STRONGHOLD DIGITAL MINING, INC. Except as otherwise indicated or required by the context, all references in this prospectus to the "Company," "we," "us" or "our" relate toStronghold Digital Mining, Inc. ("Stronghold Inc. ") and its consolidated subsidiaries following the Reorganization. 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-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, 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 "Risk Factors" and discussed elsewhere in this Form 10-K.
Overview
Stronghold Digital Mining, Inc. ("Stronghold Inc. ," the "Company," "we," "us," or "our") was incorporated as aDelaware corporation onMarch 19, 2021 . We are a low-cost, environmentally beneficial, vertically integrated crypto asset mining company currently focused on mining Bitcoin with environmental remediation and reclamation services. We wholly own and operate two 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 inApril 2021 and has the capacity to generate approximately 83.5 megawatts ("MW") of electricity (the "Scrubgrass Plant") and (ii) a facility located nearNesquehoning, Pennsylvania , which we acquired inNovember 2021 and which has the capacity to generate approximately 80 MW of electricity (the "Panther Creek Plant"), each of which is as an Alternative Energy System because coal refuse is classified underPennsylvania 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. We believe that our integrated model of owning our own power plants and Bitcoin mining data center operations helps us to produce Bitcoin at a 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") inPennsylvania . These RECs are currently valued at approximately$18.00 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 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 power revenue exceed Bitcoin mining revenue. We operate as a market participant throughPJM Interconnection , aRegional 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 We expect that our net cost of power, taking into account RECs and waste coal tax credits that we receive, will be approximately$45.00 to$50.00 per MWh in the first quarter of 2023 and thereafter. This$45.00 to$50.00 per MWh corresponds to a cost per Bitcoin of$12,000 to$13,500 with modern miners and assuming a network hash rate of approximately 285 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, who do not generate their own power but instead must purchase it. For reference, per Bloomberg, as ofMarch 24, 2022 , the estimated cost to procure 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 58 --------------------------------------------------------------------------------
System Operator ("MISO")
As ofMarch 28, 2023 , we operate more than 29,500 Bitcoin miners with hash rate capacity of approximately 2.6 EH/s. Of these Bitcoin miners, more than 25,000 are wholly owned and not subject to a profit share component with hash rate capacity of approximately 2.2 EH/s. We host the remaining approximately 4,500 Bitcoin miners with hash rate capacity of approximately 420 petahash per second ("PH/s"). As ofMarch 28, 2023 , we expect to receive an additional approximately 0.2 EH/s related to the purchase agreement we entered into withMinerVa Semiconductor Corp. ("MinerVa") datedApril 2, 2021 (the "MinerVa Purchase Agreement"), representing 15% of the contracted hash rate. We believe that the remaining MinerVa miners are available to be shipped, but they have not yet been scheduled for delivery, and we do not know when they will be received, if at all We are actively evaluating incremental opportunities, representing over 2.5 EH/s, to fill our remaining data center slots. While no assurances can be made that we will receive the remaining MinerVa miners or be able to consummate any of these transactions, we believe that we will be able to fill our existing 4 EH/s of data center capacity later this year. As we produce Bitcoin through our mining operations, we will from time-to-time exchange Bitcoins for fiat currency based on our internal cash management policy. We intend to hold enough fiat currency or hedge enough of our Bitcoin exposure to cover our projected near-term fiat currency needs, including liabilities and anticipated expenses and capital expenditures. In identifying our fiat currency needs, we will assess market conditions and review our financial forecast. We safeguard and keep private our digital assets by utilizing storage solutions provided byAnchorage 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.
Reorganization
On
Trends and Other Factors Impacting Our Performance
General Digital Asset Market Conditions
The prices of cryptocurrencies, including Bitcoin, have experienced substantial volatility.For example, the price of Bitcoin ranged from a low of approximately$29,000 to a high of approximately$69,000 during 2021 and ranged from approximately$16,000 to approximately$48,000 throughout 2022. During 2022 and more recently in 2023, a number of companies in the crypto assets industry have declared bankruptcy, including Core Scientific,Celsius Network LLC , Voyager Digital,Three Arrows Capital , BlockFi, FTX, 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 withFoundry Digital, LLC ("Foundry") or trading activities conducted withGenesis Global Trading, Inc. ("Genesis Trading"), an entity regulated by theNew York Department of Financial Services and theSEC , that engages in the trading of our mined Bitcoin. The hosting agreement is performing in line with our expectations, and onFebruary 6, 2023 , we entered into a new hosting agreement to replace the existing hosting agreement which agreement, 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 toCelsius 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 byAnchorage , which requires multi-factor authentication. While we are confident in the security of our digital assets held byAnchorage , given the broader market conditions, there can be no assurance that other crypto asset market participants, includingAnchorage as our custodian, will not ultimately be impacted. Further, given the current conditions in 59 -------------------------------------------------------------------------------- the digital assets ecosystem, we are liquidating our mined Bitcoin often, and at multiple points every week throughAnchorage . 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 "-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" for additional information.
COVID-19 and Supply Chain Constraints
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 COVID-19. However, we are actively
monitoring this situation
and the possible effects on its financial condition, liquidity, operations,
suppliers, and industry.
During the fourth quarter of 2021 and continuing into the second and third quarter of 2022, the Scrubgrass Plant had downtime that was greater than anticipated, driven largely by mechanical failures. The upgrades and maintenance that were necessary took longer and were more extensive than originally anticipated. Additionally, during the first half of 2022, higher than anticipated requirements fromPJM 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 allows the plant to sell power to the grid at market prices. Starting in the third quarter of 2022, the Scrubgrass Plant conducted its planned maintenance outage that lasted for approximately two weeks from the end of September into early October, during which time it did not generate power. During the outage, management undertook a thorough review of plant-level profitability and identified opportunities for immediate cost reductions including improved fuel purchasing, headcount reductions and optimization, and inventory and maintenance planning enhancements. Given seasonally low power prices in October, and some additional desired maintenance objectives, management kept the plant offline while it implemented the cost reduction program and improved the fuel mix through accelerated deliveries of low-cost fuel, and then returned Scrubgrass to service in late October. Following the outage, the Scrubgrass Plant has demonstrated the ability to run at baseload output levels, as expected. During the outage, theScrubgrass Data Center imported power from the grid to support operations.
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 Current Report on Form 8-K datedJuly 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 estimated 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 completed its planned maintenance outage which lasted for approximately two weeks, during which time it did not generate power. The outage went as planned, and the plant was
60
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restored to service in October. During the outage, the
Bitcoin Price Volatility
The market price of Bitcoin has historically and recently been volatile. Since the IPO, the price of Bitcoin has dropped over 70%, resulting in an adverse effect on our results of operations, liquidity and strategy, and resulting in increased credit pressures on the cryptocurrency industry. 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. Recent Developments
Bruce and Merrilees Settlement Agreement
OnMarch 28, 2023 , the Company andStronghold 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 Settlement Agreement, 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 Settlement Agreement 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 onApril 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 agreed to enter into a registration rights agreement with B&M for the shares underlying the warrants no later thanApril 4, 2023 . Simultaneous with the Settlement Agreement, the Company and each of its subsidiaries entered into a Subordination Agreement withB&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, Settlement Agreement 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. Exchange Transaction OnDecember 30, 2022 , the Company entered into an exchange agreement (the "Exchange Agreement") with the holders (the "Purchasers") of theMay 2022 Notes (as defined below) whereby theMay 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 ("Pre-funded Warrants"), at a conversion price of$0.40 per share. The Exchange Agreement closed onFebruary 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 theMay 2022 Notes. OnFebruary 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. OnFebruary 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 Company provided certain registration rights to the Purchasers. 61 --------------------------------------------------------------------------------
Second WhiteHawk Amendment
OnMarch 28, 2022 ,Equipment LLC andWhiteHawk 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 equipment financing agreement datedJune 30, 2021 , by and betweenStronghold LLC and WhiteHawk (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 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 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 byPanther 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 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"). The Second WhiteHawk Warrant expires onMarch 28, 2032 .
MinerVa
OnApril 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. InDecember 2021 , we extended the deadline for delivery of the MinerVa miners toApril 2022 . Due to continued delays in deliveries, an impairment of approximately$12 million was recognized onMarch 31, 2022 . Due to market conditions, an additional impairment of approximately$5 million was recognized onDecember 31, 2022 . OnJuly 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 ofDecember 31, 2022 , andMarch 28, 2023 , MinerVa had delivered value to Stronghold approximately 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 Refinancing Agreement
On
OnOctober 27, 2022 , we entered into a secured credit agreement (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$23.0 million in additional commitments (such additional commitments, the "Delayed Draw Facility"). Such loans under the Delayed Draw Facility were drawn on the closing date of the Credit Agreement. The Credit Agreement and Delayed Draw Facility together reduced monthly principal payments and added approximately$21 million of cash to the Company's balance sheet following the Company's draw down on the full amount of the Delayed Draw Facility. The full amount of the WhiteHawk Financing Agreement has been drawn as of the date hereof. The financing pursuant to the Credit Agreement (such financing, the "WhiteHawk Refinancing Agreement") was entered into byStronghold LLC as Borrower (the "Borrower") and is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by the Company and each of its material subsidiaries. The WhiteHawk Refinancing Agreement requires equal monthly amortization payments resulting in full 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 default. The WhiteHawk Refinancing Agreement also contains certain financial covenants. The borrowings under the WhiteHawk Refinancing Agreement mature onOctober 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 0.50% and (y) the Term SOFR rate plus 1%, plus 9%. The loan under the Delayed Draw 62 -------------------------------------------------------------------------------- Facility was issued with 3% closing fee on the drawn amount, paid when such amount was drawn. Amounts drawn on the WhiteHawk Refinancing Agreement are subject to a prepayment premium such that the lenders thereunder achieve a 20% return on invested capital. The Company also issued a stock purchase warrant to WhiteHawk in conjunction with the closing of the WhiteHawk Refinancing Agreement, which provides for the purchase of an additional 4,000,000 shares of Class A common stock at an exercise price of$0.01 per share.
WhiteHawk Credit Agreement Amendment
OnFebruary 6, 2023 , the Company,Stronghold LLC , as borrower, their subsidiaries andWhiteHawk Capital Partners LP , 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. All capitalized words used but not defined herein have the meanings assigned in the First Amendment. 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 fromFebruary 2023 throughJuly 2024 will not be required, with monthly amortization resumingJuly 31, 2024 . BeginningJune 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 endingSeptember 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) untilMarch 31, 2024 ,$2,500,000 ; (B) during the period beginningApril 1, 2024 through and includingDecember 31, 2024 ,$5,000,000 ; and (C) from and afterJanuary 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 byFebruary 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 includesQ Power LLC (which is controlled byGreg 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. OnMarch 7, 2023 , the Board appointedThomas Doherty to the Board.
Second Amendment to Credit Agreement
OnMarch 28, 2023 , the Company,Stronghold LLC , as borrower, their subsidiaries andWhiteHawk Capital , as collateral agent and administrative agent, and the other lenders thereto, entered into the Second Amendment to Credit Agreement (the "Second Amendment"). All capitalized words used but not defined herein have the meanings assigned in and pursuant to the Second Amendment. Pursuant to the Second Amendment, among other items, the terms Permitted Indebtedness, Subordinated Indebtedness and Material Contracts were amended to include and account for the B&M Documents and the Company's obligations thereunder.
OnMay 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 "May 2022 Private Placement"). TheMay 2022 Notes and theMay 2022 Warrants were sold for aggregate consideration of$27.0 million . 63 -------------------------------------------------------------------------------- In connection with theMay 2022 Private Placement, theMay 2022 Warrants were issued pursuant to a Warrant Agreement, dated as ofMay 15, 2022 . TheMay 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. TheMay 2022 Warrants will be exercisable for a five-year period from the closing. OnAugust 16, 2022 , the Company entered into an amendment to the Purchase Agreement, 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 6,318,000May 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 Purchasers on the fifteenth (15th) day of each ofNovember 2022 ,December 2022 ,January 2023 , andFebruary 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. OnDecember 30, 2022 , the Company entered into the Exchange Agreement with the Purchasers, which closed onFebruary 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 Note holders under the Notes. See "-Exchange Transaction" above for additional information.
OnMay 9, 2022 , an award in the amount of$5.0 million plus interest computed as ofMay 15, 2022 , in the amount of$0.8 million was issued in favor of theMcClymonds Supply & Transit Company, Inc. in the previously disclosed dispute over a trucking contract between the claimant and our subsidiary. The two managing members ofQ 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.
OnSeptember 13, 2022 , we entered into Securities Purchase Agreements (the "Armistice Purchase Agreements") withArmistice Capital Master Fund Ltd. ("Armistice") andGreg Beard , our Chairman and Chief Executive Officer, 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 purchase price of$1.60 and$1.66 , 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 (subject to certain adjustments) (the "September 2022 Private Placement"). Subject to certain ownership limitations, such warrants are exercisable upon issuance and will be exercisable for five and a half years commencing upon the date of issuance. Armistice also purchased pre-funded warrants to purchase 2,725,650 shares of Class A common stock (the "Pre-funded Warrants") at a purchase price of$1.60 per Pre-funded Warrant. The Pre-Funded Warrants have an exercise price of$0.0001 per warrant share. The transaction closed onSeptember 19, 2022 . The gross proceeds, before deducting offering expenses, from the sale of such securities was approximately$9.0 million . Pursuant to the Armistice Purchase Agreement, we entered into a registration rights agreement with Armistice (the "Armistice Registration Rights Agreement"), and subsequently filed a registration statement covering the resale of allRegistrable Securities (as defined in the Armistice Registration Rights Agreement). Subject to certain exceptions, until six months after the Effective Date, we will also be prohibited from effecting or entering into an agreement to effect any issuance involving a variable rate transaction.
NYDIG Asset Purchase Agreement
OnAugust 16, 2022 , the Company,Stronghold LLC ,Stronghold Digital Mining LLC , aDelaware limited liability company ("SD Mining") andStronghold Digital Mining BT, LLC , aDelaware limited liability company ("SD Mining BT", and together with SD Mining, the "APA Sellers" and, together with the Company andStronghold LLC , the "APA Seller Parties"), entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") withNYDIG ABL LLC , aDelaware limited liability company formerly known asArctos Credit, LLC ("NYDIG"), andThe Provident Bank , aMassachusetts savings bank ("BankProv" and together with NYDIG, "Purchasers" and each, a "Purchaser"). Pursuant to theJune 25, 2021 ,$34,481,700 master equipment financing agreement with an affiliate of NYDIG (the "Arctos/NYDIG Financing Agreement" and the Second NYDIG Financing Agreement (collectively, the "NYDIG Agreements"), certain miners were pledged as collateral under such agreements (and together with certain related 64 -------------------------------------------------------------------------------- agreements to purchase miners, the "APA Collateral"). Under the Asset Purchase Agreement, the APA Seller Parties agreed to sell, and the Purchasers (or their respective designee) 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"). Following (i) delivery of the APA Collateral to the Purchasers or their designees pursuant 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 APA Sellers and cancelled pursuant to the terms of the Asset Purchase Agreement (each, a "Settlement"). BetweenSeptember 30, 2022 , andOctober 13, 2022 , the APA Seller Parties completed the settlement, pursuant to the master bill of sale, of six tranches of APA Collateral to BankProv and NYDIG in exchange for the extinguishment of an aggregate of$65.3 million of principal under the NYDIG Debt and related interest. OnOctober 26, 2022 , the APA Seller Parties completed the transfer of the seventh and final tranche of the APA Collateral to NYDIG pursuant to the master bill of sale in exchange for the extinguishment of$2.1 million of principal under the NYDIG Debt and related interest (the "Final Settlement"). Following the Final Settlement, the aggregate amount of principal under the NYDIG Debt extinguished is$67.4 million , the entire amount of the NYDIG Debt, and it will therefore no longer be reflected on our balance sheet. The NYDIG Agreements were terminated concurrently with the Final Settlement.
Northern Data
OnAugust 17, 2021 ,Stronghold LLC entered into an agreement withNorthern Data PA, LLC ("Northern Data") whereby Northern Data was to construct and operate a colocation data center facility located on the Scrubgrass Plant (the "Hosting Agreement"), the primary business purpose of which was to provide hosting services and support the cryptocurrency miners that we have purchased but not yet received entirely from Northern Data. OnMarch 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. OnAugust 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. Refer to Note 27 - Hosting Services Agreement in the notes to our consolidated financial statements. OnSeptember 30, 2022 , the Company entered into a settlement agreement with Northern Data (the "Settlement Agreement") whereby the Hosting Agreement was mutually terminated. Pursuant to the Settlement Agreement, for a term of two years untilOctober 1, 2024 , the Company has the right to lease from Northern Data for its exclusive use, access, and operation of (i) 24 Northern Data manufactured pods capable of supporting approximately 550 Bitcoin miners each for an aggregate amount of approximately 13,200 available slots and (ii) four Strongboxes that the Company previously sold to Northern Data capable of supporting approximately 264 Bitcoin miners each for an aggregate of approximately 1,056 mining slots for$1,000 annually. Following the Settlement Agreement, no future revenue share will be applicable for miners in the Northern Data pods or Strongboxes, and the Company will receive 100% of the profits generated by Bitcoin miners in the Northern Data pods and Strongboxes. At the end of the two-year term of the Settlement Agreement, the Company has the option, but not the obligation, to purchase the Northern Data pods and Strongboxes for an amount between$2 million and$6 million based on the prevailing hash price at the time, net of a maximum of$1.5 million of expenditures that the Company has the option to use to upgrade the Northern Data pods throughout the two-year term. Pursuant to the Settlement Agreement, the Company paid to Northern Data an aggregate amount of$4.5 million . The Company recorded the settlement costs of$4.5 million inSeptember 2022 , partially offset by the elimination of approximately$2.6 million payable to Northern Data. The net impact of$1.9 million was recorded as operations and maintenance expense on the consolidated statement of operations for the year endedDecember 31, 2022 .
Nasdaq Continued Listing Deficiency
As disclosed in our Form 8-K filing onDecember 6, 2022 , onNovember 30, 2022 , we received a written notification from theNasdaq Stock Market LLC notifying us that, based upon the closing bid price of the Company's Class A common stock, for the 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 untilMay 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. 65 -------------------------------------------------------------------------------- The Company will regain compliance with the minimum bid price requirement if at any time beforeMay 29, 2023 , the bid price for our Class A common stock closes at or above$1.00 per share for a minimum of 10 consecutive business days. As disclosed in our Form 8-K filing onJanuary 13, 2023 , onJanuary 9, 2023 , stockholders holding a majority of our issued and outstanding Class A common stock and Class V common stock entitled to vote on such matters took action by written consent to authorize our board of directors to effect a reverse stock split in its discretion with a ratio in a range from and including one-for-two (1:2) up to one-for-ten (1:10) at any time on or beforeJune 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 Class A common stock will be subject to delisting. At such time, we may appeal the delisting determination to a hearings panel. We intend to continue to monitor the bid price levels for the common stock and will consider appropriate alternatives to achieve compliance within the initial 180 calendar-day compliance period, including, among other things, the Reverse Stock Split. There can be no assurance, however, that we will be able to do so.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated 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 consolidated financial statements. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with revenue recognition, property, plant and equipment (including the useful lives and recoverability of long-lived assets), intangible assets, stock-based compensation, and income taxes. 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 consolidated financial statements, one must have a clear understanding of the accounting policies employed.
A summary of our critical accounting policies follows:
Fair Value Measurements
The Company measures at fair value certain of its 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 liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based 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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, and minor replacements, maintenance
and repairs are charged to expenses as incurred. The Company records all assets
associated with the cryptocurrency mining operations at cost. These assets are
comprised of storage trailers and the related electrical components. When
property, plant and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is included in the consolidated statements of operations. Depreciation
is recognized over the remaining estimated useful lives ("EUL") of the related
assets using the straight-line method.
The Company's depreciation is based on its Facility being considered a single
property unit. Certain components of the Facility may require replacement or
overhaul several times over its estimated life. Costs associated with overhauls
are recorded as an expense in the period incurred. However, in instances where a
replacement of a Facility component is
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significant and the Company can reasonably estimate the original cost of the
component being replaced, the Company will write-off the replaced component and
capitalize the cost of the replacement. The component will be depreciated over
the lesser of the EUL of the component or the remaining EUL of the Facility.
In conjunction with ASC 360, Property, Plant, and Equipment, the Company reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of a long-lived asset or asset group to be held and used is
measured by a comparison of the carrying amount of the long-lived asset or asset
group to undiscounted future cash flows expected to be generated by the
long-lived asset or asset group. The factors considered by management in
performing this assessment include current operating results, trends and
prospects, the manner in which the asset is used, and the effects of
obsolescence, demand, competition, and other economic factors. If such an asset
or asset group is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the long-lived asset or
asset group exceeds its fair value. Based on the Company's analysis, no
impairment indicators existed as of December 31, 2021 ; however, impairment
indicators existed throughout the current year and as of December 31, 2022 , that
resulted in impairments on miner assets of $40,683,112 for the year ended
December 31, 2022 .
Bitcoin Mining Rigs
Management has assessed the basis of depreciation of the Company's Bitcoin
mining rigs 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 the Company generates digital assets and, therefore, consumes the
economic benefits of its transaction verification servers, is influenced by a
number of factors including the following:
1.The complexity of the transaction verification 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 hash rate capacity); and
3.Technological obsolescence reflecting rapid development in the transaction
verification server 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).
The Company operates 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 its 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
reviews 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 for its Bitcoin mining rigs 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, the estimated useful life could
change and have a prospective impact on depreciation expense and the carrying
amounts of these assets.
Revenue Recognition
The Company recognizes 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; and
5.Step 5: Recognize revenue when the company satisfies the performance
obligations.
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. Per ASC 606, a
performance obligation meets the definition of a "distinct" good or service (or
bundle of goods or services) if both of the following
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criteria are met: (1) 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 (2) 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; •Non-cash consideration; and •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 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 theFinancial Accounting Standards Board (the "FASB"), the Company may be required to change its policies, which could have an effect on the Company's consolidated financial statements.
Fair value of the digital asset awards received is determined using the quoted price of the related cryptocurrency at the time of receipt.
The Company's policies with respect to its revenue streams are detailed below.
Energy Revenue
The Company operates as a market participant throughPJM Interconnection , aRegional Transmission Organization ("RTO") that coordinates the movement of wholesale electricity. The Company sells 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 have the same pattern of transfer to the customer over time and are, therefore, accounted for as a distinct performance obligation. 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. The Company applies 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 the Company's performance obligation completed to date. Prior toJune 2022 , the Scrubgrass and Panther Creek Plants were committed as "capacity resources" through the annual Base Residual Auction ("BRA") process. In this process, a generator agrees to support the PJM capacity market, and if called upon, is required to deliver its power to the market and receive a capped selling price based on pricing published in the day ahead market. In return for this committed capacity that is deliverable on demand to support the reliability of the PJM grid, generators receive additional Capacity Revenue on a monthly basis. As the mining opportunity grew for Stronghold, being a capacity resource increasingly prevented the Company from being able to consistently power its mining operation when PJM called for the capacity. Beginning in June of 2022, Stronghold withdrew from its capacity commitment and both plants became "energy resources" able to sell power to the grid in the real-time, location marginal pricing, or "LMP," market or use that power in its data centers. 68 --------------------------------------------------------------------------------
Reactive energy power is provided to maintain a continuous voltage level. Revenue from reactive power is recognized ratably over time as the Company stands ready to provide it if called upon by the PJM RTO.
Capacity Revenue
Prior toJune 2022 , the Company provided 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 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 standalone selling price. As capacity represents the Company's stand-ready obligation, capacity revenue is recognized as the performance obligation is satisfied ratably over time, on a monthly basis, since the Company stands ready equally throughout the period to deliver power to the PJM RTO if called upon. The Company applies 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 the Company's 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.
Bitcoin Mining
The Company has 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 the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is 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 reduction to cryptocurrency mining 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. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing cryptocurrency mining computing power in digital asset transaction verification services is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's contracts with mining pool operators. The transaction consideration the Company receives, if any, is non-cash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all 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 the Company receives confirmation of the consideration it 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, the Company may be required to change its policies, which could have an effect on the Company's consolidated financial statements.
Mining Hosting
The Company has entered into customer hosting contracts whereby the Company
provides 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
to 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 recorded as
contract liabilities in the consolidated balance sheets.
Stock-Based Compensation
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Notes Payable
The Company records 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.
Warrants
Accounting for warrants includes an initial assessment of whether the warrants
qualify as debt or equity. For warrants that meet the definition of debt
instruments, the Company records the warrant liabilities at 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 within other income (expense). For
warrants that meet the definition of equity instruments, the Company records the
warrants at fair value as of the measurement date within stockholders' equity
(deficit).
Income Taxes
The Company accounts for income taxes under the asset and liability method, in
which deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carry forwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in tax rates on deferred income
tax assets and liabilities is recognized in operations in the period that
includes the enactment date. A valuation allowance is required when it is "more
likely than not" that deferred income tax assets will not be realized after
considering all positive and negative evidence available. Based on the Company's
evaluation and application of ASC 740, Income Taxes ("ASC 740"), the Company has
determined that its deferred income tax assets are not "more likely than not" to
be realized, and therefore, as of December 31, 2022 , the Company has recorded a
valuation allowance against the net deferred income tax assets of the Company.
Factors contributing to this assessment included the Company's cumulative and
current losses, as well as the evaluation of other sources of income as outlined
in ASC 740 and potential limitations imposed by Internal Revenue Code ("IRC")
Section 382 on the utilization of tax losses.
The accounting for deferred income tax assets and liabilities is often based on
assumptions that are subject to significant judgment by management. These
assumptions are reviewed and adjusted as facts and circumstances change. The
Company continues to evaluate the likelihood of the realizability of its
deferred income tax assets, and while the valuation allowance remains in place,
the Company expects to record no deferred income tax expense or benefit.
Material changes to the Company's income tax accruals may occur in the future
based on the potential for income tax audits, changes in legislation or
resolution of pending matters.
Post IPO Taxation and Public Company Costs
Stronghold LLC is and has been organized as a pass-through entity forU.S. federal income tax purposes and is therefore not subject to entity-levelU.S. federal income taxes.Stronghold Inc. was incorporated as aDelaware corporation onMarch 19, 2021 , and therefore is subject toU.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 ofStronghold 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 byQ Power , datedApril 1, 2021 (the "TRA"), which are expected to be significant. Additionally, onMarch 14, 2023 , we executed a joinder agreement with an additional holder (together withQ Power , the "TRA Holders") who thereby became a party to the TRA. To the extentStronghold LLC has available cash and subject to the terms of any current or future debt instruments, the Fifth Amended and Restated Limited Liability Company Agreement ofStronghold LLC , as amended from time to time (the "Stronghold LLC Agreement") requiresStronghold LLC to make cash distributions to holders of Stronghold LLC Units ("Stronghold Unit Holders"), includingStronghold Inc. andQ Power , in an amount sufficient to allowStronghold Inc. to pay its taxes and to make payments under the TRA. In addition, the Stronghold LLC Agreement requiresStronghold LLC to make non-pro rata payments toStronghold Inc. to reimburse it for its corporate and other overhead expenses, which 70 --------------------------------------------------------------------------------
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 consolidated 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 toU.S. federal, state and local income taxes as a corporation. Our accounting predecessor was treated as a partnership forU.S. federal income tax purposes, and as such, was generally not subject toU.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 forU.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 toStronghold 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 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 greater proportion of our revenue and expenses will relate to crypto asset mining.
As previously discussed in the Critical Accounting Policies section, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated 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 consolidated financial statements. The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates associated with revenue recognition, property, plant and equipment (including the useful lives and recoverability of long-lived assets), intangible assets, stock-based compensation, and income taxes. 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 consolidated 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 twelve months ended
Operating Revenue
Revenue increased$75.1 million for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to a$46.3 million increase in cryptocurrency mining revenue from deploying additional miners, and a$29.3 million increase in energy revenue driven by higher prevailing market rates per MW and higher MW generation as a 71 -------------------------------------------------------------------------------- result of theNovember 2021 Panther Creek Acquisition. Capacity revenue also increased$1.2 million due to the Panther Creek Acquisition. In 2022, we realized a benefit of approximately$200,000 from a combination of incremental revenue and avoided disposal costs via sales of the beneficial use ash. Ash is an ancillary business revenue stream that we expect to grow further and realize a benefit of at least$1 million during 2023.
Operating Expenses
Total operating expenses increased$200.4 million for twelve months endedDecember 31 , 20222, as compared to the same period in 2021, primarily driven by (1) a$41.5 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 theNovember 2021 Panther Creek Acquisition, and the ramp up of cryptocurrency mining operations including higher lease expenses for our hosting services agreement, (2) a$40.7 million increase in impairment charge on miner assets attributable to the decline in the price of Bitcoin, (3) a$39.6 million increase in depreciation and amortization primarily from deploying additional miners and transformers, (4) a$29.5 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, (5) a$15.6 million increase in fuel expenses driven by higher MW generation and increased fuel delivery costs from higher diesel prices, and a$17.3 million impairment on equipment deposits for MinerVa miners discussed in Note 4 - Equipment Deposits AndMiner Sales and Note 8 - Commitments And Contingencies. Impairments on digital currencies of$8.3 million were primarily attributed to the June decline in the price of Bitcoin. InMarch 2022 andDecember 2022 , the Company evaluated the MinerVa equipment deposits for impairment and determined an impairment charge of$17.3 million based on lack of miner delivery per agreement and decline in fair value.
Other Income (Expense)
Total other income (expense) decreased$42.7 million for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, primarily driven by (1) the strategic decision to sell approximately 26 thousand miners under an Asset Purchase Agreement that resulted in a$40.5 million loss on debt extinguishment discussed in Note 6 - Debt, (2) a$9.3 million increase in interest expense on additional financing agreements used to fund the growth of cryptocurrency operations, and (3) a$2.2 million decrease in the fair value of the convertible note discussed in Note 29 - Private Placements in the notes to our consolidated financial statements. These decreases were partially offset by a$5.4 million change in fair value of warrant liabilities and a$3.6 million increase from a change in value of the forward sale derivative. See Note 6 - Debt and Note 13 - Warrants in the notes to our consolidated financial statements for further information on financing agreements. 72 --------------------------------------------------------------------------------
Segment Results
The below presents summarized results for our operations for the two reporting segments: Energy Operations and Cryptocurrency Operations.
Twelve months ended December 31,
2022 2021 $ Change
Operating Revenues
Energy Operations $ 46,809,665 $ 16,123,067 $ 30,686,598
Cryptocurrency Operations 59,223,437 14,792,070 44,431,367
Total Operating Revenues $ 106,033,102 $ 30,915,137 $ 75,117,965
Net Operating Income/(Loss)
Energy Operations $ (38,992,034) $ (17,237,107) $ (21,754,927)
Cryptocurrency Operations $ (108,274,121) (4,767,358) (103,506,763)
Net Operating Income/(Loss) $ (147,266,155) $ (22,004,465) $ (125,261,690)
Other Income, net (a) (47,905,812) (5,250,864) $ (42,654,948)
Net Loss $ (195,171,967) $ (27,255,329) $ (167,916,638)
Depreciation and Amortization
Energy Operations $ (5,189,071) $ (1,305,402) $ (3,883,669)
Cryptocurrency Operations (42,046,273) (6,302,319) (35,743,954)
Total Depreciation & Amortization $ (47,235,344) $ (7,607,721) $ (39,627,623)
Interest Expense
Energy Operations $ (100,775) $ (80,866) $ (19,909)
Cryptocurrency Operations (13,810,233) (4,541,789) (9,268,444)
Total Interest Expense $ (13,911,008) $ (4,622,655) $ (9,288,353)
(a)We do not allocate other income, net for segment reporting purposes. Amount
is shown as a reconciling item between net operating income/(losses) and
consolidated income before taxes. Refer to our consolidated statement of
operations for the twelve months ended December 31, 2022 , and 2021, for further
details.
73
--------------------------------------------------------------------------------Energy Operations Segment
Twelve months ended
2022 2021 $ Change
OPERATING REVENUES
Energy $ 41,194,237 $ 11,870,817 $ 29,323,420
Capacity $ 5,469,648 $ 4,238,921 $ 1,230,727
Other $ 145,780 $ 13,329 $ 132,451
Total operating revenues $ 46,809,665 $ 16,123,067 $ 30,686,598
OPERATING EXPENSES
Fuel - net of crypto segment subsidy1 $ 16,578,974 $ 10,626,393 $ 5,952,581
Operations and maintenance $ 45,416,970 $ 14,440,664 $ 30,976,306
General and administrative $ 1,399,071 $ 1,450,166 $ (51,095)
Depreciation and amortization $ 5,189,071 $ 1,305,402 $ 3,883,669
Total operating expenses $ 68,584,086 $ 27,822,625 $ 40,761,461
NET OPERATING LOSS EXCLUDING CORPORATE OVERHEAD $ (21,774,421) $ (11,699,558) $ (10,074,863)
Corporate overhead $ 17,217,614 $ 5,537,550 $ 11,680,064
NET OPERATING LOSS $ (38,992,035) $ (17,237,108) $ (21,754,927)
INTEREST EXPENSE $ (100,775) $ (80,866) $ (19,909)
1 Cryptocurrency operations consumed $12.2 million and $2.5 million of
electricity generated by the Energy Operations segment for the twelve months
ended December 31, 2022 , and December 31, 2021 , respectively. 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 revenues increased by$30.7 million for the twelve-month period endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to a$29.3 million increase in energy revenue driven by higher prevailing market rates per MW and higher MW generation. Capacity revenue increased$1.2 million resulting from theNovember 2021 Panther Creek Acquisition. EffectiveJune 1, 2022 , throughMay 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 Regulation A certification, which will reduce 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 Revenue as well as grid support over time. Full plant power utilization is optimal for our revenue growth as it also drives a higher volume of Tier II RECs, waste coal tax credits, and beneficial use ash sales, as well as the increased electricity supply for the crypto asset operations.
Operating Expenses
Operating expenses increased$40.8 million for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to the incremental operations and fuel expenses associated with operating the Panther Creek Plant after itsNovember 2021 acquisition. Operations and maintenance expense increased$31.0 million primarily driven by payroll, major maintenance and upgrade expenditures. Fuel expenses increased$6.0 million primarily due to higher MW generation resulting from theNovember 2021 Panther Creek Acquisition and increased fuel delivery costs from 74 -------------------------------------------------------------------------------- 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$10.0 million and$1.7 million were recognized as contra-expense to offset fuel expenses for the twelve months endedDecember 31, 2022 , andDecember 31, 2021 , respectively. Depreciation and amortization expense increased$3.9 million primarily due to thePanther Creek Acquisition. Corporate overhead increased$11.7 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.
Cryptocurrency Operations Segment
Twelve
months ended
2022 2021 $ Change
OPERATING REVENUES
Cryptocurrency mining $ 58,763,565 $ 12,494,581 $ 46,268,984
Cryptocurrency hosting 459,872 2,297,489 (1,837,617)
Total operating revenues $ 59,223,437 $
14,792,070
OPERATING EXPENSES Electricity - purchased from energy segment 12,201,136 2,516,683 9,684,453 Operations and maintenance 11,613,219 1,052,100 10,561,119 General and administrative 692,074 2,181,018 (1,488,944) Impairments on digital currencies 8,339,660 1,870,274 6,469,386 Impairments on equipment deposits 17,348,742 - 17,348,742 Impairments on miner assets 40,683,112 - 40,683,112 Realized gain on sale of digital currencies (1,102,220) - (1,102,220) Loss on disposal of fixed assets 2,511,262 - 2,511,262 Realized loss on sale of miner assets 8,012,248 - 8,012,248 Depreciation and amortization 42,046,273 6,302,319 35,743,954 Total operating expenses$ 142,345,506 $ 13,922,394 $ 128,423,112 NET OPERATING LOSS EXCLUDING CORPORATE OVERHEAD (83,122,069) 869,676 (83,991,745) Corporate Overhead 25,152,051 5,786,892 19,365,159 NET OPERATING INCOME/(LOSS)$ (108,274,120) $ (4,917,216) $ (103,356,904) INTEREST EXPENSE$ (13,810,233) $ (4,541,789) $ (9,268,444) Operating Revenues Total operating revenues increased by$44.4 million for the twelve months endedDecember 31, 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 2022. The increased quantity of miners increased total hash rates and Bitcoin awards. Cryptocurrency hosting revenue decreased by$1.8 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
Operating expenses increased by$128.4 million for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to (1) a$40.7 million impairment on miner assets, (2) a$35.7 million increase in depreciation and amortization resulting from the deployment of miners and infrastructure assets, (3) a$17.3 million impairment on equipment deposits for MinerVa miners, (4) a$10.6 million increase in Operations and maintenance due to$4.5 million of lease expense and settlement expenses from the Northern Data Hosting Agreement discussed in Note 27 - Hosting Services Agreement, and increased miner maintenance and parts costs, (5) a$9.7 million increase in intercompany 75 -------------------------------------------------------------------------------- electric charges related to the ramp up of cryptocurrency mining operations, (6) a$8.0 million Realized loss on sale of miner assets as discussed in Note 4 - Equipment Deposits AndMiner Sales in the notes to our consolidated financial statements, and (7) a$6.5 million increase in Impairments on digital currencies primarily related to theJune 2022 decrease in Bitcoin pricing. Corporate overhead increased by$19.4 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.
Impairments on digital currencies
The crypto spot market is volatile and can have a negative impact on the mark-to-market of our digital currencies as of the ending balance sheet reporting date. As a result, a$8.3 million impairment charge was recognized as a result of the negative impacts from the crypto coin spot market declines against the held crypto coin inventories not yet converted to cash. As ofDecember 31, 2022 , the Company held on its balance sheet approximately 6 Bitcoin and the spot market price of Bitcoin was$16,548 per Yahoo Finance.
Interest Expense
Interest expense increased$9.3 million for the twelve months endedDecember 31, 2022 , as compared to the same period in 2021, primarily due to the outstanding borrowings from our WhiteHawk promissory notes during 2022, draws against the Arctos/NYDIG Financing Agreements during, and accrued interest from theMay 2022 Private Placement.
Liquidity and Capital Resources
Overview
Stronghold Inc. is a holding company with no operations and is the sole managing member ofStronghold LLC . Our principal asset consists of units ofStronghold 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, working capital to support equipment financing and the purchase of additional 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, 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$25.0 million from WhiteHawk as a result of the Second WhiteHawk Amendment. Additionally, onMay 15, 2022 , we received$33.8 million (net of loan fees and debt issuance costs) pursuant to theMay 2022 Private Placement, and onSeptember 13, 2022 , we received approximately$9.0 million pursuant to the September PIPE. Please see "-Recent Developments - WhiteHawk Refinancing Agreement" for more information regarding our Credit Agreement with WhiteHawk. Please see "-Debt Agreements - Equipment Financing Transactions" for more information regarding our financing arrangements. These cash sources provided additional short and long-term liquidity to support our operations in fiscal year 2021 and 2022. As ofDecember 31, 2022 , andMarch 28, 2023 , we had approximately$13.4 million and$8.8 million , respectively, of cash, cash equivalents and Bitcoin on our balance sheet, which included 6 Bitcoin and 39 Bitcoin, 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 may further sell assets or seek potential additional debt or equity financing to fund our short-term and long-term needs. Further, the terms of the Credit Agreement andSeptember 2022 Private Placement contain certain restrictions, including maintenance of certain financial and liquidity 76 -------------------------------------------------------------------------------- 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$195.2 million for the twelve months endedDecember 31, 2022 , and an accumulated deficit of$240.4 million as ofDecember 31, 2022 . 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 inApril 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 byApril 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 onMarch 31, 2022 . We spent approximately$5.1 million in fiscal year 2021 on maintenance and repair costs at the Scrubgrass Plant, and an additional$7 million in 2022 on major repairs and upgrades, primarily during the planned maintenance outage that occurred beginning inSeptember 2022 . Taking into account the Bitmain sale, other miner sales, September PIPE, NYDIG Debt extinguishment, the Foundry Hosting Agreement and transactions subsequent toDecember 31, 2022 , which include the WhiteHawk Credit Agreement Amendment and the Exchange Agreement, we believe our liquidity position, combined with expected improvements in operating cash flows, will be sufficient to meet our existing commitments and fund our operations for the next twelve months.
Cash Flows
Analysis of Cash Flow Changes Between the Twelve Months Ended
The following table summarizes our cash flows for the periods indicated:
Twelve
Months Ended
2022 2021 Change
(in thousands)
Net cash provided by (used in) operating activities $ (27,154.5) $
(5,080.4)
186,024.4
Net cash provided by (used in) financing activities
294,170.1 (213,930.6) Net change in cash$ (18,493.4) $ 31,486.9 $ (49,980.3)
Operating Activities
Net cash used in operating activities was$27.2 million for the twelve months endedDecember 31, 2022 , compared to$5.1 million of net cash used in operating activities for the twelve months endedDecember 31, 2021 . The$22.1 million net decrease in cash from operating activities was primarily driven by (1) a 2021 cash benefit from an increase in accounts payable, (2) higher cash outflows in 2022 for increases in operations and maintenance expenses related to major repairs and upgrades to the plants, and (3) increases in general and administrative expenses from higher legal and professional fees, insurance costs, and compensation as we continue to organize and scale operations. Interest expense increased for the same period driven by incremental borrowings discussed in Note 6 - Debt in the notes to our consolidated financial statements. These increases in cash paid were partially offset by higher proceeds from the sale of digital currencies and higher energy revenue after the acquisition of the Panther Creek Plant.
Investing Activities
Net cash used in investing activities was$71.6 million for the twelve months endedDecember 31, 2022 , compared to$257.6 million used in investing activities for the twelve months endedDecember 31, 2021 . The$186.0 million decrease in net cash used in investing activities was primarily attributable to lower outflows for equipment deposits and the purchase of property, plant and equipment for the continued ramp up of cryptocurrency mining operations. These investments require significant deposits to be made with equipment vendors as commitments for future deliveries of miners and cryptocurrency mining infrastructure. Cash outflows were partially offset by the sale of some of our unproductive, excess or not-in-use assets. See Note 4 - Equipment Deposits AndMiner Sales . 77 --------------------------------------------------------------------------------
Financing Activities
Net cash provided by financing activities was$80.2 million for the twelve months endedDecember 31, 2022 , compared to$294.2 million provided by financing activities for the twelve months endedDecember 31, 2021 . The significant decrease of$213.9 million in cash provided by financing activities was primarily due to the 2021 receipt of$131.5 million in proceeds from the initial public offering (net of transaction fees) and lower proceeds from private placements in 2022 as compared to the$96.8 million (net of transaction fees) from our private placement equity raises of Series A Stock and Series B Stock. These decreases were partially offset by higher proceeds from debt, net of issuance costs, partially offset by cash outflows for payments on debt. See the IPO, promissory note, equipment financing agreements and convertible note discussed in Note 26 - Initial Public Offering, Note 6 - Debt and Note 13 - Warrants and Note 29 - Private Placements.
Debt Agreements
We have entered into various debt agreements used to purchase equipment to operate our business.
We entered into the WhiteHawk Financing Agreement onJune 30, 2021 , and amended the agreement onDecember 31, 2021 , andMarch 28, 2022 . OnOctober 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 Delayed Draw Facility. Such loans under the Delayed Draw Facility were drawn on the closing date of the Credit Agreement. As ofDecember 31, 2022 , the amount owed under the debt agreements totaled$56.1 million . For additional information, see Note 6 - Debt in the notes to our consolidated financial statements. Four draws against the Arctos/NYDIG Financing Agreement totaled$37.3 million secured by our equipment contract commitments for future miner deliveries. The amount owed under the debt agreements was cancelled pursuant to the terms of the Asset Purchase Agreement inOctober 2022 . For additional information, see Note 6 - Debt in the notes to our consolidated financial statements. Three draws against the Second NYDIG Financing Agreement totaled$54.0 million secured by our equipment contract commitments for future miner deliveries. The amount owed under the debt agreements was cancelled pursuant to the terms of the Asset Purchase Agreement inOctober 2022 . For additional information, see Note 6 - Debt in the notes to our consolidated financial statements.
Total net obligations under all debt agreements as of
Amended
OnMay 15, 2022 , we issued$33.75 million aggregate principal amount ofMay 2022 Notes to the Purchasers (the "May 2022 Notes"), bearing an interest rate of 10.00% per annum (in arrears) and a maturity date ofMay 15, 2024 . OnAugust 16, 2022 , we entered into an agreement with the Purchasers, whereby we agreed to amend the terms of theMay 2022 Notes such that an aggregate of$11.25 million of the outstanding principal under theMay 2022 Notes was exchanged for the amended and restated warrant agreement pursuant to which the strike price of the aggregate 6,318,000May 2022 Warrants was reduced from$2.50 to$0.01 . After giving effect to the principal reduction under the as amendedMay 2022 Notes, subsequent payments were due to the Purchasers on the fifteenth (15th) day of each ofNovember 2022 ,December 2022 ,January 2023 , andFebruary 2023 . We generally had the option to make each such payment (A) in cash or (B) in shares of common stock, 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. Amounts due under theMay 2022 Notes were subsequently terminated in exchange for shares of the Series C Preferred Stock. See "-Recent Developments - Exchange Transaction" for additional information.
Equipment Purchase and Financing Transactions
OnApril 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 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 78 --------------------------------------------------------------------------------$44,032,500 , was paid onApril 2, 2021 , and an additional payment of 20% of the purchase price, or$14,677,500 , was paidJune 2, 2021 . As ofDecember 31, 2022 , there are no remaining deposits owed. InDecember 2021 , the Company extended the deadline for delivery of the MinerVa miners toApril 2022 . InMarch 2022 , MinerVa was again unable to meet its delivery date and has only delivered approximately 3,200 of the 15,000 miners. As a result, an impairment totaling$12,228,742 was recorded 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 ofDecember 31, 2022 , MinerVa had delivered, refunded cash, or swapped into deliveries of industry-leading miners of equivalent value to approximately 10,700 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 remaining miners, it does not know when the remaining miners will be delivered, if at all. OnJuly 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. As the 60-day period has now expired, the Company is evaluating all available remedies under the MinerVa Purchase Agreement.
WhiteHawk Refinancing Agreement
OnOctober 27, 2022 , the Company entered into a secured credit agreement (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$23.0 million in additional commitments (such additional commitments, the "Delayed Draw Facility"). Such loans under the Delayed Draw Facility were drawn on the closing date of the Credit Agreement. The financing pursuant to the Credit Agreement (such financing, the "WhiteHawk Refinancing Agreement") was entered into byStronghold LLC as Borrower (the "Borrower") and is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by the Company and each of its material subsidiaries. The WhiteHawk Refinancing Agreement requires equal monthly amortization payments resulting in full 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 default. The WhiteHawk Refinancing Agreement contains 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 beginningJuly 01, 2023 ) and (z) a maximum total leverage ratio covenant of (i) 7.5:1.0 for the quarter endingDecember 31, 2022 , (ii) 5.0:1.0 for the quarter endingMarch 31, 2023 , (iii) 4.0:1.0 for the quarter endingJune 30, 2023 , and (iv) 4.0:1.0 for each quarter ending thereafter. The borrowings under the WhiteHawk Refinancing Agreement mature onOctober 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%. The loan under the Delayed Draw Facility was issued with a 3% closing fee on the drawn amount, paid when such amount was drawn on the closing date of the Credit Agreement. Amounts drawn on the WhiteHawk Refinancing Agreement are subject to a prepayment premium such that the lenders thereunder achieve a 20% return on invested capital. The Company also issued a stock purchase warrant to WhiteHawk in conjunction with the closing of the WhiteHawk Refinancing Agreement, which provides for the purchase of an additional 4,000,000 shares of Class A common stock at an exercise price of$0.01 per share. Borrowings under the WhiteHawk Refinancing Agreement may also be accelerated in certain circumstances. OnFebruary 6, 2023 , the Company,Stronghold LLC , as borrower, their subsidiaries andWhiteHawk Capital Partners LP , 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 fromFebruary 2023 throughJuly 2024 will not be required, with monthly amortization resumingJuly 31, 2024 . BeginningJune 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 endingSeptember 30, 2024 , and (ii) in the case of 79 -------------------------------------------------------------------------------- the minimum liquidity covenant, modified to require minimum liquidity at any time to be not less than: (A) untilMarch 31, 2024 ,$2,500,000 ; (B) during the period beginningApril 1, 2024 , through and includingDecember 31, 2024 ,$5,000,000 ; and (C) from and afterJanuary 1, 2025 ,$7,500,000 . The Company was in compliance with all applicable covenants under the WhiteHawk Refinancing Agreement as ofDecember 31, 2022 .
Convertible Note Exchange
OnDecember 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"). OnFebruary 20, 2023 , the Exchange Transaction was consummated, and the Notes were paid in full. Approximately$16.9 million of principal amount of debt was extinguished in exchange for the issuances of the shares of Series C Preferred Stock.
Tax Receivable Agreement
The TRA generally provides for the payment byStronghold Inc. to the TRA Holders of 85% of the net cash savings, if any, inU.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) thatStronghold 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 ofStronghold Inc.'s acquisition (or deemed acquisition forU.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 byStronghold Inc. as a result of, and additional tax basis arising from, any paymentsStronghold 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 asStronghold Inc. realizes actual cash tax savings from the tax benefits covered by the TRA. However, the TRA provides that ifStronghold Inc. elects to terminate the TRA early (or it is terminated early due toStronghold 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 byStronghold 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 the TRA Holders (or their permitted assignees) in connection with the TRA will be substantial. Any payments made byStronghold Inc. to the TRA Holders (or their permitted assignees) under the TRA will generally reduce the amount of cash that might have otherwise been available toStronghold Inc. orStronghold LLC . To the extentStronghold LLC has available cash and subject to the terms of any current or future debt or other agreements, the Stronghold LLC Agreement will requireStronghold LLC to make cash distributions to holders of Stronghold LLC Units, includingStronghold Inc. , in an amount sufficient to allowStronghold Inc. andQ Power to pay its taxes and to make payments under the TRA.Stronghold Inc. generally expectsStronghold LLC to fund such distributions out of available cash. However, except in cases whereStronghold Inc. elects to terminate the TRA early, the TRA is terminated early due to certain mergers or other changes of control orStronghold Inc. has available cash but fails to make payments when due, generallyStronghold 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 exceedStronghold Inc.'s other costs of capital. IfStronghold 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. 80 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2 - Nature Of Operations And Significant Accounting Policies in the notes to our consolidated financial statements.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 1013) 81
Consolidated Balance Sheets 83
Consolidated Statement s of Operations 84
Consolidated Statement s of Stockholders' Equity (Deficit) 85
Consolidated Statements of Cash Flows 87
Notes to Consolidated Financial Statements 88
Management's Report on Financial Statements and Practices
The accompanying consolidated financial statements of the Company were prepared by Management, which is responsible for their integrity and objectivity. The statements were prepared in accordance withU.S. generally accepted accounting principles and include amounts that are based on Management's best judgments and estimates. The other financial information included in the 10-K is consistent with that in the consolidated financial statements. Management also recognizes its responsibility for conducting the Company's affairs according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in key policy statements issued from time to time regarding, among other things, conduct of its business activities within the laws of host countries in which the Company operates and potentially conflicting outside business interests of its employees. The Company maintains a systematic program to assess compliance with these policies.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of DirectorsStronghold Digital Mining, Inc. New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets ofStronghold Digital Mining, Inc. and subsidiaries (the "Company" and successor toScrubgrass Generating Company, L.P. andStronghold Digital Mining, LLC ) as ofDecember 31, 2022 , and 2021, the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company atDecember 31, 2022 , and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted inthe United States of America . Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with thePublic Company Accounting Oversight Board (United States ) ("PCAOB") and are required to be 81 --------------------------------------------------------------------------------
independent with respect to the Company in accordance with the
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2021.
/s/Urish Popeck & Co., LLC Pittsburgh, PA March 31, 2023 82 -------------------------------------------------------------------------------- STRONGHOLD DIGITAL MINING, INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 ASSETS: Cash and cash equivalents$ 13,296,703 $ 31,790,115 Digital currencies 109,827 7,718,221 Digital currencies, restricted - 2,699,644 Accounts receivable 10,837,126 2,111,855 Due from related parties 73,122 - Prepaid insurance 4,877,935 6,301,701 Inventory 4,471,657 3,372,254 Other current assets 1,975,300 661,640 Total current assets 35,641,670 54,655,430 Equipment deposits 10,081,307 130,999,398 Property, plant and equipment, net 167,204,681 166,657,155 Land 1,748,440 1,748,440 Road bond 211,958 211,958 Operating lease right-of-use assets 1,719,037 - Security deposits 348,888 348,888 TOTAL ASSETS$ 216,955,981 $ 354,621,269 LIABILITIES: Current portion of long-term debt, net of discounts and issuance fees 17,422,546 45,799,651 Current portion of operating lease liabilities 593,063 - Financed insurance premiums 4,587,935 4,299,721 Forward sale contract - 7,116,488 Accounts payable 27,540,317 28,650,659 Due to related parties 1,375,049 1,430,660 Accrued liabilities 8,893,248 5,053,957 Total current liabilities 60,412,158 92,351,136 Asset retirement obligation 1,023,524 973,948 Contract liabilities 351,490 187,835 Long-term operating lease liabilities 1,230,001 - Paycheck Protection Program Loan - 841,670 Warrant liabilities 2,131,959 - Long-term debt, net of discounts and issuance fees 57,027,118 18,378,841 Total liabilities 122,176,250 112,733,430 COMMITMENTS AND CONTINGENCIES (NOTE 8) REDEEMABLE COMMON STOCK: Common Stock - Class V;$0.0001 par value; 34,560,000 shares authorized and 26,057,600 and 27,057,600 shares issued and outstanding as of December 31, 2022, and 2021, respectively. 11,754,587 301,052,617 Total redeemable common stock 11,754,587 301,052,617
STOCKHOLDERS' EQUITY (DEFICIT):
Noncontrolling Series A redeemable and convertible preferred
stock;
- 37,670,161
Common Stock - Class A;
3,171 2,002
Accumulated deficits (240,443,302) (338,709,688)
Additional paid-in capital 323,465,275 241,872,747
Total stockholders' equity (deficit) 83,025,144 (59,164,778)
Total redeemable common stock and stockholders' equity (deficit) 94,779,731
241,887,839
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
$
216,955,981
The accompanying notes are an integral part of these consolidated financial
statements.
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STRONGHOLD DIGITAL MINING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31, 2022 December 31, 2021
OPERATING REVENUES:
Cryptocurrency mining $ 58,763,565 $ 12,494,581
Energy 41,194,237 11,870,817
Capacity 5,469,648 4,238,921
Cryptocurrency hosting 459,872 2,297,489
Other 145,780 13,329
Total operating revenues 106,033,102 30,915,137
OPERATING EXPENSES:
Fuel 28,780,110 13,143,076
Operations and maintenance 57,030,189 15,492,763
General and administrative 44,460,810 14,955,626
Impairments on digital currencies 8,339,660 1,870,274
Impairments on equipment deposits 17,348,742 -
Impairments on miner assets 40,683,112 -
Realized gain on sale of digital currencies (1,102,220) (149,858)
Loss on disposal of fixed assets 2,511,262 -
Realized loss on sale of miner assets 8,012,248 -
Depreciation and amortization 47,235,344 7,607,721
Total operating expenses 253,299,257 52,919,602
NET OPERATING LOSS (147,266,155) (22,004,465)
OTHER INCOME (EXPENSE):
Interest expense (13,911,008) (4,622,655)
Loss on debt extinguishment (40,517,707) -
Gain on extinguishment of PPP loan 841,670 638,800
Changes in fair value of warrant liabilities 4,226,171 (1,143,809)
Realized gain on sale of derivative contract 90,953 -
Changes in fair value of forward sale derivative 3,435,639 (116,488)
Changes in fair value of convertible note (2,167,500) -
Other 95,970 (6,712)
Total other income (expense) (47,905,812) (5,250,864)
NET LOSS $ (195,171,967) $ (27,255,329)
NET LOSS attributable to predecessor (1/1/21-3/31/21) - (238,948)
NET LOSS attributable to noncontrolling interest (105,910,737) (15,803,234)
NET LOSS attributable to Stronghold Digital Mining, Inc $
(89,261,230)
$ (3.45) $ (2.03)
Diluted $ (3.45) $ (2.03)
Weighted average number of Class A common shares outstanding(1)
Basic 25,849,048 5,518,752
Diluted 25,849,048 5,518,752
(1) Basic and diluted net loss per share of Class A common stock is presented
only for the period after the Company's Reorganization Transactions. See Note 1
- Business Combinations for a description of the Reorganization Transactions.
See Note 16 - Earnings (Loss) Per Share for the calculation of net loss per
share.
The accompanying notes are an integral part of these consolidated financial
statements.
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STRONGHOLD DIGITAL MINING, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended December 31, 2021
Noncontrolling
Redeemable Preferred Common A
Additional
Limited General Series A Accumulated Paid-in Stockholders'
Partners Partners Shares Amount Shares Amount Deficit Capital Equity (Deficit)
Balance - January 1, 2021 $ (1,336,784) $ (2,710,323) - $ - - $ - $ - $ - $ (4,047,107)
Net loss attributable to legacy
partners (71,687) (167,261) - - - - - - (238,948)
Balance prior to the reorganization onApril 1, 2021 (1,408,471) (2,877,584) - - - - - - (4,286,055) Effect of reorganizations Opco formation and contributions - 2,877,584 - - - - - -
2,877,584
Aspen Scrubgrass Participant, LLC ("Olympus") contribution 1,408,471 - - - - - (1,408,471) - - Buyout of Aspen Interest - - - - - (7,000,000) 4,999,942 (2,000,058) Converted to Class A common shares - - - - 576,000 58 - - 58 Exchange of common units for Class A common shares - - - - 14,400 1 - - 1 Common stock issued as part of debt financing - - - - 126,273 12 - 1,389,887
1,389,899
Warrants issued as part of debt financing - - - - - - - 1,999,396
1,999,396
Conversion of Series A convertible redeemable preferred units to common stock - - - - 9,792,000 979 - 77,823,388
77,824,369
Conversion of Series B convertible redeemable preferred units to common stock - - - - 1,816,994 182 - 18,182,739
18,182,921
Maximum redemption right valuation [Common V Units] - - - - - - (303,930,195) -
(303,930,195)
Issuance of Series A convertible redeemable preferred units - - 1,152,000 38,315,520 - - - -
38,315,520
Net losses for the nine months endedDecember 31, 2021 - - - - - - (11,213,147) - (11,213,147) Net losses attributable to noncontrolling interest - - - (645,359) - - (15,157,875) - (15,803,234) Net proceeds from initial public offering, net of offering costs - - - - 7,690,400 769 - 131,537,789
131,538,558
Warrants issued and outstanding - - - - - - - 1,924,281 1,924,281 Stock-based compensation - - - - - - - 4,015,324 4,015,324 Balance -December 31, 2021 $ - $ - 1,152,000$ 37,670,161 20,016,067$ 2,002 $ (338,709,688) $ 241,872,747 $ (59,164,778) 85
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Year ended December 31, 2022
Noncontrolling
Redeemable Preferred Common A
Additional Stockholders'
Series A Accumulated Paid-in Equity
Shares Amount Shares Amount Deficit Capital (Deficit)
Balance - January 1, 2022 1,152,000 $ 37,670,161 20,016,067 $ 2,002 $
(338,709,688)
- - - - (89,261,230) - (89,261,230)
Net loss attributable to
noncontrolling interest - (4,140,324) - - (101,770,413) - (105,910,737)
Maximum redemption right
valuation [Common V Units] - - - - 289,298,029 - 289,298,029
Vesting of restricted stock
units - - 241,067 24 - (24) -
Issuance of common stock -
September PIPE - - 2,876,759 288 - 2,241,022 2,241,310
Warrants issued and outstanding - - - - - 26,894,078 26,894,078
McClymonds arbitration award -
paid by Q Power - - - - - 5,038,122 5,038,122
Stock-based compensation - - - - - 13,890,350 13,890,350
Exercised warrants - - 6,424,324 642 - (642) -
Redemption of Series A
convertible preferred shares (1,152,000) (33,529,837) 1,152,000 115 - 33,529,722 -
Redemption of Class V shares - - 1,000,000 100 (100) -
Balance - December 31, 2022 - $ - 31,710,217 $ 3,171 $ (240,443,302) $ 323,465,275 $ 83,025,144 The accompanying notes are an integral part of these consolidated financial
statements.
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STRONGHOLD DIGITAL MINING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31, 2022 December 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (195,171,967) $ (27,255,329)
Adjustments to reconcile net loss to cash flows from operating
activities:
Depreciation and amortization 47,235,344 7,607,721
Accretion of asset retirement obligation 49,576 -
Gain on extinguishment of PPP loan (841,670) (638,800)
Realized gain on sale of derivatives (90,953) -
Loss on disposal of fixed assets 2,511,262 -
Write-off of bad debts - 244,924
Realized loss on sale of miner assets 8,012,248 -
Amortization of debt issuance costs 2,935,795 1,404,732
Stock-based compensation 13,890,350 4,015,324
Loss on debt extinguishment 40,517,707 -
Impairments on equipment deposits 17,348,742 -
Impairments on miner assets 40,683,112 -
Changes in fair value of warrant liabilities (4,226,171) 1,143,809
Changes in fair value of forward sale derivative (3,435,639) 116,488
Forward sale contract prepayment 970,000 -
Changes in fair value of convertible note 2,167,500 -
Other 2,217,458 -
(Increase) decrease in digital currencies:
Mining revenue (58,763,565) (12,494,581)
Net proceeds from sales of digital currencies 56,172,048 434,529
Impairments on digital currencies 8,339,660 1,870,274
(Increase) decrease in assets:
Accounts receivable (8,725,271) (1,176,239)
Prepaid insurance 6,908,215 588,808
Due from related parties (5,671) 302,973
Inventory (1,099,402) (1,417,689)
Other assets (603,963) (2,619,911)
Increase (decrease) in liabilities:
Accounts payable (3,093,265) 17,395,556
Due to related parties (55,611) 268,182
Accrued liabilities (180,943) 4,981,013
Other liabilities, including contract liabilities (819,461) 147,835
NET CASH FLOWS USED IN OPERATING ACTIVITIES (27,154,535) (5,080,381)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Panther Creek, net of cash acquired - (3,914,362)
Purchase of land - (21,439)
Purchase of reclamation bond - (26,712)
Proceeds from sale of equipment deposits 13,013,974 -
Purchases of property, plant and equipment (70,935,935) (122,640,861)
Equipment purchase deposits - net of future commitments (13,656,428) (130,999,398)
NET CASH FLOWS USED IN INVESTING ACTIVITIES (71,578,389) (257,602,772)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (76,119,454) (16,283,900)
Repayments of financed insurance premiums (4,598,592) (2,590,788)
Proceeds from debt, net of issuance costs paid in cash 152,358,118 -
Proceeds from promissory note - 39,100,000
Proceeds from equipment financing agreement - 41,435,466
Proceeds from equipment financed - 517,465
Proceeds from PPP loan - 841,670
Proceeds from private placements, net of issuance costs paid in cash
8,599,440 96,786,629
Initial Public Offering proceeds, net of fees - 131,537,789
Repayments of EIDL loan - (150,000)
Repayments of related-party debt - (2,024,250)
Buyout of Aspen Interest - (2,000,000)
Forward sale contract prepayment - 7,000,000
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 80,239,512 294,170,081
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (18,493,412) 31,486,928
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 31,790,115 303,187
CASH AND CASH EQUIVALENTS - END OF PERIOD $
13,296,703
The accompanying notes are an integral part of these consolidated financial
statements.
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STRONGHOLD DIGITAL MINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 - BUSINESS COMBINATIONS
Reorganization
Immediately prior to the Reorganization,Q Power LLC ("Q Power ") directly held all of the equity interests inStronghold Digital Mining LLC ("SDM"), and indirectly held 70% of the limited partner interests, and all of the general partner interests, inScrubgrass Reclamation Company, L.P. (f/k/aScrubgrass Generating Company, L.P. ) ("Scrubgrass LP "), through wholly-owned subsidiariesEIF Scrubgrass LLC ("EIF Scrubgrass"),Falcon Power LLC ("Falcon") andScrubgrass Power LLC .Aspen Scrubgrass Participant, LLC ("Aspen") held the remaining 30% of the limited partner interests inScrubgrass LP (the "Aspen Interest").Scrubgrass LP is aDelaware limited partnership originally formed onDecember 1, 1990 , under the name ofScrubgrass Generating Company, L.P. SDM is aDelaware limited liability company originally formed onFebruary 12, 2020 , under the nameStronghold Power LLC ("Stronghold Power "). OnApril 1, 2021 ,Stronghold Inc. entered into a Series A Preferred Stock Purchase Agreement pursuant to whichStronghold Inc. issued and sold 9,792,000 shares of Series A Convertible Redeemable Preferred Stock (the "Series A Preferred Stock") in a private offering (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 of 1933, as amended (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. Contemporaneously with the Reorganization,Stronghold Inc. acquired theAspen Interest using 576,000 shares of newly issued Series A Preferred Stock and$2,000,000 from a portion of the proceeds from the Series A Private Placement. The acquisition of the Aspen Interest was for a total consideration of$7,000,000 that consisted of the$2,000,000 in cash plus a valuation of$5,000,000 for the 576,000 shares of the Series A Preferred Stock at the issuance per share price of$8.68 and are classified as permanent equity and not subject to mandatory redemptions as outlined inStronghold Inc.'s certificate of incorporation, as amended (the "Charter"). Pursuant to the Reorganization,Q Power contributed all of its ownership interests in EIF Scrubgrass, Falcon and SDM toStronghold Digital Mining Holdings LLC ("Stronghold LLC ") in exchange for 27,072,000 Class A common units ofStronghold LLC ("Stronghold LLC Units").Stronghold Inc. contributed cash (using the remaining proceeds from the Series A Private Placement, net of fees, expenses and amounts paid toAspen ), 27,072,000 shares of Class V common stock ofStronghold Inc. and the Aspen Interest toStronghold LLC in exchange for 10,368,000 preferred units ofStronghold LLC , andStronghold LLC immediately thereafter distributed the 27,072,000 shares of Class V common stock toQ Power . In addition, effective as ofApril 1, 2021 ,Stronghold Inc. acquired 14,400 Stronghold LLC Units held byQ 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. As a result of the Reorganization, the acquisition of the Aspen Interest and the acquisition of Stronghold LLC Units byStronghold Inc. discussed above, (a)Q Power acquired and retained 27,057,600 Stronghold LLC Units, 14,400 shares of Class A common stock ofStronghold Inc. and 27,057,600 shares of Class V common stock ofStronghold Inc. , effectively givingQ Power approximately 69% of the voting power ofStronghold Inc. and approximately 69% of the economic interest inStronghold LLC , (b)Stronghold Inc. acquired 10,368,000 preferred units ofStronghold LLC and 14,400 Stronghold LLC Units, effectively givingStronghold Inc. approximately 31% of the economic interest inStronghold LLC , (c)Stronghold Inc. became the sole managing member ofStronghold LLC and is responsible for all operational, management and administrative decisions relating toStronghold LLC's business and consolidates financial results ofStronghold LLC and its subsidiaries, (d)Stronghold Inc. became a holding company whose only material asset consists of membership interests inStronghold LLC , and (e)Stronghold LLC directly or indirectly owns all of the outstanding equity interests in the subsidiaries through which the Company operates its assets, includingScrubgrass LP and SDM.
On
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Stock, the "Preferred Stock") (the "Series B Private Placement," and, together
with the Series A Private Placement, the "Private Placements"). The terms of the
Series B Preferred Stock are 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 . The Company also
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.
Pursuant to the terms of the Preferred Stock, on (i) the date that a
registration statement registering the shares of Class A common stock issuable
upon the conversion of the Preferred Stock is declared effective by the U.S.
Securities and Exchange Commission (the "SEC") or (ii) the date on which a
"Significant Transaction Event" occurs, as defined in the Company's second
amended and restated certificate of incorporation, such shares of Preferred
Stock will automatically convert into shares of Class A common stock of
Stronghold Inc. on a one-to-one basis, subject to certain adjustments as set
forth in the Charter. Correspondingly, pursuant to the Second Amended and
Restated Limited Liability Company Agreement of Stronghold LLC , as amended from
time to time (the "Stronghold LLC Agreement"), preferred units in Stronghold LLC
automatically convert into Stronghold LLC Units on a one-to-one basis under like
circumstances (subject to corresponding adjustments). On October 19, 2021 , the
registration statement registering the shares of Class A common stock issuable
upon conversion of the Preferred Stock was declared effective by the SEC , and
all of the outstanding shares of Preferred Stock converted into shares of Class
A common stock at that time. Correspondingly, all of the preferred units in
Stronghold LLC converted into Stronghold LLC Units.
On June 29, 2021 , Stronghold LLC formed Stronghold Digital Mining Equipment, LLC
("Equipment LLC "). On October 27, 2021 , Stronghold Digital Mining Operating, LLC
("Operating LLC") formed Stronghold Digital Mining BT, LLC ("Digital Mining
BT"). On December 10, 2021 , Operating LLC formed Stronghold Digital Mining TH,
LLC ("TH LLC ").
Prior to the Reorganization
Prior to the Reorganization on April 1, 2021 , Scrubgrass Generating Company,
L.P. ("Scrubgrass") existed as a Delaware limited partnership formed on December
1, 1990 . Q Power LLC existed as a multi-member limited liability company and
indirectly held limited and general partner interests of Scrubgrass.
Additionally, Aspen , a wholly-owned subsidiary of Olympus Power, LLC (together
with its affiliates "Olympus"), was a limited partner of Scrubgrass.
Scrubgrass had two subsidiaries: (1) Clearfield Properties, Inc. ("Clearfield"),
which was formed for the purpose of purchasing a 175-acre site in Clearfield
County, Pennsylvania , and acquiring access to certain coal material; and (2)
Leesburg Properties, Inc. ("Leesburg"), which was formed for the purpose of
acquiring access rights to certain waste coal sites. Leesburg was a dormant
entity as of December 31, 2022 , and 2021.
Pursuant to an equity Assignment and Assumption agreement dated September 24,
2020 , Q Power assigned a 50%-member interest to a second individual. As a
result, two individuals were the sole members of Q Power . Stronghold Power was
established on February 12, 2020 , as a Delaware limited liability company and is
100% owned by Q Power . Stronghold Power was created to pursue opportunities
involving cryptocurrency mining as well as providing hosting services for
third-party miners.
NOTE 2 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
In most instances,Stronghold Inc. and its subsidiaries will collectively be referred to as the "Company" if a discussion applies to all. Where it may not apply to all, then each company, described as itself, will be specifically noted.
Nature of 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 Merchant Market ("PJM") under an
Professional Services Agreement ("PSA") with Customized Energy Solutions, Ltd.
("CES"), effective July 27, 2022 . Under the PSA, CES agreed to act as the
exclusive provider of services for the benefit of the Company related to
interfacing with PJM, including handling daily marketing, energy scheduling,
telemetry, capacity management, reporting and other related services for our
Panther Creek and Scrubgrass Plants. The term of the agreement is two years, and
then
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will extend automatically on an annual basis unless terminated by either party
with 60 days written (or electronic) notice prior to term end. For these
services, CES charges each plant a range of $500 to $5,500 /month per service,
depending on the service. The Company's primary fuel source is waste coal which
is provided by various third parties. Waste coal tax credits are earned by the
Company by generating electricity utilizing coal refuse.
The Company is also a vertically-integrated digital currency mining business.
The Company buys and maintains a fleet of digital or cryptocurrency mining
equipment and the required infrastructure, provides power to third party digital
currency miners under favorable Power Purchase Agreement ("PPA") agreements, and
sells energy as a merchant power producer and receives capacity payments from
PJM for making its energy available to the grid. The digital currency mining
operations are in their early stages, and digital currencies and energy pricing
mining economics are volatile and subject to uncertainty. The Company's current
strategy will continue to expose it to the numerous risks and volatility
associated with the digital mining and power generation sectors, including
fluctuating Bitcoin-to-U.S. -Dollar prices, the costs and availability of miners,
the number of market participants mining Bitcoin, the availability of other
power generation facilities to expand operations, and regulatory changes.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with existing accounting principles generally accepted inthe United States of America ("GAAP"), under the rules and regulations of theU.S. Securities and Exchange Commission (the "SEC"). In addition, certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements in order to conform to current presentation. Additionally, since there are no differences between net income (loss) and comprehensive income (loss), all references to comprehensive income (loss) have been excluded from the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term, highly-liquid investments with original maturities of three months or less. The Company maintains its cash in non-interest bearing accounts that are insured by theFederal Deposit Insurance Corporation up to$250,000 . The Company's deposits may, from time to time, exceed the$250,000 limit; however, management believes that there is no unusual risk present, as the Company places its cash with financial institutions that management considers to be of high quality.
As of
Digital Currencies
Digital currencies are included in the consolidated balance sheets as current assets and are considered an intangible asset with an indefinite useful life. Digital currencies are recorded at cost less any impairment. Currently, Bitcoin is the only cryptocurrency the Company mines or holds in material amounts. Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. However, in most cases, the Company's qualitative assessment indicates impairment when the quoted price of the cryptocurrency subsequently falls below its carrying amount, and the Company is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The Company performed an impairment test on its digital currencies as ofDecember 31, 2022 , and 2021, 90 --------------------------------------------------------------------------------
and recognized impairments losses of
The following table presents the activities of the digital currencies for the
years ended
December 31, 2022 December 31, 2021
Digital currencies at beginning of year $ 10,417,865 $ 228,087
Additions of digital currencies 58,763,565 12,494,581
Realized gain on sale of digital currencies 1,102,220 149,858
Impairment losses (8,339,660) (1,870,274)
Proceeds from sale of digital currencies (57,274,268) (584,387)
Collateral sold to close derivative (Note 25) (4,559,895) -
Digital currencies at end of year $
109,827
As of
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from balances outstanding at period end. An allowance for doubtful accounts is provided when necessary and is based upon management's evaluation of outstanding accounts receivable at period end. The potential risk is limited to the amount recorded in the consolidated financial statements. For the years endedDecember 31, 2022 , and 2021, outstanding customer balances totaling$0 and$244,924 , respectively, were considered not collectable and written off to bad debt expense. No further allowance for doubtful accounts was considered necessary as ofDecember 31, 2022 , and 2021.
Inventory
Waste coal, fuel oil and limestone are valued at the lower of average cost or net realizable value and includes all related transportation and handling costs. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and unusable inventory and records necessary provisions to reduce such inventories to net realizable value.
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 consolidated balance sheets. Certain contracts that require physical delivery may qualify for and be designated as normal purchases and normal sales. Such contracts are accounted for on an accrual basis. The Company uses derivative instruments to mitigate its exposure to various energy commodity market risks. The Company does not enter into any derivative contracts or similar arrangements for speculative or trading purposes. The Company will, at times, sell its forward unhedged electricity capacity to stabilize its future operating margins. As ofDecember 31, 2022 , and 2021, there were no open energy commodity derivatives outstanding. The Company also uses derivative instruments to mitigate the risks of Bitcoin market pricing volatility. The Company entered into a variable prepaid forward sale contract that mitigated Bitcoin market pricing volatility risks between a low and high collar of Bitcoin market prices during the contract term. This contract settled inSeptember 2022 . The contract met the definition of a derivative transaction pursuant to guidance under ASC 815, Derivatives and Hedging, and was considered a compound derivative instrument which was required to be presented at fair value subject to remeasurement each reporting period. The changes in fair value were recorded as changes in fair value of forward sale derivative in the consolidated statements of operations. Refer to Note 25 - Variable Prepaid Forward Sales Contract Derivative. As ofDecember 31, 2022 , there were no derivative contracts open. 91 --------------------------------------------------------------------------------
Fair Value Measurements
The Company measures at fair value certain of its 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 liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based 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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, and minor replacements, maintenance
and repairs are charged to expenses as incurred. The Company records all assets
associated with the cryptocurrency mining operations at cost. These assets are
comprised of storage trailers and the related electrical components. When
property, plant and equipment are retired or otherwise disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is included in the consolidated statements of operations. Depreciation
is recognized over the remaining estimated useful lives ("EUL") of the related
assets using the straight-line method.
The Company's depreciation is based on its Facility being considered a single
property unit. Certain components of the Facility may require replacement or
overhaul several times over its estimated life. Costs associated with overhauls
are recorded as an expense in the period incurred. However, in instances where a
replacement of a Facility component is significant and the Company can
reasonably estimate the original cost of the component being replaced, the
Company will write-off the replaced component and capitalize the cost of the
replacement. The component will be depreciated over the lesser of the EUL of the
component or the remaining EUL of the Facility.
In conjunction with ASC 360, Property, Plant, and Equipment, the Company reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of a long-lived asset or asset group to be held and used is
measured by a comparison of the carrying amount of the long-lived asset or asset
group to undiscounted future cash flows expected to be generated by the
long-lived asset or asset group. The factors considered by management in
performing this assessment include current operating results, trends and
prospects, the manner in which the asset is used, and the effects of
obsolescence, demand, competition, and other economic factors. If such an asset
or asset group is considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the long-lived asset or
asset group exceeds its fair value. Based on the Company's analysis, no
impairment indicators existed as of December 31, 2021 ; however, impairment
indicators existed throughout the current year and as of December 31, 2022 , that
resulted in impairments on miner assets of $40,683,112 for the year ended
December 31, 2022 .
Bitcoin Mining Rigs
Management has assessed the basis of depreciation of the Company's Bitcoin
mining rigs 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 the Company generates digital assets and, therefore, consumes the
economic benefits of its transaction verification servers, is influenced by a
number of factors including the following:
1.The complexity of the transaction verification 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 hash rate capacity); and
3.Technological obsolescence reflecting rapid development in the transaction
verification server 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
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--------------------------------------------------------------------------------later hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase).
The Company operates 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 its 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 reviews 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 for its transaction verification servers 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, the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.
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, the Company recognizes a gain or loss on settlement. The Company's asset retirement obligation represents the cost the Company would incur to perform environmental clean-up or dismantle certain portions of the Facility.
Right-of-Use Assets
A right-of-use ("ROU") asset represents the right to use an underlying asset for
the term of the lease, and the corresponding liability represents an obligation
to make periodic payments arising from the lease. A determination of whether an
arrangement includes a lease is made at the inception of the arrangement. ROU
assets and liabilities are recognized on the consolidated balance sheets, at the
commencement date of the lease, in an amount equal to the present value of the
lease payments over the term of the lease calculated using the interest rate
implicit in the lease arrangement or, if not known, the Company's incremental
borrowing rate. The present value of a ROU asset also includes any lease
payments made prior to commencement of the lease and excludes any lease
incentives received or to be received under the arrangement. The lease term
includes options to extend or terminate the lease when it is reasonably certain
that such options will be exercised. Operating leases that have original terms
of less than 12 months, inclusive of options to extend that are reasonably
certain to be exercised, are classified as short-term leases and are not
recognized on the consolidated balance sheet.
ROU assets are recorded as noncurrent assets on the consolidated balance sheets.
The corresponding liabilities are recorded as an operating lease liability,
either current or noncurrent, as applicable, on the consolidated balance sheets.
Operating lease costs are recognized on a straight-line basis over the lease
term within operations and maintenance or general and administrative expenses
based on the use of the related ROU asset.
Revenue Recognition
The Company recognizes 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; and
5.Step 5: Recognize revenue when the company satisfies the performance
obligations.
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. Per ASC 606, a
performance obligation meets the definition of a "distinct" good or service (or
bundle of goods or services) if both of the following criteria are met: (1) 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 (2) the entity's promise
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--------------------------------------------------------------------------------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; •Non-cash consideration; and •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 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 theFinancial Accounting Standards Board (the "FASB"), the Company may be required to change its policies, which could have an effect on the Company's consolidated financial statements.
Fair value of the digital asset awards received is determined using the quoted price of the related cryptocurrency at the time of receipt.
The Company's policies with respect to its revenue streams are detailed below.
Energy Revenue
The Company operates as a market participant throughPJM Interconnection , aRegional Transmission Organization ("RTO") that coordinates the movement of wholesale electricity. The Company sells 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 have the same pattern of transfer to the customer over time and are, therefore, accounted for as a distinct performance obligation. 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. The Company applies 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 the Company's performance obligation completed to date. Prior toJune 2022 , the Scrubgrass and Panther Creek Plants were committed as "capacity resources" through the annual Base Residual Auction ("BRA") process. In this process, a generator agrees to support the PJM capacity market, and if called upon, is required to deliver its power to the market and receive a capped selling price based on pricing published in the day ahead market. In return for this committed capacity that is deliverable on demand to support the reliability of the PJM grid, generators receive additional Capacity Revenue on a monthly basis. As the mining opportunity grew for Stronghold, being a capacity resource increasingly prevented the Company from being able to consistently power its mining operation when PJM called for the capacity. Beginning in June of 2022, Stronghold withdrew from its capacity commitment and both plants became "energy resources" able to sell power to the grid in the real-time, location marginal pricing, or "LMP," market or use that power in its data centers.
Reactive energy power is provided to maintain a continuous voltage level. Revenue from reactive power is recognized ratably over time as the Company stands ready to provide it if called upon by the PJM RTO.
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Prior toJune 2022 , the Company provided 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 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 standalone selling price. As capacity represents the Company's stand-ready obligation, capacity revenue is recognized as the performance obligation is satisfied ratably over time, on a monthly basis, since the Company stands ready equally throughout the period to deliver power to the PJM RTO if called upon. The Company applies 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 the Company's 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.
Bitcoin Mining
The Company has 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 the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is 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 reduction to cryptocurrency mining 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. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing cryptocurrency mining computing power in digital asset transaction verification services is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's contracts with mining pool operators. The transaction consideration the Company receives, if any, is non-cash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all 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 the Company receives confirmation of the consideration it 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, the Company may be required to change its policies, which could have an effect on the Company's consolidated financial statements.
Mining Hosting
The Company has entered into customer hosting contracts whereby the Company
provides 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
to 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 recorded as
contract liabilities in the consolidated balance sheets.
Waste Coal Tax Credits
Waste coal tax credits are issued by theCommonwealth of Pennsylvania . Facilities that generate electricity by using coal refuse for power generation, control acid gases for emission control and use the ash produced to reclaim mining-affected sites are eligible for such credits. Proceeds related to these credits are recorded upon cash receipt and accounted for as a reduction to fuel costs within operating expenses. For the years endedDecember 31, 2022 , and 2021, waste coal tax credits reduced fuel expenses in the consolidated statements of operations by$1,836,823 and$53,443 , respectively. 95 --------------------------------------------------------------------------------
Renewable Energy Credits ("RECs")
The Company uses coal refuse, which is classified as a Tier II Alternative Energy Source underPennsylvania law, to produce energy to sell to the open market ("the grid"). A third party acts as the benefactor, on behalf of the Company, in the open market and is invoiced as RECs are realized. These credits are recognized as a contra-expense within operating expenses to offset the fuel costs incurred to produce this refuse. Starting late in 2021, and for the year endedDecember 31, 2022 , the Company significantly increased the use of coal refuse as the plant increased megawatt capacity. The plant was relatively dormant during the comparative year endedDecember 31, 2021 . As a result, the Company's usage of coal refuse significantly increased. RECs offset against the costs of fuel operating costs were$9,960,655 and$1,736,071 for the years endedDecember 31, 2022 , and 2021, respectively.
Waste
The Company sells fly ash and scrubber material collected, which are by-products from its coal refuse reclamation used as fuel. The Company realized waste ash sales of$51,453 and$0 for the years endedDecember 31, 2022 , and 2021, respectively, which has been recorded as other operating revenues in the consolidated statements of operations.
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, restricted stock units ("RSUs") and performance share units ("PSUs").
Notes Payable
The Company records 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.
Warrants
Accounting for warrants includes an initial assessment of whether the warrants
qualify as debt or equity. For warrants that meet the definition of debt
instruments, the Company records the warrant liabilities at 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 within other income (expense). For
warrants that meet the definition of equity instruments, the Company records the
warrants at fair value as of the measurement date within stockholders' equity
(deficit).
Segment Information
Operating segments are defined as components of an enterprise for which separate
financial information is evaluated regularly by the chief operating decision
maker ("CODM"). The role of the CODM is to make decisions about allocating
resources and assessing performance. The Company's operations are based on its
Energy Operations and Cryptocurrency Operations and, therefore, the Company has
concluded that its business operates in two operating segments. The CODM reviews
financial information presented on each of these two operating segments for
purposes of allocating resources and evaluating financial performance. The
Company's chief executive officer has been identified as its CODM. The Company's
two operating segments are also its reportable segments: Energy Operations and
Cryptocurrency Operations.
Common Stock - Class V
The Company accounts for the 45.1% interest represented by the Class V common
stock outside of permanent equity as a result of certain redemption rights held
by the holders that are outside the control of the Company. As such, the Company
adjusts the Common Stock - Class V to its maximum redemption amount at the
balance sheet date, if higher than the carrying amount. The redemption amount is
based on a third-party valuation methodology of the Company's Class A common
stock at the end of the reporting period. Changes in the redemption value are
recognized immediately as they occur, as if the end of the reporting period was
also the redemption date for the instrument, with an offsetting entry to
accumulated deficit.
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
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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 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
consolidated balance sheet as of December 31, 2022 .
Net Income (Loss) Per Share
Basic earnings (loss) per share of common stock ("EPS") is computed by dividing
net income (loss) by the weighted average number of Class A 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. Since the Company incurred a net loss
for the years ended December 31, 2022 , and 2021, basic and diluted net loss per
share are the same for the years then ended.
Income Taxes
Reorganization
Upon completion of the Reorganization, the Company is organized as an "Up-C" structure in which substantially all of the assets and business of the consolidated Company are held byStronghold Inc. through its subsidiaries, and the Company's direct assets largely consist of cash and investments in subsidiaries. For income tax purposes, the portion of the Company's earnings allocable toStronghold Inc. is subject to corporate income tax rates at the federal and state levels. Therefore, the income taxes recorded prior to the Reorganization are not representative of the income taxes after the Reorganization. The Company accounts for income taxes under the asset and liability method, in which deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in operations in the period that includes the enactment date. A valuation allowance is required when it is "more likely than not" that deferred income tax assets will not be realized after considering all positive and negative evidence available. Based on the Company's evaluation and application of ASC 740, Income Taxes ("ASC 740"), the Company has determined that its deferred income tax assets are not "more likely than not" to be realized, and therefore, as ofDecember 31, 2022 , the Company has recorded a valuation allowance against the net deferred income tax assets of the Company. Factors contributing to this assessment included the Company's cumulative and current losses, as well as the evaluation of other sources of income as outlined in ASC 740 and potential limitations imposed by Internal Revenue Code ("IRC") Section 382 on the utilization of tax losses. The accounting for deferred income tax assets and liabilities is often based on assumptions that are subject to significant judgment by management. These assumptions are reviewed and adjusted as facts and circumstances change. The Company continues to evaluate the likelihood of the realizability of its deferred income tax assets, and while the valuation allowance remains in place, the Company expects to record no deferred income tax expense or benefit. Material changes to the Company's income tax accruals may occur in the future based on the potential for income tax audits, changes in legislation or resolution of pending matters. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be "more likely than not" to be sustained upon examination by taxing authorities. Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. The basis of tax positions applied to the Company's tax provisions substantially comply with all applicable federal and state regulations. The Company acknowledges the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to the Company's provision or benefit for income taxes in the period in which a final determination is made. As ofDecember 31, 2022 , the Company's tax years endedDecember 31, 2018 , through the current year are open for potential examination by taxing authorities. 97 -------------------------------------------------------------------------------- Certain ofStronghold Inc.'s subsidiaries are structured as flow-through entities, and therefore, the taxable income or loss of such subsidiaries is included in the income tax returns of the partners, includingStronghold Inc. Application of ASC 740 to these entities results in no recognition of federal or state income taxes at the entity level. The portion of such subsidiaries' activities that are allocable to the Company will increase the Company's taxable income or loss and be accounted for under ASC 740 by the Company.
Prior to the Reorganization
Scrubgrass and Stronghold LLC were structured as a limited partnership and limited liability company, respectively; therefore, the taxable income or loss of the Company is included in the income tax returns of the individual partners. Accordingly, no recognition has been given to federal or state income taxes in the accompanying consolidated financial statements. Two of Scrubgrass' subsidiaries,Clearfield and Leesburg, are corporations for federal and state income tax purposes. Income taxes attributable toClearfield and Leesburg are provided based on the asset and liability method of accounting pursuant to ASC 740, both prior to and subsequent to the Reorganization. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.Clearfield and Leesburg have not recorded any temporary differences resulting in either a deferred income tax asset or liability as ofDecember 31, 2022 , or 2021.
Recently Implemented Accounting Pronouncements
As an "emerging growth company" ("EGC"), the Jumpstart Our Business Startups Act
("JOBS Act") allows us to delay adoption of new or revised accounting
pronouncements applicable to public companies until such pronouncements are made
applicable to private companies. We have elected to use this extended transition
period under the JOBS Act. The adoption dates discussed below reflect this
election.
In February 2016 , the FASB issued ASU 2016-02, Leases ("Topic 842"), which
supersedes ASC Topic 840, Leases. Topic 842 requires lessees to recognize a
lease liability and a lease asset on its balance sheet for all leases, including
operating leases, with a term greater than 12 months. Topic 842 also expands the
required quantitative and qualitative disclosures surrounding leases. The new
guidance has been applied using a modified retrospective transition approach for
leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. Topic 842 also
provided an election for practical expedients which permits an entity (i) not to
reassess whether any expired or existing contracts contained leases; (ii) to
carry forward the existing lease classification; (iii) not to reassess initial
direct costs associated with existing leases; (iv) not to separate non-lease
components from lease components and instead accounted for all components as a
single lease component; (v) and not to apply the provisions of Topic 842 to
short-term leases. An operating lease ROU asset and operating lease liability
equal to the present value of lease payments of $1,871,241 was recorded as of
January 1, 2022 . Refer to Note 17 - Operating Lease ROU Assets And Liabilities
for the required disclosures.
In August 2020 , the FASB issued ASU 2020-06, Debt - Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40), to simplify the accounting for certain
financial instruments. ASU 2020-06 eliminates the current models that require
separation of beneficial conversion and cash conversion features from
convertible instruments and simplifies the derivative scope exception guidance
pertaining to equity classification of contracts in an entity's own equity. The
new standard also introduces additional disclosures for convertible debt and
freestanding instruments that are indexed to and settled in an entity's own
equity. ASU 2020-06 amends the diluted earnings per share guidance, including
the requirement to use the if-converted method for all convertible instruments.
ASU 2020-06 became effective on January 1, 2022 . The Company adopted ASU 2020-06
effective January 1, 2022 , but the adoption of ASU 2020-06 did not have an
impact on the Company's consolidated financial statements.
In May 2021 , the FASB issued ASU 2021-04, Issuer's Accounting for Certain
Modifications or Exchanges of Freestanding Equity-Classified Written Call
Options, to clarify the accounting for modifications or exchanges of
equity-classified warrants. This ASU became effective for all entities for
fiscal years beginning after December 15, 2021 , including interim periods within
those fiscal years. The FASB issued ASU 2021-04 to establish a principles-based
recognition framework according to the substance of the modification
transaction. The framework applies to freestanding written call options, such as
warrants, that were and remain equity-classified by the issuer after the
modification and are not in the scope of other guidance. For example, the
framework does not apply to warrants that are modified to compensate for
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goods or services within the scope of Topic 718. The framework applies
regardless of whether the modification is through an amendment to the existing
terms or issuance of a replacement warrant. Accordingly, the provisions
introduced under ASU 2021-04 were applicable to the Company during the year
ending
Recently Issued Accounting Pronouncements
InSeptember 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which adds a new impairment model, known as the current expected credit loss ("CECL") model, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses at the initial recognition of an in-scope financial instrument and applies it to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. Since the Company meets the definition of aSmaller Reporting Company , as defined by theSEC , the new guidance becomes effective for fiscal years beginning afterDecember 15, 2022 . The Company does not expect the new guidance to have a significant impact on its consolidated financial statements. NOTE 3 - INVENTORY
Inventory consisted of the following components as of:
December 31, 2022 December 31, 2021
Waste coal $ 4,147,369 $ 3,238,383
Fuel oil 143,592 94,913
Limestone 180,696 38,958
Inventory $ 4,471,657 $ 3,372,254 NOTE 4 - EQUIPMENT DEPOSITS AND
Equipment deposits represent contractual agreements with vendors to deliver and install miners at future dates. The following details the vendor, miner model, miner count, and expected delivery month(s). InMarch 2022 , the Company evaluated theMinerVa Semiconductor Corp ("MinerVa") equipment deposits for impairment under the provisions of ASC 360, Property, Plant and Equipment. As a result of the evaluation, the Company determined an indicator for impairment was present under ASC 360-10-35-21. The Company undertook a test for recoverability under ASC 360-10-35-29 and a further fair value analysis in accordance with ASC 820, Fair Value Measurement. The difference between the fair value of the MinerVa equipment deposits and the carrying value resulted in the Company recording an impairment charge of$12,228,742 in the first quarter of 2022 and an additional$5,120,000 in the fourth quarter of 2022, as summarized in the table below. 99 -------------------------------------------------------------------------------- The following table details the total equipment deposits of$10,081,307 as ofDecember 31, 2022 : Total Transferred to Equipment Vendor Model Count Delivery Timeframe Commitments Unpaid PP&E [A] Impairment Sold Deposits MinerVa MinerVa [B] MV7 15,000 Oct '21 - TBD$ 68,887,550 $ -$ (32,756,302) $ (17,348,742) $ (8,701,199) $ 10,081,307 Bitmain Antminer Cryptech S19j 2,400 Nov '21 - Oct '22 12,656,835 - (12,656,835) - - MicroBT WhatsMiner Northern Data M30S & M30S+ 9,900 Oct '21 - Jan '22 22,061,852 - (22,061,852) - -
Bitmain Technologies Bitmain Antminer
Limited [C] S19j Pro 10,200 Apr '22 - Dec '22 60,814,500 (4,218,000) (23,951,500) - (32,645,000) -
Bitmain Technologies Bitmain Antminer
Limited [D] S19 XP 1,800 Jul '22 - Dec '22 19,530,000 (6,961,500) - - (12,568,500) -
MicroBT WhatsMiner
Northern Data PA. LLC M30S & M30S+ 4,280 Jan '22 - Jun '22 11,340,374
- (11,340,374) - - -
Totals 43,580 [A] Miners that are delivered and physically placed in service are transferred to a fixed asset account at the respective unit price as defined in the agreement. [B] Refer to Note 8 - Commitments And Contingencies for a$4,499,980 refund that reduced the total commitments to$68,887,550 . [C] The commitment for the outstanding unpaid balance was transferred upon the closing of the Asset Purchase Agreement described in Note 6 - Debt. [D] The miner purchase contract was sold inMay 2022 for$5,638,500 , and a loss of$6,930,000 was recorded as a realized loss on sale of miner assets within the consolidated statement of operations for the year endedDecember 31, 2022 . The commitment for the outstanding unpaid balance was transferred upon the closing of this sale.Miner Sales 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 and sold 3,425 miners (approximately 411 PH/s) with a historical carrying value of$21,857,028 , or$50.70 per TH/s. The Company recognized a realized loss on sale of miner assets of$8,012,248 during the second quarter of 2022. The loss was recorded as a realized loss on sale of miner assets on the consolidated statement of operations. The various buyers took over the remaining installment payments upon transfer of the contract, relieving the Company of the outstanding purchase obligation. During the third quarter of 2022, the Company consensually returned approximately 26,000 Bitcoin miners (approximately 18,700 of which were plugged in and operating prior to delivery) to NYDIG and BankProv, and the related debt was cancelled pursuant to the terms of the Asset Purchase Agreement. See Note 6 - Debt for further discussion of the Asset Purchase Agreement.
Bitmain Technologies Limited Purchase Agreement
OnOctober 28, 2021 , we entered into the first of two Non-Fixed Price Sales and Purchase Agreements with Bitmain (the "First Bitmain Agreement"). Under the First Bitmain Agreement, Stronghold purchased approximately 12,000 Bitmain Antminer S19j Pro miners, with hash rate capacity of 1.2 EH/s, to be delivered betweenApril 2022 andSeptember 2022 , for an aggregate purchase price of$75,000,000 . OnAugust 16, 2022 , Stronghold entered into the Asset Purchase Agreement and sold the miners associated with the First Bitmain Agreement to the Purchasers. Before selling these miners, the Company had paid approximately$57 million under the First Bitmain Agreement and had installed approximately 4,500 out of the 12,000 miners. OnNovember 16, 2021 , the Company entered into a second Non-Fixed Price Sales and Purchase Agreement with Bitmain (the "Second Bitmain Agreement"). Under the Second Bitmain Agreement, Stronghold purchased approximately 1,800 Bitmain Antminer S19 XP miners, with hash rate capacity of approximately 0.3 EH/s, to be delivered betweenJuly 2022 100 -------------------------------------------------------------------------------- andDecember 2022 , for an aggregate purchase price of$19,350,000 . OnMay 13, 2022 , Stronghold entered into a purchase order to transfer the Second Bitmain Agreement toCryptech Solutions, Inc. ("Cryptech") for a total value of$12,600,000 , including a$5,638,500 payment to the Company along with a transfer of the responsibility of the future payments to Cryptech. Before transferring the Second Bitmain Agreement to Cryptech, Stronghold had paid approximately$13 million under the Second Bitmain Agreement and had received none of the miners.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of:
Useful Lives
(Years) December 31, 2022 December 31, 2021
Electric plant 10 - 60
8 - 30 52,318,704 7,489,472
Machinery and equipment 5 - 20 18,131,977 12,015,811
Rolling stock 5 - 7 261,000 261,000
Cryptocurrency machines and powering supplies 2 - 3 81,945,396 78,505,675
Computer hardware and software 2 - 5 17,196 56,620
Vehicles and trailers 2 - 7 659,133 155,564
Construction in progress Not Depreciable 19,553,826 36,067,776
Asset retirement cost 10 - 30 580,452 580,452
239,763,493 201,286,355
Accumulated depreciation and amortization (72,558,812) (34,629,200)
Property, plant, and equipment, net 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$19,553,826 as ofDecember 31, 2022 , represents open contracts for future projects. Depreciation and amortization expense charged to operations was$47,235,344 and$7,607,721 for the years endedDecember 31, 2022 , and 2021, respectively, including depreciation of assets under finance leases of$406,411 and$290,805 for the years endedDecember 31, 2022 , and 2021, respectively. As a result of impairment tests performed on the underlying asset groups throughout 2022, in accordance with ASC 360, Property, Plant and Equipment, the Company recognized impairments on miner assets of$40,683,112 for the year endedDecember 31, 2022 .
The gross value of assets under finance leases and the related accumulated
amortization approximated
101
--------------------------------------------------------------------------------NOTE 6 - DEBT
Debt consisted of the following as ofDecember 31, 2022 , andDecember 31, 2021 : December 31, December 31, 2022 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. 124,023 232,337$499,895 loan, with interest at 2.95% due July 2023. 121,470 246,720$212,675 loan, with interest at 6.75% due October 2022. - 103,857$517,465 loan, with interest at 4.78% due October 2024. 339,428 490,600$585,476 loan, with interest at 4.99% due November, 2025. 513,334 -$431,825 loan, with interest at 7.60% due April 2024. 121,460 204,833$40,000,000 loan, with interest at 10.00% due June 2023. - [A] 28,149,998$25,000,000 loan, with interest at 10.00%, due March 2024. - [B] -
56,114,249 [C] -
$10,641,362 loan, with interest at 10.00% due June 2023. - [D] 7,546,542
$14,077,800 loan, with interest at 10.00% due June 2023 .
- [E] 9,982,551
- [F] 9,891,200
- [G] 7,319,488
- [H] -
16,812,500 [I] -
$92,381 loan, with interest at 1.49% due April 2026. 79,249 -
$64,136 loan, with interest at 11.85% due May 2024. 39,056 -
$196,909 loan, with interest at 6.49% due May 2024. 184,895 -
Total outstanding borrowings $ 74,449,664 $ 64,178,492 Current portion of long-term debt, net of discounts and issuance fees
17,422,546 45,799,651
Long-term debt, net of discounts and issuance fees $ 57,027,118 $ 18,378,841
[A] WhiteHawk Promissory Note agreement with a term of 24 months. On December
31, 2021 , the Company amended the WhiteHawk Financing Agreement (as defined
below, the "WhiteHawk Amendment") 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 to WhiteHawk Finance
LLC ("WhiteHawk"), which were included in deferred debt issuance costs. This
debt was effectively extinguished as of October 27, 2022 . See additional details
below.
[B] WhiteHawk Promissory Note agreement with a term of 24 months. Pursuant to
the Second WhiteHawk Amendment, Equipment LLC paid an amendment fee in the
amount of $275,414 and a closing fee of $500,000 to WhiteHawk, which were
included in deferred debt issuance costs. This debt was effectively extinguished
as of October 27, 2022 . See additional details below.
[C] On October 27, 2022 , the Company entered into a secured 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. The
borrowings under the WhiteHawk Refinancing Agreement mature on October 26, 2025 .
The loan under the Delayed Draw Facility was issued with a 3% closing fee on the
drawn amount, paid when such amount was drawn on the closing date of the Credit
Agreement.
[D] Arctos/NYDIG Financing Agreement [loan #1] with a term of 24 months. This
debt tranche was extinguished as of September 30, 2022 .
[E] Arctos/NYDIG Financing Agreement [loan #2] with a term of 24 months. This
debt tranche was extinguished as of September 30, 2022 .
[F] Second NYDIG Financing Agreement (as defined below) with a term of 24
months. This debt tranche was extinguished as of September 30, 2022 .
[G] Second NYDIG Financing Agreement with a term of 24 months. This debt tranche
was extinguished as of December 31, 2022 .
[H] Second NYDIG Financing Agreement with a term of 24 months. This debt tranche
was extinguished as of December 31, 2022 .
[I] Convertible Note with a term of 24 months.
Extinguishment of NYDIG Financing Agreements
On
102
--------------------------------------------------------------------------------
with NYDIG, formerly known as
Pursuant to the master equipment financing agreement entered into betweenSDM and Arctos Credit, LLC ("Arctos" now known as "NYDIG") onJune 25, 2021 (the "Arctos/NYDIG Financing Agreement"), and the master equipment financing agreement entered into between Digital Mining BT and NYDIG onDecember 15, 2021 (the "Second NYDIG Financing Agreement" and together with the Arctos/NYDIG Financing Agreement, the "NYDIG Financing Agreements"), certain miners were 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 agreed to sell, and the Purchasers (or their respective designee) 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 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 to the Purchasers or their designees pursuant 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 was to be assigned to the Sellers and cancelled pursuant to the terms of the Asset Purchase Agreement (each, a "Settlement"). As a result of this transaction, the Company incurred a loss on debt extinguishment of$19,475,514 in the third quarter of 2022, comprising a loss on debt extinguishment of$15,316,510 and an impairment on assets held for sale of$4,159,004 . As ofSeptember 30, 2022 , three of the seven tranches of the NYDIG Debt were extinguished in conjunction with the sale of the associated miners and was recorded as a loss on debt extinguishment. The remaining four tranches of the NYDIG Debt, totaling$39,998,415 (excluding deferred debt issuance costs and discounts), were extinguished inOctober 2022 .
WhiteHawk Refinancing Agreement
OnOctober 27, 2022 , the Company entered into a secured credit agreement (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$23.0 million in additional commitments (such additional commitments, the "Delayed Draw Facility"). Such loans under the Delayed Draw Facility were drawn on the closing date of the Credit Agreement. The financing pursuant to the Credit Agreement (such financing, the "WhiteHawk Refinancing Agreement") was entered into byStronghold LLC as Borrower (the "Borrower") and is secured by substantially all of the assets of the Company and its subsidiaries and is guaranteed by the Company and each of its material subsidiaries. The WhiteHawk Refinancing Agreement requires equal monthly amortization payments resulting in full 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 default. The WhiteHawk Refinancing Agreement contains 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 beginningJuly 01, 2023 ) and (z) a maximum total leverage ratio covenant of (i) 7.5:1.0 for the quarter endingDecember 31, 2022 , (ii) 5.0:1.0 for the quarter endingMarch 31, 2023 , (iii) 4.0:1.0 for the quarter endingJune 30, 2023 , and (iv) 4.0:1.0 for each quarter ending thereafter. The borrowings under the WhiteHawk Refinancing Agreement mature onOctober 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%. The loan under the Delayed Draw Facility was issued with a 3% closing fee on the drawn amount, paid when such amount was drawn on the closing date of the Credit Agreement. Amounts drawn on the WhiteHawk Refinancing Agreement are subject to a prepayment premium such that the lenders thereunder achieve a 20% return on invested capital. The Company also issued a stock purchase warrant to WhiteHawk in conjunction with the closing of the WhiteHawk Refinancing Agreement, which provides for the purchase of an additional 4,000,000 shares of Class A common stock at an exercise price of$0.01 per share. Borrowings under the WhiteHawk Refinancing Agreement may also be accelerated in certain circumstances. In accordance with ASC 470, Debt, the transaction noted above was determined to be an extinguishment of the existing debt and an issuance of new debt. As a result, the Company recorded a loss on debt extinguishment of$7,661,682 in the consolidated statement of operations for the year endedDecember 31, 2022 , including$2,796,084 for the write-off of deferred financing fees related to the extinguished debt and$1,115,000 of new fees paid to WhiteHawk. The remaining loss of$3,750,598 resulted from recording the new debt at fair value, primarily for the stock purchase warrant issued to WhiteHawk described above. 103 -------------------------------------------------------------------------------- OnFebruary 6, 2023 , the Company,Stronghold LLC , as borrower, their subsidiaries andWhiteHawk Capital Partners LP , 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 fromFebruary 2023 throughJuly 2024 will not be required, with monthly amortization resumingJuly 31, 2024 . BeginningJune 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 endingSeptember 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) untilMarch 31, 2024 ,$2,500,000 ; (B) during the period beginningApril 1, 2024 , through and includingDecember 31, 2024 ,$5,000,000 ; and (C) from and afterJanuary 1, 2025 ,$7,500,000 . The Company was in compliance with all applicable covenants under the WhiteHawk Refinancing Agreement as ofDecember 31, 2022 .
Convertible Note Exchange
OnDecember 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"). OnFebruary 20, 2023 , the Exchange Transaction was consummated, and the Notes were paid in full. Approximately$16.9 million of principal amount of debt was extinguished in exchange for the issuances of the shares of Series C Preferred Stock. OnFebruary 20, 2023 , in connection with the consummation of the Exchange Transaction, the Company entered into a Registration Rights Agreement with the Holders (the "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 endedDecember 31, 2022 , a resale registration statement (the "Resale Registration Statement") with theSecurities and Exchange Commission covering all shares of the Company's Class A common stock, par value$0.0001 per share (the "Common Stock") issuable upon conversion of the Series C Preferred Stock or upon exercise of the pre-funded warrants that may be issued in lieu of Common Stock upon conversion of the Series C Preferred Stock (the "Pre-funded Warrants"), and (ii) to cause the Resale Registration Statement to become effective within the timeframes specified in the Registration Rights Agreement.
Future scheduled maturities on the outstanding borrowings for each of the next
five years as of
Years endingDecember 31 : 2023$ 17,422,546 2024 10,024,636 2025 46,992,601 2026 9,881 2027 -$ 74,449,664 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 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. CES accounted for 28% of our energy operations segment revenues for the 104 -------------------------------------------------------------------------------- year endedDecember 31, 2022 . Over the course of 2022, the Company transitioned entirely to CES from DEBM, and it expects that they will represent approximately 100% of our energy segment revenue in 2023. CES accounted for approximately 100% of the Company's accounts receivable balance as ofDecember 31, 2022 , and 2021, including approximately$5.1 million CES expects to receive from PJM on the Company's behalf, and forward to the Company upon receipt. For the year endedDecember 31, 2022 , and 2021, the Company purchased 17% and 30% of coal from two related parties, respectively. See Note 9 - Related-Party Transactions for further information.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Commitments:
As disclosed in Note 4 - Equipment Deposits AndMiner Sales , the Company has entered into various equipment contracts to purchase miners. Most of these contracts required a percentage of deposits upfront and subsequent future payments to cover the contracted purchase price of the equipment. Details of the outstanding purchase agreement with MinerVa are summarized below.
OnApril 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 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 onApril 2, 2021 , and an additional payment of 20% of the purchase price, or$14,677,500 , was paid onJune 2, 2021 . As ofDecember 31, 2022 , there were no remaining deposits owed. InDecember 2021 , the Company extended the deadline for delivery of the MinerVa miners toApril 2022 . InMarch 2022 , MinerVa was again unable to meet its delivery date and has only delivered approximately 3,200 of the 15,000 miners. As a result, an impairment totaling$12,228,742 was recorded 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 ofDecember 31, 2022 , MinerVa had delivered, refunded cash, or swapped into deliveries of industry-leading miners of equivalent value to approximately 10,700 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 remaining miners, it does not know when the remaining miners will be delivered, if at all. OnJuly 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. As the 60-day period has now expired, the Company is evaluating all available remedies under the MinerVa Purchase Agreement.
Contingencies:
Legal Proceedings
The Company experiences routine litigation in the normal course of business. Management is of the opinion that none of this routine litigation will have a material adverse effect on the Company's reported financial position or results of operations.
OnJanuary 31, 2020 ,McClymonds Supply and Transit Company, Inc. ("McClymonds") made a Demand for Arbitration, as required by the terms of the Transportation Agreement between it and the Scrubgrass datedApril 8, 2013 (the "Agreement"). In its demand, McClymonds alleged damages in the amount of$5,042,350 for failure to pay McClymonds for services. OnFebruary 18, 2020 , Scrubgrass submitted its answering statement denying the claim of McClymonds in its entirety. OnMarch 31, 2020 , Scrubgrass submitted its counterclaim against McClymonds in the amount of$6,747,328 as 105 -------------------------------------------------------------------------------- the result of McClymonds' failure to deliver fuel as required under the terms of the Agreement. Hearings were held fromJanuary 31, 2022 , toFebruary 3, 2022 . OnMay 9, 2022 , an award in the amount of$5.0 million plus interest of approximately$0.8 million was issued in favor of theMcClymonds Supply & Transit . The two managing members ofQ Power, LLC , 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. The managing members ofQ Power LLC have executed a binding document to pay the full amount of the award. McClymonds shall have no recourse to the Company with respect to the award.
InNovember 2019 , 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 inAugust 2020 , the parties again attempted to mediate the case onOctober 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 inButler County Court and the outstanding litigation has been terminated.
FERC Matters
OnNovember 19, 2021 , Scrubgrass received a notice of breach fromPJM Interconnection, LLC alleging that Scrubgrass breached Interconnection Service Agreement - No. 1795 (the "ISA") by failing to provide advance notice toPJM Interconnection, LLC andMid-Atlantic Interstate Transmission, LLC ("MAIT") pursuant to ISA, Appendix 2, section 3, of modifications made to the Scrubgrass Plant. OnDecember 16, 2021 , Scrubgrass responded to the notice of breach and respectfully disagreed that the ISA had been breached. OnJanuary 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. OnJanuary 20, 2022 , the Company sent PJM a letter regarding the installation of a resistive computational load bank at the Panther Creek Plant. OnMarch 1, 2022 , the Company executed a necessary study agreement with respect to the Panther Creek Plant. OnMay 11, 2022 , theDivision of Investigations of theFERC Office of Enforcement ("OE") informed the Company that theOffice of Enforcement is conducting a non-public preliminary investigation concerning Scrubgrass' compliance with various aspects of the PJM tariff. The OE requested that the Company provide certain information and documents concerning Scrubgrass' operations byJune 10, 2022 . OnJuly 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 regarding potential instances of non-compliance is continuing. The Company does not believe the PJM notice of breach, thePanther Creek necessary study 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.
OnApril 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 theUnited States District Court for the Southern District of New York . In the complaint, the plaintiffs allege that the Company made misleading statements and/or failed to disclose material facts in violation of Section 11 of the Securities Act, 15 U.S.C. §77k and Section 15 of the 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. OnAugust 4, 2022 , co-lead plaintiffs were appointed. OnOctober 18, 2022 , the Plaintiffs filed an amended complaint. OnDecember 19, 2022 , the Company filed a Motion to Dismiss. OnFebruary 17, 2023 , the plaintiffs filed an opposition to the defendant's motion to dismiss. OnMarch 20, 2023 , the Company filed a reply brief in further support of its motion to dismiss. We cannot predict when the court will rule on our motion. The defendants believe the allegations in the initial complaint are without merit and intend to defend the suit vigorously. 106 --------------------------------------------------------------------------------
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 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 it is obligated to mine, process, load, and otherwise handle the waste coal for itself and also for other customers ofCoal Valley Sales, LLC ("CVS") from theRussellton site specifically. The Company is also obligated to unload and properly dispose of ash at theRussellton site. The Company is charged a reduced handling fee of$1.00 per ton for any tons in excess of the minimum take of 200,000 tons. The Company is the designated operator at theRussellton site and, therefore, is responsible for complying with all state and federal requirements and regulations. The Company purchases coal fromCoal Valley Properties, LLC , a single-member limited liability company which is entirely owned by one individual who has ownership inQ Power , and from CVS. CVS is a single-member limited liability company which is owned by a coal reclamation partnership of which an owner ofQ Power has a direct and an indirect interest in the partnership of 16.26%. The Company expensed$733,458 and$303,500 for the years endedDecember 31, 2022 , and 2021, respectively, associated with coal purchases from CVS, which is included in fuel expense in the consolidated statements of operations. See the composition of the due to related parties balance as ofDecember 31, 2022 , and 2021, 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 December 31, 2023 . The Company expensed $3,121,423 and $163,412
for the years ended December 31, 2022 , and 2021, respectively, which is included
in fuel expense in the consolidated statements of operations. See the
composition of the due to related parties balance as of December 31, 2022 , and
2021, below.
Fuel purchases under these agreements for the years ended
December 31, 2022 December 31, 2021
Coal Purchases:
Northampton Fuel Supply Company, Inc. $ 3,121,423 $ 163,412
Coal Valley Sales, LLC 733,458 934,916
Total $ 3,854,881 $ 1,098,328
Fuel Management Agreements
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 ofOlympus 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 Company expensed $1,697,850 and $303,500 for the years ended December 31, 2022, and 2021, respectively, which is included in operations and maintenance expense in the consolidated statements of operations. See the composition of the due to related parties balance as of December 31, 2022, and 2021, 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 ofOlympus Power LLC . Under the Scrubgrass Fuel Agreement, Scrubgrass Fuel Services LLC 107 -------------------------------------------------------------------------------- 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 $780,410 for the year ended December 31, 2022, which is included in operations and maintenance expense in the consolidated statement of operations. See the composition of the due to related parties balance as of December 31, 2022, and 2021, below.
O&M Agreements
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 Panther Creek Plant and the Scrubgrass Plant. 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 Panther Creek Plant and Scrubgrass Plant, and an additional one-time
mobilization fee of $150,000 upon the effective date of the Omnibus Services
Agreement, which was deferred until 2023. Effective October 1, 2022, Stronghold
LLC began paying Olympus Stronghold Services a management fee for the 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 expensed $1,086,649 and $129,735
for the years ended December 31, 2022, and 2021, 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 December 31, 2022, and 2021, 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 ofOlympus 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 CreekEnergy 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 of the effective date. The Company expensed $3,877,338 and $1,027,860 for the years ended December 31, 2022, and 2021, 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 December 31, 2022, and 2021, 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 ofOlympus 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 $6,476,968 for the year ended December 31, 2022, 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 December 31, 2022, and 2021, below. 108 -------------------------------------------------------------------------------- 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 was the closing date of the Equity Contribution Agreement.
Effective October 1, 2022, Stronghold LLC no longer pays Olympus Stronghold Services a management fee for the Scrubgrass Plant.
Management Services Agreement
On May 10, 2021, a new management and advisory agreement was entered into between Q Power andWilliam Spence (the "Spence Agreement"). In consideration of consultant's performance of the services thereunder, Q Power will payMr. Spence a fee at the rate of $50,000 per complete calendar month (pro-rated for partial months) thatMr. 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 toMr. Spence including, but not limited to, any cost or expenses incurred byMr. Spence in the course of performing his obligations thereunder. Under the Spence Agreement, the Company made total payments of $550,000 and $600,000 for the years ended December 31, 2022, and 2021, respectively. Amounts due to related parties as of December 31, 2022, and 2021, were as follows: December 31, December 31, 2022 2021 Due to related parties: Coal Valley Properties, LLC $ 134,452 $ 134,452 Q Power LLC 500,000 500,000 Coal Valley Sales, LLC - 202,334 Panther Creek Energy Services LLC 10,687 94,434 Panther Creek Fuel Services LLC 53,482 47,967 Northampton Generating Fuel Supply Company, Inc. 594,039 321,738 Olympus Power LLC and other subsidiaries 78,302 129,735 Scrubgrass Energy Services LLC 4,087 - Scrubgrass Fuel Services LLC - - Totals $ 1,375,049 $ 1,430,660 Lastly, for the year ended December 31, 2021, the Company paid $69,000 to Beard Aviation LLC for various company-related business trips. There were no such payments during the year ended December 31, 2022. Beard Aviation LLC is owned byGreg Beard , the Chief Executive Officer ("CEO") of the Company.
NOTE 10 - PAYCHECK PROTECTION PROGRAM AND ECONOMIC INJURY DISASTER LOANS
On March 16, 2021, the Company received a round two Paycheck Protection Program
("PPP") loan in the amount of $841,670 that accrues interest at 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 one PPP loan in the
amount of $638,800. On May 25, 2022, the Company was granted relief as
forgiveness for the second round PPP loan in the amount of $841,670.
On June 8, 2021, the Company repaid the Economic Injury Disaster Loan ("EIDL"), received on March 31, 2020, in the amount of $150,000.
NOTE 11 - SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly in
deciding how to allocate resources and 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 available as follows:
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Reportable segment results for the years ended December 31, 2022, and 2021, were
as follows:
December 31, 2022 December 31, 2021
OPERATING REVENUES:
Energy Operations $ 46,809,665 $ 16,123,067
Cryptocurrency Operations 59,223,437 14,792,070
Total operating revenues $ 106,033,102 $ 30,915,137
NET OPERATING LOSS:
Energy Operations $ (38,992,034) $ (17,237,107)
Cryptocurrency Operations (108,274,121) (4,767,358)
Total net operating (loss) income $ (147,266,155) $ (22,004,465)
OTHER EXPENSE [A] (47,905,812) (5,250,864)
NET LOSS $ (195,171,967) $ (27,255,329)
DEPRECIATION AND AMORTIZATION:
Energy Operations $ (5,189,071) $ (1,305,402)
Cryptocurrency Operations (42,046,273)
(6,302,319)
Total depreciation and amortization $ (47,235,344) $ (7,607,721)
INTEREST EXPENSE:
Energy Operations $ (100,775) $ (80,866)
Cryptocurrency Operations (13,810,233) (4,541,789)
Total interest expense $ (13,911,008) $ (4,622,655)
CAPITAL EXPENDITURES:
Energy Operations $ 1,735,392 $ 48,384
Cryptocurrency Operations 79,295,111 168,385,858
Total capital expenditures $ 81,030,503 $ 168,434,242
[A] The Company does not allocate other income (expense) for segment reporting
purposes. Amount is shown as a reconciling item between net operating
income/(losses) and consolidated income before taxes. Refer to the accompanying
consolidated statements of operations for further details.
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--------------------------------------------------------------------------------Total assets by energy operations and cryptocurrency operations as of December 31, 2022, and 2021, are presented in the table below.
December 31, 2022 December 31, 2021
Energy Cryptocurrency Energy Cryptocurrency
Operations Operations Total Operations Operations Total
Cash and cash equivalents $ 693,805 $ 12,602,898 $ 13,296,703 $ 714,019 $ 31,076,096 $ 31,790,115
Digital currencies - 109,827 109,827 - 10,417,865 10,417,865
Accounts receivable 10,628,570 208,556 10,837,126 256,103 1,855,752 2,111,855
Due from related parties 73,122 - 73,122 - - -
Prepaid insurance 2,438,968 2,438,968 4,877,935 3,150,851 3,150,851 6,301,701
Inventory 4,471,657 - 4,471,657 3,372,254 - 3,372,254
Other current assets - 1,975,300 1,975,300 - 661,640 661,640
Equipment deposits - 10,081,307 10,081,307 - 130,999,398 130,999,398
Property, plant and
equipment, net 45,645,205 121,559,476 167,204,681 49,009,509 117,647,646 166,657,155
Land 1,748,440 - 1,748,440 1,748,440 - 1,748,440
Road bond 211,958 - 211,958 211,958 - 211,958
Operating lease
right-of-use assets 1,045,365 673,672 1,719,037 - - -
Security deposits 348,888 - 348,888 348,888 - 348,888
$ 67,305,978 $ 149,650,004 $ 216,955,981 $ 58,812,022 $ 295,809,248 $ 354,621,269
NOTE 12 - STOCK-BASED COMPENSATION
On October 19, 2021, the board of directors of the Company (the "Board") and the
stockholders of the Company approved a new long-term incentive plan (the "New
LTIP") for employees, consultants and directors. The New LTIP provides for the
grant of options (including incentive stock options and non-qualified stock
options), stock appreciation rights, restricted stock units ("RSUs"), dividend
equivalents, other stock-based awards, and substitute awards intended to align
the interests of service providers, including our named executive officers, with
those of our stockholders. Pursuant to the New LTIP, the remaining shares of
Class A common stock under the LTIP that was effective April 28, 2021, that were
reserved and available for delivery, were assumed and reserved for issuance
under the New LTIP. In addition, the New LTIP raised the aggregate number of
shares of common stock that may be issued or used for reference purposes or with
respect to which awards may be granted under the plan to not exceed 4,752,000
shares. As of October 19, 2021, the Company now grants all equity-based awards
under the New LTIP.
The Board is duly authorized to administer the New LTIP. 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 Company's New LTIP are granted with an exercise
price no less than the market price 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.
RSUs are subject to restrictions on transferability, risk of forfeiture and
other restrictions imposed by the Compensation Committee of the Board (the
"Committee"). Settlement of vested RSUs will occur upon vesting or upon
expiration of the deferral period specified for such RSUs by the Committee (or,
if permitted by the 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 Committee at the date of grant or thereafter.
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--------------------------------------------------------------------------------Stock-Based Compensation
Stock-based compensation expense, including share-based expenses associated with non-employee directors, was $13,890,350 and $4,015,324 for the years ended December 31, 2022, and 2021, respectively, and is included in general and administrative expense in the consolidated statements of operations. There is no tax benefit related to stock compensation expense due to the Company having a full valuation allowance recorded against its deferred income tax assets as of December 31, 2022.
The Company recognized total stock-based compensation expense for the years ended December 31, 2022, and 2021, from the following categories:
December 31, 2022 December 31, 2021
Restricted stock awards under the Plan 3,592,641 172,800
Stock option awards under the Plan 10,297,709
3,842,524
Total stock-based compensation $ 13,890,350 $ 4,015,324
Stock Options
The following are the weighted-average assumptions used in calculating the fair
value of the total stock options granted during 2022 using the Black-Scholes
method.
December 31, 2022 December 31, 2021
Weighted-average fair value of options granted $ 10.21 $ 7.64
Expected volatility 125.85 % 128.14 %
Expected life (in years) 5.81 5.77
Risk-free interest rate 1.69 % 0.93 %
Expected dividend yield 0 % 0 %
Expected Volatility - The Company estimates its expected stock volatility based
on the historical volatility of a publicly traded set of peer companies, as the
Company does not currently have sufficient history for the volatility of its own
stock.
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 the contractual term.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the implied yield available onU.S. Treasury zero-coupon issues with an equivalent remaining term. Expected Dividend Yield - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends 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 ASU 2016-09.
As of December 31, 2022, the total future compensation expense related to
unvested options not yet recognized in the consolidated statements of operations
was approximately $13,466,789, and the weighted-average period over which these
awards are expected to be recognized is approximately 1.61 years.
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--------------------------------------------------------------------------------The following table summarizes the Company's stock option activity for the years ended December 31, 2022, and 2021.
Weighted- Weighted-
Average Average Aggregate
Number Exercise Contractual Intrinsic
of Shares Price Term Value
Outstanding at January 1, 2021 - $ - - $ -
Granted 3,379,083 8.91 9.61 -
Exercised - - - -
Cancelled/forfeited - - - -
Outstanding at December 31, 2021 3,379,083 $ 8.91 9.61 $ 30,906,003
Granted 205,964 10.61 9.11 -
Exercised - - - -
Cancelled/forfeited (35,000) 18.06 8.68 -
Outstanding at December 31, 2022 3,550,047 9.03 9.00 -
Shares vested and expected to vest 3,550,047 $ 9.03 8.62 $ -
Exercisable as of December 31, 2022 1,721,821 $ 9.06 8.60 $ -
RSUs
The following table summarizes the Company's RSU activity for the years ended December 31, 2022, and 2021.
Number Weighted-Average Grant
of Shares Date Fair Value
Unvested at January 1, 2021 - $ -
Vested - -
Granted 60,737 11.10
Forfeited - -
Unvested at December 31, 2021 60,737 $ 11.10
Vested (319,959) 5.36
Granted 1,687,111 3.76
Forfeited (8,358) 3.88
Unvested at December 31, 2022 1,419,531 $ 4.35
The value of RSUs are measured based on their fair value on the date of grant
and amortized over their respective vesting periods. As of December 31, 2022,
total future compensation expense related to unvested RSUs not yet recognized in
the consolidated statements of operations was approximately $3,881,290, and the
weighted-average vesting period over which these awards are expected to be
recognized is approximately 1.79 years.
Non-employee Directors Compensation Policy
On January 10, 2022, the Committee formally adopted the previously approved Non-Employee Director Compensation Policy ("Policy"), effective October 19, 2021. The Policy included the following:
•An initial equity grant of 10,000 stock options;
•An annual retainer equal to $100,000, to be paid in fully-vested shares of the
company's Class A common stock on a quarterly basis in arrears;
•Once a non-employee director obtains exposures to the Company's Class A common
stock of $500,000 or greater, a director may choose to receive the annual
retainer in USD or any other currency (including Bitcoin); and
•Reimbursement for travel expenses and other reasonable out-of-pocket expenses.
The Company paid compensation to the non-employee directors of $275,843 during
2022, of which $200,843 is included within general and administrative expense in
the consolidated statement of operations for the year ended December 31,
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--------------------------------------------------------------------------------2022, after reversing an accrual of $75,000 as of December 31, 2021. By comparison, no compensation was paid to the non-employee directors during 2021.
NOTE 13 - WARRANTS
The following table summarizes outstanding warrants as of December 31, 2022, and 2021, and activity for the years then ended.
Number of Warrants
Outstanding as of January 1, 2021 -
Issued 297,795
Exercised -
Outstanding as of December 31, 2021 297,795 Issued
21,393,561
Exercised (5,816,250)
Outstanding as of December 31, 2022 15,875,106
May 2022 Private Placement
On May 15, 2022, the Company entered into a note and warrant purchase agreement, by and among the Company and the purchasers thereto, whereby the Company agreed to issue and sell (i) $33,750,000 aggregate principal amount of 10.00% unsecured convertible promissory notes and (ii) 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. The promissory notes and warrants were sold for aggregate consideration of $27.0 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 29 - Private Placements for additional details. On November 15, 2022, the Company elected to issue an additional 3,243,416 of warrants (in lieu of cash) for the November 2022 convertible note amortization payment. Subsequently, during the fourth quarter of 2022, the convertible note holders exercised 6,424,324 of the outstanding warrants.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements withArmistice Capital Master Fund Ltd. andGreg Beard , the Company's Chairman and Chief Executive Officer, for the purchase and sale of Class A common stock and warrants. Refer to Note 29 - 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.
WhiteHawk Refinancing Agreement
As detailed in Note 6 - Debt, on October 27, 2022, the Company entered into the Credit Agreement with WhiteHawk to refinance the WhiteHawk Financing Agreement, effectively terminating the WhiteHawk Financing Agreement. In conjunction with the closing of the WhiteHawk Refinancing Agreement, the Company issued a stock purchase warrant to WhiteHawk, which provides for the purchase of an additional 4,000,000 shares of Class A common stock at an exercise price of $0.01 per share.
WhiteHawk Finance LLC
On June 30, 2021, Equipment LLC entered into a $40,000,000 promissory note with
WhiteHawk. The note had a maturity date of June 23, 2023, but was effectively
extinguished on October 27, 2022, when the Company entered into the WhiteHawk
Refinancing Agreement. In conjunction with the promissory note, on June 30,
2021, Equipment LLC also entered into a stock purchase warrant agreement, where
Equipment LLC issued 181,705 warrants to WhiteHawk Finance LLC to purchase
shares of Class A common stock of Equipment LLC.
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On March 28, 2022, Equipment LLC entered into a $25,000,000 promissory note with
WhiteHawk. The note had a maturity date of March 31, 2024, but was effectively
extinguished on October 27, 2022, when the Company entered into the WhiteHawk
Refinancing Agreement. In conjunction with the promissory note, on March 28,
2022, Equipment LLC also entered into a stock purchase warrant agreement, where
Equipment LLC issued 125,000 warrants to WhiteHawk Finance LLC to purchase
shares of Class A common stock of Equipment LLC.
B. Riley Securities, Inc.
On April 1, 2021, and May 14, 2021, Stronghold Inc. entered into a warrant agreement withAmerican Stock Transfer & Trust Company . B. Riley Securities, Inc. acted as the Company's placement agent in connection with the Private Placements, and 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.
NOTE 14 - REDEEMABLE COMMON STOCK
Private Placements: Redeemable Common Stock - Series A and 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 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, the Company, 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 refusal
to the investors in the Series A Private Placement to purchase all or any
eligible capital stock not purchased by the Company 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 approximately $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.
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
one-for-one share basis at a par value of $0.0001 per share. As of December 31,
2021, these shares were no longer reported as redeemable common stock.
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--------------------------------------------------------------------------------The following is a summary of the Series A and Series B valuations and conversions to common equity:
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 13
(631,897) (148,575)
Total net redeemable common stock $ 78,041,113 $ 18,242,733
Conversion to common Class A shares $ (78,041,113) $ (18,242,733)
Remaining in net redeemable common stock $ - $ -
Common Stock - Class V
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 represented 45.1% and 56.1% ownership of Stronghold LLC, as
of December 31, 2022, and December 31, 2021, respectively, granting the owners
of Q Power economic rights and, as a holder, one vote on all matters to be voted
on by our stockholders generally, and a redemption right into Class A shares.
Refer to Note 15 - Noncontrolling Interests for more details.
The Company classifies its Class V common stock as redeemable common stock in
the accompanying consolidated balance sheets 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 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 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 December 31, 2022.
The Company recorded redeemable common stock as presented in the table below.
Common Class V
Shares Amount
Balance - December 31, 2021 27,057,600 $ 301,052,617
Net loss attributable to noncontrolling interest - (101,770,413)
Maximum redemption right valuation - (187,527,617)
Redemption of Class V shares (1,000,000) -
Balance - December 31, 2022 26,057,600 $ 11,754,587
NOTE 15 - NONCONTROLLING INTERESTS
The Company is the sole managing member of Stronghold LLC and, as a result,
consolidates the financial results of Stronghold LLC and reports a
noncontrolling interest representing the common units of Stronghold LLC held by
Q Power. Changes in the Company's ownership interest in Stronghold LLC, while
the Company retains its controlling interest, are accounted for as redeemable
common stock transactions. As such, future redemptions or direct exchanges of
common units of Stronghold LLC by the continuing equity owners will result in
changes to the amount recorded as noncontrolling
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--------------------------------------------------------------------------------interest. Refer to Note 14 - Redeemable Common Stock, which describes the redemption rights of the noncontrolling interest.
Class V common stock represented 45.1% and 56.1% ownership of Stronghold LLC, as of December 31, 2022, and 2021, respectively, granting the owners of Q Power economic rights and, as a holder, one vote on all matters to be voted on by our stockholders generally, and a redemption right into Class A shares. During the year ended December 31, 2022, 1,000,000 shares of Class V common stock held by Q Power were redeemed into Class A shares of common stock.
The following summarizes the redeemable common stock adjustments pertaining to the noncontrolling interest from April 1, 2021, through December 31, 2022:
Class V Common Stock Temporary Equity
Outstanding Fair Value Price Adjustments
Balance - April 1, 2021 (1) $ (2,877,584)
Net losses for the three months ended June 30, 2021 (2,235,219)
Maximum redemption right valuation (2) 27,057,600 $ 6.39 172,774,052
Balance - June 30, 2021 $ 167,661,249
Net losses for the three months ended September 30, 2021
(4,328,460)
Adjustment of mezzanine equity to redemption amount (3)
27,057,600 $ 9.33 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 (3)
27,057,600 $ 11.99 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 (3)
27,057,600 $ 7.72 (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 (3)
27,057,600 $ 1.75 (102,888,062)
Balance - June 30, 2022 $ 47,239,903
Net losses for the three months ended September 30, 2022
(42,203,141)
Adjustment of temporary equity to redemption amount (3)
27,057,600 $ 1.09 24,396,766
Balance - September 30, 2022 $ 29,433,528
Net losses for the three months ended December 31, 2022
(18,865,180)
Adjustment of temporary equity to redemption amount (3)
26,057,600 $ 0.45 1,186,239
Balance - December 31, 2022 $ 11,754,587
(1) As of the date of reorganization - refer to Note 1 - Business Combinations.
(2) Temporary equity adjustment based on Class V common stock outstanding at issuance price as of April 1, 2021.
(3) 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.
Common Units
The Company is the sole managing member of Stronghold LLC and, as a result, consolidates the financial results of Stronghold LLC and reports a noncontrolling interest representing the common units of Stronghold LLC held byOlympus Power, LLC , plus a corresponding number of Class V vote-only shares of common stock.Olympus Power, LLC can exchange these common units, along with corresponding shares of Class V common stock, for shares of Class A common stock on a one-for-one basis. Because of the Class V voting rights, the Company has assessed the exchange right as a "Redemption Right" to cause Stronghold LLC to acquire all or a portion of its Stronghold LLC Units for, at Stronghold LLC's election, one share of Stronghold Inc.'s Class A common stock at a redemption ratio of one share of Class A common stock for each Stronghold LLC Unit. Common units represented 0% and 2.4% ownership of Stronghold LLC as of December 31, 2022, and 2021, respectively, where the original owners ofOlympus Power, LLC had economic rights and, as a holder, one vote on all matters to be voted on by our stockholders generally, and a redemption right into Class A shares. During the year ended December 31, 2022, all 1,152,000 of common units held byOlympus Power, LLC were redeemed into Class A shares of common stock. 117 --------------------------------------------------------------------------------
The following summarizes the permanent equity adjustments pertaining to the noncontrolling interest from November 2, 2021 (date of issuance), through December 31, 2022:
Permanent Equity Adjustments
Balance - November 2, 2021 (1) $ 38,315,520
Net loss (645,359)
Balance - December 31, 2021 $ 37,670,161
Net loss (4,140,324)
Redemption of Series A convertible preferred shares (33,529,837)
Balance - December 31, 2022 $
-
(1) As of November 2, 2021, the date of issuance, 1,152,000 of Series A Preferred units outstanding at $33.26 per public trading share price (Nasdaq closing price).
NOTE 16 - EARNINGS (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 after the date of the reorganization on April 1, 2021.
Year Ended April 1 to
December 31, 2022 December 31, 2021
Numerator:
Net loss (1) $ (195,171,967) $ (27,255,329)
Less: net loss attributable to predecessor (1/1/21-3/31/21) (238,948)
Less: net loss attributable to noncontrolling interest $ (105,910,737) $ (15,803,234)
Net loss attributable to Stronghold Digital Mining, Inc. $ (89,261,230) $ (11,213,147)
Denominator:
Weighted average number of Class A common shares
outstanding 25,849,048 5,518,752
Basic net loss per share $ (3.45) $ (2.03)
Diluted net loss per share $ (3.45) $ (2.03)
(1)Basic and diluted earnings (loss) per share of Class A common stock is
presented only for the period after the Company's Reorganization Transactions.
As such, net loss used in the calculation represents the loss during the year
ended December 31, 2021 (post-reorganization date of April 1, 2021, through
December 31, 2021).
Securities that could potentially dilute earnings (loss) per share in the future
that were not included in the computation of diluted net loss per share as of
December 31, 2022, and 2021, because their inclusion would be anti-dilutive,
were as follows:
December 31, 2022 December 31, 2021
Stock options 1,721,821 -
RSUs 319,959 -
Warrants (excluding those with $0.01 exercise price) 5,718,499 -
Series A preferred units not yet exchanged for Common A shares - 1,152,000
Common V shares not yet exchanged for Common A shares 26,057,600 27,057,600
Total 33,817,879 28,209,600
Subsequent to December 31, 2022, warrant holders exercised an additional 4,574,350 of warrants. Additionally, on February 20, 2023, as described in Note 6 - Debt, the Company entered into the Exchange Transaction for shares of the
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newly-created Series C Convertible Preferred Stock. As of March 28, 2023, 1,530
units of Series C Convertible Preferred Stock were converted to 3,825,000 of
Class A common shares.
NOTE 17 - OPERATING LEASE ROU ASSETS AND LIABILITIES
The Company leases storage and office space, information technology equipment, and certain machinery and equipment used in the operation of the Company's coal refuse power generation facilities. Right-of-use assets associated with operating leases were $1,719,037, net of accumulated amortization of $464,845, in the consolidated balance sheet as of December 31, 2022.
The current and noncurrent portions of the Company's operating lease liabilities as of December 31, 2022, were as follows:
December 31, 2022
Current portion of operating lease liabilities $ 593,063 Long-term operating lease liabilities
1,230,001
Total operating lease liabilities $ 1,823,064
Future operating lease payments as of December 31, 2022, were as follows:
2023 $ 768,175 2024 754,243 2025 448,198 2026 180,587
Total operating lease payments (undiscounted) 2,151,203 Less: amount representing interest
(328,139)
Total operating lease payments (discounted) $ 1,823,064
At December 31, 2022, the weighted-average remaining lease term approximated 2.76 years, and the weighted-average discount rate approximated 7.80%. Cash paid for amounts included in the measurement of operating lease liabilities totaled $712,143 for the year ended December 31, 2022, and was classified as operating cash flows in the consolidated statement of cash flows for the year then ended.
NOTE 18 -
On April 1, 2021, the Company, using in part 576,000 shares of newly issued Series A Preferred Stock and in part proceeds from the Series A Private Placement, acquired the Aspen Interest.
The total consideration was a combination of the newly issued Series A Preferred Stock valued at the issuance price of $8.68 per share, or $5,000,000, plus an additional $2,000,000 in cash. A total of $7,000,000 was treated as a buyout of the Partners' Deficits of the Limited Partner (i.e., Aspen Interest) as of April 1, 2021.
The following table details the Partners' Deficit of the Aspen Interest as of April 1, 2021:
Limited Partners
Balance - December 31, 2020 $ (1,336,784)
Net loss - three months ended March 31, 2021 (71,687)
Balance - April 1, 2021 $ (1,408,471)
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--------------------------------------------------------------------------------NOTE 19 - SUPPLEMENTAL CASH AND NON-CASH INFORMATION
Supplemental disclosures of cash flow information for the years ended December 31, 2022, and 2021, were as follows:
December 31, 2022 December 31, 2021
Income tax payments $ - $ -
Interest payments $ 9,636,505 $ 1,195,692
Supplemental non-cash investing and financing activities consisted of the following for the years ended December 31, 2022, and 2021:
December 31, 2022 December 31, 2021
Equipment financed with debt $ - $ 45,793,381
Purchases of property, plant and equipment through finance leases 938,902 -
Purchases of property, plant and equipment included in accounts payable or accrued liabilities
6,614,671 -
Operating lease right-of-use assets exchanged for lease liabilities
630,831 -
Reclassifications from deposits to property, plant and equipment 63,363,287 -
McClymonds arbitration award - paid by Q Power 5,038,122 -
Convertible note payment via warrants 3,340,078 -
Redemption of Series A convertible preferred shares 33,529,837 -
Return of miners to settle debt 39,008,651 -
Issued as part of financing:
Warrants - WhiteHawk 1,150,000 1,999,396
Warrants - convertible note 6,604,881 -
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 - Aspen Interest buyout
- 5,000,000
Series A redeemable and convertible preferred stock units - Panther Creek Acquisition
- 38,315,520
Financed insurance premiums 5,484,449 6,890,509
NOTE 20 - 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 Holders 85% of the realized (or, in
certain circumstances, deemed realized) cash tax savings attributable to the tax
basis step-ups arising from taxable exchanges of units and certain other items.
For the year ended December 31, 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 has not been recorded due to maintaining a valuation allowance
on the Company's deferred tax assets, and no liability has been recorded with
respect to the TRA in light of the applicable criteria for accrual.
Estimating the amount and timing of Stronghold Inc.'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
liability associated with the TRA.
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--------------------------------------------------------------------------------NOTE 21 - INCOME TAXES
Subsequent to the Company's incorporation, the Company and its indirectly-owned corporate subsidiaries,Clearfield and Leesburg, provide for income taxes under the asset and liability method. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities - specifically for the Company and its investment in Stronghold LLC - using enacted income tax rates expected to be in effect during the year in which the basis differences reverse. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred income tax assets will not be realized. Prior to the Reorganization, Scrubgrass and Stronghold Power were structured as a limited partnership and limited liability company, respectively. Therefore, any taxable income or loss was included in the income tax returns of the individual owners. Accordingly, no recognition has been given to federal or state income taxes in the Company's financial statements for the periods prior to the Reorganization. For the years ended December 31, 2022, and 2021, the Company's total income tax provision (benefit) of $0 differed from amounts computed by applyingthe United States federal income tax rate to pre-tax loss for the period primarily due to the net losses attributable to noncontrolling interests and due to maintaining a valuation allowance on the Company's deferred income tax assets.
The components of the provision for income taxes for the years ended December 31, 2022, and 2021, were as follows:
Year ended December 31,
2022 2021
Current income tax provision (benefit):
Federal $ - $ -
State - -
Total current income tax provision (benefit) $ - $ -
Deferred income tax provision (benefit):
Federal $ - $ -
State - -
Total deferred income tax provision (benefit) $ - $ -
Total income tax provision (benefit) $ - $ -
The provision for income taxes differs from the amounts computed by applyingthe United States federal income tax rate to pre-tax loss. A reconciliation of the statutory federal income tax amount to the recorded income tax provision (benefit) expense is detailed in the following table.
Year ended December 31,
2022 2021
Income tax expense (benefit) at 21% federal income tax rate $ (40,986,113) $ (5,723,619)
Income attributable to the pre-incorporation period - 50,179
Income attributable to nontaxable noncontrolling interest 22,241,255 3,318,679
State income tax expense (benefit), net of federal tax effect (3,495,720) (752,955)
Change in valuation allowance 20,934,443 2,756,486
Change in state income tax rate 1,430,670 -
Other, net (124,535) 351,230
Total income tax provision (benefit) $ - $ -
Significant components of the Company's deferred income tax assets and liabilities as of December 31, 2022, and 2021, were as follows:
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Year ended December 31,
2022 2021
Net operating loss and other carryforwards $ 25,852,100 $ 6,243,820 Investment in Stronghold LLC
15,068,075 3,999,780
Total deferred income tax assets $ 40,920,175 $
10,243,600
Valuation allowance (40,920,175)
(10,243,600)
Net deferred income tax assets $ - $
-
Net deferred income tax assets (liabilities) $ - $
-
As of December 31, 2022, and 2021, the Company and its subsidiaries had no net deferred income tax assets or liabilities. Subsequent to the Company's Reorganization in 2021, deferred taxes are provided on the difference between the Company's basis for financial reporting purposes and basis for federal income tax purposes in its investment in Stronghold LLC. On July 8, 2022, the state ofPennsylvania enacted HB 1342 (Act 53), which includes a gradual reduction to the state corporate income tax rate to 4.99% over the 2023 through 2031 period. The Company considered the impact of this legislation in the period of enactment and reduced the gross amount of itsPennsylvania deferred income tax assets to take into account the reduced statutory rate. There was no impact to deferred income tax expense or net deferred income tax assets due to the valuation allowance against the Company's deferred income tax assets. As of December 31, 2022, no deferred income tax asset or liability has been recorded with respect to the Company's TRA with Q Power and other parties thereto because any basis-step generated by an exchange that triggers amounts potentially owed by the Company under the TRA (i.e., the redemption of Stronghold LLC units for shares of Class A common stock or cash) would be a component of a deferred income tax asset not more likely than not to be realized, as discussed further below. The Company has not yet realized cash tax savings with respect to basis step-ups resulting from any exchange, due to the Company's estimated taxable losses. As of December 31, 2022, the Company had federal net operating loss and interest expense carryforwards of approximately $113.8 million, which may be carried forward indefinitely to offset future taxable income, and state net operating loss carryforwards of approximately $43.2 million expiring in 2041 if not used. The Company incurred a tax net operating loss in 2022 due principally to Stronghold LLC's tax deductions for accelerated depreciation, in addition to its pre-tax loss. As of December 31, 2022, the Company did not have any uncertain tax positions requiring recognition in its consolidated financial statements. The 2021 and 2022 tax years for the Company and the 2018 through 2022 tax years forClearfield and Leesburg remain open to potential examination by tax authorities. As of December 31, 2022, and 2021, the Company had a valuation allowance of approximately $40.9 million and $10.2 million, respectively, related to deferred income tax assets the Company does not believe are more likely than not to be realized. 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 ASC 740. Factors contributing to this assessment included the Company's cumulative and current losses, as well as the evaluation of other sources of income as outlined in ASC 740. In addition, as of December 31, 2022, the Company determined that it sustained an ownership change as defined by IRC Section 382, which subjects the Company's pre-change net operating losses and other carryforwards to annual limitation. Generally, the amount of the limitation is equal to the value of the company's stock immediately prior to the ownership change multiplied by an interest rate, referred to as the long-term tax-exempt rate, periodically promulgated by theIRS . The Company estimates that the amount of its losses generated prior to the ownership change that may be used annually subsequent to the change is approximately $2.1 million. Such annual limit may significantly impact the timing of utilization of the Company's federal and state losses and other carryforwards. The Company continues to evaluate the likelihood of the utilization of its deferred income tax assets, and, while the valuation allowance remains in place, the Company expects to record no deferred income tax expense or benefit. 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 December 31, 2022, and 2021. 122 --------------------------------------------------------------------------------
NOTE 22 - PREPAID INSURANCE
As of December 31, 2022, and 2021, the Company had an unamortized prepaid
insurance balance of $4,877,935 and $6,301,701, respectively. The unamortized
balance as of December 31, 2022, consisted of $4,080,241 to cover directors and
officers insurance, including corporate reimbursement ("D&O Policy"), and
various commercial property and risk coverages totaling $797,694. Effective
October 20, 2022, the D&O Policy was renewed for 12 months. Refer to Note 28 -
Financed Insurance Premiums for disclosure of the annual premiums and financing
details. The Company's commercial property and risk coverages vary in policy
term expirations and are renewable on an annual basis.
NOTE 23 - ACCRUED LIABILITIES
Other accrued liabilities consisted of the following as of December 31, 2022, and 2021:
December 31, 2022 December 31, 2021
Accrued legal and professional fees $ 1,439,544 $ 1,457,727
Accrued interest 1,343,085 79,267
Accrued sales and use tax 5,150,659 2,609,664
Other 959,960 907,299
Total accrued liabilities $ 8,893,248 $ 5,053,957
NOTE 24 - ACQUISITION
On July 9, 2021, the Company entered into a purchase agreement with Panther
Creek Reclamation Holdings, LLC ("Panther Creek Reclamation"), a subsidiary of
Olympus (the "Panther Creek Acquisition") to acquire all of the assets of
Panther Creek Power Operating LLC ("Panther Creek"), comprised primarily of a
coal refuse reclamation facility with 80 MW of net electricity generation
capacity located near Nesquehoning, Pennsylvania (the "Panther Creek Plant").
Stronghold Inc. completed the Panther Creek Acquisition on November 2, 2021. The
consideration 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) 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 one 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 the
Panther Creek Redemption. In November 2022, these shares were redeemed for Class
A common stock. Refer to Note 15 - Noncontrolling Interests for further details.
The transaction was analyzed in accordance with ASC 805, Business Combinations,
to first determine whether the acquired assets constituted a business. If
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
acquired assets do not constitute 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 was 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 concluded that none of the assets qualified for combination into a single identifiable asset per ASC 805-10-55-5B.
Step 2. Combine the assets into similar assets. The Company concluded that none of the assets qualified for combination as similar assets under ASC 805-10-55-5C.
Step 3. Measure the fair value of the gross assets acquired. The Company
concluded that the gross assets acquired included consideration transferred in
excess of the fair value of the net identifiable assets acquired (i.e., goodwill
in a
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--------------------------------------------------------------------------------business combination), but it did not include goodwill resulting from the effects of deferred income tax liabilities, cash and cash equivalents or deferred income tax assets.
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 was concentrated in a single identifiable asset or group of similar identifiable assets. As a result, the transaction met the screen test as outlined in ASC 805-10-55-5A through 55-5C and was treated as an asset acquisition.
The following represented the fair value of the identifiable assets and liabilities as of the acquisition date of November 2, 2021:
The purchase price allocation was as follows (in thousands): Cash and cash equivalents
$ 491
Accounts receivable - trade 831
Prepaids and other current assets 429
Materials and supplies 1,559
Land and Rights of Way 1,727
Property, plant and equipment 43,782
Accounts payable (2,943)
Accrued expenses (298)
Due to related parties (73)
Total identifiable assets and liabilities $ 45,505
Total purchase consideration (1) $ 45,505
(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 50% of land closing costs
$0.808 million), $0.501 million in asset retirement obligations, $0.218 million
in assumed notes payable, $0.613 million 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 25 - 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 250 Bitcoin (the "Sold Bitcoin") at a floor price of $28,000 per Bitcoin (such sale, the "Forward Sale"). Pursuant to the Forward Sale, NYDIG Trading paid the Company $7.0 million, an amount equal to the floor price per Bitcoin (the "Initial Sale Price") on December 16, 2021, times the 250 Bitcoin provided for sale.
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 $970,000 of proceeds to the Company.
On July 27, 2022, the Company exited the Variable Prepaid Forward Sales Contract
Derivative with NYDIG Trading. As a result, 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.
For the years ended December 31, 2022, and 2021, the Company recognized a gain
(loss) from changes in the fair value of the forward sale derivative of
$3,435,639 and $(116,488), respectively.
On September 24, 2022, the Forward Sale was settled and Sold Bitcoin was 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.
As a result of the embedded price floor and cap mechanisms, this transaction was
considered a compound derivative instrument subject to fair value remeasurement
each reporting period. To determine the fair value, the Company used a
Black-Scholes option pricing model to assess the combined net value of the
embedded call and put features. The Company
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did not formally designate this instrument as a hedge, and as such, changes in
the fair value of the compound derivative instrument were recorded as "changes
in fair value of forward sale derivative" within other income (expense) in the
consolidated statements of operations.
NOTE 26 - INITIAL PUBLIC OFFERING
On October 19, 2021, by unanimous written consent, the Board and a newly-formed Pricing Committee approved the issuance and sale of the Company's Class A common stock, par value $0.0001 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 andB. Riley Securities, Inc. andCowen 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 included 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 27 - 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 agreed to
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 was to provide hosting services and support
cryptocurrency miners. In October 2021, the final deposit owed to Northern Data
was paid, and Northern Data began to deliver the 9,900 miners committed in the
Hardware and Purchase Agreement dated April 14, 2021. On March 28, 2022, the
Company restructured the Hosting Agreement to obtain an additional 2,675 miners
at a 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 was 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. As a
result, the Company neither made payment for such additional miners nor obtained
title to such additional miners.
The Company determined the arrangement with Northern Data met the definition of
a lease under Topic 842 and also determined the proper accounting for this
lease. The company recorded 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 were payable to the Company, and 35% of all cryptocurrency
revenue generated by the miners were payable to Northern Data or its designee
and recorded as a lease expense.
On September 30, 2022, the Company entered into a settlement agreement with
Northern Data (the "Settlement Agreement") whereby the Hosting Agreement was
mutually terminated. Pursuant to the Settlement Agreement, for a term of two
years until October 1, 2024, the Company has the right to lease from Northern
Data for its exclusive use, access and operation of (i) 24 Northern Data
manufactured pods capable of supporting approximately 550 Bitcoin miners each
for an aggregate amount of approximately 13,200 available slots and (ii) four
Strongboxes that the Company previously sold to Northern Data capable of
supporting approximately 264 Bitcoin miners each for an aggregate of
approximately 1,056 mining slots for $1,000 annually. Following the Settlement
Agreement, the revenue share is no longer applicable for miners in the Northern
Data pods or Strongboxes, and the Company now receives 100% of the profits
generated by Bitcoin miners in the Northern Data pods and Strongboxes. At the
end of the two-year term of the Settlement Agreement, the Company has the
option, but not the obligation, to purchase the Northern Data pods and
Strongboxes for an amount between $2 million and $6 million based on the
prevailing hash price at the time, net of a maximum of $1.5 million of
expenditures that the Company has the option to use to upgrade the Northern Data
pods throughout the two-year term.
Pursuant to the Settlement Agreement, the Company will pay Northern Data an
aggregate amount of $4.5 million as follows: (i) $2.5 million to Northern Data
not later than October 3, 2022, which amount was paid to Northern Data in full
on October, 3, 2022; (ii) $1.0 million to Northern Data not later than October
31, 2022, which amount was paid to Northern Data in full on October 31, 2022;
and (iii) $1.0 million to Northern Data not later than November 30, 2022, which
amount was paid to Northern Data in full on November 30, 2022. The Company
recorded the settlement costs of $4.5 million in September 2022, partially
offset by the elimination of approximately $2.6 million of payables to Northern
Data. The net
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--------------------------------------------------------------------------------impact of $1.9 million was recorded as operations and maintenance expense on the consolidated statement of operations for the year ended December 31, 2022.
NOTE 28 - FINANCED INSURANCE PREMIUMS
Effective October 20, 2022, the Company renewed its director and officer insurance policy for an additional 12 months with annual premiums totaling $5,484,449. On November 8, 2022, the Company executed a Commercial Premium Finance Agreement with AFCO Premium Credit LLC over a term of nine months, with an annual interest rate of 9.460%, that financed the payment of the total premiums owed. The agreement required a $750,000 down payment, with the remaining $4,734,449 plus interest to be paid over nine months. As of December 31, 2022, the unpaid balance was $4,208,399.
Effective September 10, 2022, the Company entered into a commercial property
insurance policy with annual premiums totaling $367,493. The Company executed a
Commercial Premium Finance Agreement with AON Premium Finance, over a term of
eleven months, with an annual interest rate of 7.460%, that financed the payment
of the total premiums owed. As of December 31, 2022, the unpaid balance was
$246,487.
Effective April 29, 2022, the Company entered into a commercial property
insurance policy with annual premiums totaling $523,076. The Company 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 financed the
payment of the total premiums owed. The agreement required a $44,793 down
payment, with the remaining $478,283 plus interest to be paid over eleven
months. As of December 31, 2022, the unpaid balance was $133,049.
NOTE 29 - 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 "Purchasers"), whereby the Company 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 sold 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, for 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 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 the Purchase Agreement Amendment,
by and among the Company and the Purchasers, whereby the Company agreed to amend
the Purchase Agreement such that $11.25 million of the outstanding principal was
exchanged for the Purchaser's execution of an amended and restated warrant
agreement pursuant to which the strike price of the 6,318,000 of May 2022
Warrants was reduced from $2.50 to $0.01. As a result of the reduction of the
warrant strike price, the Company recorded a loss on extinguishment of
$13,380,511. After giving effect to the principal
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reduction and amended and restated warrants, the Company was to 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 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.
As described in Note 6 - Debt, on December 30, 2022, the Company entered into an
exchange agreement with the Holders of the Company's Notes, providing for the
exchange of the Notes for shares of the Company's newly-created Series C
Preferred Stock. On February 20, 2023, the Exchange Transaction was consummated,
and the Notes were paid in full and terminated in exchange for the issuances of
the shares of Series C Preferred Stock.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements (the "Purchase Agreements") withArmistice Capital Master Fund Ltd. ("Armistice") andGreg Beard , the Company's Chairman and Chief Executive Officer (together with Armistice, the "September PIPE 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 purchase price of $1.60 and $1.66, 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 (subject to certain adjustments). Subject to certain ownership limitations, such warrants were exercisable upon issuance and will be exercisable for five and a half years commencing on the date of issuance. Armistice also purchased the pre-funded warrants for 2,725,650 shares of Class A common stock (the "Pre-Funded Warrants") at a purchase price of $1.60 per Pre-Funded Warrant. The Pre-Funded Warrants have an exercise price of $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 balance sheet date, and any change in fair value is recognized as "changes in fair value of warrant liabilities" in the consolidated statements of operations. The fair value of the warrant liabilities was estimated as of December 31, 2022, using a Black-Scholes model with significant inputs as follows: December 31, 2022 Expected volatility 130.9 % Expected life (in years) 5.5 Risk-free interest rate 4.0 % Expected dividend yield 0 % Fair value $ 2,131,959 NOTE 30 - SUBSEQUENT EVENTS On February 6, 2023, Stronghold entered into a two-year hosting agreement with Foundry Digital LLC, replacing the previous hosting agreement entered into on November 7, 2022. The new Foundry hosting agreement covers the same Bitcoin mining rigs as the prior hosting agreement, representing approximately 4500 miners with total hash rate capacity of approximately 420 PH/s. Pursuant to the new Foundry hosting agreement, Foundry will participate fully in the Company's vertically integrated business model at the Panther Creek Plant. On March 28, 2023, the Company and 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 agreed to eliminate an approximately $11.4 million outstanding payable in exchange for a Promissory Note in the amount of $3.5 million (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"). The B&M note has no definitive payment schedule or term. Pursuant to the Settlement Agreement, 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 Settlement Agreement included a mutual release of all claims. Pursuant to the B&M Warrant, the Company agreed to enter into a registration rights agreement with B&M for the shares underlying the B&M warrants no later than April 4, 2023. Simultaneous with the Settlement Agreement, 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 127 --------------------------------------------------------------------------------
B&M Note, Settlement Agreement 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.
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