compensation by written notice to the Company. The Policy became effective as of the date set forth above (the “Effective Date”) and shall remain in effect until it is revised or rescinded by further action of the Board.
The Company paid compensation to the non-employee directors totaling $64,370 and $275,843 during the three and six months ended June 30, 2022, respectively, but the latter amount was reduced to a net $200,843 after reversing the December 31, 2021 accrual.
This plan requires payment of compensation in arrears, so the Company accrued $75,000 in compensation costs as of December 31, 2021 for the periods after October 19, 2021 (the eligibility date of this plan) through December 31, 2021. In the quarter ended March 31, 2022, the Company paid the $75,000 accrued as of December 31, 2021.
NOTE 32 – CONVERTIBLE NOTE
On May 15, 2022, we entered into a note and warrant purchase agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “Purchasers”), whereby we agreed to issue and sell to Purchasers, and Purchasers agreed to purchase from the Company, (i) $33,750,000 aggregate principal amount of 10.00% unsecured convertible promissory notes (the “May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the right to purchase up to 6,318,000 shares of Class A Common Stock, of the Company with an exercise price per share equal to $2.50, on the terms and subject to the conditions set forth in the Purchase Agreement collectively, the “2022 Private Placement”). The Purchase Agreement contained representations and warranties by the Company and the Purchasers that are customary for transactions of this type. The May 2022 Notes and the May 2022 Warrants were offered and sold in reliance on the exemption afforded by Section 4(a)(2) of the Securities Act, and Rule 506(b) of Regulation D promulgated thereunder for aggregate consideration of $27.0 million.
In connection with the 2022 Private Placement, the Company undertook to negotiate with the Purchasers, and to file a certificate of designation (“Series C Preferred Certificate of Designation”) with the State of Delaware, following the closing of the 2022 Private Placement, the terms of a new series of preferred stock (the “Series C Preferred Stock”).
In connection with the 2022 Private Placement, the May 2022 Warrants were issued pursuant to the Warrant Agreement (the “Warrant Agreement”). The May 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. The May 2022 Warrants will be exercisable for a five-year period from the closing.
The issuance of the Convertible Note is within the scope of ASC 480-10 and thus has been measured at fair value as described in ASC 480-10-30-7 and will be remeasured each reporting period as described in paragraph 480-10-25-8. Additionally, under the guidance provided by ASC 815-40-15-7 it has been determined that the warrants are indexed to the Company's stock. The warrants will initially be recorded at their fair value and recorded in equity.
NOTE 3320 – SUBSEQUENT EVENTS
Management has evaluated events and transactions subsequent to the balance sheet date through the date of this report (the date the financial statements were available to be issued) for potential recognition or disclosure in the financial statements. Except as disclosed in the following sections, management has not identified any items requiring recognition or disclosure.
WhiteHawk Refinancing Agreement
April 2023 Private Placement
On August 16, 2022, weApril 20, 2023, the Company entered into a commitment letter (the “Commitment Letter”)Securities Purchase Agreements with WhiteHawk to provide for committed financing to refinancean institutional investor and the WhiteHawk Financing AgreementCompany’s chairman and provide up to $20 million in additional commitments (such additional commitments, the “Delayed Draw Facility”) for an aggregate loan not to exceed $60.0 million. Such loans under the Delayed Draw Facility will be available to be drawn for 180 days from the closing date of the WhiteHawk Refinancing Agreement (as defined below). The financing contemplated by the Commitment Letter (such financing, the “WhiteHawk Refinancing Agreement”) will be entered into by Stronghold LLC as Borrower (the “Borrower”) and secured by substantially all of the assets of the Company and its subsidiaries and will be guaranteed by the Company and each of its subsidiaries. The WhiteHawk Refinancing Agreement will require equal monthly amortization payments resulting in full amortization at maturity. The WhiteHawk Refinancing Agreement will have customary representations, warranties and covenants including restrictions on indebtedness, liens, restricted payments and dividends, investments, asset sales and similar covenants and will contain customary events of default. The WhiteHawk Refinancing Agreement will contain a covenant requiring the Borrower and its subsidiaries to maintain a minimum (x) of $7.5 million of liquidity at all times, (y) a minimum liquidity of $10 million of average daily liquidity for each calendar month (rising to $20 million beginning July 1, 2023) and (z) a maximum total leverage ratio covenant of (i) 7.5:1.0 for the quarter ending December 31, 2022, (ii) 5.0:1.0 for the quarter ending March 31, 2023, (iii) 4.0:1.0 for the quarter ending June 30, 2023 and (iv) 4.0:1.0 for each quarter ending thereafter.The initial closing of the WhiteHawk Refinancing Agreement will be subject to customary closing conditions. In addition, the initial closing of the WhiteHawk Refinancing Agreement will subject to the full extinguishment and termination of all of the NYDIG Debt (as defined below) and other obligations of the Company and its affiliates under the NYDIG Agreements (as defined below), whether pursuant to the Asset Purchase Agreement (as defined below) or otherwise.
The borrowings under the WhiteHawk Refinancing Agreement will mature 36 months after the closing date of the WhiteHawk Refinancing Agreement and will bear interest at a rate of Secured Overnight Financing Rate plus 10%. The loans under the Delayed Draw Facility will be issued with 3% “original issue discount” on all drawn amounts, payable when such amounts are drawn, and undrawn commitments thereunder will incur a commitment fee, paid monthly, equal to 1% per annum. Amounts drawn on the WhiteHawk Refinancing Agreement will be subject to a prepayment premium such that the lenders thereunder achieve a 20% return on invested capital. In addition, Borrower has agreed to pay an alternate transaction fee to WhiteHawk in the event that (x) WhiteHawk Refinancing Agreement does not close on or before October 31, 2022, (y) the initial funding under the WhiteHawk Financing Agreement does not occur on or before October 31, 2022 or (z) Borrower or any of its affiliates utilize any debt or equity financing other than the WhiteHawk Refinancing Agreement to refinance the existing indebtedness owed to Whitehawk. We agreed to issue a stock purchase warrant to WhiteHawk in conjunction with the closing of the WhiteHawk Refinancing Agreement, which provideschief executive officer, Greg Beard, for the purchase and sale of an additional 2,000,000shares of Class A common stock, par value $0.0001 per share at a purchase price of $1.00 per share, and warrants to purchase shares of Class A common stock, at $0.01an initial exercise price of $1.10 per share (subject to certain adjustments in accordance with the terms thereof). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 9,000,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 1,000,000 shares of Class A common stock, in each case at a price of $1.00 per share equivalent. Further, the institutional investor and Mr. Beard received warrants exercisable for 9,000,000 shares and 1,000,000 shares, respectively, of Class A common stock.
Subject to certain ownership limitations, the warrants are exercisable six months after issuance. The warrants are exercisable for five and a half years commencing upon the date of issuance, subject to certain ownership limitations. The pre-funded warrants have an exercise price of $0.0001 per warrant share and are immediately exercisable, subject to certain ownership limitations. The gross proceeds from the April 2023 Private Placement, before deducting offering expenses, was approximately $10.0 million. The April 2023 Private Placement closed on April 21, 2023.
Additionally, as previously disclosed, the Company entered into Securities Purchase Agreements with the September 2022 Private Placement Purchasers for, in part, warrants to purchase an aggregate of 5,602,409 shares of Class A common stock, at an exercise price of $1.75 per share. On April 20, 2023, the Company and the September 2022 Private Placement Purchasers entered into amendments to, among other things, adjust the strike price of the warrants from $1.75 per share to $1.01 per share.
MicroBT Miner Purchase
NYDIG AssetOn April 20, 2023, Stronghold Inc. entered into a Master Sales and Purchase Agreement
On August 16, 2022, the Company, to acquire 5,000 new, latest-generation MicroBT WhatsMiner M50 miners (the “M50 Miners”) for $15.50 per terahash per second, including shipping. The M50 Miners have an average hash rate of 118 terahash per second and energy efficiency of 28.5 joules per terahash. This addition of approximately 600 petahash per second of hash rate capacity is expected to grow Stronghold LLC, SDM and Stronghold Digital Mining BT, LLC, a Delaware limited liability companyInc.'s total delivered hash rate capacity by over 20% to over 3.2 exahash per second (“Digital Mining BT, and together with SDM, the “APA Sellers” and, together with the Company and Stronghold LLC, the “APA Seller Parties”EH/s”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with NYDIG, formerly known as Arctos Credit, LLC, and The Provident Bank, a Massachusetts savings bank (“BankProv” and together with NYDIG, “Purchasers” and each, a “Purchaser”).
Pursuant to the Arctos/NYDIG Financing Agreement and the Second NYDIG Financing Agreement (collectively, the
“NYDIG Agreements”), certain miners are pledged as collateral under such agreements (and together with certain related
agreements to purchase miners, the “APA Collateral”). Under the Asset Purchase Agreement, the APA Seller Parties have agreed to sell, and the Purchasers (or their respective designee) have agreed to purchase, the APA Collateral in a private disposition in exchange for the forgiveness, reduction and release of all principal, interest, and fees owing under each of the NYDIG Agreements (collectively, the “NYDIG Debt”). The Sellers have agreed to clean, service, package, ship and deliver the APA Collateral, and to bear the costs associatedapproximately 3.5 EH/s with such activities. Following (i) delivery of the APAall
Collateral pursuant to the Purchasers or their designees to a master bill of sale and (ii) a subsequent inspection period of up to 14 days (which may be extended up to seven additional days), upon acceptance of the APA Collateral, the related portion of the NYDIG Debt will be assigned to the Sellers and cancelled pursuant to the terms of the Asset Purchase Agreement (each, a “Settlement”). A Settlement is subject to certain conditions, including the delivery of certain milestone schedules to a master bill of sale and the completion of an inspection of the APA Collateral by the Purchasers, and, in the event of certain failures to satisfy the inspection conditions, the obligation of the Company to replace such APA Collateral with
comparable assets, provided that such obligation only applies once the aggregate value of such APA Collateral exceeds $426,183.02 (with $173,650.68, with respect to BankProv, and $252,532.33, with respect to NYDIG).
Prior to the date on which (i) APA Seller Parties first breaches a material obligation under the Asset Purchase Agreement, (ii) to the date on which the Asset Purchase Agreement is terminated or if a Seller elects not to sell any or all of its APA Collateral, or (iii) an insolvency or liquidation proceeding is commenced by or against the APA Sellers (the “Non-Interference Period”), the Purchasers have agreed not to foreclose on any of the APA Collateral under such NYDIG Agreements.remaining contracted miners delivered. The APA Seller Parties also granted certain indemnification rights to the Purchasers. The Asset Purchase Agreement also provides for certain termination rights.
Pursuant to the Asset Purchase Agreement, the Seller Parties have granted a release from certain claims arising out of
or in connection with the Asset Purchase Agreement and the transactions contemplated thereunder. Further, except for the
payment of accrued but unpaid interest through the date of signing of the Asset Purchase Agreement, prior to the earlier of
(i) the termination of the Asset Purchase Agreement, (ii) the end of the Non-Interference Period, or (iii) a Seller electing not to sell any of its APA Collateral required to be sold at a settlement, the Sellers will not be required to make payments pursuant to the NYDIG Agreements (although interest shall accrue but not be due and payable) and each Purchaser, in its capacity as the respective lender under the NYDIG Agreements, will not exercise any remedies available as a lender or declare any event of default as a result of the Sellers taking any actions required or directly contemplated by the Asset Purchase Agreement.
As a result of this transaction, the Company expects to incur a loss of approximately$21 million inreceive and install the thirdM50 Miners during the second quarter of 2022.2023.
Private Placement Amendment
Canaan Bitcoin Mining Agreement
On August 16, 2022,April 27, 2023, the Company entered into an amendment to the note and warrant purchasesigned a two-year hosting agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “Purchasers”with Cantaloupe Digital LLC, a subsidiary of Canaan Inc. ("Canaan"), whereby Stronghold Inc. will operate 2,000 A1346 (110 TH/s per miner) and 2,000 A1246 (90 TH/s per miner) Bitcoin miners supplied by Canaan (the “Canaan Miners”), with total hash rate capacity of 400 PH/s (the “Canaan Bitcoin Mining Agreement”). The Canaan Bitcoin Mining Agreement has a two-year term, with no unilateral early termination option. The Company will receive 50% of the Bitcoin mined by the Canaan Miners and receive payments from Canaan equal to 55% of the net cost of power at the Company’s Panther Creek Plant, in dollar-per-megawatt-hour terms, calculated on a monthly basis. Additionally, Stronghold Inc. will retain all upside associated with selling power to the grid, and, if the Company agreedelects to amendcurtail the Purchase Agreement suchCanaan Miners to sell power to the grid, Canaan will receive a true-up payment that $11.25 millionrepresent estimates of the outstanding principal hasBitcoin mining revenue would have been exchanged forgenerated had the Purchaser's execution of an amendedminers not been curtailed. The A1246 Bitcoin miners are to be installed by May 15, 2023, and restated warrant agreement pursuantthe A1346 Bitcoin miners are to whichbe installed by June 15, 2023. On May 3, 2023, the strike price of the 6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01. After giving effect2,000 A1246 Bitcoin miners were delivered to the principal reductionCompany's Panther Creek Plant and amended and restated warrants, the Company will continuewere ready to make subsequent monthly, payments to the Purchasers on the fifteenth (15th) day of each of November 2022, December 2022, January 2023 and February 2023. The Company may elect to pay each such payment (A) in cash or (B) in shares of Common Stock, in each case, at a twenty percent (20%) discount to the average of the daily VWAPs for each of the twenty (20) consecutive trading days preceding the payment date.
be deployed.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the "Securities Act")), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the "Exchange Act"). In particular, statements pertaining to our trends, liquidity, capital resources, and future performance, among others, contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).
Forward-looking statements may include statements about:
•the hybrid nature of our business model, which is highly dependent on the price of Bitcoin;
•our ability to raise capital to fund our business growth;
•our dependence on the level of demand and financial performance of the crypto asset industry;
•our ability to manage our growth, business, financial results and results of operations;
•uncertainty regarding our evolving business model;
•our ability to raise capital to fund our business growth;
•our ability to maintain sufficient liquidity to fund operations, growth and acquisitions;
•our substantial indebtedness and its effect on our results of operations and our financial condition;
•uncertainty regarding the outcomes of any investigations or proceedings;
•our ability to retain management and key personnel and the integration of new management;
•our ability to enter into purchase agreements, acquisitions and financing transactions;
•our ability to maintain our relationships with our third-party brokers and our dependence on their performance;
•public health crises, epidemics, and pandemics such as the coronavirus ("COVID-19") pandemic;
•our ability to procure crypto asset mining equipment from foreign-based suppliers;
•developments and changes in laws and regulations, including increased regulation of the crypto asset industry through legislative action and revised rules and standards applied by The Financial Crimes Enforcement Network under the authority of the U.S. Bank Secrecy Act and the Investment Company Act;
•the future acceptance and/or widespread use of, and demand for, Bitcoin and other crypto assets;
•our ability to respond to price fluctuations and rapidly changing technology;
•our ability to operate our coal refuse power generation facilities as planned;
•our ability to remain listed on a stock exchange and maintain an active trading market;
•our ability to avail ourselves of tax credits for the clean-up of coal refuse piles; and
•legislative or regulatory changes, and liability under, or any future inability to comply with, existing or future energy regulations or requirements.
We caution you that the forward-looking statements contained in this Form 10-Q are subject to a variety of risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, decline in demand for our products and services, the seasonality and volatility of the crypto asset industry, our acquisition strategies, the inability to comply with developments and changes in regulation, cash flow and access to capital, maintenance of third partythird-party relationships, the COVID-19 pandemic and the other risks described under the heading “Item 1A.Risk Factors” as filed in our Annual Report on Form 10-K for the year ended December 31, 2021 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, each as filed with the U.S. Securities and Exchange Commission (the "SEC"), on April 3, 2023, and in this Form 10-Q. Should one or more of the risks or uncertainties
described in the Annual Report on Form 10-K or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Any forward-looking statement that we make in this Form 10-Q speaks only as of the date of such statement. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Except as otherwise indicated or required by the context, all references in this prospectus to the “Company,” “we,” “us” or “our” relate to Stronghold Digital Mining, Inc. (“Stronghold Inc.”) and its consolidated subsidiaries following the Reorganization.subsidiaries.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing in this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans, expectations and strategy for our business, and operations, includes forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see section above entitled “Cautionary Statement Regarding Forward-Looking Statements.” Certain risks may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion and analysis. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading “Item 1A.Risk Factors” as filed in our Annual Report on Form 10-K for the year ended December 31, 2021, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, each as filed with the U.S. Securities and Exchange CommissionSEC on April 3, 2023 (the "SEC""2022 Form 10-K"), and in this Form 10-Q. Except as set forth in Item 1A. "Risk Factors" below, there have been no material changes to the risk factors previously disclosed in the 2021 Form 10-K, or first quarter 2022 Form 10-Q.10-K.
Overview of the Business
Stronghold Digital Mining, Inc. (“Stronghold Inc.,” the “Company,” “we,” “us,” or “our”) was incorporated as a Delaware corporation on March 19, 2021. We are a low-cost, environmentally beneficial, vertically integrated crypto asset mining company currently focused on mining Bitcoin.Bitcoin with environmental remediation and reclamation services. We wholly own and operate two low-cost, environmentally-beneficial coal refuse power generation facilities that we have upgraded: (i) our first reclamation facility located on a 650-acre site in Scrubgrass Township, Venango County, Pennsylvania, which we acquired the remaining interest of in April 2021 and currently has the capacity to generate approximately 83.5 megawatts ("MW"(“MW”) of electricity(the "Scrubgrass Plant" (the “Scrubgrass Plant”) and (ii) a facility located near Nesquehoning, Pennsylvania, which we acquired in November of 2021 and whichhas the capacity to generate approximately 80 megawatts ("MW")MW of electricity (the "Panther“Panther Creek Plant"Plant”), each of which is as an Alternative Energy System because coal refuse is classified under Pennsylvania law as a Tier II Alternative Energy Source (large-scale hydropower is also classified in this tier). We are committed to generating our energy and managing our assets sustainably, and we believe that we are one of the first vertically integrated crypto asset mining companies with a focus on environmentally beneficial operations. Owning
We believe that our integrated model of owning our own source of power plants and Bitcoin mining data center operations helps us to produce Bitcoin at onea cost that is attractive versus the price of Bitcoin, and generally below the prevailing market price of power that many of our peers must pay and may have to pay in the future during periods of uncertain or elevated power pricing. Due to the environmental benefit resulting from the remediation of the sites from which the waste coal utilized by our two power generation facilities is removed, we also qualify for Tier II renewable energy tax credits (“RECs”) in Pennsylvania. These RECs are currently valued at approximately over $22 per megawatt hour (“MWh”) and help reduce our net cost of power. We believe that our ability to utilize RECs in reducing our net cost of power further differentiates us from our public company peers that purchase power from third-party sources or import power from the grid and that do not have access to RECs or other similar tax credits. Should power prices weaken to a level that is below the Company’s cost to produce power, we have the ability to purchase power from the PJM grid to ensure that we are producing Bitcoin at the lowest prices among our publicly traded peers.possible cost. Conversely, we are able to sell power to the PJM grid instead of using the power to produce Bitcoin, as we have recently done, on an opportunistic basis, when revenue from power sales exceeds Bitcoin mining revenue. We operate as a market participant through PJM Interconnection, a Regional Transmission Organization (“RTO”) that coordinates the movement of wholesale electricity. Our ability to sell energy in the wholesale generation market in the PJM RTO provides us with the ability to optimize between selling power to the grid, and mining for Bitcoin. We also believe that owning our own power source makes us a more attractive partner to crypto asset mining equipment purveyors. We intend to leverage these competitive advantages to continue to grow our business through the opportunistic acquisition of additional power generating assets and miners.
Our net cost of power, taking into account RECs and waste coal tax credits that we receive, reached the guided range of $45 and $50 per MWh by the end of the first quarter of 2023. We believe that our net cost of power will average between $40 and $50 per MWh over the course of the rest of 2023. This $40 to $50 per MWh corresponds to a cost per Bitcoin Mining Growth
During 2018of approximately $10,000 to $14,000 with modern miners and 2019, we began providingassuming a network hash rate of 320 exahash per second (“EH/s”). We believe this cost to mine is attractive versus the price of Bitcoin and generally below the prevailing market price of power that many of our publicly traded peers who engage in Bitcoin mining, serviceswho do not generate their own power but instead must purchase it. For reference, per Bloomberg, as of May 1, 2023, the estimated cost to third partiesprocure electricity over the
forward 24-month period based on the forward power price curve for six major pricing points (Electric Reliability Council of Texas (“ERCOT”) North, ERCOT West, Mid-continent Independent System Operator (“MISO”) Illinois, MISO Indiana, PJM East, and also began operatingPJM West) is approximately $52 per MWh, to which our own Bitcoin mining equipmentexpected cost of approximately $40 to generate Bitcoin, which we then exchange for U.S. Dollars. We have been expanding our mining operations since such date. $50 per MWh compares favorably.
As of June 30, 2022,May 8, 2023, we operated approximately 32 thousand cryptocurrency mining computers (known as “miners”)operate more than 31,000 Bitcoin miners with hash rate capacity of approximately 3.02.8 EH/s. As of June 30, 2022, we had entered into definitive agreementsOf these Bitcoin miners, approximately 25,000 are wholly owned with multiple suppliers to deliver approximately 10 thousand additional miners withhash rate capacity of approximately 1.02.2 EH/s. We host the remaining approximately 6,500 Bitcoin miners with hash rate capacity of approximately 600 petahash per second (“PH/s”). As of May 8, 2023, we expect to receive an additional approximately 0.6 EH/s throughrelated to the purchase of 5,000 MicroBT WhatsMiner M50 Bitcoin miners on April 20, 2023, and we also expect to receive an additional approximately 0.2 EH/s related to the purchase agreement we entered into with MinerVa Semiconductor Corp. (“MinerVa”) dated April 2, 2021, representing the final 15% of the contracted hash rate yet to be delivered. We also expect to receive an additional 2,000 Canaan A1346 miners, which will yield an additional 0.2 EH/s of hash rate capacity, related to our hosting agreement with Cantaloupe Digital LLC, a subsidiary of Canaan Inc. ("Canaan") after receiving the first 2,000 miners (0.2 EH/s) in early May. We are actively evaluating incremental opportunities, and while no assurances can be made that we will receive the remaining MinerVa miners or be able to consummate any of these incremental transactions, we continue to believe that we will be able to fill our existing 4 EH/s of data center capacity by the end of 2022. the third quarter.
Bitcoin
Bitcoin was introduced in 2008 with the goal of serving as a digital means of exchanging and storing value. Bitcoin is a form of digital currency that depends upon a consensus-based network and a public ledger called a “blockchain,” which contains a record of every Bitcoin transaction ever processed. The Bitcoin network is the first decentralized peer-to-peer payment network, powered by users participating in the consensus protocol, with no central authority or middlemen, that has wide network participation. The authenticity of each Bitcoin transaction is protected through digital signatures that correspond with addresses of users that send and receive Bitcoin. Users have full control over remitting Bitcoin from their own sending addresses. All transactions on the Bitcoin blockchain are transparent, allowing those running the appropriate software to confirm the validity of each transaction. To be recorded on the blockchain, each Bitcoin transaction is validated through a proof-of-work consensus method, which entails solving complex mathematical problems to validate transactions and post them on the blockchain. This process is called mining. Miners are rewarded with Bitcoins, both in the form of newly created Bitcoins and fees in Bitcoin, for successfully solving the mathematical problems and providing computing power to the network. A company’s computing power, measured in hash rate, is generally considered to be one of the most important metrics for evaluating Bitcoin mining companies.
We intendreceive Bitcoin as a result of our mining operations, and we sell Bitcoin, from time to housetime, to support our minersoperations and strategic growth. We do not currently plan to engage in regular trading of Bitcoin (other than as necessary to convert our Bitcoin to U.S. dollars) or to engage in hedging activities related to our holding of Bitcoin; however, our decisions to hold or sell Bitcoin at any given time may be impacted by the Scrubgrass PlantBitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell Bitcoin that we hold or the number of Bitcoins we will sell. We assess our fiat currency needs on an ongoing basis, incorporating market conditions, our financial forecasts, and scenarios analyses. We safeguard and keep private our digital assets by utilizing storage solutions provided by Anchorage Digital Bank (“Anchorage”), which require multi-factor authentication and utilize cold and hot storage. While we are confident in the security of our digital assets, we are evaluating additional measures to provide additional protection.
Recent Developments
Bruce and Merrilees Settlement Agreement
On March 28, 2023, the Company and Stronghold Digital Mining Holdings, LLC ("Stronghold LLC") entered into a Settlement Agreement (the “B&M Settlement”) with its electrical contractor, Bruce & Merrilees Electric Co. (“B&M”). Pursuant to the B&M Settlement, B&M eliminated an estimated $11.4 million outstanding payable in exchange for a promissory note in the amount of $3,500,000 (the "B&M Note") and a stock purchase warrant for the right to purchase from the Company 3,000,000 shares of Class A Common Stock (the B&M Warrant").
Pursuant to the B&M Settlement, B&M released ten (10) 3000kva transformers to the Company and fully cancelled ninety (90) transformers remaining under a pre-existing order with a third-party supplier. The terms of the B&M Settlement include a mutual release of all pre-existing claims.
Pursuant to the B&M Note, the first $500,000 of the principal amount of the loan shall be payable in four equal monthly installments of $125,000 beginning on April 30, 2023, so long as (i) no default or event of default has occurred or is occurring under the Credit Agreement (as defined below) and (ii) no PIK Option (as such term is defined in the First Amendment, as defined below) has been elected by the Company. The principal amount under the B&M Note bears interest at seven and one-half percent (7.5%). Pursuant to the B&M Warrant, the Company entered into a registration rights agreement with B&M for the shares underlying the warrants.
Simultaneous with the B&M Settlement, the Company and each of its subsidiaries entered into a Subordination Agreement with B&M and WhiteHawk Capital Partners LP ("Whitehawk Capital") pursuant to which all obligations, liabilities and indebtedness of every nature of the Company and each of its subsidiaries owed to B&M pursuant to the B&M Note, B&M Settlement and otherwise shall be subordinate and subject in right and time of payment, to the prior payment of full of the Company's obligation to WhiteHawk pursuant to the Credit Agreement.
Series C Convertible Preferred Stock
On December 30, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with the holders (the “Purchasers”) of the May 2022 Notes (as defined below) whereby the May 2022 Notes were to be exchanged for shares of a new series of convertible preferred stock (the “Series C Preferred Stock”) that, among other things, will convert into shares of Common Stock or pre-funded warrants that may be exercised for shares of Class A common stock, at a conversion price of $0.40 per share. The Exchange Agreement closed on February 20, 2023. Pursuant to the Exchange Agreement, the Purchasers received an aggregate 23,102 shares of the Series C Preferred Stock in exchange for the cancellation of an aggregate $17,893,750 of principal and accrued interest, representing all of the amounts owed to the Purchasers under the May 2022 Notes. On February 20, 2023, one Purchaser converted 1,530 shares of the Series C Preferred Stock to 3,825,000 shares of the Company’s Class A common stock. On February 20, 2023, one Purchaser converted 1,530 shares of the Series C Preferred Stock to 3,825,000 shares of the Company’s Class A common stock. The rights and preferences of the Series C Preferred Stock are designated in a certificate of designation (the “Certificate of Designation”), and the Panther Creek Plant data centers. Company provided certain registration rights to the Purchasers.
MinerVa
On April 2, 2021, we entered into a purchase agreement with MinerVa (the “MinerVa Purchase Agreement”) for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miners, with a total hash rate capacity of 1.5 exahash per second to be delivered. In December 2021, we extended the deadline for delivery of the MinerVa miners to April 2022. Due to continued delays in deliveries, an impairment of approximately $12 million was recognized on March 31, 2022. Due to market conditions, an additional impairment of approximately $5 million was recognized on December 31, 2022. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. As of December 31, 2022, and May 8, 2023, MinerVa had delivered value to Stronghold Inc. equivalent to approximately 1,070 PH/s and approximately 1,270 PH/s, respectively, of the 1,500 PH/s in the form of MinerVa miners, refunded cash, and other industry leading miners. We have continued to receive MinerVa miners during the first quarter of 2023 and expect to receive the remaining MinerVa miners, but we do not know when they will be received, if at all.
WhiteHawk Credit Agreement Amendment
On February 6, 2023, the Company, Stronghold LLC, as borrower, their subsidiaries and WhiteHawk Capital, as collateral agent and administrative agent, and the other lenders thereto, entered into an amendment (the “First Amendment”) to the previously announced secured credit agreement (the "Credit Agreement") the Company entered into with WhiteHawk Finance LLC ("WhiteHawk") on October 27, 2022, in order to modify certain covenants and remove certain prepayment requirements contained therein. Following the First Amendment, Stronghold LLC will be permitted to pay interest in kind in each month that its average daily cash balance (including cryptocurrencies) is less than $5,000,000, up to a maximum of six elections during the life of the Credit Agreement. As a result of the First Amendment, amortization payments for the period from February 2023 through July 2024 will not be required, with monthly amortization resuming July 31, 2024. Beginning June 30, 2023, following a five-month holiday, Stronghold LLC will make monthly prepayments of the loan in an amount equal to 50% of its average daily cash balance (including cryptocurrencies) in excess of $7,500,000 for such month. The First Amendment also modifies the financial covenants to (i) in the case of the requirement of the Company to maintain a leverage ratio no greater than 4.00:1.00, such covenant will not be tested until the fiscal quarter ending September 30, 2024 and (ii) in the case of the minimum liquidity covenant, modified to require minimum liquidity at any time to be not less than: (A) until March 31, 2024, $2,500,000; (B) during the period beginning April 1, 2024 through and including December 31, 2024, $5,000,000; and (C) from and after January 1, 2025, $7,500,000. The average monthly
minimum liquidity requirement has been removed entirely. The First Amendment required the Company to produce a budget, to be approved by the required lenders, and to resolve all claims of and amounts payable to B&M in a manner satisfactory to the required lenders by February 28, 2023.
During the term of the Credit Agreement, the administrative agent (at the direction of the required lenders) will have the right to designate a board observer to attend meetings of Board and all committees thereof. Such person will not be entitled to vote on or consent to any matters presented to the Board or any committees thereof. Such observer maybe excluded from certain meetings or discussions in limited circumstances. The Company will reimburse the observer for its reasonable out-of-pocket expenses incurred in connection with attending any meetings, but none of the lenders or such observer will receive any additional compensation or remuneration for such services.
Further, the Company agreed to appoint an additional independent director that is reasonably satisfactory to the required lenders to its Board to serve until the Company’s next annual meeting, and to nominate such person for election at its next annual meeting. Further, the failure of the sponsor, which includes Q Power LLC (which is controlled by Greg Beard, the chairman and chief executive officer of the Company), to vote for such person as a director will constitute an event of default under the Credit Agreement. On March 7, 2023, the Board appointed Thomas Doherty to the Board.
Simultaneous with the entry into the B&M Settlement and the Subordination Agreement, on March 28, 2023, the Company, Stronghold LLC, as borrower, their subsidiaries and WhiteHawk Capital, as collateral agent and administrative agent, and the other lenders thereto, entered into a second amendment to the Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, among other items, the terms “Permitted Indebtedness”, “Subordinated Indebtedness” and “Material Contracts” under the Credit Agreement were amended to include and account for the B&M Settlement, B&M Note and B&M Warrant, and the Company’s obligations thereunder.
May 2022 Private Placement
On May 15, 2022, the Company entered into a note and warrant purchase agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “May Purchasers”), whereby the Company agreed to issue and sell to the May Purchasers, and the May Purchasers agreed to purchase from the Company, (i) $33,750,000 aggregate principal amount of 10.00% unsecured convertible promissory notes (the “May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the right to purchase up to 6,318,000 shares of Class A common stock, of the Company with an exercise price per share equal to $2.50, on the terms and subject to the conditions set forth in the Purchase Agreement (collectively, the “2022 Private Placement”). The Purchase Agreement contained representations and warranties by the Company and the May Purchasers that are customary for transactions of this type. The May 2022 Notes and the May 2022 Warrants were sold for aggregate consideration of approximately $27.0 million.
In connection with the 2022 Private Placement, the Company undertook to negotiate with the May Purchasers and to file a certificate of designation with the State of Delaware, following the closing of the 2022 Private Placement, for the terms of a new series of preferred stock.
In connection with the 2022 Private Placement, the May 2022 Warrants were issued pursuant to the Warrant Agreement. The May 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. The May 2022 Warrants are exercisable for a five-year period from the closing.
The issuance of the May 2022 Notes was within the scope of ASC 480-10 and, therefore, was initially measured at fair value (consistent with ASC 480-10-30-7). Additionally, under the guidance provided by ASC 815-40-15-7, the Company determined that the May 2022 Warrants were indexed to the Company's stock. As a result, the May 2022 Warrants were initially recorded at their fair value within equity. The May 2022 Notes were valued using the gross yield method under the income approach. As of the issuance date of May 15, 2022, a calibration analysis was performed by back solving the implied yield associated with the May 2022 Notes, such that the total value of the May 2022 Notes and the May 2022 Warrants equaled the purchase amount. The calibrated yield was then rolled forward for changes to the risk-free rate and option-adjusted spreads to the August 16, 2022, valuation date to value the May 2022 Notes.
On August 16, 2022, the Company entered into an amendment to the Purchase Agreement, by and among the Company and the May Purchasers, whereby the Company agreed to sell approximately 26 thousand NYDIG-secured Bitcoin miners to NYDIG, fewer than 19 thousandamend the Purchase Agreement, such that $11.25 million of which were installed as of August 16, 2022, to NYDIG in exchangethe outstanding principal was exchanged for the NYDIG Debt (as defined below). ReferMay Purchaser's execution of an amended and restated warrant agreement pursuant to Note 33 – Subsequent Events.
Acquisitions
On March 3, 2021, Stronghold Digital Mining LLC (“SDM”) entered into a non-binding letter of intent (the “Olympus LOI”) with Olympus Power, LLC (together with its affiliates, "Olympus")forwhich the purchase of (i) the ownership interest in Scrubgrass Reclamation Company, L.P. (f/k/a Scrubgrass Generating Company, L.P.) (“Scrubgrass LP”) held by Aspen Scrubgrass Participant, LLC (the “Aspen Interest”), (ii) the Panther Creek Plant, and (iii) a third coal refuse power generation facility (the "Third Plant").
On July 9, 2021, Stronghold Digital Mining Holdings LLC (“Stronghold LLC”) entered into a purchase agreement for the Panther Creek Plant (the “Panther Creek Acquisition”), as contemplated by the Olympus LOI, from Olympus. The Panther Creek Acquisition includes allstrike price of the assets6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01. After giving effect to the principal reduction and amended and restated warrants, the Company was to continue to make subsequent monthly, payments to the May Purchasers on the fifteenth (15th) day of Panther Creek Power Operating LLC, comprised primarilyeach of November 2022, December 2022, January 2023, and February 2023. The Company was able to elect to pay each such payment (A) in cash or (B) in shares of common stock, in each case, at a twenty percent (20%) discount to the average of the daily VWAPs for each of the twenty (20) consecutive trading days preceding the payment date.
Panther Creek Plant. The Panther Creek Plant is a coal refuse reclamation facilityApril 2023 Private Placement
On April 20, 2023, we entered into Securities Purchase Agreements with 80 MW of net electricity generation capacity located near Nesquehoning, Pennsylvania. We completedan institutional investor (the “Institutional Purchaser”) and the Panther Creek Acquisition on November 2, 2021. The considerationCompany’s chairman and chief executive officer, Greg Beard, for the Panther Creek Plant was approximately $2.2 million ($3 million less $800 thousand in shared land closing costs) in cash and 1,152,000 Class A common units of Stronghold LLC (“Stronghold LLC Units”), together with a corresponding number of shares of Class V common stock. Effective November 2, 2021, we closed on this acquisition.
We continue to evaluate the acquisition of the Third Plant as contemplated by the Olympus LOI, although we do not consider this acquisition to be probable at this time. The acquisition of the Third Plant is subject to further due diligence and the negotiation of a definitive agreement, and there is no assurance that the acquisition will be completed.
Initial Public Offering
We completed the issuancepurchase and sale of ourshares of Class A common stock, par value $.0001$0.0001 per share in an initial public offering (the "IPO") on October 22, 2021,at a purchase price of $1.00 per share, and ourwarrants to purchase shares of Class A common stock, is listed on Nasdaq underat an initial exercise price of $1.10 per share (subject to certain adjustments in accordance with the symbol “SDIG.”
Stock Split
We effected 2.88-for-1 stock split on October 22, 2021, pursuant to which each share of common stock held of record by the holder thereof was reclassified into approximately 2.88 shares of common stock. No fractional shares were issued.terms thereof) (“April 2023 Private Placement”). Pursuant to the Second Amended and Restated Limited Liability Company AgreementSecurities Purchase Agreements, the Institutional Purchaser invested $9.0 million in exchange for an aggregate of Stronghold LLC, as amended from time to time, each “Stronghold LLC Unit” was also split on a corresponding 2.88-for-1 basis, such that there are an equivalent number of Stronghold LLC Units outstanding as the aggregate number of9,000,000 shares of Class V common stock and Class A common stock outstanding followingand pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 1,000,000 shares of Class A common stock, in each case at a price of $1.00 per share equivalent. Further, the stock split. We referInstitutional Purchaser and Mr. Beard received warrants exercisable for 9,000,000 shares and 1,000,000 shares, respectively, of Class A common stock.
Subject to this collectively ascertain ownership limitations, the “Stock Split.”
Bitmain
On October 28, 2021, we entered into an agreement with Bitmain Technologies Limited (“Bitmain”)warrants are exercisable six months after issuance. The warrants are exercisable for five and a half years commencing upon the date of issuance, subject to purchase 12,000 miners, which will be delivered in six equal batches on a monthly basis beginning in April 2022 (the "First Bitmain Purchase Agreement"). Per the First Bitmain Purchase Agreement, on October 29, 2021, we made an initial payment of $23,300,000 to Bitmain for the miners, On November 18, 2021, we made an additional payment of $4,550,000. Subsequent payments will be made in the future in connection with additional deliveries of miners under the First Bitmain Purchase Agreement.
On November 16, 2021, we entered into a second agreement with Bitmain to purchase 1,800 miners, which will be delivered in six equal batches on a monthly basis beginning in July 2022 (the "Second Bitmain Purchase Agreement"). Per the Second Bitmain Purchase Agreement, on November 18, 2021, we made an initial payment of $6,835,000 to Bitmain for the miners. Subsequent payments will be made in the future in connection with additional deliveries of miners under the Second Bitmain Purchase Agreement.
certain ownership limitations. The miners purchased pursuant to the two agreements with Bitmain willpre-funded warrants have an aggregate hash rate capacityexercise price of $0.0001 per warrant share and are immediately exercisable, subject to certain ownership limitations. The gross proceeds from the April 2023 Private Placement, before deducting offering expenses, was approximately 1,450 PH/s.$10.0 million. The April 2023 Private Placement closed on April 21, 2023.
On MayAdditionally, as previously disclosed, on September 13, 2022, we entered into Securities Purchase Agreements (the “2022 SPAs”) with the Institutional Purchaser and Greg Beard for the purchase of shares of Class A common stock, pre-funded warrants and warrants to purchase an aggregate of 5,602,409 shares of Class A common stock (the “2022 Warrants”), at an exercise price of $1.75 per share (the “September 2022 Private Placement). On April 20, 2023, we and the September 2022 Private Placement Purchasers entered into amendments to the 2022 SPAs and the 2022 Warrants to, among other things, (i) replace Section 4.11(b) in the 2022 SPA with Section 4.11(b) in the Securities Purchase Agreements, (ii) with respect to the Institutional Purchaser, remove Section 4.2(b) in the 2022 SPA, and (iii) adjust the strike price of the 2022 Warrants to $1.01 per share.
MicroBT Miner Purchase
On April 20, 2023, we entered into a purchase order to transfer the Second BitmainMaster Sales and Purchase Agreement for 1,800 Bitmain Antminer S19 XPto acquire 5,000 new, latest-generation MicroBT WhatsMiner M50 miners (the "Bitmain Sale") to Cryptech Solutions, Inc. ("Cryptech"“M50 Miners”) for a total value of $12,600,000,$15.50 per terahash per second, including a $5,638,500 payment to the Company.
Nowlit Solutions Corp.
We paid for two separate purchases of miners from Nowlit Solutions Corp. The first purchase payment was made on November 23, 2021, in the amount of $1,605,360 for 190 miners. The second purchase payment was made on November 26, 2021, in the amount of $2,486,730 for an additional 295 miners.
Luxor Technology Corporation
We paid for three separate purchases of miners from Luxor Technology Corporation ("Luxor"shipping (the “MicroBT Miner Purchase”). The first purchaseM50 Miners have an average hash rate of 118 terahash per second and energy efficiency of 28.5 joules per terahash. This addition of approximately 600 petahash per second of hash rate capacity is expected to grow our total delivered hash rate capacity by over 20% to over 3.2 EH/s and to approximately 3.5 EH/s with all remaining contracted miners delivered. We expect to receive and install the M50 Miners during the second quarter of 2023.
Canaan Bitcoin Mining Agreement
On April 27, 2023, we signed a two-year hosting agreement with Cantaloupe Digital LLC, a subsidiary of Canaan, whereby we will operate 2,000 A1346 (110 TH/s per miner) and 2,000 A1246 (90 TH/s per miner) Bitcoin miners supplied by Canaan (the “Canaan Miners”), with total hash rate capacity of 400 PH/s (the “Canaan Bitcoin Mining Agreement”). The Canaan Bitcoin Mining Agreement has a two-year term, with no unilateral early termination option. We will receive 50% of the Bitcoin mined by the Canaan Miners and receive payments from Canaan equal to 55% of the net cost of power at the Company’s Panther Creek Plant, in dollar-per-megawatt-hour terms, calculated on a monthly basis. Additionally, we will retain all upside associated with selling power to the grid, and, if we elect to curtail the Canaan Miners to sell power to the grid, Canaan will receive a true-up payment was madethat represent estimates of the Bitcoin mining revenue would have been generated had the miners not been curtailed. The A1246 Bitcoin miners are to be installed by May 15, 2023, and the A1346 Bitcoin miners are to be installed by June 15, 2023. On May 3, 2023, the 2,000 A1246 Bitcoin miners were delivered to our Panther Creek Plant and were ready to be deployed.
Nasdaq Continued Listing Deficiency
As disclosed in our Form 8-K filing on December 6, 2022, on November 26, 2021, in30, 2022, we received a written notification from the amountNasdaq Stock Market LLC ("Nasdaq") notifying us that, based upon the closing bid price of $4,312,650the Company’s Class A common stock, for 770 miners. Thethe last 30 consecutive business days, the Class A common stock did not meet the minimum bid price of $1.00 per share required by Nasdaq Listing Rule 5450(a)(1), initiating an automatic 180 calendar-day grace period for the Company to regain compliance. Pursuant to the Nasdaq Listing Rule 5810(c)(3)(A), we have been granted a 180 calendar day compliance period, or until May 29, 2023, to regain compliance with the minimum bid price requirement. During the compliance period, our shares of Class A common stock will continue to be listed and traded on the Nasdaq Global Market. If we do not regain compliance during the compliance period, we may be afforded a second and third purchase payments were made on November 29, 2021, in the amount of $5,357,300 and $3,633,500 respectively; for an additional 750 and 500 miners.
180 calendar day period to
On November 30, 2021,regain compliance if, among other things, we entered intomeet certain listing requirements of, and elect to transfer to, the Nasdaq Capital Market. The Company may regain compliance with the minimum bid price requirement if at any time before May 29, 2023, the bid price for our Class A common stock closes at or above $1.00 per share for a fourth purchase agreement with Luxorminimum of 10 consecutive business days.
As disclosed in our Form 8-K filing on January 13, 2023, on January 9, 2023, stockholders holding a majority of our issued and outstanding Class A common stock and Class V common stock entitled to acquire 400 Antminer T19 minersvote on such matters took action by written consent to authorize our Board to effect a reverse stock split in its discretion with a hash rateratio in a range from and including one-for-two (1:2) up to one-for-ten (1:10) at any time on or before June 30, 2023 (the “Reverse Stock Split”).
If we do not regain compliance within the allotted compliance period, including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that the Company’s shares of 84 TH/s and 400 Antminer T19 miners with a hash rate of 88 TH/sfor a total purchase price of $6,260,800.
Cryptech Purchase Agreement
On December 7, 2021, we entered into a Hardware Purchase and Sales Agreement (the “Cryptech Purchase Agreement”) with Cryptech to acquire 1,000 Bitmain S19a miners with a hash rate of 96 TH/s for a total purchase price of $8,592,000. Pursuant to the Cryptech Purchase Agreement, all hardwareClass A common stock will be paidsubject to delisting. At such time, we may appeal the delisting determination to a hearings panel. We intend to continue to monitor the bid price for in advance of being shippedour Class A common stock and will consider appropriate alternatives to achieve compliance within the Company.
Supplier Purchase Agreements
On December 10, 2021,initial 180 calendar-day compliance period, including, among other things, effecting the Reverse Stock Split. We intend to effect a Reverse Stock Split to regain compliance within the initial 180 calendar-day compliance period. There can be no assurance, however, that we entered into a Hardware Purchase and Sale Agreement (the “First Supplier Purchase Agreement”)will be able to acquire 3,000 MicroBT WhatsMiner M30S miners (the “M30S Miners”) with a hash rate per unit of 87 TH/s. Pursuant to the First Supplier Purchase Agreement, the unit price per M30S Miner is $6,960 for a cumulative purchase price of $20,880,000 that was paid in full within five business days of the execution of the First Supplier Purchase Agreement.
On December 16, 2021, we entered into a Second Hardware Purchase and Sale Agreement (the “Second Supplier Purchase Agreement") to acquire a cumulative amount of approximately 4,280 M30S Miners and MicroBT WhatsMiner M30S+ miners with a hash rate per unit of 100 TH/s (the “M30S+ Miners”). Pursuant to the Second Supplier Purchase Agreement, the unit price per M30S Miner is $2,714 and the unit price per M30S+ Miner is $3,520 for a cumulative purchase price of $11,340,373.
NYDIG ABL LLC
On December 15, 2021, we entered into a Master Equipment Finance Agreement (the “Second NYDIG Financing Agreement”) with NYDIG ABL LLC (“NYDIG”) whereby NYDIG agreed to lend Stronghold Digital Mining BT, LLC ("Digital Mining BT") up to $53,952,000 to finance the purchase of certain Bitcoin miners and related equipment (the “Second NYDIG-Financed Equipment”).Outstanding borrowings under the Second NYDIG Financing Agreement are secured by the Second NYDIG-Financed Equipment, contracts to acquire Second NYDIG-Financed Equipment, and the Bitcoin mined by the Second NYDIG-Financed Equipment. The Second NYDIG Financing Agreement includes customary restrictions on additional liens on the Second NYDIG-Financed Equipment. The NYDIG Second Financing Agreement may not be terminated by Digital Mining BT or prepaid in whole or in part.
O&M Agreement
On November 2, 2021, we entered into the Operations, Maintenance and Ancillary Services Agreement (the “Omnibus Services Agreement”) with Olympus Stronghold Services, LLC (“Olympus Stronghold Services”), whereby Olympus Stronghold Services will provide certain operations and maintenance services to Stronghold LLC, as well as employ certain personnel to operate the Panther Creek Plant and the Scrubgrass Plant. Stronghold LLC will reimburse Olympus Stronghold Services for those costs incurred by Olympus Stronghold Services and approved by Stronghold LLC in the course of providing services under the Omnibus Services Agreement, including payroll and benefits costs and insurance costs. The material costs incurred by Olympus Stronghold Services shall be approved by Stronghold LLC. Stronghold LLC will also pay Olympus Stronghold Services a management fee at the rate of $1,000,000 per year, payable monthly, and an additional one-time mobilization fee of $150,000 upon the effective date of the Omnibus Services Agreement.
Miner Sales Agreement
During the second quarter of 2022, the Company entered into multiple miner sales agreements with multiple buyers. The Company previously disclosed its effort to optimize its Bitcoin miner fleet through its sale of 3,425 miners (approximately 411 PH/s) with a historical carrying value of $21.9 million, or $50.70 per TH/s. The Company recognized a loss of approximately $8.0 million on these miners during the second quarter of 2022. The Company undertook these sales due to its priorities of improving its liquidity position and improved returns over growth. The loss was recorded in Realized gain (loss) on sale of miner assets on the consolidated statements of operations. The various buyers paid the Company an aggregate of $13.8 million up front and took over the remaining installment payment obligations upon transfer of the contract, relieving the Company of the outstanding purchase obligation.
Reorganization
On April 1, 2021, we effected the corporate reorganization described in Note 1 – Business Combinations in the notes to our financial statements.do so.
Trends and Other Factors Impacting Our Performance
COVID-19 and Supply Chain ConstraintsGeneral Digital Asset Market Conditions
The coronavirus ("COVID-19") global pandemic has resulted and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Among other things, the COVID-19 pandemic has caused supply chain disruptions that may have lasting impacts. Additionally, the global supply chain for Bitcoin miners is presently further constrained due to unprecedented demand coupled with a global shortage of mining equipment and mining equipment parts. Based on our current assessments, however, we do not expect any material impact on long-term development, operations, or liquidity due to the spread of COVID-19. However, we are actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.
China’s Crackdown on Bitcoin Mining
In May 2021, the Chinese government called for a crackdown on Bitcoin mining and trading. Following this, the majority of Bitcoin miners in China were taken offline. This resulted in (i) a significant reduction in the Bitcoin global network hash rate, (ii) an increase in the availability of Bitcoin miners for purchase and (iii) an increase in the demand for power outside of China. Further, in September 2021, Chinese regulators instituted a blanket ban on all crypto mining and transactions, including overseas crypto exchange services taking place in China, effectively making all crypto-related activities illegal in China. The reduction in network hash rate has improved Bitcoin mining profitability (not factoring in underlying Bitcoin prices), with plugged-in Bitcoin miners representing a larger percentage of the global hash rate. We do not believe that higher demand for power will have a negative impact on our business because we own and operate our power sources.
Scrubgrass Plant
During the fourth quarter of 2021 and continuing into the second quarter of 2022, the Scrubgrass Plant had downtime that was greater than anticipated, driven largely by mechanical failures. The upgrades and maintenance that are necessary have taken longer and are more extensive than originally anticipated. We expect these investments to be completed in the second half of 2022. Once finished, the Scrubgrass Plant is expected to be operational at nameplate capacity with high uptime and low operating costs.
During the first half of 2022, higher than anticipated requirements from PJM Interconnection LLC (“PJM”) resulted in unplanned and extended outages of our mining operations at the Scrubgrass Plant, diverting capacity away from our mining operations at a time that was not economical for our business strategy. These diversions of power away from our mining operations during the first and second quarters had a material adverse effect on our business, financial condition and results of operations. The Scrubgrass Plant also experienced higher than expected cost capping, as the result of its role as a capacity resource, from PJM which obligated the Scrubgrass Plant to supply power to the PJM grid at pre-set prices in an effort to stabilize PJM grid pricing. Starting in June, Scrubgrass Plant was no longer classified as a capacity resource, and is now an energy resource, which will allow the plant to sell power to the grid at market prices.
In the third quarter of 2022, the Scrubgrass Plant will undergo planned maintenance for approximately seven to ten days, during which time it will not be generating power.
Panther Creek Plant and Data Center
During the second quarter of 2022, the Panther Creek Plant's mining operations were offline for ten days due to the failure of a switchgear and the need to source, deliver and install a new piece of equipment, causing ten days of no mining revenue generation at the facility and resulting in an estimated loss of approximately$1.4 million. The operation of our power generation facilities, information technology systems and other assets and conduct of other activities subjects us to a variety of risks, including the breakdown or failure of equipment, accidents, security breaches, viruses or outages affecting information technology systems, labor disputes, obsolescence, delivery/transportation problems and disruptions of fuel supply, failure to receive spare parts in a timely manner, and performance below expected levels.
As previously disclosed on the Company's Form 8-K dated July 25, 2022, the Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in the month of June from damaged transmission lines caused by a storm, and other plant maintenance issues. The Company estimates the financial impact of the June outages to be lost revenue of $1.8 million and a net income impact of $1.4 million.
In the third quarter of 2022, the Panther Creek Plant will undergo planned maintenance for approximately one week, during which time it will not be generating power.
Bitcoin Price Volatility
The market price of Bitcoin has historically and recently been volatile. For example, the price of Bitcoin ranged from a low of approximately $29,000$15,000 to a high of approximately $69,000$48,000 during 20212022 and has ranged from approximately $18,000$17,000 to approximately $48,000$31,000 year-to-date as of August 12, 2022. SinceMay 8, 2023. During 2022 and more recently in 2023, a number of companies in the IPO,crypto assets industry have declared bankruptcy, including Core Scientific, Celsius Network LLC, Voyager Digital, Three Arrows Capital, BlockFi, FTX Trading Ltd., and Genesis Holdco. Such bankruptcies have contributed, at least in part, to further price decreases in Bitcoin, a loss of confidence in the participants of the digital asset ecosystem and negative publicity surrounding digital assets more broadly. To date, aside from the general decrease in the price of Bitcoin and in our and our peers stock price that may be indirectly attributable to the bankruptcies in the crypto assets industry, we have not been indirectly or directly materially impacted by such bankruptcies. As of the date hereof, we have no direct or material contractual relationship with any company in the crypto assets industry that has experienced a bankruptcy. Additionally, there has been no impact on our hosting agreement or relationship with Foundry Digital, LLC (“Foundry”) or trading activities conducted with Genesis Global Trading, Inc. (“Genesis Trading”), an entity regulated by the New York Department of Financial Services and the SEC, that engages in the trading of our mined Bitcoin. The hosting agreement with Foundry is performing in line with our expectations, and on February 6, 2023, we entered into a new hosting agreement to replace the existing hosting agreement with Foundry which, among other things, extended the agreement term to two years with no unilateral early termination option and made amendments to certain profit-sharing components. The recent bankruptcy of Genesis Holdco, which is affiliated with the parent entity of Foundry and Genesis Trading, has not materially impacted the original or currently existing hosting arrangement, nor has it impacted trading activities with Genesis Trading. Additionally, we have had no direct exposure to Celsius Network LLC, First Republic Bank, FTX Trading Ltd., Signature Bank, Silicon Valley Bank, or Silvergate Capital Corporation. We continue to conduct diligence, including into liquidity or insolvency issues, on third parties in the crypto asset space with whom we have potential or ongoing relationships. While we have not been materially impacted by any liquidity or insolvency issues with such third parties to date, there is no guarantee that our counterparties will not experience liquidity or insolvency issues in the future.
We safeguard and keep private our digital assets, including the Bitcoin that we mine, by utilizing storage solutions provided by Anchorage, which requires multi-factor authentication. While we are confident in the security of our digital assets held by Anchorage, given the broader market conditions, there can be no assurance that other crypto asset market participants, including Anchorage as our custodian, will not ultimately be impacted. Further, given the current conditions in the digital assets ecosystem, we are liquidating our mined Bitcoin often, and at multiple points every week through Anchorage. We continue to monitor the digital assets industry as a whole, although it is not possible at this time to predict all of the risks stemming from these events that may result to us, our service providers, our counterparties, and the broader industry as a whole. We cannot provide any assurance that we will not be materially impacted in the future by bankruptcies of participants in the crypto asset space. See “Risk Factors—Crypto Asset Mining Related Risks— Our crypto assets may be subject to loss, damage, theft or restriction on access. Further, digital asset exchanges on which crypto assets trade are relatively new and largely unregulated, and thus may be exposed to fraud and failure. Incorrect or fraudulent cryptocurrency transactions may be irreversible” in the 2022 Form 10-K for additional information.
Bitcoin Price Volatility
The market price of Bitcoin has historically and recently been volatile. After our initial public offering, the price of Bitcoin dropped over 70%75%, resulting in an adverse effect on our results of operations, liquidity and strategy, and resulting in increased credit pressures on the cryptocurrency industry. Since then, Bitcoin has recovered approximately 100%. Our operating results depend on the value of Bitcoin because it is the only crypto asset we currently mine.
We cannot accurately predict the future market price of Bitcoin and, as such, we cannot accurately predict potential adverse effects, including whether we will record impairment of the value of our Bitcoin assets. The future value of Bitcoin will affect the revenue from our operations, and any future impairment of the value of the Bitcoin we mine and hold for our account would be reported in our consolidated financial statements and results of operations as charges against net income, which could have a material adverse effect on the market price for our securities.
Bitcoin Adoption and Network Hash Rate
Recent DevelopmentsSince its introduction in 2008, Bitcoin has become the leading cryptocurrency based on several measures of adoption: total value of coins in circulation, transactions, and computing power devoted to its protocol. The total value of Bitcoin in circulation was approximately $558 billion as of May 4, 2023, nearly twice that of Ethereum at $230 billion, the second largest cryptocurrency. Bitcoin transactions have increased from 13,528 on May 4, 2009, to 831,761,978 on May 4, 2023. Transactions in Bitcoin greatly surpassed the 1,110,210 Ethereum transactions on May 4, 2023. As the adoption of Bitcoin has progressed, the computing power devoted to mining for it has also increased. This collective computing power is referred to as "network hash rate". Bitcoin network hash rate has risen from nearly zero at inception to approximately 351 EH/s as of May 4, 2023, as Bitcoin price has risen from its initial trading price of $0.0008 in July 2010 to approximately $29,000 as of May 4, 2023. The actual number of mining computers hashing at any given time cannot be known; therefore, the network hash rate, at any given time, is approximated by using "mining difficulty."
Northern Data
On August 17, 2021, Stronghold LLC entered into an agreement with Northern Data PA, LLC (“Northern Data”The term difficulty refers to the complexity of the mathematical problems that the miners solve and is adjusted up or down automatically after 2,016 blocks (an "epoch") whereby Northern Data will construct and operate a colocation data center facility locatedhave been mined on the Scrubgrass Plant (the “Hosting Agreement”),network. Difficulty on May 4, 2023, was 48.01 trillion, and it has ranged from one to 48.7 trillion. Generally speaking, if network hash rate has moved up during the primary business purposecurrent epoch, it is likely that difficulty will increase in the next epoch, which reduces the award per unit of hash rate during that epoch, all else equal, and vice versa. Deriving network hash rate from difficulty requires the following equation: network hash rate is the product of a) blocks solved over the last 24 hours divided by 144, b) difficulty, c) 2^32, divided by 600 seconds.
Embedded in the Bitcoin source code is an upper limit of 21 million for the quantity of Bitcoin that can ever be mined or in circulation, which means that the currency is finite, unlike fiat currencies. Through the end of the first quarter of 2023, approximately 19 million Bitcoins have been mined, leaving approximately 2 million left to be mined. The year in which the last Bitcoin is expected to be mined is 2140. Every four years there is an event called a halving where the coins awarded per block is cut in half. Whereas today the reward for adding a block to the blockchain is currently 6.25 Bitcoins, it is estimated that in April 2024, the award per block will be reduced to provide hosting services3.125 Bitcoins. Each day there are approximately 144 blocks awarded to the entirety of the global Bitcoin network. While network hash rate has been somewhat cyclical over short periods of time, since the creation of Bitcoin, as network hash rate has increased over time through a combination of an increased number of network participants, an increased quantity of miners hashing, and supportmore efficient miners with faster processing speeds hashing, competition for block awards has increased.
Hash Price
There are three critical drivers of revenue per unit of hash rate in the cryptocurrency minersBitcoin mining industry (using terahash as the unit of hash rate): Bitcoin price, difficulty, and Bitcoin transaction fees. Hash price is the nexus of those terms and is equivalent to revenue per terahash per day. Hash price was $0.084 on May 4, 2023, compared to the average year-to-date hash price of $0.075, and compared to the five-year, one year, 2022, and 2021 average hash prices of $0.20, $0.08, $0.12, and $0.31, respectively. The five-year high price was May 5, 2018, when hash price was at $0.62. The five-year low hash price was November 21, 2022, ten days after the bankruptcy filing of FTX Trading Ltd. and certain of its subsidiaries, when hash price reached $0.056. We estimate that the average global Bitcoin network breakeven hash price required to cover operating costs is between $0.06 to $0.10, which assumes operating expenses of $60 to $70 per MWh, annual fixed expenses of $1 to $5 million per EH/s, and network efficiency of 40 to 50 J/TH. We believe that the majority of network hash rate was operating at or below breakeven operating costs during the last six months.
In addition to mining for new Bitcoin, we are also paid transaction fees in the form of Bitcoin for processing and validating transactions. From November 2021 to April 2023, transaction fees averaged approximately 1.8% of a block subsidy. However, transaction fees and volume have risen sharply on the Bitcoin network in recent weeks, and from May 1, 2023, to May 8, 2023, transaction fess averaged approximately 26% of block subsidy, meaning that we have purchased but not yet received entirely from Northern Data. On March 28, 2022, we restructured the Hosting Agreement to obtain an additional 2,675 miners at cost of $37.5 per terahash (to be paid five months after delivery) and temporarily reduced the profit share for Northern Data while incorporating performance thresholds until the data center build-out is complete. On August 10, 2022 the Company and Northern Data terminated the provision of the restructured Hosting Agreement related to the additional 2,675 miners and the Company shall neither make payment for such additional miners nor obtain title to such additional miners.
MinerVa
On April 2, 2021, we entered into a purchase agreement with MinerVa (the “MinerVa Purchase Agreement”) for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner equipment (miners) with a total terahash to be delivered equal to 1.5 million terahash. In December 2021, we extended the deadline for delivery of the MinerVa miners to April 2022. As of June 30, 2022, MinerVa has delivered, refunded cash, or swapped into deliveries of industry leading miners of equivalent value to approximately 7,200 of the 15,000 miners. As of August 12, 2022, the Company has received approximately 8,500 of the miners or equivalent value from MinerVa. We do not know when the remaining MinerVa miners will be received, if at all. As a result, an impairment totaling $12,228,742 was recognized on March 31, 2022. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60) days, Stronghold may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement.
Second WhiteHawk Amendment
On March 28, 2022, Equipment LLC and WhiteHawk Finance LLC (“WhiteHawk”) amended the WhiteHawk Financing Agreement (as defined below) for a second time (the "Second WhiteHawk Amendment") to exchange the collateral under the WhiteHawk Financing Agreement. Pursuant to the Second WhiteHawk Amendment, (i) the approximately 11,700 remaining miners under the MinerVa Purchase Agreement were exchanged as collateral for additional miners received by us from other suppliers and (ii) WhiteHawk agreed to lend to us an additional amount not to exceed $25.0 million to finance certain previously purchased Bitcoin miners and related equipment (the "Second Totalmore
Advance"). Pursuant to the Second WhiteHawk Amendment, Equipment, LLC paid an amendment feeBitcoin in May 2023 than what we previously received in prior periods for processing and validating transactions. Transaction fees are volatile and there are no assurances that transaction fees will continue at recent levels in the amount of $275,414.40 and a closing fee with respect to the Second Total Advance of $500,000. In addition to the purchased Bitcoin miners and related equipment, Panther Creek and Scrubgrass each agreed to a negative pledge of the Panther Creek Plant and Scrubgrass Plant, respectively, and guaranteed the WhiteHawk Financing Agreement. Each of the negative pledge and the guaranty by Panther Creek and Scrubgrass will be released upon payment in full of the Second Total Advance, regardless of whether the Total Advance remains outstanding. In conjunction with the Second WhiteHawk Amendment, we issued a warrant to WhiteHawk to purchase 125,000 shares of Class A common stock, subject to certain antidilution and other adjustment provisions as described in the warrant agreement, at an exercise price of $0.01 per share (the “Second WhiteHawk Warrant”). The Second WhiteHawk Warrant expires on March 28, 2032.future.
2022 Private Placement
On May 15, 2022, we entered into a note and warrant purchase agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “Purchasers”), whereby we agreed to issue and sell to Purchasers, and Purchasers agreed to purchase from the Company, (i) $33,750,000 aggregate principal amount of 10.00% unsecured convertible promissory notes (the “May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the right to purchase up to 6,318,000 shares of Class A Common Stock, of the Company with an exercise price per share equal to $2.50, on the terms and subject to the conditions set forth in the Purchase Agreement (collectively, the “2022 Private Placement”). The Purchase Agreement contained representations and warranties by the Company and the Purchasers that are customary for transactions of this type. The May 2022 Notes and the May 2022 Warrants were offered and sold in reliance on the exemption afforded by Section 4(a)(2) of the Securities Act, and Rule 506(b) of Regulation D promulgated thereunder for aggregate consideration of $27.0 million.
In connection with the 2022 Private Placement, the Company undertook to negotiate with the Purchasers, and to file a certificate of designation (“Series C Preferred Certificate of Designation”) with the State of Delaware, following the closing of the 2022 Private Placement, the terms of a new series of preferred stock (the “Series C Preferred Stock”).
In connection with the 2022 Private Placement, the May 2022 Warrants were issued pursuant to a Warrant Agreement, dated as of May 15, 2022 (the “Warrant Agreement”). The May 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. The May 2022 Warrants will be exercisable for a five-year period from the closing.
McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs Scrubgrass Generating Company, L.P.
On May 9, 2022, an award in the amount of $5.0 million plus interest computed as of May 15, 2022 in the amount of $0.8 million was issued in favor of the McClymonds Supply & Transit Company, Inc. in the previously disclosed dispute over a trucking contract between the claimant and our subsidiary. The two managing members of Q Power, LLC, our primary Class V shareholder, have agreed to and begun to pay the full amount of the award such that there will be no effect on the financial condition of the Company.
WhiteHawk Refinancing Agreement
On August 16, 2022, we entered into a commitment letter (the “Commitment Letter”) with WhiteHawk to provide for committed financing to refinance the WhiteHawk Financing Agreement and provide up to $20 million in additional commitments (such additional commitments, the “Delayed Draw Facility”) for an aggregate loan not to exceed $60.0 million. Such loans under the Delayed Draw Facility will be available to be drawn for 180 days from the closing date of the WhiteHawk Refinancing Agreement (as defined below). The financing contemplated by the Commitment Letter (such financing, the “WhiteHawk Refinancing Agreement”) will be entered into by Stronghold LLC as Borrower (the “Borrower”) and secured by substantially all of the assets of the Company and its subsidiaries and will be guaranteed by the Company and each of its subsidiaries. The WhiteHawk Refinancing Agreement will require equal monthly amortization payments resulting in full amortization at maturity. The WhiteHawk Refinancing Agreement will have customary representations, warranties and covenants including restrictions on indebtedness, liens, restricted payments and dividends, investments, asset sales and similar covenants and will contain customary events of default. The WhiteHawk Refinancing Agreement will contain a covenant requiring the Borrower and its subsidiaries to maintain a minimum of (x) $7.5 million of liquidity at all times (y) a minimum liquidity of $10 million of average daily liquidity for each calendar month (rising to $20 million beginning July 1, 2023) and (z) a maximum total leverage ratio covenant of (i) 7.5:1.0 for the quarter ending December 31, 2022, (ii) 5.0:1.0 for the quarter ending March 31, 2023, (iii) 4.0:1.0 for the quarter ending June 30, 2023 and (iv) 4.0:1.0 for each quarter ending thereafter. The initial closing of the WhiteHawk Refinancing Agreement will be subject to customary closing conditions. In addition, the initial closing of the WhiteHawk Refinancing Agreement will
subject to the full extinguishment and termination of all of the NYDIG Debt (as defined below) and other obligations of the Company and its affiliates under the NYDIG Agreements (as defined below), whether pursuant to the Asset Purchase Agreement (as defined below) or otherwise.
The borrowings under the WhiteHawk Refinancing Agreement will mature 36 months after the closing date of the WhiteHawk Refinancing Agreement and will bear interest at a rate of Secured Overnight Financing Rate plus 10%. The loans under the Delayed Draw Facility will be issued with 3% “original issue discount” on all drawn amounts, payable when such amounts are drawn, and undrawn commitments thereunder will incur a commitment fee, paid monthly, equal to 1% per annum. Amounts drawn on the WhiteHawk Refinancing Agreement will be subject to a prepayment premium such that the lenders thereunder achieve a 20% return on invested capital. We agreed to issue a stock purchase warrant to WhiteHawk in conjunction with the closing of the WhiteHawk Refinancing Agreement, which provides for the purchase of an additional 2,000,000 shares of Class A common stock at $0.01 per share.
NYDIG Asset Purchase Agreement
On August 16, 2022, the Company, Stronghold LLC, Stronghold Digital Mining LLC, a Delaware limited liability company (“SD Mining”) and Stronghold Digital Mining BT, LLC, a Delaware limited liability company (“SD Mining BT”, and together with SD Mining, the “APA Sellers” and, together with the Company and Stronghold LLC, the “APA Seller Parties”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with NYDIG ABL LLC, a Delaware limited liability company formerly known as Arctos Credit, LLC (“NYDIG”), and The Provident Bank, a Massachusetts savings bank (“BankProv” and together with NYDIG, “Purchasers” and each, a “Purchaser”).
Pursuant to the Arctos/NYDIG Financing Agreement and the Second NYDIG Financing Agreement (collectively, the “NYDIG Agreements”), certain miners are pledged as collateral under such agreements (and together with certain related agreements to purchase miners, the “APA Collateral”). Under the Asset Purchase Agreement, the APA Seller Parties have agreed to sell, and the Purchasers (or their respective designee) have agreed to purchase, the APA Collateral in a private disposition in exchange for the forgiveness, reduction and release of all principal, interest, and fees owing under each of the NYDIG Agreements (collectively, the “NYDIG Debt”). The Sellers have agreed to clean, service, package, ship and deliver the APA Collateral and to bear the costs associated with such activities. Following (i) delivery of the APA Collateral pursuant to the Purchasers or their designees to a master bill of sale and (ii) a subsequent inspection period of up to 14 days (which may be extended up to seven additional days), upon acceptance of the APA Collateral, the related portion of the NYDIG Debt will be assigned to the Sellers and cancelled pursuant to the terms of the Asset Purchase Agreement (each, a “Settlement”). A Settlement is subject to certain conditions, including the delivery of certain milestone schedules to a master bill of sale and the completion of an inspection of the APA Collateral by the Purchasers, and, in the event of certain failures to satisfy the inspection conditions, the obligation of the Company to replace such APA Collateral with comparable assets, provided that such obligation only applies once the aggregate value of such APA Collateral exceeds $173,650.68, with respect to BankProv, and $252,532.33, with respect to NYDIG.
Prior to the date on which (i) APA Seller Parties first breaches a material obligation under the Asset Purchase Agreement, (ii) the date on which the Asset Purchase Agreement is terminated or if a Seller elects not to sell any or all of its APA Collateral, or (iii) an insolvency or liquidation proceeding is commenced by or against the APA Sellers (the “Non-Interference Period”), the Purchasers have agreed not to foreclose on any of the APA Collateral under such NYDIG Agreements. The APA Seller Parties also granted certain indemnification rights to the Purchasers. The Asset Purchase Agreement also provides for certain termination rights.
Pursuant to the Asset Purchase Agreement, the Seller Parties have granted a release from certain claims arising out of or in connection with the Asset Purchase Agreement and the transactions contemplated thereunder. Further, except for the payment of accrued but unpaid interest through the date of signing of the Asset Purchase Agreement, prior to the earlier of (i) the termination of the Asset Purchase Agreement, (ii) the end of the Non-Interference Period, or (iii) a Seller electing not to sell any of its APA Collateral required to be sold at a settlement, the Sellers will not be required to make payments pursuant to the NYDIG Agreements (although interest shall accrue but not be due and payable) and each Purchaser, in its capacity as the respective lender under the NYDIG Agreements, will not exercise any remedies available as a lender or declare any event of default as a result of the Sellers taking any actions required or directly contemplated by the Asset Purchase Agreement.
Private Placement Amendment
On August 16, 2022, the Company entered into an amendment to the note and warrant purchase agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “Purchasers”), whereby the Company agreed to amend the Purchase Agreement such that $11.25 million of the outstanding principal has been exchanged for the Purchaser's execution of an amended and restated warrant agreement pursuant to which the strike price
of the 6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01. After giving effect to the principal reduction and amended and restated warrants, the Company will continue to make subsequent monthly, payments to the Purchasers on the fifteenth (15th) day of each of November 2022, December 2022, January 2023 and February 2023. The Company may elect to pay each such payment (A) in cash or (B) in shares of Common Stock, in each case, at a twenty percent (20%) discount to the average of the daily VWAPs for each of the twenty (20) consecutive trading days preceding the payment date.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, investments, intangible assets, stock-based compensation and business combinations.Our financial position, results of operations and cash flows are impacted by the accounting policies we have adopted. In order to get a full understanding of our financial statements, one must have a clear understanding of the accounting policies employed.
A summary of ourCompany's critical accounting policies follows:
Fair Value Measurements
We measure at fair value certain of our financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liabilitysignificant estimates, as summarized in an orderly transaction between market participants at the measurement date, essentially an exit price, basedits Annual Report on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data; and
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Cryptocurrency Machines
Management has assessed the basis of depreciation of our cryptocurrency machines used to verify digital currency transactions and generate digital currencies and believes they should be depreciated over a three-year period. The rate at which we generate digital assets and, therefore, consume the economic benefits of our Bitcoin miners, is influenced by a number of factors including the following:
1.The complexity of the Bitcoin mining process which is driven by the algorithms contained within the Bitcoin open-source software;
2.The general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured in petahash units); and
3.Technological obsolescence reflecting rapid development in the Bitcoin miner industry such that more recently developed hardware is more economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs, (i.e., the speed of hardware evolution in the industry is such that later
hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase).
We operate in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Management has determined that three years best reflects the current expected useful life of Bitcoin miners. This assessment takes into consideration the availability of historical data and management’s expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate annually and will revise such estimate as and when data becomes available.
To the extent that any of the assumptions underlying management’s estimate of useful life of its Bitcoin miners are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.
Revenue Recognition
We recognize revenue under ASC 606, Revenue from Contracts with Customers. The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
1.Step 1: Identify the contract with the customer
2.Step 2: Identify the performance obligations in the contract
3.Step 3: Determine the transaction price
4.Step 4: Allocate the transaction price to the performance obligations in the contract
5.Step 5: Recognize revenue when we satisfy a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
When determining the transaction price, an entity must consider the effects of all of the following:
•Variable consideration
•Constraining estimates of variable consideration
•The existence of a significant financing component in the contract
•Noncash consideration
•Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. There were no revenue streams with variable consideration during the six months ended June 30, 2022, and 2021.
There is currently no specific definitive guidance under GAAP or alternative accounting frameworkForm 10-K for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (the "FASB"), we may be required to change our policies, which could have an effect on our condensed consolidated financial position and results from operations.
The Company has determined that the Bitcoin that are awarded through its Bitcoin mining operations are a current asset and should be accounted for in Cash Flow from Operations due to the fact that it has been selling coins on a regular basis in order to fund Operations. As such, any changes in the balance of the current asset account, including those resulting from mining revenue, sales of Bitcoin and any associated gains and losses, and impairments, should be accounted for in Operations as opposed to Investing, where sales of Bitcoin had appeared previously.
Fair value of the digital asset award received is determined using the quoted price of the related cryptocurrency at the time of receipt.
Our policies with respect to our revenue streams are detailed below.
Energy Revenue
We operate as a market participant through PJM Interconnection, a Regional Transmission Organization (“RTO”) that coordinates the movement of wholesale electricity. We sell energy in the wholesale generation market in the PJM RTO. Energy revenues are delivered as a series of distinct units that are substantially the same and that have the same pattern of transfer to the customer over time and are therefore accounted for as a distinct performance obligation. The transaction price is based on pricing published in the day ahead market which constitute the stand-alone selling price.
Energy revenue is recognized over time as energy volumes are generated and delivered to the RTO (which is contemporaneous with generation), using the output method for measuring progress of satisfaction of the performance obligation. We apply the invoice practical expedient in recognizing energy revenue. Under the invoice practical expedient, energy revenue is recognized based on the invoiced amount which is considered equal to the value provided to the customer for our performance obligation completed to date.
Reactive energy power is provided to maintain a continuous voltage level. Revenue from reactive power is recognized ratably over time as we stand ready to provide it if called upon by the PJM RTO.
Capacity Revenue
We provide capacity to a customer through participation in capacity auctions held by the PJM RTO. Capacity revenues are a series of distinct performance obligations that are substantially the same and that have the same pattern of transfer to the customer over time and are therefore accounted for as a distinct performance obligation. The transaction price for capacity is market-based and constitutes the stand-alone selling price. As capacity represents our stand-ready obligation, capacity revenue is recognized as the performance obligation is satisfied ratably over time, on a monthly basis, since we stand ready equally throughout the period to deliver power to the PJM RTO if called upon. We apply the invoice practical expedient in recognizing capacity revenue. Under the invoice practical expedient, capacity revenue is recognized based on the invoiced amount which is considered equal to the value provided to the customer for our performance obligation completed to date. Penalties may be assessed by the PJM RTO against generation facilities if the facility is not available during the capacity period. The penalties assessed by the PJM RTO, if any, are recorded as a reduction to capacity revenue when incurred.
Cryptocurrency Hosting
We have entered into customer hosting contracts whereby we provide electrical power to cryptocurrency mining customers, and the customers pay a stated amount per MWh (“Contract Capacity”). This amount is paid monthly in advance. Amounts used in excess of the Contract Capacity are billed based upon calculated formulas as contained in the contracts. If any shortfalls occur due to outages, make-whole payment provisions contained in the contracts are used to offset the billings to the customer which prevented them from cryptocurrency mining. Advanced payments and customer deposits are reflected as contract liabilities.
Cryptocurrency Mining
We have entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and our enforceable right to compensation only begins when we provide computing power to the mining pool operator. In exchange for providing computing power, we are entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. Our fractional share is based on the proportion of computing power we contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power in Bitcoin miners is an output of our ordinary activities. The provision of providing such computing power is the only performance obligation in our contracts with mining pool operators. The transaction consideration we receive, if any, is noncash consideration, which we measure at fair value on the date received, which is not materially different than the fair value at contract inception or the time we have earned the award from the pools. The consideration is not variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and we receive confirmation of the consideration we will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, we may be required to change our policies, which could have an effect on our consolidated financial position and results from operations.
Asset Retirement Obligations
Asset retirement obligations, including those conditioned on future events, are recorded at fair value in the period in which they are incurred, if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset in the same period. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the EUL of the long-lived asset. If the asset retirement obligation is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement. Our asset retirement obligation represents the cost we would incur to perform environmental clean-up or dismantle certain portions of the Facility.
Impairment of long-lived assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.A long-lived asset (group) that is held and used must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable (i.e., information indicates that an impairment might exist). We areresponsible for routinely assessing whether impairment indicators are present and should have systems or processes to assist in the identification of potential impairment indicators.
We are not required to perform an impairment analysis (i.e., test the asset (group) for recoverability and potentially measure an impairment loss) if indicators of impairment are not present. We have assessed the need for an impairment write-down only if an indicator of impairment (e.g., a significant decrease in the market value of a long-lived asset (group)) is present. The Company performed an impairment test on its long-lived assets and $4,990,000 was recognized as expenses for both the three and six monthsyear ended June 30, 2022. No impairment indicators existed as of the three and six months ended June 30, 2021 that would require impairment testing of our long-lived assets.
Derivative Contracts
In accordance with guidance on accounting for derivative instruments and hedging activities all derivatives should be recognized at fair value. Derivatives or any portion thereof, that are not designated as, and effective as, hedges must be adjusted to fair value through earnings. Derivative contracts are classified as either assets or liabilities on the accompanying combined balance sheets. Certain contracts that require physical delivery may qualify for and be designated as normal purchases/normal sales. Such contracts are accounted for on an accrual basis.
We use derivative instruments to mitigate our exposure to various energy commodity market risks. We do not enter into any derivative contracts or similar arrangements for speculative or trading purposes. We will, at times, sell our forward unhedged electricity capacity to stabilize its future operating margins.
We also use derivative instruments to mitigate the risks of Bitcoin market pricing volatility.We entered into a variable prepaid forward sale contract that mitigates Bitcoin market pricing volatility risks between a low and high collar of Bitcoin market prices during the contract term.This contract settles in September 2022.The contract meets the definition of a derivative transaction pursuant to guidance under ASC 815 and is considered a compound derivative instrument which is required to be presented at fair value subject to remeasurement each reporting period.The change in fair value is recorded as changes in fair value of forward sale derivative as part of earnings.
Stock Based Compensation
For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).
Notes Payable
We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.
Warrant Liabilities
We record warrant liabilities at their fair value as of the balance sheet date, and recognizes changes in the balances, over the comparative periods of either the issuance date or the last reporting date, as part of changes in fair value of warrant liabilities expense. At the issuance date, each series of warrants were convertible and redeemable to preferred stock.
Loss per share
Basic net (loss) income per share (“EPS”) of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding or shares subject to exercise for a nominal value during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Income Taxes
The amount of income taxes we record requires interpretations of complex rules and regulations of federal, state, and local tax jurisdictions. We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying values and the tax bases of existing assets and liabilities, and for operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when
those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized after considering all positive and negative evidence available concerning the realizability of our deferred tax assets.
As of June 30, 2022 and December 31, 2021, we maintained a valuation allowance on our deferred tax assets. The valuation allowance remains in place based on the uncertainty of future events, including the Company’s ability to generate future taxable income in light of its recent losses, and management considered this and other factors in evaluating the realizability of our deferred tax assets.Any changes in the positive or negative evidence evaluated when determining if our deferred tax assets will be realized could result in a material change to our consolidated financial statements.
The accruals for deferred tax assets and liabilities are often based on assumptions that are subject to a significant amount of judgment by management. These assumptions and judgments are reviewed and adjusted as facts and circumstances change. Material changes to our income tax accruals may occur in the future based on the potential for income tax audits, changes in legislation or resolution of pending matters.2022, remain unchanged.
Post IPO Taxation and Public Company Costs
Stronghold LLC is and has been organized as a pass-through entity for U.S. federal income tax purposes and is therefore not subject to entity-level U.S. federal income taxes. Stronghold Inc. was incorporated as a Delaware corporation on March 19, 2021 and therefore is subject to U.S. federal income taxes and state and local taxes at the prevailing corporate income tax rates, including with respect to its allocable share of any taxable income of Stronghold LLC. In addition to tax expenses, Stronghold Inc. also incurs expenses related to its operations, plus payment obligations under the Tax Receivable Agreement entered into between the Company, Q Power LLC (“Q Power”) and an agent named by Q Power, dated April 1, 2021 (the “TRA”), which are expected to be significant. Additionally, on March 14, 2023, we executed a joinder agreement with an additional holder (together with Q Power, the “TRA Holders”) who thereby became a party to the TRA. To the extent Stronghold LLC has available cash and subject to the terms of any current or future debt instruments, the FourthFifth Amended and Restated Limited Liability Company Agreement of Stronghold LLC, as amended from time to time (the “Stronghold LLC Agreement”) requires Stronghold LLC to make pro rata cash distributions to holders of Stronghold LLC Units (“Stronghold Unit Holders”), including Stronghold Inc., and Q Power, in an amount sufficient to allow Stronghold Inc. to pay its taxes and to make payments under the TRA. In addition, the Stronghold LLC Agreement requires Stronghold LLC to make non-pro rata payments to Stronghold Inc. to reimburse it for its corporate and other overhead expenses, which payments are not treated as distributions under the Stronghold LLC Agreement. See “Tax Receivable Agreement” herein for additional information.
In addition, we have incurred, and expect to continue to incur incremental, non-recurring costs related to our transition to a publicly traded corporation, including the costs of the IPO and the costs associated with the initial implementation of our internal control reviews and testing pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). We have also incurred, and expect to continue to incur additional significant and recurring expenses as a publicly traded corporation, including costs associated with compliance under the Securities Exchange Act, of 1934, as amended, (the "Exchange Act"), annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation. Our financial statements following the IPO will continue to reflect the impact of these expenses.
Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations
Our historical financial results discussed below may not be comparable to our future financial results for the reasons described below.
Stronghold Inc. is subject to U.S. federal, state and local income taxes as a corporation. Our accounting predecessor was treated as a partnership for U.S. federal income tax purposes, and as such, was generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to its taxable income was passed through to its members. Accordingly, the financial data attributable to our predecessor contains no provision for U.S. federal income taxes or income taxes in any state or locality. Due to cumulative and current losses as well as an evaluation of other sources of income as outlined in ASC 740, management has determined that the utilization of our deferred tax assets is not more likely than not, and therefore we have recorded a valuation allowance against our net deferred tax assets. Management continues to evaluate the likelihood of the Company utilizing its deferred taxes, and while the valuation allowance remains in place, we expect to record no deferred income tax expense or benefit. Should the valuation allowance no longer be required, the 21% statutory federal income tax rate as well as state and local income taxes at their respective rates will apply to income allocated to Stronghold Inc.
As we further implement controls, processes and infrastructure applicable to companies with publicly traded equity securities, it is likely that we will incur additional selling, general and administrative ("G&A") expenses relative to historical periods. Our future results will depend on our ability to efficiently manage our consolidated operations and execute our business strategy.
As we continue to acquire miners and utilize our power generating assets to power such miners, we anticipate that a greatgreater proportion of our revenue and expenses will relate to crypto asset mining.
As previously discussed in the Critical"Critical Accounting PoliciesPolicies" section in our 2022 Form 10-K, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, property, plant and equipment (including the useful lives and recoverability of long-lived assets), investments, intangible assets, stock-based compensation, and business combinations.The Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting policies employed.
Results of Operations
Highlights of our consolidated results of operations for the three and six months ended June 30, 2022March 31, 2023, compared to the three and six months ended June 30, 2021March 31, 2022, include:
Operating Revenue
Revenue increased $25.0decreased $12.1 million for the three-month period ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily due to a $18.9$6.9 million increasedecrease in cryptocurrency mining revenue from deploying additional miners,due to lower Bitcoin prices and a $5.6higher global network hash rate, and a $6.3 million increasedecrease in energy revenue driven by higherlower prevailing power pricesmarket rates per MW and higher MW generation as a result ofMW. Cryptocurrency hosting revenue increased by $2.3 million primarily due to the hosting agreement with Foundry Digital, LLC (the "Foundry Hosting Agreement") which began in November 2021 Panther Creek Acquisition.2022. Capacity revenue also increased $1.1decreased $1.2 million due to both plants strategically reducing exposure to the Panther Creek Acquisition.capacity markets, and the resulting cost-capping and operational requirements in the day ahead market by PJM.
Operating Expenses
Revenue increased $50.0Total operating expenses decreased $26.4 million for the six-monththree-month period ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily driven by (1) a $12.2 million decrease in impairments on equipment deposits, (2) a $4.6 million decrease in depreciation and amortization due to prior period asset impairments, (3) a $3.0 million decrease in general and administrative expenses primarily due to lower insurance expenses, professional services and other cost saving initiatives, partially offset by a $36.6$1.0 million expense related to a decrease in the value of accounts receivable, (4) a $2.1 million decrease in operations and maintenance due to improved plant stability and performance, and (5) a $2.6 million decrease in fuel expenses due to higher proceeds from the sale of RECs driven by a year-over-year increase in cryptocurrency mining revenue from deploying additional miners, and a $12.0 million increase in energy revenue driven by higher prevailingREC market rates per MW and higher MW generation as a result of the November 2021 Panther Creek Acquisition. Capacity revenue also increased $2.4 million due to the Panther Creek Acquisition.pricing.
Other Income (Expense)
Operating Expenses
Total operating expenses increased $51.8other income (expense) decreased $28.7 million for the three-month period ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily driven by (1) a $14.8 million increase in operations and maintenance expense as a resultloss on debt extinguishment related to the extinguishment of the November 2021 Panther Creek Acquisition, higher labor and maintenance costs at the Scrubgrass Plant associated with increased plant uptime, and the ramp up of cryptocurrency mining operations including higher lease expenses for our hosting services agreement, (2) a $11.9 million increaseConvertible Notes in depreciation and amortization primarily from deploying additional miners and transformers, (3) a $8.9 million increase in general and administrative expenses due to legal and professional fees, insurance costs, and compensation as we continue to organize and scale operations, (4) a $6.5 million increase in fuel expenses driven by higher MW generation, primarily due to the November 2021 Panther Creek Acquisition, and increased fuel delivery costs from higher diesel prices, and (5) a $5.0 million impairment on miner assets attributable to the decline in the price of Bitcoin. Impairments on digital currencies of $5.2 million were primarily attributable to the June decline in the price of Bitcoin.
Total operating expenses increased $105.5 millionexchange for the six-month period ended June 30, 2022,newly-created Series C Convertible Preferred Stock as compared to the same perioddescribed in 2021, primarily driven by (1) a $24.7 million increase in operations and maintenance expense driven by major maintenance costs and labor at the Scrubgrass Plant associated with increasing plant uptime, higher costs as a result of the November 2021 Panther Creek Acquisition, and the ramp up of cryptocurrency mining operations including higher lease expenses for our hosting services agreement, (2) a $23.7 million increase in depreciation and amortization primarily from deploying additional miners and transformers, (3) a $18.6 million increase in general and administrative expenses due to legal and professional fees, insurance costs, and compensation as we continue to organize and scale operations, (4) a $13.9 million increase in fuel expenses driven by higher MW generation and increased fuel delivery costs from higher diesel prices, and (5) a $12.2 million impairment on equipment deposits for MinerVa miners discussed in Note 47 – Equipment Deposits and Miner Sales and Note 8 – Contingencies and Commitments. Impairments on digital currencies of $7.7 million were primarily attributed to the June decline in the price of Bitcoin. In March 2022, the Company evaluated the MinerVa equipment deposits for impairment and determined an impairment charge of $12.2 million based on lack of miner delivery per agreement. In June 2022, the Company evaluated miner assets and determined an impairment charge of $5.0 million for certain miners attributable to the decline in the price of Bitcoin.
Other Income (Expense)
DebtTotal other income (expense) decreased $10.2 million for the three-month period ended June 30, 2022, as compared to the same period in 2021, primarily driven by (1) a $8.0 million realized loss on the sale of miner assets discussed in Note 4 – Equipment Deposits and Miner Sales, (2) a $4.5 million increase in interest expense on additional financing agreements used to fund the growth of cryptocurrency operations, (3) a $1.7 million realized loss on the disposal of fixed assets, and (4) a $0.8 million increase in other income from the one-time gain on extinguishment of PPP loan, partially offset by (5) a $3.9 million increase from a change in value of the forward sale derivative. See Note 4 – Equipment Deposits and Miner Sales regarding the sale of miner assets. See Note 6 – Long-Term Debt and Note 14 – Stock Issued Under Master Financing Agreements and Warrants in the notes to our financial statements for further information on financing agreements.
Total other income (expense) decreased $13.6 million for the six-month period ended June 30, 2022, as compared to the same period in 2021, primarily driven by (1) a $8.0 million realized loss on the sale of miner assets, (2) a $7.3 million increase in interest expense on additional financing agreements used to fund the growth of cryptocurrency operations, (3) a $3.4 million increase from a change in value of the forward sale derivative, and (4) a $0.6 million increase in realized losses on the sale of digital currencies. See Note 6 – Long-Term Debt and Note 14 – Stock Issued Under Master Financing Agreements and Warrants in the notes to our financial statements for further information on financing agreements.Condensed Consolidated Financial Statements.
Segment Results
The below presents summarized results for our operations for the two reporting segments: Energy Operations and Cryptocurrency Operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended, | | Six Months Ended, |
| June 30, 2022 | | June 30, 2021 | | June 30, 2022 | | June 30, 2021 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) |
Operating Revenues | | | | | | | |
Energy Operations | $ | 8,829,741 | | | $ | 2,173,108 | | | $ | 19,257,731 | | | $ | 4,803,181 | |
Cryptocurrency Operations | 20,348,708 | | | 2,011,416 | | | 38,620,777 | | | 3,083,421 | |
Total Operating Revenues | $ | 29,178,449 | | | $ | 4,184,524 | | | $ | 57,878,508 | | | $ | 7,886,602 | |
Net Operating Income/(Loss) | | | | | | | |
Energy Operations | $ | (11,731,620) | | | $ | (2,570,168) | | | $ | (23,828,745) | | | $ | (3,785,805) | |
Cryptocurrency Operations | (18,123,022) | | | (467,593) | | | (35,663,263) | | | (221,239) | |
Net Operating Income/(Loss) | $ | (29,854,642) | | | $ | (3,037,761) | | | $ | (59,492,008) | | | $ | (4,007,044) | |
Other Income, net (a) | $ | (10,383,933) | | | $ | (205,248) | | | $ | (13,052,982) | | | $ | 525,079 | |
Net Income/(Loss) | $ | (40,238,575) | | | $ | (3,243,009) | | | $ | (72,544,990) | | | $ | (3,481,965) | |
Depreciation and Amortization | | | | | | | |
Energy Operations | $ | (1,326,552) | | | $ | (137,904) | | | $ | (2,582,653) | | | $ | (281,538) | |
Cryptocurrency Operations | (11,340,748) | | | (649,827) | | | (22,404,228) | | | (1,023,636) | |
Total Depreciation & Amortization | $ | (12,667,300) | | | $ | (787,731) | | | $ | (24,986,881) | | | $ | (1,305,174) | |
Interest Expense | | | | | | | |
Energy Operations | $ | (24,547) | | | $ | (27,048) | | | $ | (56,069) | | | $ | (68,306) | |
Cryptocurrency Operations | (4,484,236) | | | (28,395) | | | (7,364,166) | | | (65,777) | |
Total Interest Expense | $ | (4,508,783) | | | $ | (55,443) | | | $ | (7,420,235) | | | $ | (134,083) | |
| | | | | | | | | | | | | | |
| Three Months Ended | |
| March 31, 2023 | | March 31, 2022 | | | |
OPERATING REVENUES: | | | | | | |
Energy Operations | $ | 3,642,921 | | | $ | 11,109,581 | | | | |
Cryptocurrency Operations | 13,623,294 | | | 18,272,069 | | | | |
Total operating revenues | $ | 17,266,215 | | | $ | 29,381,650 | | | | |
NET OPERATING LOSS: | | | | | | |
Energy Operations | $ | (10,734,947) | | | $ | (12,097,125) | | | | |
Cryptocurrency Operations | (3,881,166) | | | (16,834,089) | | | | |
Total net operating loss | $ | (14,616,113) | | | $ | (28,931,214) | | | | |
OTHER EXPENSE [A] | $ | (32,044,449) | | | $ | (3,375,202) | | | | |
NET LOSS | $ | (46,660,562) | | | $ | (32,306,416) | | | | |
| | | | | | |
DEPRECIATION AND AMORTIZATION: | | | | | | |
Energy Operations | $ | (1,332,873) | | | $ | (1,256,101) | | | | |
Cryptocurrency Operations | (6,389,968) | | | (11,063,480) | | | | |
Total depreciation and amortization | $ | (7,722,841) | | | $ | (12,319,581) | | | | |
INTEREST EXPENSE: | | | | | | |
Energy Operations | $ | (159,287) | | | $ | (31,522) | | | | |
Cryptocurrency Operations | (2,224,626) | | | (2,879,931) | | | | |
Total interest expense | $ | (2,383,913) | | | $ | (2,911,453) | | | | |
(a)[A]We do not allocate other income net(expense) for segment reporting purposes. Amount is shown as a reconciling item between net operating income/(losses)income (loss) and consolidated net income before taxes.(loss). Refer to our accompanying condensed consolidated statementstatements of operations for the six months ended June 30, 2022 and 2021 for further details.
Energy Operations Segment
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | $ Change | | 2022 | | 2021 | | $ Change | | 2023 | | 2022 | | Change | | |
| (unaudited) | | (unaudited) | | | | (unaudited) | | (unaudited) | | | |
OPERATING REVENUES | | |
OPERATING REVENUES: | | OPERATING REVENUES: | | | | | | | |
Energy | Energy | $ | 7,129,732 | | | $ | 1,570,966 | | | $ | 5,558,766 | | | $ | 15,492,533 | | | $ | 3,486,822 | | | $ | 12,005,711 | | Energy | $ | 2,730,986 | | | $ | 9,044,392 | | | $ | (6,313,406) | | | |
Capacity | Capacity | 1,668,001 | | | 595,545 | | | 1,072,456 | | | 3,712,428 | | | 1,283,236 | | | 2,429,192 | | Capacity | 859,510 | | | 2,044,427 | | | (1,184,917) | | | |
Other | Other | 32,008 | | | 6,597 | | | 25,411 | | | 52,770 | | | 33,123 | | | 19,647 | | Other | 52,425 | | | 20,762 | | | 31,663 | | | |
Total operating revenues | Total operating revenues | 8,829,741 | | | 2,173,108 | | | 6,656,633 | | | 19,257,731 | | | 4,803,181 | | | 14,454,550 | | Total operating revenues | 3,642,921 | | | 11,109,581 | | | (7,466,660) | | | |
| OPERATING EXPENSES | | |
Fuel - net of crypto segment subsidy1 | 4,752,332 | | | 1,825,716 | | | 2,926,616 | | | 11,559,912 | | | 3,601,815 | | | 7,958,097 | | |
OPERATING EXPENSES: | | OPERATING EXPENSES: | | |
Fuel - net of crypto segment subsidy (1) | | Fuel - net of crypto segment subsidy (1) | 2,716,047 | | | 7,489,171 | | | (4,773,124) | | | |
Operations and maintenance | Operations and maintenance | 11,122,830 | | | 1,796,119 | | | 9,326,711 | | | 21,469,517 | | | 3,093,697 | | | 18,375,820 | | Operations and maintenance | 7,412,152 | | | 10,346,687 | | | (2,934,535) | | | |
General and administrative | General and administrative | 316,563 | | | — | | | 316,563 | | | 757,690 | | | — | | | 757,690 | | General and administrative | 1,447,473 | | | 441,127 | | | 1,006,346 | | | |
Depreciation and amortization | Depreciation and amortization | 1,326,552 | | | 137,904 | | | 1,188,648 | | | 2,582,653 | | | 281,538 | | | 2,301,115 | | Depreciation and amortization | 1,332,873 | | | 1,256,101 | | | 76,772 | | | |
Total operating expenses | Total operating expenses | $ | 17,518,277 | | | $ | 3,759,739 | | | $ | 13,758,538 | | | $ | 36,369,772 | | | $ | 6,977,050 | | | $ | 29,392,722 | | Total operating expenses | 12,908,545 | | | 19,533,086 | | | (6,624,541) | | | |
NET OPERATING LOSS EXCLUDING CORPORATE OVERHEAD | (8,688,536) | | | $ | (1,586,631) | | | (7,101,905) | | | (17,112,041) | | | $ | (2,173,869) | | | (14,938,172) | | |
NET OPERATING LOSS (EXCLUDING CORPORATE OVERHEAD) | | NET OPERATING LOSS (EXCLUDING CORPORATE OVERHEAD) | $ | (9,265,624) | | | $ | (8,423,505) | | | $ | (842,119) | | | |
Corporate overhead | Corporate overhead | 3,043,084 | | | 983,537 | | | 2,059,547 | | | 6,716,704 | | | 1,611,936 | | | 5,104,768 | | Corporate overhead | 1,469,323 | | | 3,673,620 | | | (2,204,297) | | | |
NET OPERATING LOSS | NET OPERATING LOSS | $ | (11,731,620) | | | $ | (2,570,168) | | | $ | (9,161,452) | | | $ | (23,828,745) | | | $ | (3,785,805) | | | $ | (20,042,940) | | NET OPERATING LOSS | $ | (10,734,947) | | | $ | (12,097,125) | | | $ | 1,362,178 | | | |
| INTEREST EXPENSE | INTEREST EXPENSE | $ | (24,547) | | | $ | (27,048) | | | $ | 2,501 | | | $ | (56,069) | | | $ | (68,306) | | | $ | 12,237 | | INTEREST EXPENSE | $ | (159,287) | | | $ | (31,522) | | | $ | (127,765) | | | |
1 (1) Cryptocurrency operations consumed $3.9 million and $6.5$4.7 million of electricity generated by the Energy Operations segment for the three and six months ended June 30, 2022March 31, 2023, and $0.4 million and $0.5$2.5 million for the three and six months ended June 30, 2021.March 31, 2022. For segment reporting, this intercompany electric charge is recorded as a contra-expense to offset fuel costs within the Energy Operations segment.
Operating Revenues
Total operating revenue increased $6.7decreased $7.5 million for the three-month period ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily due to a $5.6$6.3 million increasedecrease in energy revenue driven by higherlower prevailing market rates per MW and higher MW generation.MW. Capacity revenue increased $1.1 million as a result of the November 2021 Panther Creek Acquisition. decreased $1.2 million.
Effective June 1, 2022, through May 31, 2024, both plants strategically reduced their exposure to the capacity markets, and the resulting cost-capping and operational requirements in the day ahead market by PJM. The Company chose to be an energy resource after achieving its RegA certification, which will reducereduced monthly capacity revenue and the frequency with
which the plants will be mandated to sell power at non-market rates, in exchange for the opportunity to sell power to the grid at prevailing market rates, which management expects will more than make up for lost capacity revenue. This also gives our plants the ability to provide fast response energy to the grid in the real time market when needed without having to comply with day ahead power commitments. Over the course of 2022, the PJM grid has seen stronger around the clock prices, and stronger daily "peak" prices suggesting tight supply and demand grid conditions. When high power prices call for more electricity to be supplied by our plants, and those prices are in excess of Bitcoin-equivalent power prices, the Company may shut off its data center Bitcoin mining load in order to sell power to the grid. The Company believes that this integration should allow it to optimize for both Revenuerevenue as well as grid support over time.
Total operating revenue increased $14.5 million for the six-month period ended June 30, 2022, as compared to the same period in 2021, primarily due to a $12.0 million increase in energy revenue driven by higher prevailing market rates per MW and higher MW generation. Capacity revenue increased $2.4 million resulting from the November 2021 Panther Creek Acquisition.
Full plant power utilization is optimal for our revenue growth as it also drives a higher volume of Tier II Renewable Energy Credits ("RECs"),RECs, waste coal tax credits, and beneficial use ash sales, as well as the increased electricity supply for the crypto asset operations.
Operating Expenses
Total operating expenses increased $13.8decreased $6.6 million for the three-month period ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily due to the incremental(1) a $4.8 million decrease in fuel expenses associated with operating the Panther Creek Plant after its
November 2021 acquisition. Operations and maintenance expense increased $9.3 million primarily driven by higher labor, plant maintenance and one-time upgrades. Fuel expenses increased $2.9 million primarily due to higher MW generation resultingproceeds from the November 2021 Panther Creek Acquisitionsale of RECs and increased fuel delivery costs from higher diesel prices,(2) a $2.9 million decrease in operations and maintenance expenses due to improved plant stability and performance driven by one-time plant upgrades that occurred in 2022. These decreases were partially offset by higher costs being allocateda $1.0 million increase in general and administrative expenses related to a decrease in the Cryptocurrency Segment due to higher electric consumption for bitcoin mining operations, and greater REC sales.value of accounts receivable. REC sales of $2.1$4.9 million and $0.6$0.5 million were recognized as contra-expense to offset fuel expenses for the three months ended June 30,March 31, 2023, and 2022, and 2021, respectively. Depreciation and amortization expense increased $1.2
Corporate overhead decreased $2.2 million primarily due to the Panther Creek Acquisition.
Corporate overhead increased $2.1 million primarily due to higher legallower insurance expenses and professional fees, directors’services related to organizing and officers’ liability insurance, and payroll expenses,scaling operations, which havehas been allocated to the two segments using a “fair-share” of revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments.
Cryptocurrency Operations Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | |
| 2023 | | 2022 | | Change | | | | | | | |
OPERATING REVENUES: | | | | | | | | | | | | |
Cryptocurrency mining | $ | 11,297,298 | | | $ | 18,204,193 | | | $ | (6,906,895) | | | | | | | | |
Cryptocurrency hosting | 2,325,996 | | | 67,876 | | | 2,258,120 | | | | | | | | |
Total operating revenues | 13,623,294 | | | 18,272,069 | | | (4,648,775) | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | |
Electricity - purchased from energy segment | 4,697,967 | | | 2,530,814 | | | 2,167,153 | | | | | | | | |
Operations and maintenance | 1,028,771 | | | 987,646 | | | 41,125 | | | | | | | | |
General and administrative | 57,186 | | | 58,487 | | | (1,301) | | | | | | | | |
Impairments on digital currencies | 71,477 | | | 2,506,172 | | | (2,434,695) | | | | | | | | |
Impairments on equipment deposits | — | | | 12,228,742 | | | (12,228,742) | | | | | | | | |
Realized gain on sale of digital currencies | (326,768) | | | (751,110) | | | 424,342 | | | | | | | | |
Loss on disposal of fixed assets | 91,086 | | | 44,958 | | | 46,128 | | | | | | | | |
Depreciation and amortization | 6,389,968 | | | 11,063,480 | | | (4,673,512) | | | | | | | | |
Total operating expenses | 12,009,687 | | | 28,669,189 | | | (16,659,502) | | | | | | | | |
NET OPERATING LOSS (EXCLUDING CORPORATE OVERHEAD) | $ | 1,613,607 | | | $ | (10,397,120) | | | $ | 12,010,727 | | | | | | | | |
Corporate overhead | 5,494,773 | | | 6,436,969 | | | (942,196) | | | | | | | | |
NET OPERATING LOSS | $ | (3,881,166) | | | $ | (16,834,089) | | | $ | 12,952,923 | | | | | | | | |
| | | | | | | | | | | | |
INTEREST EXPENSE | $ | (2,224,626) | | | $ | (2,879,931) | | | $ | 655,305 | | | | | | | | |
Operating Revenues
Total operating expenses increased $29.4revenues decreased by $4.6 million for the six-monththree-month period ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily due to a decrease in cryptocurrency mining revenue due to lower Bitcoin prices and a higher global network hash rate. Cryptocurrency hosting revenue increased by $2.3 million due to the incremental operationsFoundry Hosting Agreement which began in November 2022.
Operating Expenses
Total operating expenses decreased by $16.7 million for the three-month period ended March 31, 2023, as compared to the same period in 2022, primarily due to (1) a $12.2 million impairment on equipment deposits that was recorded in 2022, (2) a $4.7 million decrease in depreciation and maintenanceamortization due to prior period asset impairments, and fuel expenses associated with operating the Panther Creek Plant after its November 2021 acquisition. Operations and maintenance increased $18.4(3) a $2.4 million primarilydecrease in impairments on digital currencies driven by payroll, major maintenance and upgrade expenditures. Fuel expenses increased $8.0an upward trend of Bitcoin prices during the first quarter of 2023. These decreases were partially offset by a $2.2 million increase in intercompany electric charges related to the ramp up of cryptocurrency mining operations.
Corporate overhead decreased by $0.9 million primarily due to higher MW generation resulting from the November 2021 Panther Creek Acquisition and increased fuel delivery costs from higher diesel prices, partially offset by higher costs being allocated to the Cryptocurrency Segment due to higher electric consumption for bitcoin mining operations, and greater REC sales. REC sales of $2.6 million and $0.8 million were recognized as contra-expense to offset fuellower insurance expenses for the six months ended June 30, 2022, and 2021, respectively. Depreciation and amortization expense increased $2.3 million primarily due to the Panther Creek Acquisition.
Corporate overhead increased $5.1 million primarily due to higher legal and professional fees, directors’services related to organizing and officers’ liability insurance, and payroll expenses,scaling operations, which havehas been allocated to the two segments using a “fair-share” of revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments.
Cryptocurrency Operations Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2022 | | 2021 | | $ Change | | 2022 | | 2021 | | $ Change | |
| (unaudited) | | (unaudited) | | | | (unaudited) | | (unaudited) | | | |
OPERATING REVENUES | | | | | | | | | | | | |
Cryptocurrency mining | $ | 20,227,536 | | | $ | 1,324,645 | | | $ | 18,902,891 | | | $ | 38,431,729 | | | $ | 1,840,903 | | | $ | 36,590,826 | | |
Cryptocurrency hosting | 121,172 | | | 686,771 | | | (565,599) | | | 189,048 | | | 1,242,518 | | | (1,053,470) | | |
Total operating revenues | 20,348,708 | | | 2,011,416 | | | 18,337,292 | | | 38,620,777 | | | 3,083,421 | | | 35,537,356 | | |
| | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | |
Electricity - purchased from energy segment | 3,927,782 | | | 402,451 | | | 3,525,331 | | | 6,458,596 | | | 498,706 | | | 5,959,890 | | |
Operations and maintenance | 5,463,926 | | | 38,051 | | | 5,425,875 | | | 6,451,572 | | | 111,161 | | | 6,340,411 | | |
General and administrative | 511,058 | | | 34,731 | | | 476,327 | | | 569,545 | | | 70,118 | | | 499,427 | | |
Impairments on digital currencies | 5,205,045 | | | 375,246 | | | 4,829,799 | | | 7,711,217 | | | 375,246 | | | 7,335,971 | | |
Impairments on equipment deposits | — | | | — | | | — | | | 12,228,742 | | | — | | | 12,228,742 | | |
Impairments on miner assets | 4,990,000 | | | — | | | 4,990,000 | | | 4,990,000 | | | — | | | 4,990,000 | | |
Depreciation and amortization | 11,340,748 | | | 649,827 | | | 10,690,921 | | | 22,404,228 | | | 1,023,636 | | | 21,380,592 | | |
Total operating expenses | $ | 31,438,559 | | | $ | 1,500,306 | | | $ | 29,938,253 | | | $ | 60,813,900 | | | $ | 2,078,867 | | | $ | 58,735,033 | | |
NET OPERATING LOSS EXCLUDING CORPORATE OVERHEAD | (11,089,851) | | | 511,110 | | | (11,600,961) | | | (22,193,123) | | | 1,004,554 | | | (23,197,677) | | |
Corporate overhead | 7,033,171 | | | 978,703 | | | 6,054,468 | | | 13,470,140 | | | 1,225,793 | | | 12,244,347 | | |
NET OPERATING LOSS | $ | (18,123,022) | | | $ | (467,593) | | | $ | (17,655,429) | | | $ | (35,663,263) | | | $ | (221,239) | | | $ | (23,197,677) | | |
| | | | | | | | | | | | |
INTEREST EXPENSE | $ | (4,484,236) | | | $ | (28,395) | | | $ | (4,455,841) | | | $ | (7,364,166) | | | $ | (65,777) | | | $ | (7,298,389) | | |
Operating Revenues
Total operating revenues increased by $18.3 million for the three-month period ended June 30, 2022, as compared to the same period in 2021, primarily due to increased cryptocurrency mining revenue as a result of purchasing and deploying additional miners throughout 2021 and the six-month period ended June 30, 2022. The increased quantity of miners increased total hash rates and Bitcoin awards. The Company's Bitcoin mining operations were awarded 637 coins during the second quarter, a 45% increase versus the 438 Bitcoin it was awarded in the first quarter of 2022. Cryptocurrency hosting revenue decreased by $0.6 million due to the strategic termination of several agreements of generated power sales to crypto asset mining customers for which we were providing hosting services.
Total operating revenues increased by $35.5 million for the six-month period ended June 30, 2022, as compared to the same period in 2021, primarily due to increased cryptocurrency mining revenue as a result of purchasing and deploying additional miners throughout 2021 and the six-month period ended June 30, 2022. The increased quantity of miners increased total hash rates and Bitcoin awards. Cryptocurrency hosting revenue decreased by $1.1 million due to the strategic termination of several agreements of generated power sales to crypto asset mining customers for which we were providing hosting services.
Operating Expenses
Total operating expenses increased by $29.9 million for the three-month period ended June 30, 2022, as compared to the same period in 2021, primarily due to (1) a $10.7 million increase in depreciation and amortization resulting from the deployment of miners and infrastructure assets, (2) a $5.0 million impairment on miner assets attributable to the decline in the price of Bitcoin, (3) a $5.4 million increase in operations and maintenance due to higher lease expenses from the ramp up of the Northern Data Hosting Agreement, purchases of power supplies and labor, (4) a $4.8 million increase in Impairments on digital currencies related to the June 2022 decrease in Bitcoin pricing, and (5) a $3.5 million increase of intercompany electric charges related to the ramp up of cryptocurrency mining operations.
Corporate overhead increased by $6.1 million primarily due to higher legal and professional fees, directors’ and officers’ liability insurance, and payroll expenses, which have been allocated to the two segments using a “fair-share” of
revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments.
Total operating expenses increased by $58.7 million for the six-month period ended June 30, 2022, as compared to the same period in 2021, primarily due to (1) a $21.4 million increase in depreciation and amortization resulting from the deployment of miners and infrastructure assets, (2) a $12.2 million impairment on equipment deposits for MinerVa miners, (3) a $7.3 million increase in Impairments on digital currencies primarily related to the June 2022 decrease in Bitcoin pricing, (4) a $6.3 million increase in Operations and maintenance due to higher lease expenses from the ramp up of the Northern Data Hosting Agreement, purchases of power supplies and labor, (5) a $6.0 million increase of intercompany electric charges related to the ramp up of cryptocurrency mining operations, and (6) a $5.0 million impairment on miner assets attributable to the decline in the price of Bitcoin.
Corporate overhead increased by $12.2 million primarily due to higher legal and professional fees, directors’ and officers’ liability insurance, and payroll expenses, which have been allocated to the two segments using a “fair-share” of revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments.
Impairment on Digital Currencies
Impairments on digital currencies of $5.2$0.1 million and $7.7$2.5 million were recognized for the threethree-months ended March 31, 2023, and six-months ended June 30,March 31, 2022, respectively, as a result of the negative impacts from the crypto coin spot market declines. As of June 30, 2022,March 31, 2023, the Company held approximately 26824 Bitcoin on its balance sheet at carrying value, of which 250 were restricted.value. The spot market price of Bitcoin was $19,986$28,478 as of June 30, 2022,March 31, 2023, per Coinbase Global Inc.Yahoo Finance.
Interest Expense
Interest expense increased $4.5 million and $7.3decreased $0.7 million for the three and six months ended June 30, 2022,March 31, 2023, as compared to the same period in 2021,2022, primarily due to lower debt as a result of extinguishing the borrowingsdebt under the master equipment financing agreements entered into with an affiliate of NYDIG ABL, LLC, from our WhiteHawk promissory notes and draws against the Arctos/NYDIG Financing Agreement discussed in Note 14 – Stock Issued Under Master Financing Agreements and Warrants in the notesAugust to our financial statements.October 2022.
Liquidity and Capital Resources
Overview
Stronghold Inc. is a holding company with no operations and is the sole managing member of Stronghold LLC. Our principal asset consists of units of Stronghold LLC. Our earnings and cash flows and ability to meet any debt obligations will depend on the cash flows resulting from the operations of our operating subsidiaries, and the payment of distributions to us by such subsidiaries.
Our cash needs are primarily for growth through acquisitions, capital expenditures, and working capital to support equipment financing and the purchase of additional miners.miners and general operating expenses. We have incurred and may continue to incur significant expenses in servicing and maintaining our power generation facilities. If we were to acquire additional facilities in the future, capital expenditures may include improvements, maintenance, and build out costs associated with equipping such facilities to house miners to mine Bitcoin.
We have historically relied on funds from equity issuances, equipment financings, and revenue from sales of Bitcoin and power generated at our power plants to provide for our liquidity needs. During 2021 and the first quarter of 2022,Subsequent to March 31, 2023, we received $63.2 million (net of loan fees and debt issuance costs) in proceeds from the financing agreements with WhiteHawk and NYDIG, net proceeds of $131.5 million from the IPO, net proceeds of $96.8 million from two private placements of convertible preferred securities, and an additional $25.0approximately $10.0 million from WhiteHawk as a result of the Second WhiteHawk Amendment. Additionally, on May 15, 2022, the Company received $33.75 million (net of loan fees and debt issuance costs) pursuant to the 2022April 2023 Private Placement. Please see “—Debt Agreements - Equipment Financing Transactions” for more information regardingNote 15 – Private Placements in the notes to our financing arrangements. These cash sources provided additional short and long-term liquidity to support our operations in fiscal year 2021 and through the second quarter of 2022.
Condensed Consolidated Financial Statements.
As of June 30, 2022, we held 268 Bitcoin on hand, of which 250 were pledged as collateral. On July 27, 2022, we closed out the forward sale derivative agreement with NYDIG for a gain of approximately $0.2 millionMarch 31, 2023, and sold the above
referenced 250 Bitcoin pledged as collateral and associated with the agreement. As of June 30, 2022 and August 12, 2022,May 8, 2023, we had approximately $33.3$7.0 million and $27.5$8.0 million, respectively, of cash and cash equivalents and Bitcoin on our balance sheet, which included 1824 Bitcoin and 44 unrestricted22 Bitcoin, respectively. As of June 30, 2022March 31, 2023, and August 12, 2022,May 8, 2023, we had principal amount outstanding indebtedness of $127.9$59.8 million and $141.0$59.6 million, respectively, and availability under our financing agreements of $7.2 million and $3.6 million, respectively.
If our cash flows from operations continue to fall short of uses of capital, we may need to seek additional sources of capital to fund our short-term and long-term capital needs. We maymay further sell assets or seek potential additional debt or equity financing to fundfund our short-term and long-term needs. Further, the terms of the Credit Agreement, September 2022 Private Placement and April 2023 Private Placement contain certain restrictions, including maintenance of certain financial and liquidity ratios and minimums, and certain restrictions on future issuances of equity and debt. If we are unable to raise additional capital, there is a risk that we could default on our obligations and could be required to discontinue or significantly reduce the scope of our operations, including through the sale of our assets, if no other means of financing options are available.
Operations have not yet established a consistent record of covering our operating expenses and we incurred a net loss of $40.2 million and $72.5$46.7 million for the three and six months ended June 30, 2022, respectively,March 31, 2023, and an accumulated deficit of $155.7$290.8 million as of June 30, 2022.March 31, 2023. We experienced a number of previously disclosed setbacks and unexpected challenges, including a longer-than-expected and continuing delay of the MinerVa miners and longer than expected downtime at our Scrubgrass Plant for maintenance, the Panther Creek Plant's mining operations shutdown in April 2022 and the outages of our mining operations due to higher than anticipated requirements from PJM. As a result of the delay in delivery of the MinerVa miners, we were at risk of defaulting on our obligations under the WhiteHawk debt facility because those miners were to be provided as collateral to WhiteHawk by April 30, 2022. Pursuant to the Second WhiteHawk Amendment, the MinerVa miners were exchanged for collateral for additional miners received by the Company. Due to the delay, we determined an impairment charge totaling $12.2 million that was recognized on March 31, 2022. We spent approximately $5.1$7 million in fiscal year 2021 on maintenance and repair costs at the Scrubgrass Plant, and we estimate that we will spend an aggregate of approximately $5 million2022 on major repairs and upgrades at our plants, primarily during fiscal yearthe planned maintenance outage that occurred beginning in September 2022. In addition to incurred expenses, we were also unable to mine Bitcoin at the Scrubgrass Plant during such downtime, which directly and negatively affects our results of operations.
As previously disclosed, the Panther Creek Plant's mining operations were offline for ten days in April 2022 due to the failure of a switchgear and the need to source, deliver and install a new piece of equipment, causing ten days of no mining revenue generation at the facility and resulting in an estimated loss of approximately $1.4 million.
As previously disclosed in the Company's Current Report on Form 8-K dated July 25, 2022, the Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in the month of June from damaged transmission lines caused by a storm, and other plant maintenance issues. The Company estimates the financial impact of the June outages to be lost revenue of approximately $1.8 million and a net income impact of approximately $1.4 million.
The Company's Panther Creek Plant will be taking a planned two-week outage in May 2023. The Company's Scrubgrass Plant does not currently expect to take a planned outage this spring.
Taking into account the First Amendment, Second WhiteHawk Amendment, 2022 Private Placement, the Bitmain Sale, other miner sales,Exchange Agreement, and transactions subsequent to the June 30, 2022March 31, 2023, quarter end which include the WhiteHawk RefinancingApril 2023 Private Placement, and the continued expansion of our cryptocurrency mining operations through the MicroBT Miner Purchase and the Canaan Bitcoin Mining Agreement, NYDIG debt extinguishment and equitization of the May 2024 Convertible Notes, we believe our liquidity position, combined with expected improvements in operating cash flows, and the proceeds of additional asset sales, will be sufficient to meet our existing commitments and fund our operations for the next twelve months.
We have no material off balance sheet arrangements.
Cash Flows
Analysis of Cash Flow Changes Between the SixThree Months Ended June 30,March 31, 2023, and 2022 and 2021
The following table summarizes our cash flows for the periods indicated:
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2022 | | 2021 | | Change | | 2023 | | 2022 | | Change |
($ in thousands) | (in thousands) | |
Net cash provided by (used in) operating activities | Net cash provided by (used in) operating activities | $ | (7,628.2) | | | $ | 2,225.2 | | | $ | (9,853.4) | | Net cash provided by (used in) operating activities | $ | (3,341,466) | | | $ | (4,218,388) | | | $ | 876,922 | |
Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | (55,303.8) | | | (91,457.2) | | | 36,153.4 | | Net cash provided by (used in) investing activities | (13,738) | | | (44,639,218) | | | 44,625,480 | |
Net cash provided by (used in) financing activities | Net cash provided by (used in) financing activities | 64,129.1 | | | 132,643.6 | | | (68,514.5) | | Net cash provided by (used in) financing activities | (3,587,526) | | | 42,548,184 | | | (46,135,710) | |
Net change in cash | Net change in cash | $ | 1,197.1 | | | $ | 43,411.6 | | | $ | (42,214.5) | | Net change in cash | $ | (6,942,730) | | | $ | (6,309,422) | | | $ | (633,308) | |
We have entered into various debt agreements used to purchase equipment to operate our business.
We entered into the WhiteHawk Financing Agreement on June 30, 2021 and amended the agreement on December 31, 2021 and March 28, 2022. On October 27, 2022, we entered into the Credit Agreement with WhiteHawk to refinance the WhiteHawk Financing Agreement, effectively terminating the WhiteHawk Financing Agreement. The Credit Agreement consists of $35.1 million in term loans and a $23.0 million Delayed Draw Facility (as defined therein). Such loans under the Delayed Draw Facility were drawn on the closing date of the Credit Agreement. As of June 30, 2022,March 31, 2023, the amount owed under the debt agreements totaled $65.0 million with repayment terms extending through March 31, 2024. As of June 30, 2022, the repayment amounts, including interest, totaled $46.4$54.4 million. For additional information, see Note 67 – Long-Term Debt in the notes to our financial statements.
impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. The aggregate purchase price does not include shipping costs, which are our responsibility and shall be determined at which timeAs the miners are ready for shipment.60-day period has now expired, the Company is evaluating all available remedies under the MinerVa Purchase Agreement.
The TRA generally provides for the payment by Stronghold Inc. to certain of the Stronghold UnitTRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) that Stronghold Inc. actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increases in tax basis that occur as a result of Stronghold Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of such holder’s Stronghold LLC Units pursuant to an exercise of Redemption Right or the Call Right and (ii) imputed interest deemed to be paid by Stronghold Inc. as a result of, and additional tax basis arising from, any payments Stronghold Inc. makes under the TRA. Stronghold Inc. will retain the remaining net cash savings, if any. The TRA generally provides for payments to be made as Stronghold Inc. realizes actual cash tax savings from the tax
benefits covered by the TRA. However, the TRA provides that if Stronghold Inc. elects to terminate the TRA early (or it is terminated early due to Stronghold Inc.’s failure to honor a material obligation thereunder or due to certain mergers, asset sales, other forms of business combinations or other changes of control), Stronghold Inc. is required to make an immediate payment equal to the present value of the future payments it would be required to make if it realized deemed tax savings pursuant to the TRA (determined by applying a discount rate equal to one-year LIBOR (or an agreed successor rate, if applicable) plus 100 basis points, and using numerous assumptions to determine deemed tax savings), and such early termination payment is expected to be substantial and may exceed the future tax benefits realized by Stronghold Inc.
The actual timing and amount of any payments that may be made under the TRA are unknown at this time and will vary based on a number of factors. However, Stronghold Inc. expects that the payments that it will be required to make to Q Powerthe TRA Holders (or itstheir permitted assignees) in connection with the TRA will be substantial. Any payments made by Stronghold Inc. to Q Powerthe TRA Holders (or itstheir permitted assignees) under the TRA will generally reduce the amount of cash that might have otherwise been available to Stronghold Inc. or Stronghold LLC. To the extent Stronghold LLC has available cash and subject to the terms of any current or future debt or other agreements, the Stronghold LLC Agreement will require Stronghold LLC to make pro rata cash distributions to holders of Stronghold LLC Units, including Stronghold Inc., in an amount sufficient to allow Stronghold Inc. and Q Power to pay its taxes and to make payments under the TRA. Stronghold Inc. generally expects Stronghold LLC to fund such distributions out of available cash. However, except in cases where Stronghold Inc. elects to terminate the TRA early, the TRA is terminated early due to certain mergers or other changes of control or Stronghold Inc. has available cash but fails to make payments when due, generally Stronghold Inc. may defer payments due under the TRA if it does not have available cash to satisfy its payment obligations under the TRA or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the TRA generally will accrue interest at the rate provided for in the TRA, and such interest may significantly exceed Stronghold Inc.’s other costs of capital. If Stronghold Inc. experiences a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business combinations), and in certain other circumstances, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any, Stronghold Inc. realizes in respect of the tax attributes subject to the TRA. In the case of such an acceleration in connection with a change of control, where applicable, Stronghold Inc. generally expects the accelerated payments due under the TRA to be funded out of the proceeds of the change of control transaction giving rise to such acceleration, which could have a significant impact on our ability to consummate a change of control or reduce the proceeds received by our stockholders in connection with a change of control. However, Stronghold Inc. may be required to fund such payment from other sources, and as a result, any early termination of the TRA could have a substantial negative impact on our liquidity or financial condition.