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Except as otherwise indicated or required by the context, all references in this
prospectus to the "Company," "we," "us" or "our" relate to Stronghold Digital
Mining, Inc. ("Stronghold Inc.") and its consolidated subsidiaries following the
Reorganization.
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 a Delaware corporation on March 19, 2021. We are a
low-cost, environmentally beneficial, vertically integrated crypto asset mining
company currently focused on mining Bitcoin 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 in April 2021 and has the capacity to
generate approximately 83.5 megawatts ("MW") of electricity (the "Scrubgrass
Plant") and (ii) a facility located near Nesquehoning, Pennsylvania, which we
acquired in November 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 under Pennsylvania
law as a Tier II Alternative Energy Source (large-scale hydropower is also
classified in this tier). We are committed to generating our energy and managing
our assets sustainably, and we believe that we are one of the first vertically
integrated crypto asset mining companies with a focus on environmentally
beneficial operations.
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") in Pennsylvania. 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 through PJM
Interconnection, a Regional Transmission Organization ("RTO") that coordinates
the movement of wholesale electricity. Our ability to sell energy in the
wholesale generation market in the PJM RTO provides us with the ability to
optimize between selling power to the grid, and mining for Bitcoin. We also
believe that owning our own power source makes us a more attractive partner to
crypto asset mining equipment purveyors. We intend to leverage these competitive
advantages to continue to grow our business through the opportunistic
acquisition of additional power generating assets and miners
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 of March 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
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System Operator (“MISO”) Illinois, MISO Indiana, PJM East, and PJM West) is
approximately $52 per MWh, to which our expected cost of approximately $45.00 to
$50.00 per MWh compares favorably.
As of March 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 of March 28, 2023, we expect to receive an additional approximately
0.2 EH/s related to the purchase agreement we entered into with MinerVa
Semiconductor Corp. ("MinerVa") dated April 2, 2021 (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 by Anchorage Digital Bank ("Anchorage"),
which require multi-factor authentication and utilize cold and hot storage.
While we are confident in the security of our digital assets, we are evaluating
additional measures to provide additional protection.
Reorganization
On April 1, 2021, we effected the corporate reorganization described in Note 1 –
Business Combinations in the notes to our consolidated financial statements.
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 with Foundry Digital, LLC ("Foundry") or trading
activities conducted with Genesis Global Trading, Inc. ("Genesis Trading"), an
entity regulated by the New York Department of Financial Services and the SEC,
that engages in the trading of our mined Bitcoin. The hosting agreement is
performing in line with our expectations, and on February 6, 2023, we entered
into a new hosting agreement to replace the existing hosting agreement 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 to Celsius Network LLC, First Republic Bank, FTX Trading Ltd.,
Signature Bank, Silicon Valley Bank, or Silvergate Capital Corporation. We
continue to conduct diligence, including into liquidity or insolvency issues, on
third-parties in the crypto asset space with whom we have potential or ongoing
relationships. While we have not been materially impacted by any liquidity or
insolvency issues with such third parties to date, there is no guarantee that
our counterparties will not experience liquidity or insolvency issues in the
future.
We safeguard and keep private our digital assets, including the Bitcoin that we
mine, by utilizing storage solutions provided by Anchorage, which requires
multi-factor authentication. While we are confident in the security of our
digital assets held by Anchorage, given the broader market conditions, there can
be no assurance that other crypto asset market participants, including Anchorage
as our custodian, will not ultimately be impacted. Further, given the current
conditions in
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the digital assets ecosystem, we are liquidating our mined Bitcoin often, and at
multiple points every week through Anchorage. We continue to monitor the digital
assets industry as a whole, although it is not possible at this time to predict
all of the risks stemming from these events that may result to us, our service
providers, our counterparties, and the broader industry as a whole. We cannot
provide any assurance that we will not be materially impacted in the future by
bankruptcies of participants in the crypto asset space. See "-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.
Scrubgrass Plant and Data Center
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 from PJM Interconnection LLC ("PJM") resulted in
unplanned and extended outages of our mining operations at the Scrubgrass Plant,
diverting capacity away from our mining operations at a time that was not
economical for our business strategy. These diversions of power away from our
mining operations during the first and second quarters had a material adverse
effect on our business, financial condition and results of operations. The
Scrubgrass Plant also experienced higher than expected cost capping, as the
result of its role as a capacity resource, from PJM which obligated the
Scrubgrass Plant to supply power to the PJM grid at pre-set prices in an effort
to stabilize PJM grid pricing. Starting in June, Scrubgrass Plant was no longer
classified as a capacity resource, and is now an energy resource, which 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, the Scrubgrass Data Center
imported power from the grid to support operations.
Panther Creek Plant and Data Center
During the second quarter of 2022, the Panther Creek Plant's mining operations were offline for ten days due to the failure of a switchgear and the need to source, deliver and install a new piece of equipment, causing ten days of no mining revenue generation at the facility and resulting in an estimated loss of approximately $1.4 million. The operation of our power generation facilities, information technology systems and other assets and conduct of other activities subjects us to a variety of risks, including the breakdown or failure of equipment, accidents, security breaches, viruses or outages affecting information technology systems, labor disputes, obsolescence, delivery/transportation problems and disruptions of fuel supply, failure to receive spare parts in a timely manner, and performance below expected levels. As previously disclosed on the Company's Current Report on Form 8-K dated July 25, 2022, the Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in the month of June from damaged transmission lines caused by a storm, and other plant maintenance issues. The Company 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
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restored to service in October. During the outage, the Panther Creek Data Center
imported power from the grid to support operations.
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
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 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 on
April 30, 2023, so long as (i) no default or event of default has occurred or is
occurring under the Credit Agreement (as defined below) and (ii) no PIK Option
(as such term is defined in the First Amendment, as defined below) has been
elected by the Company. The principal amount under the B&M Note bears interest
at seven and one-half percent (7.5%). Pursuant to the B&M Warrant, the Company
agreed to enter into a registration rights agreement with B&M for the shares
underlying the 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 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
On December 30, 2022, the Company entered into an exchange agreement (the
"Exchange Agreement") with the holders (the "Purchasers") of the May 2022 Notes
(as defined below) whereby the May 2022 Notes were to be exchanged for shares of
a new series of convertible preferred stock (the "Series C Preferred Stock")
that, among other things, will convert into shares of Common Stock or pre-funded
warrants that may be exercised for shares of Class A common stock ("Pre-funded
Warrants"), at a conversion price of $0.40 per share. The Exchange Agreement
closed on February 20, 2023. Pursuant to the Exchange Agreement, the Purchasers
received an aggregate 23,102 shares of the Series C Preferred Stock in exchange
for the cancellation of an aggregate $17,893,750 of principal and accrued
interest, representing all of the amounts owed to the Purchasers under the May
2022 Notes. On February 20, 2023, one Purchaser converted 1,530 shares of the
Series C Preferred Stock to 3,825,000 shares of the Company's Class A common
stock. On February 20, 2023, one Purchaser converted 1,530 shares of the Series
C Preferred Stock to 3,825,000 shares of the Company's Class A common stock. The
rights and preferences of the Series C Preferred Stock are designated in a
certificate of designation (the "Certificate of Designation"), and the Company
provided certain registration rights to the Purchasers.
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Second WhiteHawk Amendment
On March 28, 2022, Equipment LLC and WhiteHawk Finance LLC ("WhiteHawk") amended
the WhiteHawk Financing Agreement (as defined below) for a second time (the
"Second WhiteHawk Amendment") to exchange the collateral under the equipment
financing agreement dated June 30, 2021, by and between Stronghold 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 by
Panther Creek and Scrubgrass will be released upon payment in full of the Second
Total Advance, regardless of whether the Total Advance remains outstanding. In
conjunction with the Second WhiteHawk Amendment, we issued a warrant to
WhiteHawk to purchase 125,000 shares of Class A common stock, subject to certain
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 on March 28, 2032.
MinerVa
On April 2, 2021, we entered into a purchase agreement with MinerVa (the "MinerVa Purchase Agreement") for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miners, with a total hash rate capacity of 1.5 exahash per second to be delivered. In December 2021, we extended the deadline for delivery of the MinerVa miners to April 2022. Due to continued delays in deliveries, an impairment of approximately $12 million was recognized on March 31, 2022. Due to market conditions, an additional impairment of approximately $5 million was recognized on December 31, 2022. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. As of December 31, 2022, and March 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 August 16, 2022, we entered into a commitment letter (the “Commitment
Letter”) with WhiteHawk to provide for committed financing to refinance the
WhiteHawk Financing Agreement and provide up to $20 million in additional
commitments for an aggregate loan not to exceed $60.0 million.
On October 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 by Stronghold 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 on October 26,
2025 and bear interest at a rate of either (i) the Secured Overnight Financing
Rate ("SOFR") plus 10% or (ii) a reference rate equal to the greater of (x) 3%,
(y) the federal funds rate plus 0.50% and (y) the Term SOFR rate plus 1%, plus
9%. The loan under the Delayed Draw
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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
On February 6, 2023, the Company, Stronghold LLC, as borrower, their subsidiaries and WhiteHawk 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 from February 2023 through July 2024 will not be required, with monthly amortization resuming July 31, 2024. Beginning June 30, 2023, following a five-month holiday, Stronghold LLC will make monthly prepayments of the loan in an amount equal to 50% of its average daily cash balance (including cryptocurrencies) in excess of $7,500,000 for such month. The First Amendment also modifies the financial covenants to (i) in the case of the requirement of the Company to maintain a leverage ratio no greater than 4.00:1.00, such covenant will not be tested until the fiscal quarter ending September 30, 2024 and (ii) in the case of the minimum liquidity covenant, modified to require minimum liquidity at any time to be not less than: (A) until March 31, 2024, $2,500,000; (B) during the period beginning April 1, 2024 through and including December 31, 2024, $5,000,000; and (C) from and after January 1, 2025, $7,500,000. The average monthly minimum liquidity requirement has been removed entirely. The First Amendment required the Company to produce a budget, to be approved by the required lenders, and to resolve all claims of and amounts payable to B&M in a manner satisfactory to the required lenders by February 28, 2023. During the term of the Credit Agreement, the administrative agent (at the direction of the required lenders) will have the right to designate a board observer to attend meetings of Board and all committees thereof. Such person will not be entitled to vote on or consent to any matters presented to the Board or any committees thereof. Such observer maybe excluded from certain meetings or discussions in limited circumstances. The Company will reimburse the observer for its reasonable out-of-pocket expenses incurred in connection with attending any meetings, but none of the lenders or such observer will receive any additional compensation or remuneration for such services. Further, the Company agreed to appoint an additional independent director that is reasonably satisfactory to the required lenders to its Board to serve until the Company's next annual meeting, and to nominate such person for election at its next annual meeting. Further, the failure of the Sponsor, which includes Q Power LLC (which is controlled by Greg Beard, the Chairman and Chief Executive Officer of the Company), to vote for such person as a director will constitute an event of default under the Credit Agreement. On March 7, 2023, the Board appointed Thomas Doherty to the Board.
Second Amendment to Credit Agreement
On March 28, 2023, the Company, Stronghold LLC, as borrower, their subsidiaries and WhiteHawk Capital, as collateral agent and administrative agent, and the other lenders thereto, entered into 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.
May 2022 Private Placement and Amendments
On May 15, 2022, we entered into a note and warrant purchase agreement (the
"Purchase Agreement"), by and among the Company and the purchasers thereto
(collectively, the "Purchasers"), whereby we agreed to issue and sell to
Purchasers, and Purchasers agreed to purchase from the Company, (i) $33,750,000
aggregate principal amount of 10.00% unsecured convertible promissory notes (the
"May 2022 Notes") and (ii) warrants (the "May 2022 Warrants") representing the
right to purchase up to 6,318,000 shares of Class A Common Stock, of the Company
with an exercise price per share equal to $2.50, on the terms and subject to the
conditions set forth in the Purchase Agreement (collectively, the "May 2022
Private Placement"). The May 2022 Notes and the May 2022 Warrants were sold for
aggregate consideration of $27.0 million.
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In connection with the May 2022 Private Placement, the May 2022 Warrants were
issued pursuant to a Warrant Agreement, dated as of May 15, 2022. The May 2022
Warrants are subject to mandatory cashless exercise provisions and have certain
anti-dilution provisions. The May 2022 Warrants will be exercisable for a
five-year period from the closing.
On August 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 6,318,000 May 2022 Warrants was reduced from $2.50
to $0.01. After giving effect to the principal reduction and amended and
restated warrants, the Company was to continue to make subsequent monthly,
payments to the 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.
On December 30, 2022, the Company entered into the Exchange Agreement with the
Purchasers, which closed on February 20, 2023. Pursuant to the Exchange
Agreement, the Purchasers received an aggregate 23,102 shares of the Series C
Preferred Stock in exchange for the cancellation of an aggregate $17,893,750 of
principal and accrued interest, representing all of the amounts owed to the Note
holders under the Notes. See "-Exchange Transaction" above for additional
information.
McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs Scrubgrass Generating
Company, L.P.
On May 9, 2022, an award in the amount of $5.0 million plus interest computed as of May 15, 2022, in the amount of $0.8 million was issued in favor of the McClymonds Supply & Transit Company, Inc. in the previously disclosed dispute over a trucking contract between the claimant and our subsidiary. The two managing members of Q Power, LLC, our primary Class V shareholder, have agreed to and begun to pay the full amount of the award such that there will be no effect on the financial condition of the Company.
September 2022 Private Placement
On September 13, 2022, we entered into Securities Purchase Agreements (the
"Armistice Purchase Agreements") with Armistice Capital Master Fund Ltd.
("Armistice") and Greg 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 on September
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 all
Registrable 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
On August 16, 2022, the Company, Stronghold LLC, Stronghold Digital Mining LLC,
a Delaware limited liability company ("SD Mining") and Stronghold Digital Mining
BT, LLC, a Delaware limited liability company ("SD Mining BT", and together with
SD Mining, the "APA Sellers" and, together with the Company and Stronghold LLC,
the "APA Seller Parties"), entered into an Asset Purchase Agreement (the "Asset
Purchase Agreement") with NYDIG ABL LLC, a Delaware limited liability company
formerly known as Arctos Credit, LLC ("NYDIG"), and The Provident Bank, a
Massachusetts savings bank ("BankProv" and together with NYDIG, "Purchasers" and
each, a "Purchaser").
Pursuant to the June 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
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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").
Between September 30, 2022, and October 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. On October 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
On August 17, 2021, Stronghold LLC entered into an agreement with Northern 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. On March 28, 2022, we restructured the
Hosting Agreement to obtain an additional 2,675 miners at cost of $37.5 per
terahash (to be paid five months after delivery) and temporarily reduced the
profit share for Northern Data while incorporating performance thresholds until
the data center build-out is complete. On August 10, 2022, the Company and
Northern Data terminated the provision of the restructured Hosting Agreement
related to the additional 2,675 miners and the Company shall neither make
payment for such additional miners nor obtain title to such additional miners.
Refer to Note 27 - Hosting Services Agreement in the notes to our consolidated
financial statements.
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, 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 in September 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 ended December 31, 2022.
Nasdaq Continued Listing Deficiency
As disclosed in our Form 8-K filing on December 6, 2022, on November 30, 2022,
we received a written notification from the Nasdaq 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 until May 29,
2023, to regain compliance with the minimum bid price requirement. During the
compliance period, our shares of Class A common stock will continue to be listed
and traded on the Nasdaq Global Market.
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The Company will regain compliance with the minimum bid price requirement if at
any time before May 29, 2023, the bid price for our Class A common stock closes
at or above $1.00 per share for a minimum of 10 consecutive business days.
As disclosed in our Form 8-K filing on January 13, 2023, on January 9, 2023,
stockholders holding a majority of our issued and outstanding Class A common
stock and Class V common stock entitled to 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 before June 30, 2023 (the
"Reverse Stock Split").
If we do not regain compliance within the allotted compliance period, including
any extensions that may be granted by Nasdaq, Nasdaq will provide notice that
the Company's shares of 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 in the 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 the Financial 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 through PJM Interconnection, a
Regional 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 to June 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.
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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 to June 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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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).
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 for U.S.
federal income tax purposes and is therefore not subject to entity-level U.S.
federal income taxes. Stronghold Inc. was incorporated as a Delaware corporation
on March 19, 2021, and therefore is subject to U.S. federal income taxes and
state and local taxes at the prevailing corporate income tax rates, including
with respect to its allocable share of any taxable income of Stronghold LLC. In
addition to tax expenses, Stronghold Inc. also incurs expenses related to its
operations, plus payment obligations under the Tax Receivable Agreement entered
into between the Company, Q Power LLC ("Q Power") and an agent named by Q Power,
dated April 1, 2021 (the "TRA"), which are expected to be significant.
Additionally, on March 14, 2023, we executed a joinder agreement with an
additional holder (together with Q Power, the "TRA Holders") who thereby became
a party to the TRA. To the extent Stronghold LLC has available cash and subject
to the terms of any current or future debt instruments, the Fifth Amended and
Restated Limited Liability Company Agreement of Stronghold LLC, as amended from
time to time (the "Stronghold LLC Agreement") requires Stronghold LLC to make
cash distributions to holders of Stronghold LLC Units ("Stronghold Unit
Holders"), including Stronghold Inc. and Q Power, in an amount sufficient to
allow Stronghold Inc. to pay its taxes and to make payments under the TRA. In
addition, the Stronghold LLC Agreement requires Stronghold LLC to make non-pro
rata payments to Stronghold Inc. to reimburse it for its corporate and other
overhead expenses, which
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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 to U.S. federal, state and local income taxes as a corporation. Our accounting predecessor was treated as a partnership for U.S. federal income tax purposes, and as such, was generally not subject to U.S. federal income tax at the entity level. Rather, the tax liability with respect to its taxable income was passed through to its members. Accordingly, the financial data attributable to our predecessor contains no provision for U.S. federal income taxes or income taxes in any state or locality. Due to cumulative and current losses as well as an evaluation of other sources of income as outlined in ASC 740, management has determined that the utilization of our deferred tax assets is not more likely than not, and therefore we have recorded a valuation allowance against our net deferred tax assets. Management continues to evaluate the likelihood of the Company utilizing its deferred taxes, and while the valuation allowance remains in place, we expect to record no deferred income tax expense or benefit. Should the valuation allowance no longer be required, the 21% statutory federal income tax rate as well as state and local income taxes at their respective rates will apply to income allocated to Stronghold Inc. As we further implement controls, processes and infrastructure applicable to companies with publicly traded equity securities, it is likely that we will incur additional selling, general and administrative 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
December 31, 2022, compared to the twelve months ended December 31, 2021,
include:
Operating Revenue
Revenue increased $75.1 million for the twelve months ended December 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
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result of the November 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 ended December 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 the November 2021 Panther Creek Acquisition, and the ramp up of cryptocurrency mining operations including higher lease expenses for our hosting services agreement, (2) a $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 And Miner 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. In March 2022 and December 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 ended
December 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.
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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.
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Energy Operations Segment
Twelve months ended December 31,
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 ended December 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 the November 2021 Panther Creek Acquisition. Effective June 1, 2022, through May 31, 2024, both plants strategically reduced their exposure to the capacity markets, and the resulting cost-capping and operational requirements in the day ahead market by PJM. The Company chose to be an energy resource after achieving its 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 ended
December 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 its November 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 the November 2021 Panther Creek Acquisition
and increased fuel delivery costs from
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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
ended December 31, 2022, and December 31, 2021, respectively. Depreciation and
amortization expense increased $3.9 million primarily due to the Panther 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 December 31,
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 $ 44,431,367
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 ended December 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 ended
December 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
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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 And Miner Sales in the notes to our consolidated financial
statements, and (7) a $6.5 million increase in Impairments on digital currencies
primarily related to the June 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 of December 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 ended December 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 the May 2022 Private Placement.
Liquidity and Capital Resources
Overview
Stronghold Inc. is a holding company with no operations and is the sole managing
member of Stronghold LLC. Our principal asset consists of units of Stronghold
LLC. Our earnings and cash flows and ability to meet any debt obligations will
depend on the cash flows resulting from the operations of our operating
subsidiaries, and the payment of distributions to us by such subsidiaries.
Our cash needs are primarily for growth through acquisitions, capital
expenditures, 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, on
May 15, 2022, we received $33.8 million (net of loan fees and debt issuance
costs) pursuant to the May 2022 Private Placement, and on September 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 of December 31, 2022, and March 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 and September 2022 Private Placement contain
certain restrictions, including maintenance of certain financial and liquidity
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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 ended December 31, 2022, and an accumulated deficit of $240.4 million as
of December 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 in April
2022 and the outages of our mining operations due to higher than anticipated
requirements from PJM. As a result of the delay in delivery of the MinerVa
miners, we were at risk of defaulting on our obligations under the WhiteHawk
debt facility because those miners were to be provided as collateral to
WhiteHawk by April 30, 2022. Pursuant to the Second WhiteHawk Amendment, the
MinerVa miners were exchanged for collateral for additional miners received by
the Company. Due to the delay, we determined an impairment charge totaling $12.2
million that was recognized on March 31, 2022. We spent approximately $5.1
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 in
September 2022.
Taking into account the Bitmain sale, other miner sales, September PIPE, NYDIG
Debt extinguishment, the Foundry Hosting Agreement and transactions subsequent
to December 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 December 31, 2022,
and 2021
The following table summarizes our cash flows for the periods indicated:
Twelve
Months Ended December 31,
2022 2021 Change
(in thousands)
Net cash provided by (used in) operating activities $ (27,154.5) $
(5,080.4) $ (22,074.2)
Net cash provided by (used in) investing activities $ (71,578.4) $ (257,602.8)
186,024.4
Net cash provided by (used in) financing activities $ 80,239.5 $
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 ended December 31, 2022, compared to $5.1 million of net cash used in operating activities for the twelve months ended December 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
ended December 31, 2022, compared to $257.6 million used in investing activities
for the twelve months ended December 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 And
Miner Sales.
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Financing Activities
Net cash provided by financing activities was $80.2 million for the twelve months ended December 31, 2022, compared to $294.2 million provided by financing activities for the twelve months ended December 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 on June 30, 2021, and amended the agreement on December 31, 2021, and March 28, 2022. On October 27, 2022, we entered into the Credit Agreement with WhiteHawk to refinance the WhiteHawk Financing Agreement, effectively terminating the WhiteHawk Financing Agreement. The Credit Agreement consists of $35.1 million in term loans and a $23.0 Delayed Draw Facility. Such loans under the Delayed Draw Facility were drawn on the closing date of the Credit Agreement. As of December 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 in October 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 in October 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 December 31, 2022, were
$74.4 million (excluding financed insurance premiums).
Amended May 2022 Notes
On May 15, 2022, we issued $33.75 million aggregate principal amount of May 2022 Notes to the Purchasers (the "May 2022 Notes"), bearing an interest rate of 10.00% per annum (in arrears) and a maturity date of May 15, 2024. On August 16, 2022, we entered into an agreement with the Purchasers, whereby we agreed to amend the terms of the May 2022 Notes such that an aggregate of $11.25 million of the outstanding principal under the May 2022 Notes was exchanged for the amended and restated warrant agreement pursuant to which the strike price of the aggregate 6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01. After giving effect to the principal reduction under the as amended May 2022 Notes, subsequent payments were due to the Purchasers on the fifteenth (15th) day of each of November 2022, December 2022, January 2023, and February 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 the May 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
MinerVa Semiconductor Corp
On April 2, 2021, the Company entered into a purchase agreement (the "MinerVa
Purchase Agreement") with MinerVa for the acquisition of 15,000 of their MV7
ASIC SHA256 model cryptocurrency miner equipment (miners) with a total terahash
to be delivered equal to 1.5 million terahash (total terahash). The price per
miner 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
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$44,032,500, was paid on April 2, 2021, and an additional payment of 20% of the
purchase price, or $14,677,500, was paid June 2, 2021. As of December 31, 2022,
there are no remaining deposits owed.
In December 2021, the Company extended the deadline for delivery of the MinerVa
miners to April 2022. In March 2022, MinerVa was again unable to meet its
delivery date and 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 of December 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.
On July 18, 2022, the Company provided written notice of dispute to MinerVa
pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to
work together in good faith towards a resolution for a period of sixty (60)
days. In accordance with the MinerVa Purchase Agreement, if no settlement has
been reached after sixty (60) days, Stronghold may end discussions and declare
an impasse and adhere to the dispute resolution provisions of the MinerVa
Purchase Agreement. As the 60-day period has now expired, the Company is
evaluating all available remedies under the MinerVa Purchase Agreement.
WhiteHawk Refinancing Agreement
On October 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 by Stronghold 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
beginning July 01, 2023) and (z) a maximum total leverage ratio covenant of (i)
7.5:1.0 for the quarter ending December 31, 2022, (ii) 5.0:1.0 for the quarter
ending March 31, 2023, (iii) 4.0:1.0 for the quarter ending June 30, 2023, and
(iv) 4.0:1.0 for each quarter ending thereafter.
The borrowings under the WhiteHawk Refinancing Agreement mature on October 26,
2025, and bear interest at a rate of either (i) the Secured Overnight Financing
Rate ("SOFR") plus 10% or (ii) a reference rate equal to the greater of (x) 3%,
(y) the federal funds rate plus 0.5% and (y) the Term SOFR rate plus 1%, plus
9%. 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.
On February 6, 2023, the Company, Stronghold LLC, as borrower, their
subsidiaries and WhiteHawk 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 from
February 2023 through July 2024 will not be required, with monthly amortization
resuming July 31, 2024. Beginning June 30, 2023, following a five-month holiday,
Stronghold LLC will make monthly prepayments of the loan in an amount equal to
50% of its average daily cash balance (including cryptocurrencies) in excess of
$7,500,000 for such month. The First Amendment also modifies the financial
covenants to (i) in the case of the requirement of the Company to maintain a
leverage ratio no greater than 4.00:1.00, such covenant will not be tested until
the fiscal quarter ending September 30, 2024, and (ii) in the case of
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the minimum liquidity covenant, modified to require minimum liquidity at any
time to be not less than: (A) until March 31, 2024, $2,500,000; (B) during the
period beginning April 1, 2024, through and including December 31, 2024,
$5,000,000; and (C) from and after January 1, 2025, $7,500,000. The Company was
in compliance with all applicable covenants under the WhiteHawk Refinancing
Agreement as of December 31, 2022.
Convertible Note Exchange
On December 30, 2022, the Company entered into an exchange agreement with the holders (the "Holders") of the Company's Amended and Restated 10% Notes (the "Notes"), providing for the exchange of the Notes (the "Exchange Transaction") for shares of the Company's newly-created Series C Convertible Preferred Stock, par value $0.0001 per share (the "Series C Preferred Stock"). On February 20, 2023, the Exchange Transaction was consummated, and the Notes were 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 by Stronghold Inc. to the TRA Holders
of 85% of the net cash savings, if any, in U.S. federal, state and local income
tax and franchise tax (computed using the estimated impact of state and local
taxes) that Stronghold Inc. actually realizes (or is deemed to realize in
certain circumstances) as a result of (i) certain increases in tax basis that
occur as a result of Stronghold Inc.'s acquisition (or deemed acquisition for
U.S. federal income tax purposes) of all or a portion of such holder's
Stronghold LLC Units pursuant to an exercise of Redemption Right or the Call
Right and (ii) imputed interest deemed to be paid by Stronghold Inc. as a result
of, and additional tax basis arising from, any payments Stronghold Inc. makes
under the TRA. Stronghold Inc. will retain the remaining net cash savings, if
any. The TRA generally provides for payments to be made as Stronghold Inc.
realizes actual cash tax savings from the tax benefits covered by the TRA.
However, the TRA provides that if Stronghold Inc. elects to terminate the TRA
early (or it is terminated early due to Stronghold Inc.'s failure to honor a
material obligation thereunder or due to certain mergers, asset sales, other
forms of business combinations or other changes of control), Stronghold Inc. is
required to make an immediate payment equal to the present value of the future
payments it would be required to make if it realized deemed tax savings pursuant
to the TRA (determined by applying a discount rate equal to one-year LIBOR (or
an agreed successor rate, if applicable) plus 100 basis points, and using
numerous assumptions to determine deemed tax savings), and such early
termination payment is expected to be substantial and may exceed the future tax
benefits realized by Stronghold Inc.
The actual timing and amount of any payments that may be made under the TRA are
unknown at this time and will vary based on a number of factors. However,
Stronghold Inc. expects that the payments that it will be required to make to
the TRA Holders (or their permitted assignees) in connection with the TRA will
be substantial. Any payments made by Stronghold 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 to Stronghold Inc. or Stronghold
LLC. To the extent Stronghold LLC has available cash and subject to the terms of
any current or future debt or other agreements, the Stronghold LLC Agreement
will require Stronghold LLC to make cash distributions to holders of Stronghold
LLC Units, including Stronghold Inc., in an amount sufficient to allow
Stronghold Inc. and Q Power to pay its taxes and to make payments under the TRA.
Stronghold Inc. generally expects Stronghold LLC to fund such distributions out
of available cash. However, except in cases where Stronghold Inc. elects to
terminate the TRA early, the TRA is terminated early due to certain mergers or
other changes of control or Stronghold Inc. has available cash but fails to make
payments when due, generally Stronghold Inc. may defer payments due under the
TRA if it does not have available cash to satisfy its payment obligations under
the TRA or if its contractual obligations limit its ability to make these
payments. Any such deferred payments under the TRA generally will accrue
interest at the rate provided for in the TRA, and such interest may
significantly exceed Stronghold Inc.'s other costs of capital. If Stronghold
Inc. experiences a change of control (as defined under the TRA, which includes
certain mergers, asset sales and other forms of business combinations), and in
certain other circumstances, payments under the TRA may be accelerated and/or
significantly exceed the actual benefits, if any, Stronghold Inc. realizes in
respect of the tax attributes subject to the TRA. In the case of such an
acceleration in connection with a change of control, where applicable,
Stronghold Inc. generally expects the accelerated payments due under the TRA to
be funded out of the proceeds of the change of control transaction giving rise
to such acceleration, which could have a significant impact on our ability to
consummate a change of control or reduce the proceeds received by our
stockholders in connection with a change of control. However, Stronghold Inc.
may be required to fund such payment from other sources, and as a result, any
early termination of the TRA could have a substantial negative impact on our
liquidity or financial condition.
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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 with U.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 Directors Stronghold Digital Mining, Inc. New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Stronghold
Digital Mining, Inc. and subsidiaries (the "Company" and successor to Scrubgrass
Generating Company, L.P. and Stronghold Digital Mining, LLC) as of December 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 at December 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 in the 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 the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be
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independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
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
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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; $0.0001 par value; $5,000,000 aggregate liquidation value;
0 and 1,152,000 shares issued and outstanding as of December 31,
2022, and 2021, respectively.
- 37,670,161
Common Stock – Class A; $0.0001 par value; 685,440,000 shares
authorized; 31,710,217 and 20,016,067 shares issued and
outstanding as of December 31, 2022, and 2021, respectively.
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 $ 354,621,269
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) $ (11,213,147)
NET LOSS attributable to Class A common shareholders(1)
Basic
$ (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 on April 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 ended December 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)
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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) $ 241,872,747 $ (59,164,778)
Net loss attributable to
Stronghold Digital Mining, Inc.
- - - - (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 $ 31,790,115
The accompanying notes are an integral part of these consolidated financial
statements.
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STRONGHOLD DIGITAL MINING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS COMBINATIONS
Reorganization
Stronghold Digital Mining, Inc. (“Stronghold Inc.” or the “Company”) was
incorporated as a Delaware corporation on March 19, 2021. On April 1, 2021,
contemporaneously with the Series A Private Placement (as defined below),
Stronghold Inc. underwent a corporate reorganization pursuant to a Master
Transaction Agreement, which will be referred to herein as the “Reorganization.”
Immediately prior to the Reorganization, Q Power LLC ("Q Power") directly held
all of the equity interests in Stronghold Digital Mining LLC ("SDM"), and
indirectly held 70% of the limited partner interests, and all of the general
partner interests, in Scrubgrass Reclamation Company, L.P. (f/k/a Scrubgrass
Generating Company, L.P.) ("Scrubgrass LP"), through wholly-owned subsidiaries
EIF Scrubgrass LLC ("EIF Scrubgrass"), Falcon Power LLC ("Falcon") and
Scrubgrass Power LLC. Aspen Scrubgrass Participant, LLC ("Aspen") held the
remaining 30% of the limited partner interests in Scrubgrass LP (the "Aspen
Interest"). Scrubgrass LP is a Delaware limited partnership originally formed on
December 1, 1990, under the name of Scrubgrass Generating Company, L.P. SDM is a
Delaware limited liability company originally formed on February 12, 2020, under
the name Stronghold Power LLC ("Stronghold Power").
On April 1, 2021, Stronghold Inc. entered into a Series A Preferred Stock
Purchase Agreement pursuant to which Stronghold 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 the Aspen
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 in Stronghold 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 to Stronghold Digital Mining Holdings LLC ("Stronghold LLC") in exchange for
27,072,000 Class A common units of Stronghold 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 to Aspen), 27,072,000
shares of Class V common stock of Stronghold Inc. and the Aspen Interest to
Stronghold LLC in exchange for 10,368,000 preferred units of Stronghold LLC, and
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.
As a result of the Reorganization, the acquisition of the Aspen Interest and the
acquisition of Stronghold LLC Units by Stronghold Inc. discussed above, (a) Q
Power acquired and retained 27,057,600 Stronghold LLC Units, 14,400 shares of
Class A common stock of Stronghold Inc. and 27,057,600 shares of Class V common
stock of Stronghold Inc., effectively giving Q Power approximately 69% of the
voting power of Stronghold Inc. and approximately 69% of the economic interest
in Stronghold LLC, (b) Stronghold Inc. acquired 10,368,000 preferred units of
Stronghold LLC and 14,400 Stronghold LLC Units, effectively giving Stronghold
Inc. approximately 31% of the economic interest in Stronghold LLC, (c)
Stronghold Inc. became the sole managing member of Stronghold LLC and is
responsible for all operational, management and administrative decisions
relating to Stronghold LLC's business and consolidates financial results of
Stronghold LLC and its subsidiaries, (d) Stronghold Inc. became a holding
company whose only material asset consists of membership interests in Stronghold
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, including Scrubgrass LP and SDM.
On May 14, 2021, the Company completed a private placement of shares of the
Company’s Series B Convertible Redeemable Preferred Stock of Stronghold Inc.
(the “Series B Preferred Stock,” and, together with the Series A Preferred
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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.
Scrubgrass and Stronghold Power were under common control prior to the
Reorganization on April 1, 2021, and consolidated financial statements reported
as of December 31, 2020, and are included in the consolidated statements of
operations for the years ended December 31, 2022, and 2021.
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 in the United States of
America ("GAAP"), under the rules and regulations of the U.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 the Federal 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 December 31, 2022, cash and cash equivalents includes $900,000 of
restricted cash, which represents a continuous bond in place of $400,000 to
mitigate fees charged by customs brokerage companies associated with importing
miners and a $500,000 letter of credit required to finance the Company’s
director and officer insurance policy.
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 of December 31, 2022,
and 2021,
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and recognized impairments losses of $8,339,660 and $1,870,274 for the years
ended December 31, 2022, and 2021, respectively.
The following table presents the activities of the digital currencies for the
years ended December 31, 2022, and 2021:
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 $ 10,417,865
As of December 31, 2021, the Company held an aggregate amount of digital
currencies of $10,417,865 that was comprised of restricted and unrestricted
Bitcoin. Of that amount, $2,699,644 and $7,718,221 was restricted and
unrestricted, respectively.
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 ended December 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 of December 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 of December 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 in September 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 of December 31, 2022,
there were no derivative contracts open.
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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 the Financial 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 through PJM Interconnection, a
Regional 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 to June 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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Capacity Revenue
Prior to June 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 the Commonwealth 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 ended December 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.
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Renewable Energy Credits (“RECs”)
The Company uses coal refuse, which is classified as a Tier II Alternative
Energy Source under Pennsylvania 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 ended December 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 ended
December 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 ended December 31, 2022, and 2021, respectively.
Waste Ash Sales
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 ended December 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 by Stronghold 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 to Stronghold 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 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.
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 of
December 31, 2022, the Company's tax years ended December 31, 2018, through the
current year are open for potential examination by taxing authorities.
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Certain of Stronghold 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, including Stronghold 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 to Clearfield 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 of December 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 December 31, 2022, and specifically to the amended May 2022 Warrants.
Recently Issued Accounting Pronouncements
In September 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 a Smaller
Reporting Company, as defined by the SEC, the new guidance becomes effective for
fiscal years beginning after December 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 MINER SALES
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).
In March 2022, the Company evaluated the MinerVa 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.
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The following table details the total equipment deposits of $10,081,307 as of
December 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
$ 195,291,111 $ (11,179,500) $ (102,766,863) $ (17,348,742) $ (53,914,699) $ 10,081,307
[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 in May 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 ended December 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
On October 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
between April 2022 and September 2022, for an aggregate purchase price of
$75,000,000. On August 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.
On November 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 between July 2022
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and December 2022, for an aggregate purchase price of $19,350,000. On May 13,
2022, Stronghold entered into a purchase order to transfer the Second Bitmain
Agreement to Cryptech 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
$ 66,295,809 $ 66,153,985
Strongboxes and power transformers
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
$ 167,204,681 $ 166,657,155
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 of December 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 ended December 31, 2022, and 2021, respectively, including depreciation of assets under finance leases of $406,411 and $290,805 for the years ended December 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 ended December 31, 2022.
The gross value of assets under finance leases and the related accumulated
amortization approximated $2,890,665 and 1,758,629 as of December 31, 2022,
respectively, and $2,108,280 and $1,352,218 as of December 31, 2021,
respectively.
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NOTE 6 – DEBT
Debt consisted of the following as of December 31, 2022, and December 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] -
$58,149,411 loan, with interest at 10.00% plus SOFR, due
October 2025.
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
$17,984,000 maximum advance loan, with interest at 9.99% due
December 2023.
– [F] 9,891,200
$17,984,000 maximum advance loan, with interest at 9.99% due
December 2023.
– [G] 7,319,488
$17,984,000 maximum advance loan, with interest at 9.99% due
December 2023.
- [H] -
$33,750,000 Convertible Note, with interest at 10.00% due May
2024.
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 August 16, 2022, the Company, Stronghold LLC, SDM and Stronghold Digital
Mining BT, LLC, a Delaware limited liability company (“Digital Mining BT” and,
together with SDM, the “APA Sellers” and, together with the Company and
Stronghold LLC, the “APA Seller Parties”), entered into an Asset Purchase
Agreement (the “Asset Purchase Agreement”)
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with NYDIG, formerly known as Arctos Credit, LLC, and The Provident Bank, a
Massachusetts savings bank (“BankProv” and, together with NYDIG, “Purchasers”
and each, a “Purchaser”).
Pursuant to the master equipment financing agreement entered into between SDM
and Arctos Credit, LLC ("Arctos" now known as "NYDIG") on June 25, 2021 (the
"Arctos/NYDIG Financing Agreement"), and the master equipment financing
agreement entered into between Digital Mining BT and NYDIG on December 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 of September 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 in October 2022.
WhiteHawk Refinancing Agreement
On October 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 by Stronghold 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
beginning July 01, 2023) and (z) a maximum total leverage ratio covenant of (i)
7.5:1.0 for the quarter ending December 31, 2022, (ii) 5.0:1.0 for the quarter
ending March 31, 2023, (iii) 4.0:1.0 for the quarter ending June 30, 2023, and
(iv) 4.0:1.0 for each quarter ending thereafter.
The borrowings under the WhiteHawk Refinancing Agreement mature on October 26,
2025, and bear interest at a rate of either (i) the Secured Overnight Financing
Rate ("SOFR") plus 10% or (ii) a reference rate equal to the greater of (x) 3%,
(y) the federal funds rate plus 0.5% and (y) the Term SOFR rate plus 1%, plus
9%. 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 ended December 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.
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On February 6, 2023, the Company, Stronghold LLC, as borrower, their
subsidiaries and WhiteHawk 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 from
February 2023 through July 2024 will not be required, with monthly amortization
resuming July 31, 2024. Beginning June 30, 2023, following a five-month holiday,
Stronghold LLC will make monthly prepayments of the loan in an amount equal to
50% of its average daily cash balance (including cryptocurrencies) in excess of
$7,500,000 for such month. The First Amendment also modifies the financial
covenants to (i) in the case of the requirement of the Company to maintain a
leverage ratio no greater than 4.00:1.00, such covenant will not be tested until
the fiscal quarter ending September 30, 2024, and (ii) in the case of the
minimum liquidity covenant, modified to require minimum liquidity at any time to
be not less than: (A) until March 31, 2024, $2,500,000; (B) during the period
beginning April 1, 2024, through and including December 31, 2024, $5,000,000;
and (C) from and after January 1, 2025, $7,500,000. The Company was in
compliance with all applicable covenants under the WhiteHawk Refinancing
Agreement as of December 31, 2022.
Convertible Note Exchange
On December 30, 2022, the Company entered into an exchange agreement with the holders (the "Holders") of the Company's Amended and Restated 10% Notes (the "Notes"), providing for the exchange of the Notes (the "Exchange Transaction") for shares of the Company's newly-created Series C Convertible Preferred Stock, par value $0.0001 per share (the "Series C Preferred Stock"). On February 20, 2023, the Exchange Transaction was consummated, and the Notes were 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. On February 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 ended December 31, 2022, a resale registration statement (the "Resale Registration Statement") with the Securities 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 December 31, 2022, are as follows:
Years ending December 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
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year ended December 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 of December 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 ended December 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 And Miner 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.
MinerVa Semiconductor Corp
On April 2, 2021, the Company entered into a purchase agreement (the "MinerVa Purchase Agreement") with MinerVa for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner equipment (miners) with a total terahash to be delivered equal to 1.5 million terahash (total terahash). The price per miner was $4,892.50 for an aggregate purchase price of $73,387,500 to be paid in installments. The first installment equal to 60% of the purchase price, or $44,032,500, was paid on April 2, 2021, and an additional payment of 20% of the purchase price, or $14,677,500, was paid on June 2, 2021. As of December 31, 2022, there were no remaining deposits owed. In December 2021, the Company extended the deadline for delivery of the MinerVa miners to April 2022. In March 2022, MinerVa was again unable to meet its delivery date and 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 of December 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. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60) days, Stronghold may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. 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.
McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs. Scrubgrass
Generating Company, L.P.
On January 31, 2020, McClymonds Supply and Transit Company, Inc. ("McClymonds")
made a Demand for Arbitration, as required by the terms of the Transportation
Agreement between it and the Scrubgrass dated April 8, 2013 (the "Agreement").
In its demand, McClymonds alleged damages in the amount of $5,042,350 for
failure to pay McClymonds for services. On February 18, 2020, Scrubgrass
submitted its answering statement denying the claim of McClymonds in its
entirety. On March 31, 2020, Scrubgrass submitted its counterclaim against
McClymonds in the amount of $6,747,328 as
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the result of McClymonds' failure to deliver fuel as required under the terms of
the Agreement. Hearings were held from January 31, 2022, to February 3, 2022. On
May 9, 2022, an award in the amount of $5.0 million plus interest of
approximately $0.8 million was issued in favor of the McClymonds Supply &
Transit. The two managing members of Q 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 of Q 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.
Allegheny Mineral Corporation v. Scrubgrass Generating Company, L.P., Butler
County Court of Common Pleas, No. AD 19-11039
In November 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 in August 2020, the parties again attempted to mediate the case on October 26, 2022, which led to a mutual agreement to settlement terms of a $300,000 cash payment, and a supply agreement for limestone. Subject to completion of the settlement terms, this matter has been stayed in Butler County Court and the outstanding litigation has been terminated.
FERC Matters
On November 19, 2021, Scrubgrass received a notice of breach from PJM
Interconnection, LLC alleging that Scrubgrass breached Interconnection Service
Agreement - No. 1795 (the "ISA") by failing to provide advance notice to PJM
Interconnection, LLC and Mid-Atlantic Interstate Transmission, LLC ("MAIT")
pursuant to ISA, Appendix 2, section 3, of modifications made to the Scrubgrass
Plant. On December 16, 2021, Scrubgrass responded to the notice of breach and
respectfully disagreed that the ISA had been breached. On January 7, 2022,
Scrubgrass participated in an information gathering meeting with representatives
from PJM regarding the notice of breach and Scrubgrass continues to work with
PJM regarding the dispute, including conducting a necessary study agreement with
respect to the Scrubgrass Plant. On January 20, 2022, the Company sent PJM a
letter regarding the installation of a resistive computational load bank at the
Panther Creek Plant. On March 1, 2022, the Company executed a necessary study
agreement with respect to the Panther Creek Plant. On May 11, 2022, the Division
of Investigations of the FERC Office of Enforcement ("OE") informed the Company
that the Office of Enforcement is conducting a non-public preliminary
investigation concerning Scrubgrass' compliance with various aspects of the PJM
tariff. The OE requested that the Company provide certain information and
documents concerning Scrubgrass' operations by June 10, 2022. On July 13, 2022,
after being granted an extension to respond by the OE, the Company submitted a
formal response to the OE's request. 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, the Panther 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. Stronghold Digital Mining Inc., et al., U.S District Court for the
Southern District of New York
On April 14, 2022, the Company, and certain of our current and former directors,
officers and underwriters were named in a putative class action complaint filed
in the United 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. On August
4, 2022, co-lead plaintiffs were appointed. On October 18, 2022, the Plaintiffs
filed an amended complaint. On December 19, 2022, the Company filed a Motion to
Dismiss. On February 17, 2023, the plaintiffs filed an opposition to the
defendant's motion to dismiss. On March 20, 2023, the Company filed a reply
brief in further support of its motion to dismiss. 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.
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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 of Coal Valley Sales, LLC ("CVS") from the
Russellton site specifically. The Company is also obligated to unload and
properly dispose of ash at the Russellton 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 the Russellton site and,
therefore, is responsible for complying with all state and federal requirements
and regulations.
The Company purchases coal from Coal Valley Properties, LLC, a single-member
limited liability company which is entirely owned by one individual who has
ownership in Q Power, and from CVS. CVS is a single-member limited liability
company which is owned by a coal reclamation partnership of which an owner of Q
Power has a direct and an indirect interest in the partnership of 16.26%.
The Company expensed $733,458 and $303,500 for the years ended December 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 of December 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, and
December 31, 2021, were as follows:
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
of Olympus Power LLC. Under the Fuel Agreement, Panther Creek Fuel Services LLC
provides the Company with operations and maintenance services with respect to
the Facility. The Company reimburses Panther Creek Energy Services LLC for
actual wages and salaries. The 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 of Olympus Power LLC. Under the Scrubgrass Fuel Agreement,
Scrubgrass Fuel Services LLC
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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
Olympus Power LLC
On November 2, 2021, Stronghold LLC entered into an Operations, Maintenance and
Ancillary Services Agreement (the "Omnibus Services Agreement") with Olympus
Stronghold Services, LLC ("Olympus Stronghold Services"), whereby Olympus
Stronghold Services currently provides certain operations and maintenance
services to Stronghold LLC and currently employs certain personnel to operate
the 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 of Olympus Power LLC. Under the O&M Agreement, Panther Creek Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The Company also 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 of Olympus Power LLC. Under the Scrubgrass O&M
Agreement, Scrubgrass Energy Services LLC provides the Company with operations
and maintenance services with respect to the Facility. The Company reimburses
Scrubgrass Energy Services LLC for actual wages and salaries. The Company also
agreed to pay a management fee of $175,000 per operating year, which is payable
monthly, and is adjusted by the consumer price index on each anniversary date of
the effective date. The Company expensed $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.
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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 and William Spence (the "Spence Agreement"). In consideration of
consultant's performance of the services thereunder, Q Power will pay Mr. Spence
a fee at the rate of $50,000 per complete calendar month (pro-rated for partial
months) that Mr. Spence provides services thereunder, payable in arrears. The
previous agreement requiring monthly payments of $25,000 was terminated. Q Power
will not be liable for any other payments to Mr. Spence including, but not
limited to, any cost or expenses incurred by Mr. Spence in the course of
performing his obligations thereunder. 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 by
Greg 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 on U.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 with Armistice Capital Master Fund Ltd. and Greg 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 with American 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 by
Olympus 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 of Olympus
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 by Olympus Power, LLC were redeemed into Class A shares of common stock.
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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
118 -------------------------------------------------------------------------------- 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 – ASPEN INTEREST (“OLYMPUS”) BUYOUT
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 applying the 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 applying the
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 of Pennsylvania 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 its
Pennsylvania 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
for Clearfield 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 the
IRS. 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.
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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 and B. Riley Securities, Inc. and Cowen and Company, LLC, as representatives of the other underwriters named therein (the "Underwriting Agreement"). The Board unanimously approved the issuance and sale by the Company in the IPO of up to 7,690,400 shares of Class A common stock (which 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") with Armistice Capital Master Fund Ltd.
("Armistice") and Greg 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
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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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