Stronghold Digital Mining, Inc.（以下简称"公司"）正在提交本次修正案第1号，按照10-Q/A表格（以下简称"修正后的10-Q表格"）对公司的季度报告进行修订和重述，内容包括第I部分的第1、2和4项，以及第II部分的第6项，报告期截至2024年9月30日，该报告最初于2024年11月13日向证券交易委员会（以下简称"SEC"）提交（以下简称"原始10-Q表格"）。本修正后的10-Q表格包含截至2024年9月30日的三个月和九个月的未经审计的简化合并基本报表。
在2023年5月15日，经董事会和公司股东批准，公司进行了一次1比10的反向股票拆分（"反向股票拆分"），涉及其A类普通股，面值为$0.0001 每股，及面值为 $ 的 V 类普通股0.0001 公司的 A 类和 V 类普通股的面值未因反向拆股而调整。所有股份和每股金额及相关股东权益余额在此处已追溯性地调整以反映反向拆股。
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 expired on December 31, 2023. The Company expensed $0 and $324,925 for the three months ended September 30, 2024, and 2023, respectively, and $1,442,640 and $2,406,726 for the nine months ended September 30, 2024, and 2023, respectively, which is included in fuel expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of September 30, 2024, and December 31, 2023, below.
Effective February 13, 2024, the Company terminated its Omnibus Services Agreement with Olympus Power, and therefore, Northampton is no longer a related party entity.
Fuel Management Agreements
Panther Creek Fuel Services LLC
Effective August 1, 2012, the Company entered into the Fuel Management Agreement (the “Panther Creek Fuel Agreement”) with Panther Creek Fuel Services LLC, a wholly owned subsidiary of Olympus Services LLC which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the Panther Creek Fuel Agreement, Panther Creek Fuel Services LLC provides the Company with operations and maintenance services with respect to the Panther Creek Plant. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The Company expensed $0 and $2,093 for the three months ended September 30, 2024, and 2023, respectively, and $0 and $929,942 for the nine months ended September 30, 2024, and 2023, which is included in operations and maintenance expense in the condensed
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consolidated statements of operations. See the composition of the due to related parties balance as of September 30, 2024, and December 31, 2023, below.
Effective February 13, 2024, the Company terminated its Omnibus Services Agreement with Olympus Power, and therefore, Panther Creek Fuel Services LLC is no longer a related party entity.
Scrubgrass Fuel Services, LLC
Effective February 1, 2022, the Company entered into the Fuel Management Agreement (the “Scrubgrass Fuel Agreement”) with Scrubgrass Fuel Services LLC, a wholly owned subsidiary of Olympus Services LLC, which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the Scrubgrass Fuel Agreement, Scrubgrass Fuel Services LLC provides the Company with operations and maintenance services with respect to the Panther Creek Plant. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The Company expensed $0 and $0 for the three months ended September 30, 2024, and 2023, respectively, and $0 and $374,944 for the nine months ended September 30, 2024, and 2023, which is included in operations and maintenance expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of September 30, 2024, and December 31, 2023, below.
Effective February 13, 2024, the Company terminated its Omnibus Services Agreement with Olympus Power, and therefore, Scrubgrass Fuel Services, LLC is no longer a related party entity.
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 provided certain operations and maintenance services to Stronghold LLC and employed certain personnel to operate the Plants. Stronghold LLC reimbursed 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 were to be approved by Stronghold LLC. From November 2, 2021, until October 1, 2023, Stronghold LLC also agreed to pay Olympus Stronghold Services a management fee at the rate of $1,000,000 per year, payable monthly for services provided at each of the Plants, and an additional one-time mobilization fee of $150,000 upon the effective date of the Omnibus Services Agreement, which was deferred. 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 was 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 $30,000 and $133,499 for the three months ended September 30, 2024, and 2023, respectively, and $90,000 and $603,563 for the nine months ended September 30, 2024, and 2023, 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 September 30, 2024, and December 31, 2023, below. On February 13, 2024, Stronghold LLC and Olympus Services entered into a Termination and Release Agreement (the “Termination and Release”) whereby the Omnibus Services Agreement was terminated. The Termination and Release contained a mutual customary release. The Company expects to continue to pay Olympus Power LLC $10,000 per month for ongoing assistance at each of the Scrubgrass Plant and Panther Creek Plant.
As disclosed above, effective February 13, 2024, the Company terminated its Omnibus Services Agreement with Olympus Power, and therefore, Olympus Power LLC is no longer a related party entity.
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 Panther Creek Plant. 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 date of the effective date. The Company expensed $0 and $10,337 for the three months ended September 30, 2024, and 2023, respectively, and $0 and $1,856,501 for the nine months ended September 30, 2024, and 2023, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll,
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benefits and insurance. See the composition of the due to related parties balance as of September 30, 2024, and December 31, 2023, 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. Effective November 1, 2023, Stronghold LLC no longer pays Olympus Stronghold Services a management fee for the Panther Creek Plant.
Effective February 13, 2024, the Company terminated its Omnibus Services Agreement with Olympus Power, and therefore, Panther Creek Energy Services LLC is no longer a related party entity.
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 Scrubgrass Plant. 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 $0 and $0 for the three months ended September 30, 2024, and 2023, respectively, and $0 and $2,269,290 for the nine months ended September 30, 2024, and 2023, 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 September 30, 2024, and December 31, 2023, below.
In connection with the Equity Contribution Agreement effective July 9, 2021, the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Scrubgrass Amended O&M Agreement”) with Scrubgrass Energy Services LLC. Under the Scrubgrass Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Scrubgrass Amended O&M Agreement is the closing date of the Equity Contribution Agreement. Effective October 1, 2022, Stronghold LLC no longer pays Olympus Stronghold Services a management fee for the Scrubgrass Plant.
Effective February 13, 2024, the Company terminated its Omnibus Services Agreement with Olympus Power, and therefore, Scrubgrass Energy Services, LLC is no longer a related party entity.
Management Services Agreement
On April 19, 2023, pursuant to an independent consulting agreement the Company entered into with William Spence in connection with his departure from the Board (the "Spence Consulting Agreement"), Mr. Spence's annualized management fee of $600,000 decreased to the greater of $200,000 or 10% of any economic benefits derived from the sale of beneficial use ash, carbon sequestration efforts or alternative fuel arrangements, in each case, arranged by Mr. Spence. The previous consulting and advisory agreement with Mr. Spence was terminated in connection with entry into the Spence Consulting Agreement.
In April 2023, as part of the compensation pursuant to the Spence Consulting Agreement, Mr. Spence also received a one-time grant of 250,000 fully vested shares of the Company's Class A common stock, which was recorded as stock-based compensation in the second quarter of 2023.
Warrants
On September 13, 2022, the Company entered into a Securities Purchase Agreement with Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of 60,241 shares of Class A common stock and warrants to purchase 60,241 shares of Class A common stock, at an initial exercise price of $17.50 per share, subsequently amended to $10.10 per share and then $7.51 per share. Refer to Note 15 – Equity Issuances for additional details.
Additionally, on April 20, 2023, Mr. Beard invested $1.0 million in exchange for 100,000 shares of Class A common stock and 100,000 pre-funded warrants. Refer to Note 15 – Equity Issuances for additional details.
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Amounts due to related parties as of September 30, 2024, and December 31, 2023, were as follows:
September 30, 2024
December 31, 2023
Coal Valley Sales, LLC
$
1,265,862
$
433,195
Panther Creek Operating LLC
—
14,511
Northampton Generating Fuel Supply Company, Inc.
—
226,951
Olympus Power LLC and other subsidiaries
—
44,181
William Spence
183,333
—
Due to related parties
$
1,449,195
$
718,838
NOTE 9 – CONCENTRATIONS (As Restated)
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 cash equivalents and accounts receivable. Cash and cash equivalents customarily exceed federally insured limits. For accounts receivable, the Company’s significant credit risk is primarily concentrated with CES. CES accounted for approximately 92% and 100% of the Company's Energy Operations segment revenues for the three months ended September 30, 2024, and 2023, respectively, and approximately 88% and 100% of the Company's Energy Operations segment revenues for the nine months ended September 30, 2024, and 2023, respectively.
Additionally, approximately 14% and 19% of the Company's total revenues for the nine months ended September 30, 2024, and 2023, respectively, were derived from services provided to two customers.
For the three months ended September 30, 2024, and 2023, the Company purchased approximately 0% and 41% of waste coal, respectively, from two suppliers. For the nine months ended September 30, 2024, and 2023, the Company purchased approximately 40% and 49% of waste coal, respectively, from the same related parties. See Note 8 – Related Party Transactions for further information.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Commitments:
As discussed in Note 4 – Equipment Deposits, the Company has entered into various equipment contracts to purchase miners. Most of these contracts required a percentage of deposits upfront and subsequent payments to cover the contracted purchase price of the equipment. Details of the outstanding purchase agreement with MinerVa are summarized below.
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 miners with a total terahash to be delivered equal to 1.5 million 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 September 30, 2024, 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 had 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.
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As of September 30, 2024, MinerVa had delivered, refunded cash or swapped into deliveries of industry-leading miners of equivalent value to approximately 12,700 of the 15,000 miners. As disclosed below, the Company is pursuing legal action through the dispute resolution process, and as a result, the Company no longer expects equipment deliveries.
Contingencies:
Legal Proceedings
The Company experiences litigation in the normal course of business. Certain of these matters are discussed below. The Company accrues for estimated costs related to existing lawsuits, claims and legal proceedings when it is probable that it will incur these costs in the future and the costs are reasonably estimable.
McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs. Scrubgrass Generating Company, L.P.
On January 31, 2020, McClymonds Supply and Transit Company, Inc. (“McClymonds”) made a Demand for Arbitration, as required by the terms of the Transportation Agreement between McClymonds and Scrubgrass Generating Company, L.P. ("Scrubgrass") dated April 8, 2013 (the “Agreement”). In its demand, McClymonds alleged damages in the amount of $5,042,350 for failure to pay McClymonds for services. On February 18, 2020, Scrubgrass submitted its answering statement denying the claim of McClymonds in its entirety. On March 31, 2020, Scrubgrass submitted its counterclaim against McClymonds in the amount of $6,747,328 as the result of McClymonds’ failure to deliver fuel as required under the terms of the Agreement. Hearings were held from January 31, 2022, to February 3, 2022. On May 9, 2022, an award in the amount of $5.0 million plus interest of approximately $0.8 million was issued in favor of McClymonds. The two managing members of Q Power have executed a binding document to pay the full amount of the award and have begun to pay the full amount of the award, such that there will be no effect on the financial condition of the Company. McClymonds shall have no recourse to the Company with respect to the award.
Allegheny Mineral Corporation v. Scrubgrass Generating Company, L.P., Butler County Court of Common Pleas, No. AD 19-11039
In November 2019, Allegheny Mineral Corporation ("Allegheny Mineral") filed suit against the Company seeking payment of approximately $1,200,000 in outstanding invoices. In response, the Company filed counterclaims against Allegheny Mineral asserting breach of contract, breach of express and implied warranties, and fraud in the amount of $1,300,000. After unsuccessful mediation in August 2020, the parties again attempted to mediate the case on October 26, 2022, which led to a mutual agreement to settlement terms of a $300,000 cash payment, and a supply agreement for limestone. Subject to completion of the settlement terms, this matter has been stayed in Butler County Court, and the outstanding litigation has been terminated.
Federal Energy Regulatory Commission ("FERC") Matters
On November 19, 2021, Scrubgrass received a notice of breach from PJM Interconnection, LLC alleging that Scrubgrass breached Interconnection Service Agreement – No. 1795 (the “ISA”) by failing to provide advance notice to PJM Interconnection, LLC and Mid-Atlantic Interstate Transmission, LLC pursuant to ISA, Appendix 2, section 3, of modifications made to the Scrubgrass Plant. On December 16, 2021, Scrubgrass responded to the notice of breach and respectfully disagreed that the ISA had been breached. On January 7, 2022, Scrubgrass participated in an information gathering meeting with representatives from PJM regarding the notice of breach and continued 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.
PJM’s investigation and discussions with the Company regarding the notice of breach at the Scrubgrass Plant and the Panther Creek Plant are ongoing, including with respect to interim procedures, until the Company receives revised Interconnect Service Agreements for the Scrubgrass Plant and the Panther Creek Plant. Stronghold does not expect to make any material payments related to any resettlements of prior billing statements. The Company continues to expect to source electricity for its computational load banks from the Scrubgrass and Panther Creek Plants; however, Stronghold expects that, until the revised Interconnect Service Agreements are finalized and potentially thereafter, the Company will pay retail rates for electricity that is imported from the grid should it be unable to fully supply power to the computational load banks.
On May 11, 2022, the Division of Investigations of the FERC Office of Enforcement (“OE”) informed the Company that the OE was 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’
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operations by June 10, 2022. On July 13, 2022, after being granted an extension to respond by the OE, the Company submitted a formal response to the OE's request. Since the Company submitted its formal response to the OE's request, the Company has had further discussions with the OE regarding the Company's formal response. The OE's investigation, and discussions between the OE and the Company, regarding potential instances of non-compliance is continuing. The Company does not believe that the PJM notice of breach, the Panther Creek necessary study agreement, discussions regarding other potential issues related to the computational load bank, including power consumption and potential resettlements of billing statements for certain prior months, 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.
Shareholder Securities and Derivative Lawsuits
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 (Winter v. Stronghold Digital Mining, Case No. 1:22-cv-3088). On August 4, 2022, co-lead plaintiffs were appointed. On October 18, 2022, the plaintiffs filed an amended complaint, alleging 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 of 1933, as amended (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. The amended complaint also alleged violations of Section 12 of the Securities Act based on alleged false or misleading statements in the Company’s prospectus related to its initial public offering. On December 19, 2022, the Company filed a motion to dismiss, which the court largely denied on August 10, 2023. On September 8, 2023, the Court entered a Case Management Order, which set a number of case deadlines, including the completion of all discovery by April 21, 2025. On January 19, 2024, the Court granted the motion of one co-lead plaintiff to withdraw from the case, leaving one plaintiff remaining. Plaintiff filed a motion for class certification on February 19, 2024, and defendants’ response to that motion is due on June 10, 2024.The defendants continue to believe the allegations in the complaint are without merit and intend to defend these suits vigorously.
On September 5, 2023, and September 15, 2023, respectively, purported shareholders of the Company filed two derivative actions in the United States District Court for the Southern District of New York (Wilson v. Beard, Case No. 1:23-cv-7840, and Navarro v. Beard, Case No. 1:23-cv-08714) against certain of our current and former directors and officers, and the Company as a nominal defendant. The shareholders generally allege that the individual defendants breached their fiduciary duties by making or failing to prevent the misrepresentations alleged in the putative Winter securities class action, and assert claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and for contribution under Section 11 of the Securities Act and Section 21D of the Securities Exchange Act of 1934. The two cases were consolidated on October 24, 2023, under the case name In Re Stronghold Digital Mining, Inc., Stockholder Derivative Litigation (the “Consolidated Derivative Action”). On November 21, 2023, the Court entered an order staying the Consolidated Derivative Action pending a ruling on the motion for class certification in the putative Winter securities class action. The defendants believe the allegations in the Consolidated Derivative Action are without merit and intend to defend the suits vigorously.
On November 14, 2023, and February 4, 2024, respectfully, purported shareholders of the Company filed two additional derivative actions in the United States District Court for the Southern District of New York (Parker v. Beard, Case No. 23 Civ. 10028 and Bruno v. Beard, Case No. 24 Civ. 798) against certain of our current and former directors and officers, and the Company as a nominal defendant. These lawsuits assert substantially the same claims and allegations as the Wilson and Navarro complaints. Plaintiff in the Bruno action had previously served a books and records demand, as well as an investigation/litigation demand, on the Company making similar allegations. On April 24, 2024, the Parker and Bruno cases were consolidated with the Consolidated Derivative Action by agreement of the parties. As a result, the Parker and Bruno cases are also stayed pending further proceedings in the putative Winter securities class action.
Representatives for the Company and plaintiffs executed a Memorandum of Understanding reflecting the terms of their agreement in principle on July 18, 2024. On November 8, 2024, counsel for all parties to the Class Action executed a Stipulation of Settlement (the "Stipulation") which contains the terms of the settlement of the Class Action. Among other terms, the Company has agreed to pay an amount equal to $4.75 million payable in cash on the first day of the month following entry by the District Court of an order preliminarily approving the Stipulation (the "Preliminary Approval"). The Preliminary Approval is expected to be entered into within ninety (90 days) of November 8, 2024. $2.5 million is expected to be covered in full by the Company's insurance providers and paid directly at the time of Preliminary Approval. The terms of the Stipulation also include the Company paying the cash value of twenty-five (25) Bitcoins, one of which will be
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paid monthly for two years beginning on the first day of the month following Preliminary Approval, and two of which will be paid in the final month. The cash value of each Bitcoin is expected to be calculated monthly according to a price set by the Nasdaq Bitcoin reference price index. The Company expects District Court to enter the Preliminary Approval Order and to schedule a Final Hearing, at which time the shareholders may raise objections to the terms of the settlement as set forth in the Stipulation. The Company expects the final hearing to be scheduled approximately 120 days after the District Court enters the Preliminary Order. The Company has not executed a Memorandum of Understanding with respect to the Consolidated Derivative Actions to date.
The Company has agreed to settle the claims in order to avoid the cost, risks and distraction of continued litigation, as the expected costs of defense likely exceeded to amounts agreed to in the Stipulation. The Company continues to deny all allegations of wrongdoing and the Stipulation is not an admission of guilt. However, given the inherent risk of any trial and the potential cost of an adverse resolution of the litigation, the Company believes that the Stipulation is in the Company’s best interest and in the best interests of its stockholders.
Mark Grams v. Treis Blockchain, LLC, Chain Enterprises, LLC, Cevon Technologies, LLC, Stronghold Digital Mining, LLC, David Pence, Michael Bolick, Senter Smith, Brian Lambretti and John Chain
On May 4, 2023, Stronghold Digital Mining, LLC, a subsidiary of the Company, was named as one of several defendants in a complaint filed in the United States District Court for the Middle District of Alabama Eastern Division (the "Grams Complaint"). The Grams Complaint alleges that certain Bitcoin miners the Company purchased from Treis Blockchain, LLC ("Treis") in December 2021 contained firmware that is alleged to have constituted “trade secrets” owned by Grams. Principally, the Grams Complaint included allegations of misappropriation of these alleged trade secrets.
The Company believes that the allegations against it and its subsidiaries in the Grams Complaint are without merit and intends to vigorously defend the suit. To that end, the Company has entered into a joint defense agreement with Treis and the other named defendants. The Company has also entered into a tolling agreement with Treis. The Company filed a motion to dismiss the case for lack of personal jurisdiction on June 23, 2023. On October 6, 2023, Grams filed an Amended Complaint, to which the Company filed a renewed Motion to Dismiss for Lack of Personal Jurisdiction, or in the Alternative to Transfer the Case to the District of South Carolina, in addition to a renewed Motion to Dismiss several causes of action alleged in the Amended Complaint. On December 8, 2023, the Company filed its reply to Plaintiff’s response to the Company's Motion to Transfer or Alternatively to Dismiss pursuant to Rule 12(b)(2). On April 12, 2024, Grams filed an opposition to the Company’s previously filed motion to dismiss. On April 22, 2024, the Company filed a reply in support of its motion to dismiss. A ruling on the pending motions is expected to be forthcoming in the foreseeable future.On July 8, 2024, the Court denied the Motion to Dismiss for Lack of Personal Jurisdiction, or in the Alternative to Transfer the Case to the District of South Carolina. It further requested the Defendants to refile their Motion to Dismiss several causes of action alleged in the Amended Complaint so that the court could consider that motion separately. Defendants filed their Motion to Dismiss on July 22, 2024. The Company does not believe the Grams Complaint will have a material adverse effect on the Company’s reported financial position or results of operations.
MinerVa Purchase Agreement
On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement. Under the MinerVa Purchase Agreement, the Company and MinerVa were required to work together in good faith towards a resolution for a period of sixty (60) days following this notice, after which, if no settlement had been reached, the Company could end discussions, declare an impasse, and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. As the 60-day period has expired, the Company is evaluating all available remedies under the MinerVa Purchase Agreement. On October 30, 2023, the Company sent MinerVa a Notice of Impasse. On October 31, 2023, the Company filed a Statement of Claim in Calgary, Alberta against MinerVa for breach of contract related to the MinerVa Purchase Agreement.On October 18, 2024, the Company filed an Amended Statement of Claim that adds additional misrepresentation allegations against MinerVa and Chong Chao Ma, MinerVa’s former Chief Executive Officer and Director. The Claim is ongoing before the Alberta courts.
John W. Krynock v. Panther Creek Fuel Services, LLC c/o Olympus Power
On June 2, 2023, Panther Creek Fuel Services, LLC, an affiliate of the Company was named as a defendant in a Federal Black Lung Case under Title IV of the Federal Coal Mine Health and Safety Act of 1969. The Plaintiff previously settled a state law claim with a predecessor in interest of the Company. The Company denies any liability in connection with the claim and intends to defend the suit vigorously. The Company does not believe that the claim will have a material adverse
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effect on the Company’s reported financial position or results of operations, although the Company cannot predict with any certainty the outcome of these proceedings.
Department of Environmental Protection
On November 9, 2023, the Company entered into a Consent Order and Agreement (“COA”) with the Commonwealth of Pennsylvania, Department of Environmental Protection (“DEP”). Pursuant to the COA, the DEP found that a July 5, 2022, inspection of the Company’s Scrubgrass Plant observed that coal ash at the Scrubgrass Plant exceeded the capacity of the permitted ash conditioning area as approved by the DEP on September 12, 2007. The COA found that the Scrubgrass Plant’s storage of excess waste coal ash violated certain provisions of the Solid Waste Management Act and Pennsylvania Code, among other items. Pursuant to the COA, Scrubgrass must pay a civil penalty in the amount of $28,800, in two equal installments within ninety (90) days of entry into the COA. The Company made the first payment to the DEP on November 10, 2023. The terms of the COA also require the Company to remove (i) a minimum of 80,000 tons of excess waste coal ash by November 9, 2024, (ii) 160,000 aggregate tons of excess waste coal ash by November 9, 2025, (iii) 220,000 aggregate tons of excess waste coal ash by November 9, 2026, and (iv) all remaining excess waste coal ash by November 9, 2027, such that the ash conditioning area is consistent with the specifications accepted by the DEP on September 7, 2007. Beginning on January 24, 2024, the Company is to provide quarterly progress reports to the DEP. On December 15, 2023, the Scrubgrass Creek Watershed Association and Citizens for Pennsylvania’s Future filed a Notice of Appeal to the Environmental Hearing Board regarding the COA (the “COA Appeal”). The Company has removed in excess of 80,000 tons coal ash from the Scrubgrass Plant during the time period from November 9, 2023 until November 9, 2024. The Company has been made aware that waste coal ash from one transporter may not have arrived at its contracted location. The Company is currently investigating this situation. This waste coal ash represents a small percentage of the waste coal ash to be removed under the COA. Previously, in connection with the COA, in 2023 the Company had discussions with the Pennsylvania Public Utilities Commission (“PUC”) and the DEP regarding potential resettlement or forfeiture of Pennsylvania Tier II Alternative Energy Credits during any period of non-compliance, between July 5-22, 2022. In February of 2024, the Company retired 25,968 Alternative Energy Credits reflective of the amount of credits generated during the period of non-compliance from July 5-22, 2022. At this time, the Company does not believe the COA, COA Appeal or discussions with the PUC will have a material adverse effect on the Company’s reported financial position or its operations.
Save Carbon County
On March 26, 2024, the Company, Panther Creek Power Operating, LLC, Stronghold and Stronghold LLC were named as defendants (collectively, the “Stronghold Defendants”) in a complaint filed in the Court of Common Pleas in Philadelphia County by Save Carbon County (the “Complaint”). In addition to the Stronghold Defendants, Josh Shapiro in his capacity as the Governor of the Commonwealth of Pennsylvania, the Pennsylvania Department of Environmental Protection, Jessica Shirley in her capacity as the Interim Secretary for the Pennsylvania Department of Environmental Protection, and the Pennsylvania Public Utility Commission were named as defendants. Pursuant to the Complaint, Save Carbon County alleges certain public nuisance, private nuisance, products liability, and negligence claims against the Stronghold Defendants and demands compensatory and punitive damages, together with costs of suit, interest, and attorney’s fees. On July 30, 2024, the parties stipulated to the transfer of the litigation to the Commonwealth Court of Pennsylvania, where the litigation will resume in the initial pleading stage, including resolution of preliminary objections to dismiss or narrow the scope of the Complaint's claims. The Commonwealth Court processed the transfer on October 8, 2024, and the Company filed its preliminary objections on October 28, 2024. The Company believes the Complaint is without merit. The Company does not believe that the claim will have a material adverse effect on the Company’s reported financial position or results of operations, although the Company cannot predict with any certainty the outcome of these proceedings.
NOTE 11 – REDEEMABLE COMMON STOCK
Class V common stock represented 14.0% and 17.8% ownership of Stronghold LLC, as of September 30, 2024, and December 31, 2023, respectively, granting the owners of Q Power economic rights and, as a holder, one vote on all matters to be voted on by the Company's stockholders generally, and a redemption right into Class A shares. Refer to Note 12 – Noncontrolling Interests for more details.
The Company classifies its Class V common stock as redeemable common stock in the accompanying condensed consolidated balance sheets as, pursuant to 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
24
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 September 30, 2024.
The Company recorded redeemable common stock as presented in the table below.
Common - Class V
Shares
Amount
Balance - December 31, 2023
2,405,760
$
20,416,116
Net loss attributable to noncontrolling interest
—
(5,588,300)
Maximum redemption right valuation
—
(3,291,655)
Balance - September 30, 2024
2,405,760
$
11,536,161
NOTE 12 – 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 interest. Refer to Note 11 – Redeemable Common Stock which describes the redemption rights of the noncontrolling interest.
Class V common stock represented 14.0% and 17.8% ownership of Stronghold LLC as of September 30, 2024, and December 31, 2023, respectively, granting the owners of Q Power economic rights and, as a holder, one vote on all matters to be voted on by the Company's stockholders generally, and a redemption right into shares of Class A common stock.
The following summarizes the redeemable common stock adjustments pertaining to the noncontrolling interest as of and for the nine months ended September 30, 2024:
Class V Common Stock Outstanding
Fair Value Price
Redeemable Common Stock Adjustments
Balance - December 31, 2023
2,405,760
$
8.49
$
20,416,116
Net loss attributable to noncontrolling interest
—
(5,588,300)
Adjustment of redeemable common stock to redemption amount (1)
—
(3,291,655)
Balance - September 30, 2024
2,405,760
$
4.80
$
11,536,161
(1) Redeemable common stock adjustment based on Class V common stock outstanding at fair value price at each quarter end, using a 10-day variable weighted average price of trading dates including the closing date.
NOTE 13 – STOCK-BASED COMPENSATION
Stock-based compensation expense was $1,486,286 and $787,811 for the three months ended September 30, 2024, and 2023, respectively, and $5,093,193 and $7,603,859 for the nine months ended September 30, 2024, and 2023, respectively, and is included in general and administrative expense in the condensed consolidated statements of operations. There was no income tax benefit related to stock-based compensation expense due to the Company having a full valuation allowance recorded against its deferred income tax assets.
On January 22, 2024, the Company entered into award agreements with certain executive officers in which the executive officers were granted 135,000 restricted stock units. Similarly, on March 15, 2023, the Company entered into award agreements with certain executive officers in which the executive officers were granted 272,500 restricted stock units in exchange for the cancellation of 98,669 stock options and 25,000 performance share units previously granted to the executive officers. All restricted stock units were granted under the Company’s previously adopted Omnibus Incentive Plan, dated October 19, 2021.
Additionally, in April 2023, as part of the compensation pursuant to the Spence Consulting Agreement described in Note 8 – Related Party Transactions, Mr. Spence received a one-time grant of 250,000 fully vested shares of the Company's Class A common stock, which was recorded as stock-based compensation in the second quarter of 2023.
25
NOTE 14 – WARRANTS
The following table summarizes outstanding warrants as of September 30, 2024.
Number of Warrants
Outstanding as of December 31, 2023
5,277,985
Issued
—
Exercised
(1,300,000)
Outstanding as of September 30, 2024
3,977,985
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements with Armistice Capital Master Fund Ltd. ("Armistice") and Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of 227,435 and 60,241 shares of Class A common stock, respectively, and warrants to purchase an aggregate of 560,241 shares of Class A common stock, at an initial exercise price of $17.50 per share. Refer to Note 15 – Equity Issuances for additional details and information regarding subsequent amendments. As part of the transaction, Armistice purchased the pre-funded warrants for 272,565 shares of Class A common stock at a purchase price of $16.00 per warrant. The pre-funded warrants have an exercise price of $0.001 per warrant share.
In April 2023, the Company, Armistice and Mr. Beard entered into amendments to, among other things, adjust the strike price of the remaining outstanding warrants from $17.50 per share to $10.10 per share. In December 2023, the Company and Armistice entered into an amendment to, among other things, adjust the strike price of the remaining outstanding warrants from $10.10 per share to $7.00 per share and extend the expiration date through December 31, 2029. Furthermore, in January 2024, the Company and Mr. Beard entered into an amendment to, among other things, adjust the strike price of the remaining outstanding warrants from $10.10 per share to $7.51 per share. Refer to Note 15 – Equity Issuances for additional details.
As of September 30, 2024, 560,241 warrants issued in connection with the September 2022 Private Placement remained outstanding.
April 2023 Private Placement
On April 20, 2023, the Company entered into Securities Purchase Agreements with an institutional investor and Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $10.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $11.00 per share (the “April 2023 Private Placement”). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 900,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 100,000 shares of Class A common stock, in each case at a price of $10.00 per share equivalent. Further, the institutional investor and Mr. Beard received warrants exercisable for 900,000 shares and 100,000 shares, respectively, of Class A common stock. Refer to Note 15 – Equity Issuances for additional details.
In January 2024, the Company and Mr. Beard entered into an amendment to, among other things, adjust the strike price of the remaining outstanding warrants from $11.00 per share to $7.51 per share. Refer to Note 15 – Equity Issuances for additional details.
As of September 30, 2024, warrants exercisable for a total of 1,000,000 shares of Class A common stock remained outstanding.
December 2023 Private Placement
On December 21, 2023, the Company entered into a Securities Purchase Agreement with an institutional investor for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $6.71 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $7.00 per share. Pursuant to the Securities Purchase Agreement, the institutional investor invested $15.4 million in exchange for an aggregate of 2,300,000 shares of Class A common stock and pre-funded warrants at a price of $6.71 per share equivalent. Further, the institutional
26
investor received warrants exercisable for 2,300,000 shares of Class A common stock. Refer to Note 15 – Equity Issuances for additional details.
During the three months ended September 30, 2024, the institutional investor exercised all 1,300,000 of its pre-funded warrants for an approximately equal amount of shares of Class A common stock. As of September 30, 2024, warrants exercisable for a total of 2,300,000 shares of Class A common stock remained outstanding.
NOTE 15 – EQUITY ISSUANCES
Series C Convertible Preferred Stock
On December 30, 2022, the Company entered into the Exchange Agreement with the Purchasers of the Amended May 2022 Notes whereby the Amended May 2022 Notes were to be exchanged for shares of Series C Preferred Stock that, among other things, will convert into shares of Class A common stock or pre-funded warrants that may be exercised for shares of Class A common stock, at a conversion rate equal to the stated value of $1,000 per share plus cash in lieu of fractional shares, divided by a conversion price of $4.00 per share of Class A common stock. Upon the fifth anniversary of the Series C Preferred Stock, each outstanding share of Series C Preferred Stock will automatically and immediately convert into Class A common stock or pre-funded warrants. In the event of a liquidation, the Purchasers shall be entitled to receive an amount per share of Series C Preferred Stock equal to its stated value of $1,000 per share. The Exchange Agreement closed on February 20, 2023.
Pursuant to the Exchange Agreement, the Purchasers received an aggregate 23,102 shares of the Series C Preferred Stock, in exchange for the cancellation of an aggregate $17,893,750 of principal and accrued interest, representing all of the amounts owed to the Purchasers under the May 2022 Notes. On February 20, 2023, one Purchaser converted 1,530 shares of the Series C Preferred Stock to 382,500 shares of the Company’s Class A common stock. The rights and preferences of the Series C Preferred Stock are designated in a certificate of designation, and the Company provided certain registration rights to the Purchasers. As of September 30, 2024, 5,990 shares of the Series C Preferred Stock remain outstanding following the Series D Exchange Agreement described below.
Series D Exchange Agreement
On November 13, 2023, the Company consummated a transaction (the “Series D Exchange Transaction”) pursuant to an exchange agreement, dated November 13, 2023 (the “Series D Exchange Agreement”) with Adage Capital Partners, LP (the “Holder”) whereby the Company issued to the Holder an aggregate of 15,582 shares of a newly created series of preferred stock, the Series D Convertible Preferred Stock, par value $0.0001 per share (the “Series D Preferred Stock”), in exchange for 15,582 shares of Series C Preferred Stock held by the Holder, which represented all of the shares of Series C Preferred Stock held by the Holder. The Series D Preferred Stock contains substantially similar terms as the Series C Preferred Stock except with respect to a higher conversion price. The Series D Exchange Agreement contains representations, warranties, covenants, releases, and indemnities customary for transactions of this type, as well as certain trading volume restrictions. As a result of the Series D Exchange Transaction, the Company recorded a deemed contribution of $20,492,568 resulting from the extinguishment of 15,582 shares of Series C Preferred Stock associated with the Series D Exchange Transaction. The deemed contribution represented the difference between the carrying value of the existing Series C Preferred Stock and the estimated fair value of the newly-issued Series D Preferred Stock. During the first quarter of 2024, the remaining 7,610 shares of Series D Convertible Preferred Stock were converted to 1,414,117 shares of Class A common stock.
During the nine months ended September 30, 2024, the Company incurred $19,637 of final offering costs which has been recorded within additional paid-in capital in the condensed consolidated balance sheet.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements with Armistice and Greg Beard, the Company's chairman and chief executive officer (together with Armistice, the “September 2022 Private Placement Purchasers”), for the purchase and sale of 227,435 and 60,241 shares, respectively, of Class A common stock, par value $0.0001 per share at a purchase price of $16.00 and $16.60, respectively, and warrants to purchase an aggregate of 560,241 shares of Class A common stock, at an initial exercise price of $17.50 per share (subject to certain adjustments). 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 the pre-funded warrants to purchase 272,565 shares of Class A common stock at a purchase price of $16.00 per pre-funded warrant. The pre-funded warrants have an exercise
27
price of $0.001 per warrant share. The transaction closed on September 19, 2022. The gross proceeds from the sale of such securities, before deducting offering expenses, were 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 condensed consolidated statements of operations. The fair value of the warrant liabilities was estimated as of September 30, 2024, using a Black-Scholes model with significant inputs as follows:
September 30, 2024
Expected volatility
137.2
%
Expected life (in years)
5.25
Risk-free interest rate
3.6
%
Expected dividend yield
0.00
%
Fair value
$
2,446,409
In connection with the closing of the December 2023 Private Placement (discussed below), the Company and Armistice entered into an amendment to, among other things, adjust the strike price of the remaining outstanding warrants from $10.10 per share to $7.00 per share and extend the expiration date through December 31, 2029. Furthermore, in January 2024, the Company and Mr. Beard entered into an amendment to, among other things, adjust the strike price of the remaining outstanding warrants from $10.10 per share to $7.51 per share.
April 2023 Private Placement
On April 20, 2023, the Company entered into Securities Purchase Agreements with an institutional investor and the Company’s chairman and chief executive officer, Greg Beard, for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $10.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $11.00 per share (subject to certain adjustments in accordance with the terms thereof). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 900,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 100,000 shares of Class A common stock, in each case at a price of $10.00 per share equivalent. Further, the institutional investor and Mr. Beard received warrants exercisable for 900,000 shares and 100,000 shares, respectively, of Class A common stock.
Subject to certain ownership limitations, the warrants are exercisable six months after issuance. The warrants are exercisable for five and a half years commencing upon the date of issuance, subject to certain ownership limitations. The pre-funded warrants have an exercise price of $0.001 per warrant share and are immediately exercisable, subject to certain ownership limitations. The gross proceeds from the April 2023 Private Placement, before deducting offering expenses, were approximately $10.0 million. The April 2023 Private Placement closed on April 21, 2023.
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 condensed consolidated statements of operations. The fair value of the warrant liabilities was estimated as of September 30, 2024, using a Black-Scholes model with significant inputs as follows:
September 30, 2024
Expected volatility
137.2
%
Expected life (in years)
5.25
Risk-free interest rate
3.6
%
Expected dividend yield
0.00
%
Fair value
$
4,395,995
Additionally, as previously disclosed, the Company entered into Securities Purchase Agreements with the September 2022 Private Placement Purchasers for, in part, warrants to purchase an aggregate of 560,241 shares of Class A common stock, at an exercise price of $17.50 per share. On April 20, 2023, the Company and the September 2022 Private Placement Purchasers entered into amendments to, among other things, adjust the strike price of the warrants from $17.50 per share to $10.10 per share.
Pursuant to Greg Beard's employment agreement with the Company dated September 6, 2023, Mr. Beard is eligible for an annual bonus if the applicable targets to achieve such annual bonus are met. For Mr. Beard's 2023 annual bonus, on January 29, 2024, the Compensation Committee of the Company amended Mr. Beard's warrants under the September 2022 Private Placement (described above) and the April 2023 Private Placement such that the exercise price of the warrants was adjusted to $7.51.
28
December 2023 Private Placement
On December 21, 2023, the Company entered into a Securities Purchase Agreement with an institutional investor for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $6.71 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $7.00 per share (the “December 2023 Private Placement”). Pursuant to the Securities Purchase Agreement, the institutional investor invested $15.4 million in exchange for an aggregate of 2,300,000 shares of Class A common stock and pre-funded warrants at a price of $6.71 per share equivalent. Further, the institutional investor received warrants exercisable for 2,300,000 shares of Class A common stock.
Subject to certain ownership limitations, the warrants are exercisable six months after issuance. The warrants are exercisable for five and a half years commencing upon the date of issuance, subject to certain ownership limitations. The pre-funded warrants have an exercise price of $0.001 per warrant share and are immediately exercisable, subject to certain ownership limitations. The gross proceeds from the December 2023 Private Placement, before deducting offering expenses, were approximately $15.4 million. The December 2023 Private Placement closed on December 21, 2023.
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 condensed consolidated statements of operations. The fair value of the warrant liabilities was estimated as of September 30, 2024, using a Black-Scholes model with significant inputs as follows:
September 30, 2024
Expected volatility
137.2
%
Expected life (in years)
4.75
Risk-free interest rate
3.6
%
Expected dividend yield
0.00
%
Fair value
$
9,922,778
During the three months ended September 30, 2024, the institutional investor exercised all 1,300,000 of its pre-funded warrants for an approximately equal amount of shares of Class A common stock. As of September 30, 2024, warrants exercisable for a total of 2,300,000 shares of Class A common stock remained outstanding.
ATM Agreement
On May 23, 2023, the Company entered into an at-the-market offering agreement (the "ATM Agreement") with H.C. Wainwright & Co., LLC ("HCW") to sell shares of its Class A common stock having aggregate sales proceeds of up to $15.0 million (the "ATM Shares"), from time to time, through an "at the market" equity offering program under which HCW acts as sales agent and/or principal.
Pursuant to the ATM Agreement, the ATM Shares may be offered and sold through HCW in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on The Nasdaq Stock Market LLC ("Nasdaq") or sales made to or through a market maker other than on an exchange or in negotiated transactions. Under the ATM Agreement, HCW is entitled to compensation equal to 3.0% of the gross proceeds from the sale of the ATM Shares sold through HCW. The Company has no obligation to sell any of the ATM Shares under the ATM Agreement and may at any time suspend solicitations and offers under the ATM Agreement. The Company and HCW may each terminate the ATM Agreement at any time upon specified prior written notice.
The ATM Shares have been and are being issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-271671), filed with the SEC on May 5, 2023, as amended by Amendment No. 1 to the registration statement filed with the SEC on May 23, 2023 (as amended, the “ATM Registration Statement”). Pursuant to the ATM Agreement, no sales may be made until 30 days following the date on which the ATM Registration Statement is declared effective. The ATM Registration Statement was declared effective on May 25, 2023.
During the nine months ended September 30, 2024, the Company sold zero ATM Shares.
29
NOTE 16 – SEGMENT REPORTING (As Restated)
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 presented below.
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
(As Restated)
(As Restated)
OPERATING REVENUES:
Energy Operations
$
546,686
$
1,252,688
$
1,611,598
$
6,266,851
Cryptocurrency Operations
7,476,384
16,474,269
53,037,796
46,960,062
Total operating revenues
$
8,023,070
$
17,726,957
$
54,649,394
$
53,226,913
NET OPERATING LOSS:
Energy Operations
$
(6,079,564)
$
(9,685,721)
$
(23,155,919)
$
(29,864,794)
Cryptocurrency Operations
(11,504,143)
(10,019,215)
(16,651,569)
(20,035,786)
Total net operating loss
$
(17,583,707)
$
(19,704,936)
$
(39,807,488)
$
(49,900,580)
OTHER (EXPENSE) INCOME (1)
(5,086,885)
(2,606,977)
1,712,188
(30,764,024)
NET LOSS
$
(22,670,592)
$
(22,311,913)
$
(38,095,300)
$
(80,664,604)
DEPRECIATION AND AMORTIZATION:
Energy Operations
$
(1,359,278)
$
(1,341,076)
$
(4,031,499)
$
(4,004,596)
Cryptocurrency Operations
(7,264,368)
(8,326,137)
(23,397,364)
(22,020,425)
Total depreciation and amortization
$
(8,623,646)
$
(9,667,213)
$
(27,428,863)
$
(26,025,021)
INTEREST EXPENSE:
Energy Operations
$
(22,056)
$
(39,007)
$
(70,721)
$
(450,472)
Cryptocurrency Operations
(2,214,531)
(2,402,132)
(6,677,338)
(6,978,058)
Total interest expense
$
(2,236,587)
$
(2,441,139)
$
(6,748,059)
$
(7,428,530)
(1) The Company does not allocate other income (expense) for segment reporting purposes. Amount is shown as a reconciling item between net operating income (loss) and consolidated net income (loss). Refer to the accompanying condensed consolidated statements of operations for further details.
For the three and nine months ended September 30, 2024, and 2023, the loss on disposal of fixed assets, realized loss (gain) on sale of digital currencies, unrealized loss (gain) on digital currencies, realized loss on sale of miner assets, and impairments on digital currencies recorded in the condensed consolidated statements of operations were entirely attributable to the Cryptocurrency Operations segment.
NOTE 17 – 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 for the three and nine months ended September 30, 2024, and 2023.
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
Numerator:
Net loss
$
(22,670,592)
$
(22,311,913)
$
(38,095,300)
$
(80,664,604)
Less: net loss attributable to noncontrolling interest
(3,181,407)
(5,188,727)
(5,588,300)
(26,663,731)
Net loss attributable to Stronghold Digital Mining, Inc.
$
(19,489,185)
$
(17,123,186)
$
(32,507,000)
$
(54,000,873)
Denominator:
Weighted average number of Class A common shares outstanding
14,594,955
7,569,511
14,319,202
6,047,891
Basic net loss per share
$
(1.34)
$
(2.26)
$
(2.27)
$
(8.93)
Diluted net loss per share
$
(1.34)
$
(2.26)
$
(2.27)
$
(8.93)
30
Securities that could potentially dilute earnings (loss) per share in the future were not included in the computation of diluted net loss per share for the three and nine months ended September 30, 2024, and 2023, because their inclusion would be anti-dilutive. As of September 30, 2024, the potentially dilutive impact of Series C Preferred Stock not yet exchanged for shares of Class A common stock was 1,497,500, the potentially dilutive impact of Class V shares not yet exchanged for shares of Class A common stock was 2,405,760, and the potentially dilutive impact of outstanding warrants (excluding those with a $0.01 exercise price) was 3,865,910.
NOTE 18 – INCOME TAXES
Tax Receivable Agreement
The Company entered into a Tax Receivable Agreement (“TRA”) with Q Power and an agent named by Q Power on April 1, 2021 (to which an additional holder was subsequently joined as an additional "TRA Holder" on March 14, 2023), pursuant to which the Company will pay the TRA Holders 85% of the realized (or, in certain circumstances, deemed to be realized) cash tax savings attributable to the tax basis step-ups arising from taxable exchanges of units and certain other items.
During 2022 and 2023, taxable exchanges 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 income 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.
TRA Waiver and Termination Agreement
On August 21, 2024, concurrently with the execution and delivery of the Merger Agreement, the Company, Parent and each of the TRA Holders entered into a TRA Waiver and Termination Agreement (the “TRA Waiver”), pursuant to which the parties agreed, among other things, subject to and effective upon the consummation of the transactions contemplated by the Merger Agreement, to (i) terminate the TRA, dated April 1, 2021, as amended November 9, 2022, by and among the Company and the TRA Holders and (ii) waive the Early Termination Payment (as defined in the TRA) pursuant to the TRA, which would have otherwise become payable to the TRA Holders in connection with the consummation of the merger, and any other amounts to which the TRA Holders would have otherwise been entitled under the TRA. The TRA continues to be in effect prior to the completion of the Merger Agreement, but due to the TRA Waiver discussed above, the TRA is not recorded and is not currently expected to have an impact on the Company's consolidated financial statements.
Provision for Income Taxes
The provision for income taxes for the three and nine months ended September 30, 2024, and 2023, was zero, resulting in an effective income tax rate of zero. The difference between the statutory income tax rate of 21% and the Company’s effective tax rate for the three and nine months ended September 30, 2024, and 2023, was primarily due to pre-tax losses attributable to the noncontrolling interest and due to maintaining a valuation allowance against the Company’s deferred income tax assets.
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, Income Taxes. In light of the criteria under ASC 740 for recognizing the tax benefit of deferred income tax assets, the Company maintained a valuation allowance against its federal and state deferred income tax assets as of September 30, 2024, and December 31, 2023.
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NOTE 19 – SUPPLEMENTAL CASH AND NON-CASH INFORMATION
Supplemental disclosures of cash flow information for the nine months ended September 30, 2024, and 2023, were as follows:
September 30, 2024
September 30, 2023
Income tax payments
$
—
$
—
Interest payments
$
5,981,021
$
7,054,387
Supplementary non-cash investing and financing activities consisted of the following for the nine months ended September 30, 2024, and 2023:
September 30, 2024
September 30, 2023
Equipment financed with debt
$
—
$
1,184,935
Purchases of property, plant and equipment through finance leases
633,092
60,679
Purchases of property, plant and equipment included in accounts payable or accrued liabilities
134,811
145,093
Operating lease right-of-use assets exchanged for lease liabilities
—
291,291
Reclassifications from deposits to property, plant and equipment
8,000,643
4,658,970
Issued as part of financing:
Warrants – April 2023 Private Placement
—
8,882,914
Convertible Note Exchange for Series C Convertible Preferred Stock:
Extinguishment of convertible note
—
16,812,500
Extinguishment of accrued interest
—
655,500
Issuance of Series C convertible preferred stock, net of issuance costs
—
45,386,944
B&M Settlement:
Warrants – B&M
—
1,739,882
Return of transformers to settle outstanding payable
—
6,007,500
Issuance of B&M Note
—
3,500,000
Elimination of accounts payable
—
11,426,720
Financed insurance premiums
2,100,249
1,887,824
Class A common stock issued to settle outstanding payables or accrued liabilities
134,984
1,014,780
NOTE 20 – FAIR VALUE
In addition to assets and liabilities that are measured at fair value on a recurring basis, such as digital currencies pursuant to ASU 2023-08 as described above in Note 1 – Basis of Presentation (As Restated) and Note 2 – Digital Currencies (As Restated), the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company's non-financial assets, including operating lease right-of-use assets and property, plant and equipment, are measured at fair value when there is an indication of impairment and the carrying amount exceeds the asset’s projected undiscounted cash flows. These assets are recorded at fair value only when an impairment charge is recognized.
The fair values of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities approximate their carrying values because of the short-term nature of these instruments.
Adverse changes in business climate, including decreases in the price of Bitcoin and resulting decreases in the market price of miners, may indicate that an impairment triggering event has occurred. If the testing performed indicates the estimated fair value of the Company’s miners to be less than their net carrying value, an impairment charge will be recognized, decreasing the net carrying value of the Company’s miners to their estimated fair value.
NOTE 21 – SUBSEQUENT EVENTS
Matthew Smith Resignation
On October 25, 2024, the Company announced that Matthew Smith, the Company’s Chief Financial Officer, will resign from such position effective November 15, 2024. Mr. Smith will also resign from the Company's Board at such time. Mr. Smith’s resignation was not because of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices, including accounting principles and practices. At this time, the Company does not intend
to fill the vacancy on the Board that will be created following the effective date of Mr. Smith’s resignation.
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Simultaneous with his departure, the Company and Mr. Smith entered into a Consulting Agreement (the "Consulting Agreement") pursuant to which Mr. Smith will provide assistance with the Company’s finance function, and a transition from Mr. Smith's prior employment with the Company, as requested by the Company. Pursuant to the Consulting Agreement, Mr. Smith will be paid $400 per hour, and a minimum of $8,000 per month representative of twenty (20) hours per month. The Consulting Agreement has a three (3) month term and may be terminated at any time by either party upon five (5) days' notice.
Second Bitfarms Hosting Agreement
On October 29, 2024, Stronghold Digital Mining Hosting, LLC (“Stronghold Hosting”), a Delaware limited liability company and indirect subsidiary of the Company entered into a Hosting Agreement (the “Second Hosting Agreement”) with Backbone Mining Solutions LLC (“BMS”), a Delaware limited liability company and a subsidiary of Bitfarms Ltd., a corporation organized under the Business Corporations Act (Ontario) (“Bitfarms”), pursuant to which BMS will deliver approximately 10,000 Bitmain T21 or similar miners owned by BMS (the “BMS Miners”) to the Company’s mining facilities, and the Company will provide power to, maintain, host and operate the BMS Miners.
The initial term of the Second Hosting Agreement will commence on November 1, 2024 and remain effective until December 31, 2025, after which it will automatically renew for additional one year periods unless either party provides written notice of non-renewal to the other party at least sixty days prior to the expiration of the then-current initial term or renewal term, as applicable. Upon the occurrence of an event of default that is not cured within fifteen days, the non-breaching party may terminate the Second Hosting Agreement.
Pursuant to the Second Hosting Agreement, BMS will pay Stronghold Hosting a monthly fee equal to fifty percent (50%) of the profit generated by the BMS Miners, subject to certain monthly adjustments between the parties to account for the upfront monthly payment due from BMS to Stronghold Hosting in an amount of $600,000, and for taxes and the net cost of power associated with the operation of the BMS Miners.
In connection with the execution of the Second Hosting Agreement, BMS deposited with Stronghold Hosting $7,800,000 (the “Second Deposit”), equal to the estimated cost of power for three months of operations of the BMS Miners, which will be refundable in full to BMS within one business day of the end of the initial term expiring on December 31, 2025. The Second Deposit will bear interest at a floating rate equal to the forward-looking term secured overnight financing rate as administered by CME Group Benchmark Administration Limited for the applicable interest period plus 1.0%, payable in kind on the last day of each calendar quarter by capitalizing and adding such interest to the then-outstanding amount of the Second Deposit. Upon the occurrence and during the continuance of an event of default under the Second Hosting Agreement, the principal of, and all accrued and unpaid interest on, the Second Deposit shall bear interest from the date of such event of default, until cured or waived, at a rate equal to 24.0%.
Given the Company's efforts to high-grade its fleet, including through the First Hosting Agreement and Second Hosting Agreement with Bitfarms, we are exploring alternatives for a portion of our current fleet of Bitcoin miners.
Fourth Amendment to the Cantaloupe Hosting Agreement
On November 4, 2024, Stronghold Digital Mining Hashco, LLC and Cantaloupe Digital, LLC ("Cantaloupe") entered into a fourth amendment (the "Fourth Amendment") to the Hosting Agreement dated April 27, 2023. Pursuant to the Fourth Amendment, Cantaloupe is to deliver 4,000 Model A1446 Bitcoin miners, to replace the previously delivered 4,000 Model A1346 Bitcoin miners, to the Company's Panther Creek facility by December 31, 2024.
Sunnyside Sale Agreement
On November 13, 2024, as part of the Company’s efforts to high-grade its Bitcoin mining fleet following entry into the First Hosting Agreement and Second Hosting Agreement, Stronghold LLC entered into a Sale and Purchase Agreement (the “Sunnyside Purchase Agreement”) with Sunnyside Digital, Inc. (“Sunnyside”). Pursuant to the Sunnyside Purchase Agreement, Stronghold LLC sold 6,000 M50 Bitcoin miners to Sunnyside for $4.60 per terahash, for a total purchase price of $3,256,800. Pursuant to the Sunnyside Purchase Agreement, the Company shall make the M50 Bitcoin miners available to Sunnyside within ten (10) days of the transaction at the Company’s Panther Creek Plant. The Company expects the proceeds from the Sunnyside Purchase Agreement to be immediately applied towards indebtedness under the Company's Credit Agreement.
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the "Securities Act")), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In particular, statements pertaining to our trends, liquidity, capital resources, and future performance, among others, contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology including, but not limited to, “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all).
Forward-looking statements may include statements about:
•the hybrid nature of our business model, which is highly dependent on the price of Bitcoin;
•our dependence on the level of demand and financial performance of the crypto asset industry;
•our substantial indebtedness and its effect on our results of operations and financial condition;
•our ability to manage our growth, business, financial results, and results of operations;
•uncertainty regarding our evolving business model;
•our ability to raise capital to fund our business and growth;
•our ability to maintain sufficient liquidity to fund operations, growth and acquisitions;
•uncertainty regarding the outcomes of any investigations or proceedings;
•our ability to retain management and key personnel and the integration of new management;
•our ability to enter into purchase agreements, acquisitions and financing transactions;
•our ability to maintain our relationships with our third-party brokers and our dependence on their performance;
•our ability to procure crypto asset mining equipment from foreign-based suppliers;
•developments and changes in laws and regulations, including increased regulation of the crypto asset industry through legislative action and revised rules and standards applied by The Financial Crimes Enforcement Network under the authority of the U.S. Bank Secrecy Act and the Investment Company Act;
•the future acceptance and/or widespread use of, and demand for, Bitcoin and other crypto assets;
•our ability to respond to price fluctuations and rapidly changing technology;
•our ability to operate our coal refuse power generation facilities as planned;
•our ability to develop and monetize our carbon capture project to generate meaningful revenue, on a timely basis or at all;
•our ability to avail ourselves of tax credits for the clean-up of coal refuse piles;
•legislative or regulatory changes, and liability under, or any future inability to comply with, existing or future energy regulations or requirements;
•the market value of the merger consideration that Stronghold shareholders will receive in the merger may fluctuate;
•our ability to consummate the merger with Bitfarms on the anticipated terms in a timely manner or at all;
•the occurrence of any event, change or other circumstance that could give rise to the termination of the merger
with Bitfarms;
•potential adverse reactions or changes to business relationships with key business partners and customers, and
other with whom Stronghold does business, in light of the merger with Bitfarms;
•the possibility that the merger with Bitfarms may be more expensive to complete than anticipated, including as a
result of unexpected factors or events;
•our ability to continue operating as a stand-alone business until the consummation of the merger with Bitfarms; and
•our ability to register for certain demand response and sync reserve programs in PJM.
We caution you that the forward-looking statements contained in this Form 10-Q are subject to a variety of risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, decline in demand for our products and services, the seasonality and volatility of the crypto asset industry, our acquisition strategies, the inability to comply with developments and changes in regulation, cash flow and access to capital, maintenance of third-party relationships, and the other risks described under the heading “Item 1A.Risk Factors”
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in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the U.S. Securities and Exchange Commission (the "SEC") on March 8, 2024, and in any subsequently filed Quarterly Reports on Form 10-Q, including this Form 10-Q. Should one or more of the risks or uncertainties described in the Annual Report on Form 10-K or in any subsequently filed Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Any forward-looking statement that we make in this Form 10-Q speaks only as of the date of such statement. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Form 10-Q.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (As Restated)
Except as otherwise indicated or required by the context, all references to the “Company,” “we,” “us” or “our” relate to Stronghold Digital Mining, Inc. (“Stronghold Inc.”) and its consolidated subsidiaries.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing in this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans, expectations and strategy for our business and operations, includes forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see section above entitled “Cautionary Statement Regarding Forward-Looking Statements.” Certain risks may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion and analysis. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading “Item 1A.Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 8, 2024 (the "2023 Form 10-K"), and in subsequently filed Quarterly Reports on Form 10-Q.
Overview of the Business
Stronghold Digital Mining, Inc. ("Stronghold Inc.," the "Company," "we," "us," or "our") was incorporated as a Delaware corporation on March 19, 2021. The Company is a low-cost, environmentally beneficial, vertically integrated crypto asset mining company focused on mining Bitcoin and environmental remediation and reclamation services. The Company wholly owns and operates two coal refuse power generation facilities that it has upgraded: (i) the Company's first reclamation facility located on a 650-acre site in Scrubgrass Township, Venango County, Pennsylvania, which the Company acquired the remaining interest of in April 2021, and has the capacity to generate approximately 83.5 megawatts (“MW”) of electricity (the "Scrubgrass Plant"); and (ii) a facility located near Nesquehoning, Pennsylvania, which the Company acquired in November 2021, and has the capacity to generate approximately 80 MW of electricity (the "Panther Creek Plant," and collectively with the Scrubgrass Plant, the "Plants"). Both facilities qualify 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). The Company is committed to generating energy and managing its assets sustainably, and the Company believes that it is one of the first vertically integrated crypto asset mining companies with a focus on 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 $30 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 Interconnection Merchant Market ("PJM") grid pursuant to Electricity Sales and Purchase Agreements at each of our Plants with Champion Energy Services LLC 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 done, on an opportunistic basis, when revenue from power sales exceeds Bitcoin mining revenue. We operate as a market participant through PJM Interconnection, a Regional Transmission Organization (“RTO”) that coordinates the movement of wholesale electricity. Our ability to sell energy in the wholesale generation market in the PJM RTO provides us with the ability to optimize between selling power to the grid and mining for Bitcoin. We also believe that owning our own power source makes us a more attractive partner to crypto asset mining equipment purveyors.
Bitcoin Mining
As of November 8, 2024, we own or host approximately 32,000 Bitcoin miners with hash rate capacity of approximately 3.2 EH/s. We own approximately 25,000 Bitcoin miners, with hash rate capacity of nearly 2.5 EH/s, and host approximately 6,000 Bitcoin miners, with hash rate capacity exceeding 0.7 EH/s. As of November 8, 2024, we expect to receive an additional 20,000 Bitcoin miners, with hash rate capacity exceeding 3.8 EH/s, pursuant to the First Hosting Agreement with Bitfarms and Second Hosting Agreement with Bitfarms. Additionally, pursuant to the Fourth Amendment
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to our Bitcoin mining agreement with Canaan, Cantaloupe has agreed to replace 4,000 Model A1346 Bitcoin miners with 4,000 Model A1446 Bitcoin miners by December 31, 2024, which the Company expects will increase hash rate capacity by approximately 0.2 EH/s.
Our data centers have capacity to power more than 40,000 miners, which we believe can support hash rate capacity exceeding 7 EH/s through high-grading our fleet with current-generation Bitcoin miners. Additionally, we believe that opportunities exist to further grow our data center capacity to over 500 MW. Given the Company's efforts to high-grade its fleet, including through the First Hosting Agreement and Second Hosting Agreement with Bitfarms, we are exploring alternatives for a portion of our current fleet of Bitcoin miners.
Bitcoin
Bitcoin was introduced in 2008 with the goal of serving as a digital means of exchanging and storing value. Bitcoin is a form of digital currency that depends upon a consensus-based network and a public ledger called a “blockchain,” which contains a record of every Bitcoin transaction ever processed. The Bitcoin network is the first decentralized peer-to-peer payment network, powered by users participating in the consensus protocol with no central authority or middlemen, that has wide network participation. The authenticity of each Bitcoin transaction is protected through digital signatures that correspond with addresses of users that send and receive Bitcoin. Users have full control over remitting Bitcoin from their own sending addresses. All transactions on the Bitcoin blockchain are transparent, allowing those running the appropriate software to confirm the validity of each transaction. To be recorded on the blockchain, each Bitcoin transaction is validated through a proof-of-work consensus method, which entails solving complex mathematical problems to validate transactions and post them on the blockchain. This process is called mining. Miners are rewarded with Bitcoin, both in the form of newly created Bitcoin and fees in Bitcoin, for successfully solving the mathematical problems and providing computing power to the network. A company’s computing power, measured in hash rate, is generally considered to be one of the most important metrics for evaluating Bitcoin mining companies.
We receive Bitcoin as a result of our mining operations, and we sell Bitcoin, from time to time, to support our operations and strategic growth. We do not currently plan to engage in regular trading of Bitcoin (other than as necessary to convert our Bitcoin to U.S. dollars) or hedging activities related to our holding of Bitcoin; however, our decisions to hold or sell Bitcoin at any given time may be impacted by the Bitcoin market, which has been historically characterized by significant volatility. Currently, we do not use a formula or specific methodology to determine whether or when we will sell Bitcoin that we hold or the number of Bitcoin we will sell. We assess our fiat currency needs on an ongoing basis, incorporating market conditions, our financial forecasts, and scenarios analyses. We safeguard and keep private our digital assets by utilizing storage solutions provided by Anchorage Digital Bank (“Anchorage”), which require multi-factor authentication and utilize cold and hot storage. While we are confident in the security of our digital assets, we are evaluating additional measures to provide additional protection.
Carbon Capture Initiative
On November 10, 2023, the Company launched the first phase of its carbon capture project with the deployment of the first unit of carbon capture technology at the Scrubgrass Plant. The design and process follow four months of third-party laboratory tests, utilizing a variety of testing methodologies. The Company's beneficial use ash naturally contains reactive calcium oxide as a result of including limestone in the fuel mix to reduce sulfur dioxide emissions, given the high sulfur content in mining waste. Calcium oxide can, under the right conditions, bond with carbon dioxide to form calcium carbonate, effectively absorbing carbon dioxide out of ambient air and permanently storing it in a geologically stable solid. Lab results have demonstrated that the Company's beneficial use ash can potentially capture carbon dioxide at a capacity of approximately 14% by weight of starting ash. The Company expects that development of the project will be iterative, as the Company works to optimize processes around ash movement, composition, rate of capture, time to capture and cost, among other variables. Actual carbon dioxide absorption rates, and timing thereof, may vary, including by site across the Scrubgrass Plant and Panther Creek Plant, type of ash between fly and bottom ash, arrangement of ash in the field, and weather conditions, among other variables. The cost of equipment for the first phase is expected to be less than $100,000, and the Company believes that the scaled project will cost approximately $50 to $125 per annual ton of carbon dioxide capture capacity, assuming the laboratory results are validated. Assumptions included in the estimated $50 to $125 per annual ton of carbon dioxide capture capacity include, but are not limited to, (i) expected costs of equipment, taking into account the cost of the equipment used to construct the first unit at the Scrubgrass Plant, (ii) incremental labor costs related to the construction of the project, and (iii) the expected deployment of a combined 100 to 150 carbon capture units across the Scrubgrass Plant and Panther Creek Plant.
The Company's Scrubgrass Plant and Panther Creek Plant produce approximately 800,000 to 900,000 combined tons of beneficial use ash per year at baseload capacity utilization. Extrapolating the potential 14% carbon dioxide capture capacity
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from the Scrubgrass Plant's ash lab tests would imply potential to capture approximately 115,000 tons of carbon dioxide per year. The Company intends to monetize any credits generated from its carbon capture initiatives in private markets, and the Company hopes for such monetization in the private markets in earnest in 2025 or 2026. In February 2024, the carbon capture initiative at the Scrubgrass Plant was registered on the Puro Carbon Registry (“Puro”). The Company then undertook the audit process with Puro, but the carbon capture initiative at Scrubgrass was not certified by Puro due to the use of coal refuse at the Scrubgrass facility. The Company intends to continue to explore the monetization of the carbon capture initiative on other registries and in private markets. The Company is also exploring whether its carbon capture initiatives are eligible to qualify for tax credits under Section 45Q of the Internal Revenue Code of 1986, as amended (such credits, “Section 45Q tax credits”). The earliest the Company would be in a position to qualify for Section 45Q tax credits is in 2025, or more likely, in 2026, if the Company is able to qualify for Section 45Q tax credits at all. See Item 1A "Risk Factors" in our 2023 Form 10-K for risks associated with the Company's carbon capture initiative and Section 45Q tax credits.
Recent Developments
Merger Agreement and First Amendment to Merger Agreement
On August 21, 2024, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bitfarms Ltd., a corporation incorporated under the Canada Business Corporations Act and continued under the Business Corporations Act (Ontario) (the “OBCA”) (“Bitfarms” or “Parent”), Backbone Mining Solutions LLC, a Delaware limited liability company and a wholly-owned, indirect subsidiary of Parent (“BMS”), and HPC & AI Megacorp, Inc., a Delaware corporation and a wholly-owned, direct subsidiary of BMS (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company (the “merger”), with the Company surviving the merger as an indirect, wholly-owned subsidiary of Bitfarms. The Merger Agreement has been unanimously approved by the Boards of Directors of the Company and Bitfarms and is expected to close in the first quarter of 2025, subject to the receipt of Stronghold stockholder approval, applicable regulatory approvals, certain third-party consents and other customary closing conditions. Under the terms of the Merger Agreement, upon the closing of the merger, holders of Class A common stock (including holders of Series C Preferred Stock and holders of Class V common stock whose shares will convert into or be exchanged for shares of Class A common stock immediately prior to the closing of the merger) will receive 2.52 Bitfarms common shares for each share of Class A common stock they own. See Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q for risks associated with the Company's proposed merger with Bitfarms.
On September 12, 2024, the Company, Bitfarms, BMS, and Merger Sub entered into Amendment No. 1 (the “Merger Agreement Amendment”) to the Merger Agreement. The Merger Agreement Amendment revised the Merger Agreement to provide for the Parent Termination Fee Offset (as defined below), require the consent of Bitfarms for any issuances of equity interests of the Company pursuant to its at-the-market offering program, and amend certain representations and warranties of the Company.
Voting Agreement
On August 21, 2024, concurrently with the execution and delivery of the Merger Agreement, Parent entered into a Voting Agreement (the “Voting Agreement”) with each of Q Power LLC, a Delaware limited liability company (“Q Power”) and Gregory A. Beard (together with Q Power, the “Voting Agreement Holders”), pursuant to which and on the terms and subject to the conditions thereof, among other things, the Voting Agreement Holders have agreed to vote their shares of Class V common stock and Class A common stock (together, the “Company Common Stock”) in favor of the matters to be submitted to the Company’s stockholders in connection with the merger, subject to the terms and conditions set forth in the Voting Agreement.
The Voting Agreement will terminate upon the earliest to occur of (i) the effective time of the merger, (ii) the date and time the Merger Agreement is validly terminated pursuant to its terms or modified or amended in a manner that adversely affects the Voting Agreement Holders in any material respect, and (iii) the termination of the Voting Agreement by mutual consent of the parties thereto. As of the date of execution of the Merger Agreement, the shares of Company Common Stock owned by the Voting Agreement Holders represent approximately 16.4% of the outstanding shares of Company Common Stock.
TRA Waiver and Termination Agreement
On August 21, 2024, concurrently with the execution and delivery of the Merger Agreement, the Company, Parent and each of Q Power and William Spence (together with Q Power, the “TRA Holders”), entered into a TRA Waiver and
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Termination Agreement (the “TRA Waiver”), pursuant to which the parties agreed, among other things, subject to and effective upon the consummation of the transactions contemplated by the Merger Agreement, to (i) terminate the Tax Receivable Agreement, dated April 1, 2021, as amended November 9, 2022, by and among the Company and the TRA Holders (the “Tax Receivable Agreement”) and (ii) waive the Early Termination Payment (as defined in the Tax Receivable Agreement) pursuant to the Tax Receivable Agreement, which would have otherwise become payable to the TRA Holders in connection with the consummation of the merger, and any other amounts to which the TRA Holders would have otherwise been entitled under the Tax Receivable Agreement. The TRA continues to be in effect prior to the completion of the Merger Agreement, but due to the TRA Waiver discussed above, the Tax Receivable Agreement is not recorded and is not currently expected to have an impact on the Company's consolidated financial statements.
First Hosting Agreement
On September 12, 2024, Stronghold Digital Mining Hosting, LLC (“Stronghold Hosting”), a Delaware limited liability company and indirect subsidiary of the Company entered into a Hosting Agreement (the “First Hosting Agreement”) with Bitfarms, pursuant to which Bitfarms will deliver approximately 10,000 Bitmain T21 miners owned by Bitfarms (the “Bitfarms Miners”) to the Company’s Panther Creek mining facility, and the Company will provide power to maintain, host and operate the Bitfarms Miners. To date, the Company has received some of these miners, with the remainder expected in November and December of this year.
The initial term of the First Hosting Agreement commenced on October 1, 2024 and will remain effective until December 31, 2025, after which it will automatically renew for additional one year periods unless either party provides written notice of non-renewal to the other party at least sixty days prior to the expiration of the then-current initial term or renewal term, as applicable. Upon the occurrence of an event of default that is not cured within fifteen days, the non-breaching party may terminate the First Hosting Agreement.
Pursuant to the First Hosting Agreement, Bitfarms will pay Stronghold Hosting a monthly fee equal to 50% of the profit generated by the Bitfarms Miners, subject to certain monthly adjustments between the parties to account for the upfront monthly payment paid by Bitfarms to Stronghold Hosting in an amount of $210,000 and for taxes and the net cost of power associated with the operation of the Bitfarms Miners.
In connection with the execution of the First Hosting Agreement, Bitfarms deposited with Stronghold Hosting $7.8 million (the “Deposit”), equal to the estimated cost of power for three months of operations of the Bitfarms Miners, which will be refundable in full to Bitfarms within one business day of the end of the initial term expiring on December 31, 2025. In addition, if the Merger Agreement is terminated and the Parent Termination Fee (as defined in the Merger Agreement) is payable by Bitfarms in connection with such termination, up to $5.0 million of the Deposit shall be refunded by way of a corresponding $5.0 million reduction in the amount of the Parent Termination Fee, payable in accordance with the Merger Agreement Amendment (the “Parent Termination Fee Offset”). The Deposit will bear interest at a floating rate equal to the forward-looking term secured overnight financing rate as administered by CME Group Benchmark Administration Limited for the applicable interest period plus 1.0%, payable in kind on the last day of each calendar quarter by capitalizing and adding such interest to the then-outstanding amount of the Deposit. Upon the occurrence and during the continuance of an event of default under the First Hosting Agreement, the principal of, and all accrued and unpaid interest on, the Deposit shall bear interest from the date of such event of default, until cured or waived, at a rate equal to 24.0%.
Second Bitfarms Hosting Agreement
On October 29, 2024, Stronghold Hosting entered into a Hosting Agreement (the “Second Hosting Agreement”) with BMS, pursuant to which BMS will deliver approximately 10,000 BMS Miners to the Company’s mining facilities, and the Company will provide power to, maintain, host and operate the BMS Miners.
The initial term of the Second Hosting Agreement commenced on November 1, 2024, and will remain effective until December 31, 2025, after which it will automatically renew for additional one year periods unless either party provides written notice of non-renewal to the other party at least sixty days prior to the expiration of the then-current initial term or renewal term, as applicable. Upon the occurrence of an event of default that is not cured within fifteen days, the non-breaching party may terminate the Second Hosting Agreement.
Pursuant to the Second Hosting Agreement, BMS will pay Stronghold Hosting a monthly fee equal to fifty percent of the profit generated by the BMS Miners, subject to certain monthly adjustments between the parties to account for the upfront monthly payment paid by BMS to Stronghold Hosting in an amount of $600,000, and for taxes and the net cost of power associated with the operation of the BMS Miners.
In connection with the execution of the Second Hosting Agreement, BMS deposited with Stronghold Hosting $7,800,000 (the “Second Deposit”), equal to the estimated cost of power for three months of operations of the BMS Miners, which will
39
be refundable in full to BMS within one business day of the end of the initial term expiring on December 31, 2025. The Second Deposit will bear interest at a floating rate equal to the forward-looking term secured overnight financing rate as administered by CME Group Benchmark Administration Limited for the applicable interest period plus 1.0%, payable in kind on the last day of each calendar quarter by capitalizing and adding such interest to the then-outstanding amount of the Second Deposit. Upon the occurrence and during the continuance of an event of default under the Second Hosting Agreement, the principal of, and all accrued and unpaid interest on, the Second Deposit shall bear interest from the date of such event of default, until cured or waived, at a rate equal to 24.0%.
PJM Base Residual Auction
On July 31, 2024, PJM held its annual Base Residual Auction for capacity reserve scheduling for the 12-month delivery year from June 2025 through May 2026. The Company's Panther Creek Plant and Scrubgrass Plant offered capacity into the auction, as required, and each cleared the auction at $269.92/MW/day, up approximately 833% from $28.92/MW/day in last year’s Base Residual Auction. The Panther Creek Plant cleared 69.2 MW of capacity in the auction, which the Company estimates will yield approximately $7 million of incremental revenue at an estimated 100% net margin during the 12-month period from June 2025 through May 2026. The Scrubgrass Plant cleared 75.6 MW in the auction, but has since reduced that commitment through bi-lateral transactions some of its capacity commitment, retaining 62.5 MW of clearing capacity that will yield approximately $6 million of incremental revenue at an estimated 100% net margin during the 12-month period from June 2025 through May 2026. The Company is currently evaluating options with its remaining capacity commitment at the Scrubgrass Plant, including exiting the additional clearing capacity through additional bi-lateral transactions, with a focus on maximizing the flexibility and long-term potential of its data center operations. Each of the Company's plants have must-offer requirements in the upcoming 2026-2027 Base Residual Auction.
Increased Coal Refuse Reclamation and Energy Tax Credit
On July 11, 2024, the Pennsylvania General Assembly completed its annual commonwealth budget process and passed PA Senate Bill 654, which Governor Josh Shapiro subsequently signed into law. The law increases the Coal Refuse Reclamation and Energy Tax Credit from $4 per ton to $8 per ton, the annual program cap from $20 million to $55 million, and the individual facility cap from 22.2% to 26.5%. The law did not change the duration of the program, which remains effective through 2036. The Company estimates this increase in the waste coal tax credit will result in approximately $2 to $4 million per annum of incremental net income.
Distributed Energy Resource and Peak Saver Agreement with Voltus, Inc.
On April 26, 2024, the Company executed a Distributed Energy Resource and Peak Saver Agreement with Voltus, Inc. (“Voltus”) pursuant to which Voltus will assist the Company in registering for certain demand response and sync reserve programs in PJM that the Company believes will allow it to capture additional revenue.
Trends and Other Factors Impacting Our Performance
General Digital Asset Market Conditions
During 2022 and more recently in 2023, a number of companies in the crypto assets industry have declared bankruptcy, including, but not limited to, Core Scientific, Celsius Network LLC ("Celsius"), Voyager Digital, Three Arrows Capital, BlockFi, FTX Trading Ltd. ("FTX"), and Genesis Holdco. Such bankruptcies have contributed, at least in part, to the volatility in the price of our shares as well as the price of Bitcoin, and some 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”), our institutional custody agreement or relationship with Anchorage, or our institutional custody and trading relationship with Coinbase Inc. The hosting agreement with Foundry performed in line with our expectations from its inception through its bilateral termination on September 30, 2024. The bankruptcy of Genesis Holdco, which is affiliated with the parent entity of Foundry, has not materially impacted the original or currently existing hosting arrangement. Additionally, we have had no direct exposure to Celsius, First Republic Bank, FTX, 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
40
been materially impacted by any liquidity or insolvency issues with such third parties to date, there is no guarantee that our counterparties will not experience liquidity or insolvency issues in the future.
We safeguard and keep private our digital assets, including the Bitcoin that we mine, by utilizing storage solutions provided by Anchorage, which requires multi-factor authentication. While we are confident in the security of our digital assets held by Anchorage, given the broader market conditions, there can be no assurance that other crypto asset market participants, including Anchorage as our custodian, will not ultimately be impacted. Further, given the current conditions in the digital assets ecosystem, we are liquidating our mined Bitcoin often, and generally at multiple points every week through Anchorage. We continue to monitor the digital assets industry as a whole, although it is not possible at this time to predict all of the risks stemming from these events that may result to us, our service providers, our counterparties, and the broader industry as a whole. We cannot provide any assurance that we will not be materially impacted in the future by bankruptcies of participants in the crypto asset space. See “Risk Factors—Crypto Asset Mining Related Risks—Our crypto assets may be subject to loss, damage, theft or restriction on access. Further, digital asset exchanges on which crypto assets trade are relatively new and largely unregulated, and thus may be exposed to fraud and failure. Incorrect or fraudulent cryptocurrency transactions may be irreversible—” in our 2023 Form 10-K for additional information.
Bitcoin Price Volatility
The market price of Bitcoin has historically and recently been volatile. For example, the price of Bitcoin ranged from a low of approximately $17,000 in January 2023 to over $76,000 in November 2024. After our initial public offering, the price of Bitcoin dropped over 75%, resulting in an adverse effect on our results of operations, liquidity and strategy, and increased credit pressures on the cryptocurrency industry. Since then, Bitcoin recovered to over $73,000 earlier in 2024, but more recently Bitcoin has traded between $60,000 and $70,000 over the past month. 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 unrealized or realized losses on the value of our Bitcoin assets. The future value of Bitcoin will affect the revenue from our operations, and any future decline in the value of the Bitcoin we mine would impact our consolidated financial statements and results of operations, which could have a material adverse effect on the market price for our securities.
Bitcoin Adoption and Network Hash Rate
Since its introduction in 2008, Bitcoin has become the leading cryptocurrency based on several measures of adoption: total value of coins in circulation, transactions, and computing power devoted to its protocol. The total value of Bitcoin in circulation was approximately $1.3 trillion as of October 25, 2024, nearly four times that of Ethereum at $298 billion, the second largest cryptocurrency. Bitcoin cumulative transactions have increased from one transaction on January 7, 2009, to 1.1 billion transactions through October 25, 2024. As the adoption of Bitcoin has progressed, the computing power devoted to mining for it has also increased. This collective computing power is referred to as "network hash rate". Bitcoin network hash rate has risen from nearly zero at inception to a seven-day average of 736 EH/s as of October 25, 2024, as Bitcoin price has risen from its initial trading price of $0.0008 in July 2010 to approximately $67,000 as of October 25, 2024. The actual number of mining computers hashing at any given time cannot be known; therefore, the network hash rate, at any given time, is approximated by using "mining difficulty."
The term difficulty refers to the complexity of the mathematical problems that the miners solve and is adjusted up or down automatically after 2,016 blocks (an "epoch") have been mined on the network. Difficulty on October 25, 2024, was 95.7 trillion, and it has ranged from one to 95.7 trillion. Generally speaking, if network hash rate has moved up during the current epoch, it is likely that difficulty will increase in the next epoch, which reduces the award per unit of hash rate during that epoch, all else equal, and vice versa. Deriving network hash rate from difficulty requires the following equation: network hash rate is the product of a) blocks solved over the last 24 hours divided by 144, b) difficulty, c) 2^32, divided by 600 seconds.
Embedded in the Bitcoin source code is an upper limit of 21 million for the quantity of Bitcoin that can ever be mined or in circulation, which means that the currency is finite, unlike fiat currencies. Through October 25, 2024, approximately 19.8 million Bitcoin have been mined, leaving approximately 1.2 million left to be mined. The year in which the last Bitcoin is expected to be mined is 2140. Every four years there is an event called a halving where the coins awarded per block is cut in half. While the reward for adding a block to the blockchain between May 11, 2020, and April 19, 2024, was 6.25 Bitcoin, the halving occurred on April 19, 2024, and the mining award per block is now 3.125 Bitcoin instead of 6.25 previously. Each day there are approximately 144 blocks awarded to the entirety of the global Bitcoin network. While network hash rate has been somewhat cyclical over short periods of time, since the creation of Bitcoin, as network hash rate has increased over time through a combination of an increased number of network participants, an increased quantity of
41
miners hashing, and more efficient miners with faster processing speeds hashing, competition for block awards has increased.
Hash Price
There are three critical drivers of revenue per unit of hash rate in the Bitcoin mining industry (using terahash as the unit of hash rate): Bitcoin price, difficulty, and Bitcoin transaction fees. Hash price is the nexus of those terms and is equivalent to revenue per terahash per day. Hash price was $0.049 on October 25, 2024, compared to the 2024 average year-to-date hash price of $0.066, and compared to the five-year, one year, 2023, and 2022 average hash prices of $0.148, $0.070, $0.075, and $0.124, respectively. The five-year high price was April 20, 2021, when hash price was at $0.57. The five-year low hash price was $0.038 on August 5, 2024. We estimate that the average global Bitcoin network breakeven hash price required to cover operating costs is currently between $0.045 to $0.080, which assumes variable operating expenses of $60 to $70 per MWh, annual fixed operating expenses of $1 to $5 per TH/s, and average network efficiency of 30 to 40 J/TH.
In addition to mining for new Bitcoin, we are also paid transaction fees in the form of Bitcoin for processing and validating transactions. During 2022, average transaction fees were 1.6% of block subsidies, and, during the first quarter of 2023, transaction fees were 2.3%. In April 2023, transaction fees and volume rose sharply on the Bitcoin network, and transaction fees averaged 8.2% from April 1, 2023, to June 30, 2023. During the third and fourth quarters of 2023, transaction fees averaged 2.8% and 14.6%, respectively, with the latter representing the highest quarterly average since Bitcoin was founded. Transaction fees have remained elevated during 2024, with an 7.7% year-to-date average through October 25, 2024. Transaction fees are volatile and there are no assurances that transaction fees will continue at recent levels in the future.
Critical Accounting Policies and Significant Estimates
Except for the Company's corrected revenue recognition policy specific to its cryptocurrency hosting revenues disclosed in Note 1 – Basis of Presentation (As Restated) in the notes to the Condensed Consolidated Financial Statements, the Company's critical accounting policies and significant estimates, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2023, remain unchanged.
Post IPO Taxation and Public Company Costs
Stronghold LLC is and has been organized as a pass-through entity for U.S. federal income tax purposes and is therefore not subject to entity-level U.S. federal income taxes. Stronghold Inc. was incorporated as a Delaware corporation on March 19, 2021, and is therefore 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, including Stronghold Inc. and Q Power, in an amount sufficient to allow Stronghold Inc. to pay its taxes and to make payments under the TRA. In addition, the Stronghold LLC Agreement requires Stronghold LLC to make non-pro rata payments to Stronghold Inc. to reimburse it for its corporate and other overhead expenses, which payments are not treated as distributions under the Stronghold LLC Agreement. On August 21, 2024, the Company and the TRA Holders entered
into the TRA Waiver to provide that, upon the closing of the merger, the TRA will terminate and the TRA Holders will
waive the Early Termination Payment (as defined in the TRA) and any other amounts the TRA Holders would have
otherwise been entitled to therein See “Tax Receivable Agreement” and “Recent Developments—TRA Waiver and
Termination 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, annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit
42
fees, incremental director and officer liability insurance costs, and director and officer compensation. Our financial statements following the IPO have continued 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, Income Taxes, management has determined that the utilization of our deferred income tax assets is not more likely than not, and therefore, we have recorded a valuation allowance against our net deferred income 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 cryptocurrency asset mining.
As previously discussed in the "Critical Accounting Policies" section in our 2023 Form 10-K, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, property, plant and equipment (including the useful lives and recoverability of long-lived assets), investments, digital currency assets, intangible assets, stock-based compensation, loss contingency accruals, income taxes, and business combinations. The Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting policies employed.
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Consolidated Results of Operations (As Restated)
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
(As Restated)
(As Restated)
OPERATING REVENUES:
Cryptocurrency mining
$
8,709,777
$
12,684,894
$
44,989,361
$
37,764,990
Cryptocurrency hosting
(1,233,393)
3,789,375
8,048,435
9,195,072
Energy
502,640
1,210,811
1,424,077
4,682,590
Capacity
—
—
—
1,442,067
Other
44,046
41,877
187,521
142,194
Total operating revenues
8,023,070
17,726,957
54,649,394
53,226,913
OPERATING EXPENSES:
Fuel
6,500,292
8,556,626
19,709,424
22,262,141
Operations and maintenance
4,998,609
6,961,060
22,321,981
24,206,080
General and administrative
8,326,999
6,598,951
26,671,930
25,145,444
Depreciation and amortization
8,623,646
9,667,213
27,428,863
26,025,021
Loss on disposal of fixed assets
458,147
—
2,189,252
108,367
Realized gain on sale of digital currencies
(3,977,622)
(131,706)
(4,358,041)
(725,139)
Unrealized loss (gain) on digital currencies
146,607
—
(614)
—
Realized loss on sale of miner assets
530,099
—
494,087
—
Impairments on digital currencies
—
357,411
—
683,241
Impairments on equipment deposits
—
5,422,338
—
5,422,338
Total operating expenses
25,606,777
37,431,893
94,456,882
103,127,493
NET OPERATING LOSS
(17,583,707)
(19,704,936)
(39,807,488)
(49,900,580)
OTHER INCOME (EXPENSE):
Interest expense
(2,236,587)
(2,441,139)
(6,748,059)
(7,428,530)
Loss on debt extinguishment
—
—
—
(28,960,947)
Changes in fair value of warrant liabilities
(2,850,298)
(180,838)
8,445,247
5,580,453
Other
—
15,000
15,000
45,000
Total other (expense) income
(5,086,885)
(2,606,977)
1,712,188
(30,764,024)
NET LOSS
$
(22,670,592)
$
(22,311,913)
$
(38,095,300)
$
(80,664,604)
Highlights of our consolidated results of operations for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023, include:
Operating Revenues
Total operating revenues decreased by approximately $9.7 million for the three months ended September 30, 2024, as compared to the same period in 2023, resulting from (i) an approximately $5.0 million decrease in cryptocurrency hosting revenues driven by the cumulative impact of correcting an error in the Company's revenue recognition policy during the third quarter of 2024, as disclosed in Note 1 – Basis of Presentation (As Restated), and a decline in Bitcoin mining economics (e.g., hash price), and (ii) a $4.0 million decrease in cryptocurrency mining revenues due to a decline in Bitcoin mining economics (e.g., hash price). Energy revenue decreased by approximately $0.7 million driven by lower generation and increased consumption of self-generated electricity due to the expansion of our cryptocurrency operations.
Total operating revenues increased by approximately $1.4 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to an approximately $7.2 million increase in cryptocurrency mining revenues driven by increased hash rate from the purchase and installation of additional Bitcoin miners. These increases were partially offset by (i) an approximately $3.3 million decrease in energy revenues driven by lower generation and increased consumption of self-generated electricity due to the expansion of our cryptocurrency operations, (ii) an approximately $1.4 million decrease in capacity revenue due to both plants strategically reducing exposure to the capacity markets and the resulting cost-capping and operational requirements in PJM's day ahead market, and (iii) a $1.1 million decrease in cryptocurrency hosting revenues primarily driven by a decrease in Bitcoin awards resulting from the April 2024 halving.
Operating Expenses
Total operating expenses decreased by approximately $11.8 million for the three months ended September 30, 2024, as compared to the same period in 2023, primarily driven by (i) an approximately $5.4 million decrease in impairments on
44
equipment deposits recorded in the third quarter of 2023, (ii) an approximately $3.8 million increase in realized gain on sale of digital currencies due to Bitcoin price appreciation and hosting-related Bitcoin awards being recorded with a carrying value equal to the Bitcoin market price at the date of contract inception, (iii) an approximately $2.1 million decrease in fuel expenses driven by lower megawatt generation by the power plants and lower megawatt consumption by the data centers, (iv) an approximately $2.0 million decrease in operations and maintenance expenses, and (v) an approximately $1.0 million decrease in depreciation and amortization primarily due to the decommissioning of MinerVa miners. These decreases were partially offset by an approximately $1.7 million increase in general and administrative expenses due to higher professional and legal fees incurred related to the Merger Agreement and higher stock-based compensation.
Total operating expenses decreased by approximately $8.7 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily driven by (i) an approximately $5.4 million decrease in impairments on equipment deposits recorded in 2023, (ii) an approximately $3.6 million increase in realized gain on sale of digital currencies due to Bitcoin price appreciation and hosting-related Bitcoin awards being recorded with a carrying value equal to the Bitcoin market price at the date of contract inception, (iii) an approximately $2.6 million decrease in fuel expenses driven by lower megawatt generation partially offset by higher imported megawatts, and (iv) an approximately $1.9 million decrease in operations and maintenance expenses due to a decrease in plant maintenance expenses related to the Scrubgrass Plant being shut off in March 2024 as power prices softened, partially offset by an increase in professional services for cryptocurrency operations. These decreases were partially offset by (i) an approximately $1.5 million increase in general and administrative expenses driven by an estimated accrual for two loss contingencies totaling approximately $5.3 million and higher professional and legal fees incurred related to the Merger Agreement partially offset by lower stock-based compensation and insurance expenses, (ii) an approximately $2.1 million increase in the loss on disposal of fixed assets as a result of decommissioning MinerVa miners, and (iii) an approximately $1.4 million increase in depreciation and amortization due to the purchase and installation of additional Bitcoin miners.
Other Income (Expense)
Total other income (expense) decreased by approximately $2.5 million for the three months ended September 30, 2024, as compared to the same period in 2023, primarily driven by an approximately $2.7 million decrease in other income resulting from changes in the fair value of warrant liabilities, which is determined using a Black-Scholes model with significant inputs described in Note 15 – Equity Issuances in the notes to the Condensed Consolidated Financial Statements.
Total other income (expense) increased by approximately $32.5 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily driven by (i) an approximately $29.0 million loss on debt extinguishment recorded in the first quarter of 2023 and (ii) an approximately $2.9 million increase in other income resulting from changes in the fair value of warrant liabilities. For more details regarding the loss on debt extinguishment, see Note 7 – Debt in the notes to the Condensed Consolidated Financial Statements.
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Segment Results (As Restated)
The below presents summarized results for our operations for the two reporting segments: Energy Operations and Cryptocurrency Operations.
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
(As Restated)
(As Restated)
OPERATING REVENUES:
Energy Operations
$
546,686
$
1,252,688
$
1,611,598
$
6,266,851
Cryptocurrency Operations
7,476,384
16,474,269
53,037,796
46,960,062
Total operating revenues
$
8,023,070
$
17,726,957
$
54,649,394
$
53,226,913
NET OPERATING LOSS:
Energy Operations
$
(6,079,564)
$
(9,685,721)
$
(23,155,919)
$
(29,864,794)
Cryptocurrency Operations
(11,504,143)
(10,019,215)
(16,651,569)
(20,035,786)
Total net operating loss
(17,583,707)
(19,704,936)
(39,807,488)
(49,900,580)
OTHER (EXPENSE) INCOME (1)
(5,086,885)
(2,606,977)
1,712,188
(30,764,024)
NET LOSS
$
(22,670,592)
$
(22,311,913)
$
(38,095,300)
$
(80,664,604)
DEPRECIATION AND AMORTIZATION:
Energy Operations
$
(1,359,278)
$
(1,341,076)
$
(4,031,499)
$
(4,004,596)
Cryptocurrency Operations
(7,264,368)
(8,326,137)
(23,397,364)
(22,020,425)
Total depreciation and amortization
$
(8,623,646)
$
(9,667,213)
$
(27,428,863)
$
(26,025,021)
INTEREST EXPENSE:
Energy Operations
$
(22,056)
$
(39,007)
$
(70,721)
$
(450,472)
Cryptocurrency Operations
(2,214,531)
(2,402,132)
(6,677,338)
(6,978,058)
Total interest expense
$
(2,236,587)
$
(2,441,139)
$
(6,748,059)
$
(7,428,530)
(1) We do not allocate other income (expense) for segment reporting purposes. Amount is shown as a reconciling item between net operating income (loss) and consolidated net income (loss). Refer to our accompanying condensed consolidated statements of operations for further details.
Energy Operations Segment (As Restated)
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
Change
September 30, 2024
September 30, 2023
Change
(As Restated)
(As Restated)
(As Restated)
(As Restated)
OPERATING REVENUES:
Energy
$
502,640
$
1,210,811
$
(708,171)
$
1,424,077
$
4,682,590
$
(3,258,513)
Capacity
—
—
—
—
1,442,067
(1,442,067)
Other
44,046
41,877
2,169
187,521
142,194
45,327
Total operating revenues
546,686
1,252,688
(706,002)
1,611,598
6,266,851
(4,655,253)
OPERATING EXPENSES:
Fuel - net of crypto segment subsidy (1)
1,078,554
2,496,308
(1,417,754)
1,265,257
5,921,796
(4,656,539)
Operations and maintenance
3,379,694
5,685,366
(2,305,672)
17,308,588
20,618,654
(3,310,066)
General and administrative
263,826
1,026,100
(762,274)
1,276,164
3,015,375
(1,739,211)
Depreciation and amortization
1,359,278
1,341,076
18,202
4,031,499
4,004,596
26,903
Total operating expenses
6,081,352
10,548,850
(4,467,498)
$
23,881,508
$
33,560,421
$
(9,678,913)
NET OPERATING LOSS (EXCLUDING CORPORATE OVERHEAD)
$
(5,534,666)
$
(9,296,162)
$
3,761,496
$
(22,269,910)
$
(27,293,570)
$
5,023,660
Corporate overhead
544,898
389,559
155,339
886,009
2,571,224
(1,685,215)
NET OPERATING LOSS
$
(6,079,564)
$
(9,685,721)
$
3,606,157
$
(23,155,919)
$
(29,864,794)
$
6,708,875
INTEREST EXPENSE
$
(22,056)
$
(39,007)
$
16,951
$
(70,721)
$
(450,472)
$
379,751
(1) The Cryptocurrency Operations segment consumed $5.4 million and $18.4 million of electricity supplied by the Energy Operations segment for the three and nine months ended September 30, 2024, respectively, and $6.1 million and $16.3 million for the three and nine months ended September 30, 2023, respectively. For segment reporting, this intercompany electric charge is recorded as a contra-expense to offset fuel costs within the Energy Operations segment.
46
Operating Revenues
Total operating revenues decreased by approximately $0.7 million for the three months ended September 30, 2024, as compared to the same period in 2023, due to an approximately $0.7 million decrease in energy revenues driven by lower generation and increased consumption of self-generated electricity resulting from the expansion of our cryptocurrency operations.
Total operating revenues decreased by approximately $4.7 million for the nine months ended September 30, 2024, as compared to the same period in 2023, due to an approximately $3.3 million decrease in energy revenues driven by lower generation and increased consumption of self-generated electricity resulting from the expansion of our cryptocurrency operations and an approximately $1.4 million decrease in capacity revenues.
Effective June 1, 2022, through May 31, 2025, both plants strategically reduced their exposure to the capacity markets and the resulting cost-capping and operational requirements in PJM's day ahead market. The Company chose to be an energy resource, which reduced monthly capacity revenues 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 revenues. This also gives the 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. When high power prices call for more electricity to be supplied by the Company's 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 the Company's 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 our cryptocurrency asset operations.
Operating Expenses
Total operating expenses decreased by approximately $4.5 million for the three months ended September 30, 2024, as compared to the same period in 2023, primarily due to (i) an approximately $2.3 million decrease in operations and maintenance expenses, (ii) an approximately $1.4 million decrease in fuel expenses due to an increased percentage of fuel costs allocated to the Cryptocurrency Operations segment, resulting from fewer megawatt sales to the grid, and lower megawatt generation, and (iii) an approximately $0.8 million decrease in general and administration expenses primarily related to a decrease in the value of accounts receivable recorded during the third quarter of 2023. REC sales of approximately $2.5 million and $4.0 million were recognized as contra-expenses to offset fuel expenses for the three months ended September 30, 2024, and 2023, respectively.
Total operating expenses decreased by approximately $9.7 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to (i) an approximately $4.7 million decrease in fuel expenses due to an increased percentage of fuel costs allocated to the Cryptocurrency Operations segment, resulting from fewer megawatt sales to the grid and lower megawatt generation, (ii) an approximately $3.3 million decrease in operations and maintenance expenses due to a decrease in plant maintenance expenses, and (iii) an approximately $1.7 million decrease in general and administrative expenses primarily related to a decrease in the value of accounts receivable recorded during the first quarter of 2023. REC sales of approximately $14.2 million and $14.4 million were recognized as contra-expenses to offset fuel expenses for the nine months ended September 30, 2024, and 2023, respectively.
Corporate overhead allocated to the Energy Operations segment decreased by approximately $1.7 million for the nine months ended September 30, 2024, respectively, as compared to the same periods in 2023, primarily driven by a decrease in Energy Operations segment revenues and a decrease in stock-based compensation and insurance expenses. Corporate overhead has 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.
47
Cryptocurrency Operations Segment (As Restated)
Three Months Ended
Nine Months Ended
September 30, 2024
September 30, 2023
Change
September 30, 2024
September 30, 2023
Change
(As Restated)
(As Restated)
(As Restated)
(As Restated)
OPERATING REVENUES:
Cryptocurrency mining
$
8,709,777
$
12,684,894
$
(3,975,117)
$
44,989,361
$
37,764,990
$
7,224,371
Cryptocurrency hosting
(1,233,393)
3,789,375
(5,022,768)
8,048,435
9,195,072
(1,146,637)
Total operating revenues
7,476,384
16,474,269
(8,997,885)
53,037,796
46,960,062
6,077,734
OPERATING EXPENSES:
Electricity - purchased from energy segment
5,421,738
6,060,318
(638,580)
18,444,167
16,340,345
2,103,822
Operations and maintenance
1,618,915
1,275,694
343,221
5,013,393
3,587,426
1,425,967
General and administrative
66,330
60,154
6,176
145,583
181,091
(35,508)
Impairments on digital currencies (1)
—
357,411
(357,411)
—
683,241
(683,241)
Impairments on equipment deposits
—
5,422,338
(5,422,338)
—
5,422,338
(5,422,338)
Realized gain on sale of digital currencies
(3,141,437)
(131,706)
(3,009,731)
(3,521,856)
(725,139)
(2,796,717)
Unrealized loss (gain) on digital currencies
(689,578)
—
(689,578)
(836,799)
(836,799)
Loss on disposal of fixed assets
458,147
—
458,147
2,189,252
108,367
2,080,885
Realized loss on sale of miner assets
530,099
—
530,099
494,087
—
494,087
Depreciation and amortization
7,264,368
8,326,137
(1,061,769)
23,397,364
22,020,425
1,376,939
Total operating expenses
11,528,582
21,370,346
(9,841,764)
$
45,325,191
$
47,618,094
$
(2,292,903)
NET OPERATING INCOME (EXCLUDING CORPORATE OVERHEAD)
$
(4,052,198)
$
(4,896,077)
$
843,879
$
7,712,605
$
(658,032)
$
8,370,637
Corporate overhead
7,451,945
5,123,138
2,328,807
24,364,174
19,377,754
4,986,420
NET OPERATING INCOME (LOSS)
$
(11,504,143)
$
(10,019,215)
$
(1,484,928)
$
(16,651,569)
$
(20,035,786)
$
3,384,217
INTEREST EXPENSE
$
(2,214,531)
$
(2,402,132)
$
187,601
$
(6,677,338)
$
(6,978,058)
$
300,720
1 The Company adopted ASU 2023-08 effective January 1, 2024, using a modified retrospective transition method. For more information, see Note 1 – Basis of Presentation (As Restated) in the notes to the Condensed Consolidated Financial Statements.
Operating Revenues
Total operating revenues decreased by approximately $9.0 million for the three months ended September 30, 2024, as compared to the same period in 2023, resulting from (i) approximately $5.0 million decrease in cryptocurrency hosting revenues driven by the cumulative impact of correcting an error in the Company's revenue recognition policy during the third quarter of 2024, as disclosed in Note 1 – Basis of Presentation (As Restated), and a decline in Bitcoin mining economics (e.g., hash price), and (ii) a $4.0 million decrease in cryptocurrency mining revenues due to a decline in Bitcoin mining economics (e.g., hash price).
Total operating revenues increased by approximately $6.1 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to an approximately $7.2 million increase in cryptocurrency mining revenues driven by increased hash rate from the purchase and installation of additional Bitcoin miners. Cryptocurrency hosting revenues decreased by approximately $1.1 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily driven by a decrease in Bitcoin awards resulting from the April 2024 halving.
Operating Expenses
Total operating expenses increased by approximately $9.8 million for the three months ended September 30, 2024, as compared to the same period in 2023, primarily due to (i) an approximately $5.4 million decrease in impairments on equipment deposits recorded in the third quarter of 2023, (ii) an approximately $3.0 million increase in realized gain on sale of digital currencies, (iii) an approximately $1.1 million decrease in depreciation and amortization primarily due to the decommissioning of MinerVa miners, and (iv) an approximately $0.6 million decrease in intercompany electric charges driven by lower megawatt consumption by the data centers. These decreases were partially offset by (i) an approximately $0.5 million realized loss on the sale of miner assets and (ii) an approximately $0.5 million loss on disposal of fixed assets from decommissioning MinerVa miners.
Total operating expenses decreased by approximately $2.3 million for the nine months ended September 30, 2024, as compared to the same period in 2023, primarily due to (i) a $5.4 million impairment on equipment deposits recorded in the
48
third quarter of 2023 and (ii) a $2.8 million increase in realized gain on sale of digital currencies. These decreases were partially offset by (i) an approximately $2.1 million increase in intercompany electric charges related to the expansion of our cryptocurrency mining operations, (ii) an approximately $2.1 million increase in loss on disposal of fixed assets as a result of decommissioning MinerVa miners, (iii) an approximately $1.4 million increase in operations and maintenance expenses driven by an increase in professional services to support our cryptocurrency operations, and (iv) an approximately $1.4 million increase in depreciation and amortization driven by the purchase and installation of additional Bitcoin miners.
Corporate overhead allocated to the Cryptocurrency Operations segment increased by approximately $2.3 million and $5.0 million for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023, driven by increased corporate overhead related to estimated accruals for two loss contingencies and higher professional and legal fees incurred related to the Merger Agreement and increases in Cryptocurrency Operations segment revenues relative to total combined revenue. Corporate overhead has 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
Impairments on digital currencies of approximately $0.4 million and $0.7 million were recognized for the three and nine months ended September 30, 2023, respectively, as a result of the negative impacts from Bitcoin spot market declines in the prior year period. Effective January 1, 2024, however, the Company adopted ASU 2023-08 which requires cryptocurrency assets to be recorded at fair value. As such, the Company no longer accounts for digital currencies as indefinite-live intangible assets, and therefore, no impairment losses have been recognized in the current year period. As of September 30, 2024, we held approximately 10 Bitcoin on our consolidated balance sheet at fair value. The spot market price of Bitcoin was $63,463 as of September 30, 2024, per Coinbase.
Interest Expense
Interest expense decreased by approximately $0.2 million and $0.3 million for the three and nine months ended September 30, 2024, as compared to the same periods in 2023, following marginal reductions in outstanding debt over the same periods.
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 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 Bitcoin miners. We may also incur additional expenses and capital expenditures to develop our carbon capture system, which is currently in pilot testing.
We have historically relied on funds from equity issuances, equipment financings and revenues from mining Bitcoin and selling power generated at our power plants to provide for our liquidity needs. During 2023, we received approximately $10.0 million pursuant to the April 2023 Private Placement and approximately $15.4 million pursuant to the December 2023 Private Placement. During the year ended December 31, 2023, we sold 1,794,587 ATM Shares at approximately $6.47 per share under the ATM Agreement for gross proceeds of approximately $11.6 million, less sales commissions of approximately $0.4 million for net proceeds of approximately $11.2 million. During the nine months ended September 30, 2024, the Company sold zero ATM Shares. Until the earlier of the termination of the Merger Agreement or the completion
of the merger, our ability to raise capital through equity issuances, including sales pursuant to the ATM Agreement, is
subject to the consent of Bitfarms.
As of September 30, 2024, and November 8, 2024, we had approximately $5.1 million and $6.7 million, respectively, of cash and cash equivalents and Bitcoin on our consolidated balance sheet, which included approximately 10 Bitcoin and 4 Bitcoin, respectively. These amounts included the Deposit and the Second Deposit made under the First Hosting
49
Agreement and Second Hosting Agreement with Bitfarms, respectively, offset by the Company’s use of a substantial portion of such deposit amounts to pay down outstanding indebtedness. As of September 30, 2024, we had principal amount outstanding indebtedness of approximately $53.7 million.
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 December 2023 Private Placement contain certain restrictions, including maintenance of certain financial and liquidity ratios and minimums, and certain restrictions on future issuances of debt and equity (including usage of our ATM). In connection with the December 2023 Private Placement, the Company entered into a Registration Rights Agreement with the institutional investor (the “December Registration Rights Agreement”) whereby it agreed, among other things, to file a resale registration statement (the “December Resale Registration Statement”) with the SEC covering all shares of common stock sold to the institutional investor and the shares of common stock issuable upon exercise of the warrants and the prefunded warrants purchased by the institutional investor, and to cause the December Resale Registration Statement to become effective within the timeframes specified in the December Registration Rights Agreement; failure to do so will result in certain penalties specified in the December Registration Rights Agreement (and we made two such payments for liquidated damages during the second quarter of 2024 totaling approximately $300,000). In particular, we are contractually restricted from issuing equity to raise capital in the public or private markets (including sales under the ATM Agreement) until 30 days after the December Resale Registration Statement is effective, but in no event later than January 20, 2025. We received comments from the staff of the SEC’s Division of Corporation Finance in September 2023 related to the accounting of our Bitcoin-related operations (the "SEC Review"), among other things, and have been informed that we will be unable to take the December Resale Registration Statement effective until such comments are resolved. Over thirteen months later, such review is still ongoing. Beginning with the third quarter of 2023, we may be required to make monthly prepayments pursuant to the WhiteHawk Refinancing Agreement if we are unable to maintain a cash balance above a certain amount. If we are unable to raise additional capital in the near future, there is a risk that we could breach this minimum cash balance covenant and default on the prepayment obligations mentioned above, and we 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 net losses of $22.7 million and $38.1 million for the three and nine months ended September 30, 2024, respectively, and our accumulated deficit was $360.8 million as of September 30, 2024.
If we are able to begin raising capital again under our ATM Agreement in the near future, taking into account such proceeds along with the continued expansion of our cryptocurrency mining operations, the First Hosting Agreement with Bitfarms, the Second Hosting Agreement with Bitfarms, and the Merger 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.Sales under our ATM Agreement are subject to the consent of Bitfarms under the Merger Agreement and resolution of the SEC Review.
We have no material off balance sheet arrangements.
Analysis of Changes in Cash Flows
Nine Months Ended
September 30, 2024
September 30, 2023
Change
Net cash flows provided by (used in) operating activities
$
8,548,842
$
(3,288,433)
$
11,837,275
Net cash flows used in investing activities
(528,316)
(14,743,269)
14,214,953
Net cash flows (used in) provided by financing activities
(7,743,692)
9,714,298
(17,457,990)
Net increase (decrease) in cash and cash equivalents
$
276,834
$
(8,317,404)
$
8,594,238
Operating Activities. Net cash flows provided by operating activities was approximately $8.5 million for the nine months ended September 30, 2024, compared to approximately $3.3 million used in operating activities for the nine months ended September 30, 2023. The approximately $11.8 million net increase in cash flows from operating activities was due to the receipt of a deposit for the First Hosting Agreement with Bitfarms and higher hash rate on installed miners, which generated higher and more profitable revenues.
Investing Activities. Net cash flows used in investing activities was approximately $0.5 million for the nine months ended September 30, 2024, compared to approximately $14.7 million used in investing activities for the nine months ended September 30, 2023. The approximately $14.2 million net improvement in cash flows was primarily due to lower cash outflows for the purchase of property, plant and equipment. Significant cash outflows occurred during the nine months
50
ended September 30, 2023, for the continued ramp up of cryptocurrency mining operations in the prior year, and no such activities occurred during the comparable period in 2024.
Financing Activities. Net cash flows used in financing activities was approximately $7.7 million for the nine months ended September 30, 2024, compared to approximately $9.7 million provided by financing activities for the nine months ended September 30, 2023. The approximately $17.5 million net decrease in cash flows was primarily due to prior year proceeds from the April 2023 Private Placement and the ATM, net of issuance costs.
Debt Agreements
We have entered into various debt agreements used to purchase equipment to operate our business. Total net obligations under all debt agreements as of September 30, 2024, were $53.4 million (excluding financed insurance premiums).
WhiteHawk Refinancing Agreement
On October 27, 2022, the Company entered into a secured credit agreement (the “Credit Agreement”) with WhiteHawk Finance LLC ("WhiteHawk") to refinance an existing equipment financing agreement, dated June 30, 2021, by and between Stronghold Digital Mining Equipment, LLC and WhiteHawk (the “WhiteHawk Financing Agreement”). Upon closing, the Credit Agreement consisted of approximately $35.1 million in term loans and approximately $23.0 million in additional commitments.
The financing pursuant to the Credit Agreement (such financing, the “WhiteHawk Refinancing Agreement”) was entered into by Stronghold Digital Mining Holdings, LLC ("Stronghold LLC"), as Borrower (in such capacity, 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.
On February 6, 2023, the Company and WhiteHawk Capital, as collateral agent and administrative agent, and the other lenders thereto, entered into 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 are not required, with monthly amortization resuming July 31, 2024. However, in December 2023, the Company made two amortization payments of the WhiteHawk Refinancing Agreement that were otherwise due on July 31, 2024, and August 31, 2024. During the third quarter of 2024, the Company resumed the required monthly amortization payments of the WhiteHawk Refinancing Agreement with its payment of the September 2024 amortization payment.
Beginning June 30, 2023, following a five-month holiday, Stronghold LLC began to make monthly prepayments of the loan in an amount equal to 50% of its average daily cash balance (including cryptocurrencies) in excess of $7,500,000 for such month. The First Amendment also modified the financial covenants to (i) in the case of the requirement of the Company to maintain a leverage ratio no greater than 4.0:1.00, such covenant will not be tested until the fiscal quarter ending September 30, 2024, and (ii) in the case of the minimum liquidity covenant, modified to require minimum liquidity at any time to be not less than: (A) until March 31, 2024, $2,500,000; (B) during the period beginning April 1, 2024, through and including December 31, 2024, $5,000,000; and (C) from and after January 1, 2025, $7,500,000. On February 15, 2024, the Company and WhiteHawk Capital, as collateral agent and administrative agent, and the other lenders thereto, entered into the Third Amendment which, among other items, amended the Company’s minimum liquidity requirement to not be less than: (A) until June 30, 2025, $2,500,000 and (B) from and after July 1, 2025, $5,000,000. The Company was in compliance with all applicable covenants under the WhiteHawk Refinancing Agreement as of September 30, 2024.
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 (z) the term SOFR rate plus 1%, plus 9%. Borrowings under the WhiteHawk Refinancing Agreement may also be accelerated in certain circumstances. The average interest rate for borrowings under the WhiteHawk Refinancing Agreement approximated 15.54% for the nine months ended September 30, 2024.
As noted above, the Company's Credit Agreement with its primary lender matures on October 26, 2025. The Company has entered into a merger agreement that is subject to final closing conditions. The merger is considered probable as both the Company's Board of Directors and the acquiring company’s Board of Directors have approved the merger. The plan of merger will pay off the Company's current outstanding borrowings, thereby reducing liquidity needs to enable continuation of operations, as a wholly owned subsidiary of the acquiring company, for the foreseeable future.
51
Convertible Note Exchange
On December 30, 2022, the Company entered into an exchange agreement with the holders (the “Purchasers”) of the Company’s Amended and Restated 10% Notes (the “Amended May 2022 Notes”), providing for the exchange of the Amended May 2022 Notes (the “Exchange Agreement”) 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 transactions contemplated under the Exchange Agreement were consummated, and the Amended May 2022 Notes were deemed paid in full. Approximately $16.9 million of principal amount of debt was extinguished in exchange for the issuance of the shares of Series C Preferred Stock. As a result of this transaction, the Company incurred a loss on debt extinguishment of $28,960,947 during the first quarter of 2023.
Bruce & Merrilees Promissory Note
On March 28, 2023, the Company 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 $3,500,000 (the "B&M Note") and a stock purchase warrant for the right to purchase from the Company 300,000 shares of Class A common stock (the "B&M Warrant"). The B&M Note has no definitive payment schedule or term. Pursuant to the B&M Settlement, B&M released 10 3000kva transformers to the Company and fully cancelled ninety (90) transformers remaining under a pre-existing order with a third-party supplier. The terms of the B&M Settlement included a mutual release of all claims.
Pursuant to the B&M Note, the first $500,000 of the principal amount of the loan was 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 and (ii) no PIK Option (as such term is defined in the Credit Agreement) had been elected. The principal amount under the B&M Note bears interest at seven and one-half percent (7.5%). As of September 30, 2024, the Company has paid $500,000 of principal pursuant to the B&M Note.
Canaan Promissory Notes
On July 19, 2023, the Company entered into a Sales and Purchase Contract with Canaan Inc. ("Canaan") whereby the Company purchased 2,000 A1346 Bitcoin miners for a total purchase price of $2,962,337. The purchase price was payable to Canaan via an upfront payment of $1,777,402 on or before August 1, 2023, which the Company paid on July 25, 2023, and a promissory note of $1,184,935 due to Canaan in ten (10) equal, interest-free installments on the first day of each consecutive month thereafter until the remaining promissory note balance is fully repaid. The miners were delivered and installed during the third quarter of 2023 at the Company's Panther Creek Plant. As of September 30, 2024, the Company fully repaid the promissory note due to Canaan.
On December 26, 2023, the Company entered into a second Sales and Purchase Contract with Canaan whereby the Company purchased 1,100 A1346 Bitcoin miners for a total purchase price of $1,380,060. The purchase price was payable to Canaan via an upfront payment of $828,036 on or before December 26, 2023, which the Company paid on December 26, 2023, and a promissory note of $552,024 due to Canaan in six (6) equal, interest-free installments on the first day of each consecutive month thereafter, beginning in 2024, until the remaining promissory note balance is fully repaid. The miners were delivered and installed during the first quarter of 2024 at the Company's Scrubgrass Plant. As of September 30, 2024, the Company fully repaid the promissory note due to Canaan.
Treatment of Company Indebtedness Pursuant to Merger Agreement
The Merger Agreement provides that, to the extent requested by Parent, the Company will, at Parent’s expense, use reasonable best efforts to promptly obtain any consents or amendments as necessary to permit the consummation of the merger under the Company’s credit agreement (the “COC Amendment”), but the obtaining of the COC Amendment will not be a closing condition. If the COC Amendment is not obtained on or prior to closing, Parent will satisfy all outstanding obligations under such credit agreement and certain other debt instruments of the Company prior to or substantially concurrently with the consummation of the merger.
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
52
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 the Redemption Right or the Call Right (each defined in the TRA) 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.
TRA Waiver and Termination Agreement
On August 21, 2024, concurrently with the execution and delivery of the Merger Agreement, the Company, Parent and each of the TRA Holders entered into a TRA Waiver and Termination Agreement (the “TRA Waiver”), pursuant to which the parties agreed, among other things, subject to and effective upon the consummation of the transactions contemplated by the Merger Agreement, to (i) terminate the TRA, dated April 1, 2021, as amended November 9, 2022, by and among the Company and the TRA Holders and (ii) waive the Early Termination Payment (as defined in the TRA) pursuant to the TRA, which would have otherwise become payable to the TRA Holders in connection with the consummation of the merger, and any other amounts to which the TRA Holders would have otherwise been entitled under the TRA. The TRA continues to be in effect prior to the completion of the Merger Agreement, but due to the TRA Waiver discussed above, the TRA is not recorded and is not currently expected to have an impact on the Company's consolidated financial statements.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 1 – Basis of Presentation (As Restated) in the notes to the Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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Item 4. Controls and Procedures (As Restated)
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation at the time of the filing of the Original Form 10-Q, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that its disclosure controls and procedures and internal control over financial reporting were effective as of September 30, 2024.
Subsequent to the filing of the Original Form 10-Q, our management, with the participation of our principal executive officer and principal financial officer, reevaluated the Company's disclosure controls and procedures as a result of the error described above and the related restatement following the SEC's 14-month review process. Based on such reevaluation, the Company identified a material weakness in its internal control over financial reporting described below and, therefore, concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of September 30, 2024.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a significant deficiency, or combination of significant deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Subsequent to the filing of the Original Form 10-Q, the Company concluded that it did not appropriately evaluate the U.S. GAAP guidance associated with the measurement of noncash (Bitcoin) consideration, in accordance with ASC 606-10-32-21 through 24, and how it should apply to the Company's facts and circumstances surrounding its hosting contracts. Following the SEC's review process, this control deficiency resulted in a classification error between cryptocurrency hosting revenues, realized gain on sale of digital currencies and unrealized gain/loss on digital currencies in the Company's previously issued unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2024, that required a restatement of the Original Form 10-Q. Accordingly, even though this classification error did not impact the Company's net loss for any quarterly periods in 2024, management has determined that this control deficiency constituted a material weakness as of September 30, 2024.
Management is actively engaged in the implementation of remediation efforts to address the material weakness. The remediation plan includes (i) enhancing the Company's existing control structure for evaluating the revenue recognition of new contracts and (ii) improving the detailed review process of the Company's comprehensive accounting analysis under ASC 606, Revenue from Contracts with Customers, which is completed annually or more often as necessary.
The elements of the Company's remediation plan can only be accomplished over time, and management can offer no assurances that these initiatives will ultimately have the intended effects. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
Other than the material weakness described above, there were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) during the quarter ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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Part II - Other Information
Item 1. Legal Proceedings
Information regarding this Item is contained in Note 10 – Commitments and Contingencies in the notes to the Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
Except as set forth below, there are no material changes to the Risk Factors contained in Item 1A to Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2023, filed on March 8, 2024, as supplemented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, filed on May 8, 2024, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, filed on August 14, 2024.
The following risk factors relate to the merger. For additional information regarding the Merger Agreement, see “Merger Agreement and First Amendment to Merger Agreement” herein and our other information relating to the Merger Agreement that we have filed with the SEC.
Because the market value of Bitfarms common shares that Company stockholders will receive in the merger may fluctuate, Company stockholders cannot be sure of the market value of the merger consideration that they will receive in the merger.
As merger consideration, Company stockholders will receive a fixed number of Bitfarms common shares, not a number of shares that will be determined based on a fixed market value. The market value of Bitfarms common shares and the market value of Class A common stock at the effective time may vary from their respective values on the date that the Merger Agreement was executed or at other dates, such as the date of the registration statement on Form F-4 (File No. 333-282657) that Bitfarms filed with the SEC on October 15, 2024 or the date of the special meeting. Stock price changes may result from a variety of factors, including changes in Bitfarms’ or the Company’srespective businesses, operations or prospects, regulatory considerations and general business, market, industry or economic conditions. The exchange ratio will not be adjusted to reflect any changes in the market value of Bitfarms common shares, the comparative value of the Canadian dollar and U.S. dollar or market value of the Class A common stock. Therefore, the aggregate market value of the Bitfarms common shares that a Company stockholder is entitled to receive at the time that the merger is completed could vary from the value of such shares on the date of the proxy statement/prospectus, the date of the special meeting or the date on which a Company stockholder actually receives its Bitfarms common shares.
There is no assurance when or if the merger will be completed, including, but not limited to, regulatory approvals which may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be satisfied.
The completion of the merger is subject to satisfaction or waiver of certain customary mutual closing conditions, including (i) the approval of the merger proposal by the holders of Company common stock, (ii) the absence of any governmental order or law that makes consummation of the merger illegal or otherwise prohibited, (iii) receipt of certain approvals and consents from specified governmental entities, including, if applicable, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act, (iv) the effectiveness of the registration statement on Form F-4, pursuant to which the Bitfarms common shares to be issued in connection with the merger are registered with the SEC and (v) the authorization for listing of the Bitfarms common shares to be issued in connection with the merger on the Toronto Stock Exchange and Nasdaq, subject to customary conditions and official notice of issuance. The obligation of each party to consummate the merger is also conditioned upon, among other things, (1) the other party’s representations and warranties being true and correct (subject to applicable materiality and de minimis standards), (2) the other party having performed in all material respects its obligations required to be performed by it under the Merger Agreement at or prior to the effective time, (3) the absence of a material adverse effect on the other party and (4) with respect to Bitfarms’ obligation to consummate the merger, the mining facility conditions described in the Merger Agreement. There can be no assurance as to when these conditions will be satisfied or waived, if at all, or that other events will not intervene to delay or result in the failure to complete the merger.
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The Company and Bitfarms have each agreed to, promptly following the execution of the Merger Agreement, prepare and file certain filings, submissions and notices and obtain consents, orders and approvals necessary to complete the merger and the other transactions contemplated by the Merger Agreement. No assurance can be given that the required consents, orders and approvals will be obtained or that the required conditions to the completion of the merger will be satisfied and an adverse development in either party’s regulatory standing or other factors could result in an inability to obtain one or more of the required regulatory approvals or delay receipt of required approvals. Even if all such consents, orders and approvals are obtained and such conditions are satisfied, no assurance can be given as to the terms, conditions and timing of such consents, orders and approvals. For example, these consents, orders and approvals may impose conditions on or require divestitures relating to the divisions, operations or assets of the Company or may impose requirements, limitations or costs or place restrictions on the conduct of the Company’s business, and if such consents, orders or approvals require an extended period of time to be obtained, such extended period of time could increase the chance that a material adverse event occurs with respect to the Company or Bitfarms. Such extended period of time also may increase the chance that other adverse effects with respect to the Company or Bitfarms could occur, such as the loss of key personnel. Each party’s obligation to complete the merger is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s covenants under the Merger Agreement. As a result of these conditions, the Company cannot provide assurance that the merger will be completed on the terms or timeline currently contemplated, or at all.
The special meeting may take place before all of the required regulatory approvals have been obtained and before all conditions to such approvals, if any, are known. Notwithstanding the foregoing, if the merger proposal is approved by Company stockholders, then the Company would not be required to seek further approval of Company stockholders, even if the conditions imposed in obtaining required regulatory approvals could have an adverse effect on the Company either before or after completing the merger.
Certain rights of Company stockholders will change as a result of the merger.
Upon completion of the merger, Company stockholders will no longer be stockholders of the Company, a Delaware corporation, but will be shareholders of Bitfarms, a corporation organized under the OBCA. There will be certain differences between the current rights as a Company stockholder, on the one hand, and the rights to which the stockholders will be entitled as Bitfarms shareholders, on the other hand, as more fully described in the proxy statement/prospectus.
The announcement and pendency of the merger could adversely affect the Company’s business, results of operations and financial condition.
The announcement and pendency of the merger could cause disruptions in and create uncertainty surrounding the Company’s business, including affecting the Company’s relationships with its existing and future partners, suppliers and employees, which could have an adverse effect on Stronghold’s business, results of operations and financial condition, regardless of whether the merger is completed. In particular, the Company could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the merger, such as the resignation of Stronghold's Chief Financial Officer, Matthew Smith. The Company could also potentially lose business partners or suppliers, and business partner or supplier contracts could be delayed or decreased. In addition, the Company has expended, and continues to expend, management resources in an effort to complete the merger, which are being diverted from the Company’s day-to-day operations.
If the merger is not completed, the trading prices of Class A common stock may fall to the extent that the current prices reflect a market assumption that the merger will be completed. In addition, the failure to complete the merger may result in negative publicity or a negative impression of the Company in the investment community and may affect the Company’s relationship with employees, suppliers and other partners in the business community.
The Company will incur substantial transaction fees and costs in connection with the merger.
The Company has incurred and expect to incur additional material non-recurring expenses in connection with the merger and completion of the transactions contemplated by the Merger Agreement, including costs relating to obtaining required approvals. The Company has incurred significant legal, advisory and financial services fees in connection with the process of negotiating and evaluating the terms of the merger. Additional significant unanticipated costs may be incurred in the course of coordinating the business of the Company after completion of the merger. Even if the merger is not completed, The Company will be required to pay certain costs relating to the merger incurred prior to the date the merger was abandoned, such as legal, accounting, financial advisory, filing and printing fees. Such costs could have an adverse effect on the parties’ future results of operations, cash flows and financial condition. In addition, the Merger Agreement provides
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that, in certain circumstances, one party to the Merger Agreement may be required to pay a termination fee (and certain related expenses) to the other.
While the Merger Agreement is in effect, the Company and its subsidiaries’ businesses are subject to restrictions on their business activities.
Under the Merger Agreement, the Company and its respective subsidiaries are subject to certain restrictions on the conduct of their respective businesses and generally must operate their respective businesses in the ordinary course prior to completing the merger (unless the Company obtains Bitfarms’ written consent, which is not to be unreasonably withheld, delayed or conditioned), which may restrict the Company’s ability to exercise certain of its business strategies. These restrictions may prevent the Company from pursuing otherwise attractive business opportunities, making certain investments or acquisitions, selling assets, engaging in capital expenditures in excess of certain agreed limits, repurchasing or issuing securities, or incurring indebtedness prior to the completion of the merger or termination of the Merger Agreement, as applicable. These restrictions could have an adverse effect on the Company’s businesses, financial results, financial condition or stock price.
In addition, subject to certain exceptions set forth in the Merger Agreement, the Merger Agreement prohibits the Company from, among other things: (i) initiating, soliciting or knowingly encouraging the making of any inquiry, proposal or offer that would constitute, or would reasonably be expected to lead to, an acquisition proposal; (ii) engaging in any discussions relating to any acquisition proposal, or any inquiry, proposal or offer that would reasonably be expected to lead to an acquisition proposal; (iii) furnishing any non-public information regarding the Company or its subsidiaries, or access to the properties, assets or employees of the Company or its subsidiaries, to any person in connection with an acquisition proposal; (iv) entering into any letter of intent or agreement in principal, or other agreement that would constitute, or would reasonably be expected to lead to, an acquisition proposal; or (v) releasing or permitting the release of any person from, or amending, waiving or permitting the amendment or waiver of any provision of, any “standstill” or similar agreement or provision to allow such person to make or amend an agreement that would constitute, or would reasonably be expected to lead to, an acquisition proposal.
These provisions may limit the Company’s ability to pursue offers from third parties that could result in greater value to Company stockholders than the merger consideration. The termination fee may also discourage third parties from pursuing an alternative acquisition proposal with respect to the Company.
The termination of the Merger Agreement could negatively impact the Company and, in certain circumstances, could require the Company to pay certain termination fees.
The Merger Agreement is subject to a number of customary closing conditions that must be fulfilled in order to complete the merger and contains certain termination rights for both the Company and Bitfarms, which, if exercised, would result in the merger not being completed. If the merger is not completed for any reason, including as a result of Company stockholders failing to approve the merger proposal or if the Merger Agreement is terminated in accordance with its terms, the ongoing businesses of the Company may be adversely affected and, without realizing any of the anticipated benefits of having completed the merger, the Company would be subject to a number of risks, including the following:
•The Company may experience negative reactions from the financial markets, including a decline of its stock price (which may reflect a market assumption that the merger will be completed);
•The Company may experience negative reactions from or irreparable reputational harm as perceived by the Company’s investment community, customers, suppliers, peers regulators, employees, partners in the business community and any other third party whether presently known or unknown;
•The Company may be required to pay substantial costs relating to the merger, whether or not the merger is completed;
•matters relating to the merger will have required substantial commitments of time and resources by the Company’s management team, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to the Company had the merger not been contemplated; and
•the Company may experience a material adverse effect on its business, operations, earnings and financial results.
If the Merger Agreement is terminated and the Board seeks another merger, business combination or other transaction, Company stockholders cannot be certain that the Company will find a party willing to offer equivalent or more attractive consideration than the merger consideration Company stockholders would receive from Bitfarms in the merger. If the
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Merger Agreement is terminated under circumstances specified in the Merger Agreement, the Company may be required to pay Bitfarms a termination fee of $5,000,000, in the form of cash and/or Bitcoin (at the election of the Company), depending on the circumstances surrounding the termination. There is no guarantee that the Company will have sufficient funds to make this contractually required payment to Bitfarms, as applicable.
Except in specified circumstances, if the merger is not completed by May 21, 2025, subject to extension in specified circumstances, either the Company or Bitfarms may choose not to proceed with the merger.
Either the Company or Bitfarms may terminate the Merger Agreement if the merger has not been completed by 5:00 p.m. New York, New York time, on May 21, 2025. However, this right to terminate the Merger Agreement will not be available to the Company or Bitfarms if the failure of such party to perform any of its obligations under the Merger Agreement has been the principal cause of or resulted in the failure of the merger to be complete on or before such time. Termination of the Merger Agreement will also result in termination of certain other agreements, including the Voting Agreement and the TRA Waiver.
The Company may be a target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the merger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought by putative stockholders against companies (or their directors and officers) that have entered into merger agreements. Such lawsuits may seek, among other things, to enjoin the consummation of the merger. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. The Company has received a number of letters from putative stockholders that allege the disclosures in the proxy statement/prospectus are deficient and that demand corrective disclosures be made. No lawsuits have thus far been filed in connection with these letters, and the Company believes the allegations in the letters are without merit. If a stockholder is successful in obtaining an injunction prohibiting consummation of the merger, then that injunction may delay or prevent the merger from being completed or otherwise cause the Company to incur substantial costs.
The Company and Bitfarms received comments from the SEC staff in connection with the staff’s routine review of filings and registration statements, including the Registration Statement on Form F-4 filed by Bitfarms with respect to the merger.
Bitfarms and the Company have unresolved SEC staff (the “Staff”) comments, including to the Registration Statement on Form F-4 filed by Bitfarms with respect to the merger. Some of these comments remain unresolved and are subject to further review and comment by the Staff. There is no assurance that unresolved comments, or additional comments from the Staff, will not result in the need for either party to revise or restate applicable filings, including but not limited to, the respective financial statements of Bitfarms and the Company incorporated by reference in the proxy statement/prospectus. Any delay in resolving the Staff's comments could result in substantial costs and may delay or prevent the registration statement, of which the proxy statement/prospectus forms a part, being declared effective.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
Matthew Smith Resignation
On October 25, 2024, the Company announced that Matthew Smith, the Company’s Chief Financial Officer, will resign from such position effective November 15, 2024. Mr. Smith will also resign from the Company's Board at such time. Mr. Smith’s resignation was not because of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices, including accounting principles and practices. At this time, the Company does not intend to fill the vacancy on the Board that will be created following the effective date of Mr. Smith’s resignation. Simultaneous with his departure, the Company and Mr. Smith entered into a Consulting Agreement (the "Consulting Agreement") pursuant to which Mr. Smith will provide assistance with the Company’s finance function, and a transition from Mr. Smith's prior employment with the Company, as requested by the Company. Pursuant to the Consulting Agreement, Mr. Smith will be paid $400 per hour, and a minimum of $8,000 per month representative of twenty (20) hours per month. The Consulting Agreement has a three (3) month term and may be terminated at any time by either party upon five (5) days' notice.
Appointment of Principal Financial Officer
On November 13, 2024, the Company appointed Ryan Weber, the Company’s Chief Accounting Officer, to additionally serve as the Company’s Principal Financial Officer, effective November 15, 2024. Mr. Weber has served as the Company’s Chief Accounting Officer since May 1, 2024. The remainder of Mr. Weber’s biographical information, as well as information with respect to his family relationships and transactions with related persons, is incorporated herein by reference to such information contained in Item 5.02 of the Company’s Current Report on Form 8-K, filed with the SEC on May 2, 2024. There are no arrangements or understandings between Mr. Weber and any other persons pursuant to which he was appointed as Principal Financial Officer.
Cover Page Interactive Data File (embedded within the Inline XBRL document).
* Filed herewith.
** Furnished herewith.
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† Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby
undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and
Exchange Commission; provided, however, that the Company may request confidential treatment pursuant to Rule
24b-2 of the Securities Exchange Act of 1934 for any exhibits or schedules so furnished.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 13, 2024STRONGHOLD DIGITAL MINING, INC.
(registrant)
By: /s/ Ryan M. Weber
Ryan M. Weber
Chief Accounting Officer (Duly Authorized Officer and Principal Financial Officer)