SEC Filing | Stronghold Digital Mining.

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sdig-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 001-40931

Stronghold Digital Mining, Inc.

(Exact name of registrant as specified in its charter)


Delaware			86-2759890
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

595 Madison Avenue, 29th Floor New York, New York			10022
(Address of principal executive offices)			(Zip Code)

(212) 967-5294

(Registrant's telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock	SDIG	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒*

* The registrant completed its initial public offering on October 22, 2021 and, accordingly, has not been subject to the reporting requirements under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the past 90 days

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

The registrant had outstanding 20,016,067 shares of Class A common stock, par value $0.0001 per share, and 28,209,600 shares of Class V common stock, par value $0.0001 per share, as of November 30, 2021.

Table of Contents


			Page No.

Part I	Financial Information		2
	Item 1.	Financial Statements	2
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
	Item 4.	Controls and Procedures	60
Part II	Other Information		62
	Item 1.	Legal Proceedings	62
	Item 1A.	Risk Factors	62
	Item 2 .	Unregistered Sales of Equity and Use of Proceeds	96
	Item 3 .	Defaults Upon Senior Securities	96
	Item 4 .	Mine Safety Disclosures	96
	Item 5 .	Other Information	96
	Item 6 .	Exhibits	97

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Part I - Financial Information

Item 1. Financial Statements

STRONGHOLD DIGITAL MINING, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2021 and December 31, 2020


	Sep 30, 2021		Dec 31, 2020
	(unaudited)
CURRENT ASSETS
Cash	$	41,434,410	$	303,187
Digital currencies	3,228,698		228,087
Accounts receivable	308,387		65,900
Due from related party	—		302,973
Prepaid insurance	278,538		—
Inventory	367,601		396,892
Other current assets	3,779,663		65,831
Total Current Assets	49,397,297		1,362,870
EQUIPMENT DEPOSITS	85,624,852		—
PROPERTY, PLANT AND EQUIPMENT, NET	40,114,787		7,814,199
LAND	29,919		—
ROAD BOND	185,245		185,245
TOTAL ASSETS	$	175,352,100	$	9,362,314
CURRENT LIABILITIES
Current portion of long-term debt-net of discounts/issuance fees	$	31,251,305	$	449,447
Related-party notes	—		2,024,250
Accounts payable	29,620,242		8,479,187
Due to related parties	735,618		698,338
Accrued liabilities	3,833,191		828
Total Current Liabilities	65,440,356		11,652,050
LONG-TERM LIABILITIES
Asset retirement obligation	474,933		446,128
Contract liabilities	187,837		40,000
Economic Injury Disaster Loan	—		150,000
Paycheck Protection Program Loan	841,670		638,800
Warrants issued with conversions to redeemable preferred stock	878,970		—
Long-term debt-net of discounts/issuance fees	22,417,973		482,443
Total Long-Term Liabilities	24,801,383		1,757,371
Total Liabilities	90,241,739		13,409,421
MEZZANINE EQUITY
Series A redeemable and convertible preferred stock, $0.0001 par value, aggregate liquidation value $85,000,000, 5,000,000 shares authorized and 9,792,000 issued and outstanding as of September 30, 2021	78,041,113		—
Series B redeemable and convertible preferred stock, $0.0001 par value, aggregate liquidation value $20,000,006. 5,760,000 shares authorized and 1,817,035 issued and outstanding as of September 30, 2021	18,242,733		—
Common Stock - Class V, $0.0001 par value; 34,560,000 shares authorized and 27,057,600 shares issued and outstanding	243,002,390		—
Total mezzanine equity	339,286,236		—
STOCKHOLDERS’ DEFICIENCY & PARTNERS’ DEFICIT
General partners	—		(2,710,323)
Limited partners	—		(1,336,784)
Series A redeemable and convertible preferred stock, $0.0001 par value, aggregate liquidation value $5,000,000. 576,000 issued and outstanding as of September 30, 2021	58		—
Common Stock – Class A, $0.0001 par value; 238,000,000 shares authorized and 140,674 shares issued and outstanding	14		—
Accumulated deficits	(263,811,490)		—
Additional paid-in capital	9,635,543		—
Stockholders’ deficiency or partners’ deficit	(254,175,875)		(4,047,107)
Total	85,110,361		(4,047,107)
TOTAL LIABILITIES, MEZZANINE EQUITY AND DEFICIENCY	$	175,352,100	$	9,362,314

The accompanying notes are an integral part of these condensed consolidated financial statements

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STRONGHOLD DIGITAL MINING, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three and nine months ended September 30, 2021 and 2020


	Three months ended,				Nine months ended,
	Consolidated		Consolidated		Consolidated		Consolidated
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
OPERATING REVENUES
Energy	$	2,388,752	$	119,945	$	5,875,574	$	704,604
Capacity	1,069,040		732,594		2,352,276		2,202,255
Cryptocurrency hosting	499,724		—		1,742,242		—
Cryptocurrency mining	2,060,523		141,226		3,901,426		221,454
Other	1,674		(33,743)		34,797		—
Total operating revenues	6,019,713		960,022		13,906,315		3,128,313
OPERATING EXPENSES
Fuel	2,411,186		181,041		6,511,706		483,977
Operations and maintenance	2,835,315		997,169		6,040,173		2,660,536
General and administrative	3,469,830		365,269		6,377,677		1,093,858
Impairments on digital currencies	91,040		—		466,286		—
Depreciation and amortization	1,158,374		139,150		2,463,549		422,603
Total operating expenses	9,965,745		1,682,629		21,859,391		4,660,974
NET OPERATING INCOME/(LOSS)	(3,946,032)		(722,607)		(7,953,076)		(1,532,661)
OTHER INCOME (EXPENSE)
Interest expense	(2,460,668)		(32,381)		(2,594,751)		(106,881)
Gain on extinguishment of PPP loan	—		—		638,800		—
Realized gain (loss) on sale of digital currencies	—		3,662		149,858		4,941
Changes in fair value of warrant liabilities	92,979		—		(98,498)		—
Derivative contracts, net	—		—		—		1,207,131
Waste coal credits	23,356		—		47,152		7,500
Other	10,336		68,952		48,521		96,210
Total other income / (expense)	(2,333,997)		40,233		(1,808,918)		1,208,901
NET INCOME/(LOSS)	$	(6,280,029)	$	(682,374)	$	(9,761,994)	$	(323,760)
NET INCOME/(LOSS) - attributable to non-controlling interest	$	(4,328,460)			$	(6,730,940)
NET INCOME/(LOSS) - Stronghold Digital Mining, Inc	$	(1,951,569)			$	(3,031,054)
NET LOSS attributable to Class A Common Shares(1)
Basic	$	(6.05)			$	(17.05)
Diluted	$	(6.05)			$	(17.05)
Class A Common Shares Outstanding(1)
Basic	322,342				173,532
Diluted	322,342				173,532

_______________

Basic and diluted loss per share of Class A common stock is presented only for the period after the Company’s Reorganization Transactions. See Note 1 - Business Combinations for a description of the Reorganization Transactions. See Note 17 - Earnings (Loss) Per Share for the calculation of loss per share.

The accompanying notes are an integral part of these condensed consolidated financial statements

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STRONGHOLD DIGITAL MINING, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ DEFICIT AND STOCKHOLDERS’ DEFICIENCY

September 30, 2021 and September 30, 2020


					Three Months Ended September 30, 2020
					Redeemable Preferred				Common A
	Limited Partners		General Partners		Series A Shares		Amount		Shares		Amount		Accumulated Deficit		Additional Paid-in Capital		Stock Subscriptions		Partners’ Deficit
Balance – July 1, 2020	$	(726,291)	$	(2,084,155)															$	(2,810,446)
Net losses	(204,712)		(477,662)																(682,374)
Distributions			(203,020)																(203,020)
Balance – September 30, 2020	$	(931,003)	$	(2,764,837)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(3,695,840)


					Three Months Ended September 30, 2021
					Redeemable Preferred			Common A									Partners’ Deficit
	Limited Partners		General Partners		Series A Shares	Amount(1)		Common A Shares	Amount		Accumulated Deficit		Additional Paid-in Capital		Stock Subscriptions (2)		Stockholders’ Deficiency
Balance – July 1, 2021	$	—	$	—	576,000	58		140,674	$	14	$	(182,190,312)	$	8,659,015	$	(1,389,888)	$	(174,921,113)
Common stock issued as part of debt financing reclassified as against the proceeds- refer to Note 14	—		—		—	—		—	—		—		—		598,686		598,686
Common stock issued as part of debt financing reclassified as against the proceeds- refer to Note 14	—		—		—	—		—	—		—		—		791,202		791,202
Net losses for the three months ended September 30, 2021	—		—		—	—		—	—		(1,951,569)		—		—		(1,951,569)
Maximum redemption right valuation - refer to Note 15	—		—		—	—		—	—		(79,669,608)		—		—		(79,669,608)
Stock-based compensation - refer to Note 13	—		—		—	—		—	—		—		976,527		—		976,527
Balance – September 30, 2021	—		$	—	576,000	$	58	140,674	$	14	$	(263,811,490)	$	9,635,543	$	—	$	(254,175,875)

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STRONGHOLD DIGITAL MINING, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ DEFICIT AND STOCKHOLDERS’ DEFICIENCY

September 30, 2021 and September 30, 2020


					Nine Months Ended September 30, 2020
					Redeemable Preferred				Common A
	Limited Partners		General Partners		Series A Shares		Amount		Shares		Amount		Accumulated Deficit		Additional Paid-in Capital		Partners’ Deficit
Balance – January 1, 2020	$	(833,875)	$	(1,947,086)													$	(2,780,961)
Net losses	(97,128)		(226,632)														(323,760)
Distributions			(591,119)														(591,119)
Balance – September 30, 2020	$	(931,003)	$	(2,764,837)	$	—	$	—	$	—	$	—	$	—	$	—	$	(3,695,840)


					Nine Months Ended September 30, 2021
					Redeemable Preferred			Common A							Partners’ Deficit
	Limited Partners		General Partners		Series A Shares	Amount(1)		Common A Shares	Amount		Accumulated Deficit		Additional Paid-in Capital		Stockholders’ Deficiency
Balance – January 1, 2021	$	(1,336,784)	$	(2,710,323)	—	—		—	$	—	$	—	$	—	$	(4,047,107)
Net loss – January 1 to March 31, 2021	(71,687)		(167,261)		—	—		—	—		—		—		(238,948)
Balance prior to the reorganization on April 1, 2021	(1,408,471)		(2,877,584)		—	—		—	—		—		—		(4,286,055)
Effect of reorganizations (see Note 1)
Opco formation and contributions	—		$	2,877,584	—	—		—	—		—		—		2,877,584
Aspen Scrubgrass Participant, LLC [“Olympus”] contribution	1,408,471		—		—	—		—	—		(1,408,471)		—		—
Buyout of Aspen Interest– refer to Note 19	—		—		576,000	58		—	—		(7,000,000)		4,999,800		(2,000,142)
Exchange of common units for Class A common shares	—		—		—	—		14,400	2		—		—		2
Common stock issued as part of debt financing – refer to Note 14	—		—		—	—		54,392	5		—		598,687		598,692
Common stock issued as part of debt financing – refer to Note 14	—		—		—	—		71,882	7		—		791,200		791,207
Warrants issued as part of debt financing – refer to Note 14	—		—		—	—		—	—		—		1,999,396		1,999,396
Net losses for the six months ended September 30, 2021	—		—		—	—		—	—		(2,959,369)		—		(2,959,369)
Maximum redemption right valuation - refer to Note 15			—		—	—		—	—		(252,443,650)		—		(252,443,650)
Stock–based compensation – refer to Note 13	—		—		—	—		—	—		—		1,246,459		1,246,459
Balance – September 30, 2021	—		$	—	576,000	$	58	140,674	$	14	$	(263,811,490)	$	9,635,543	$	(254,175,875)

_______________

(1)Refer to Note 19- Aspen Interest (“Olympus”) Buyout for further information

(2)Refer to Note 14- Stock Issued Under Master Financing Agreements and Warrants for further information

The accompanying notes are an integral part of these condensed consolidated financial statements

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STRONGHOLD DIGITAL MINING, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

September 30, 2021 and September 30, 2020


	September 30, 2021		September 30, 2020
	(unaudited)		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income/(loss)	$	(9,761,994)	$	(323,760)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and Amortization - PP&E	2,463,549		422,603
Forgiveness of PPP loan	(638,800)		—
Realized (gain) loss on sale of derivatives	—		(1,207,131)
Realized (gain) loss on sale of digital currency	(149,858)		(4,941)
Write-off of bad debts	150,162
Amortization of debt issuance costs	643,025		—
Stock Compensation	1,246,460		—
Impairments on digital currencies	466,286		—
Changes in fair value of warrant liabilities	98,498		—
(Increase) decrease in assets:
Digital currencies	(3,901,426)		(237,107)
Accounts receivable	(242,489)		42,037
Prepaid Insurance	(278,538)		—
Due from related party	302,973		—
Inventory	29,291		(87,867)
Other current assets	(3,713,832)		(1,196)
Increase (decrease) in liabilities:
Accounts payable	21,141,055		1,380,198
Due to related parties	37,280		(358,602)
Accrued liabilities	3,832,362		(9,431)
Contract liabilities	147,836		36,000
NET CASH PROVIDED BY (USED) OPERATING ACTIVITIES	11,871,840		(349,197)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of digital currencies	584,387		94,954
Proceeds from sale of derivatives	—		1,712,878
Purchase of land	(29,919)		—
Purchase of property, plant and equipment	(34,735,332)		(1,415,621)
Equipment purchase deposits- net of future commitments	(85,624,852)		—
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(119,805,716)		392,211
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Payments on long-term debt	(7,811,150)		(198,500)
Proceeds from promissory note	38,987,333		—
Proceeds from equipment financing agreement	24,157,178		—
Proceeds from PPP loan	841,670		638,000
Proceeds from private placements- mezzanine equity (net of fees)	97,064,318		—
Proceeds/(Payoff) of EIDL loan	(150,000)		160,000
Payoff of related-party notes	(2,024,250)		—
Buyout of Aspen Interest	(2,000,000)		—
Distributions paid	—		(591,119)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	149,065,099		8,381
NET INCREASE (DECREASE) IN CASH	41,131,223		51,395
CASH - BEGINNING OF PERIOD	303,187		134,143
CASH - END OF PERIOD	$	41,434,410	$	185,538

The accompanying notes are an integral part of these condensed consolidated financial statements

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STRONGHOLD DIGITAL MINING, INC.

UNAUDITED CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

September 30, 2021 and September 30, 2020

NOTE 1 – BUSINESS COMBINATIONS

Reorganization

Stronghold Digital Mining, Inc. (“Stronghold Inc.” or "the Company") was incorporated as a Delaware corporation on March 19, 2021. On April 1, 2021, contemporaneously with the Series A Private Placement (as defined below), Stronghold Inc. underwent a corporate reorganization pursuant to a Master Transaction Agreement, which will be referred to herein as the “Reorganization.”

Immediately prior to the Reorganization, Q Power LLC (“Q Power”) directly held all of the equity interests in Stronghold Digital Mining LLC (“SDM”), and indirectly held 70% of the limited partner interests, and all of the general partner interests, in Scrubgrass Reclamation Company, L.P. (f/k/a Scrubgrass Generating Company, L.P.) (“Scrubgrass LP”), through wholly owned subsidiaries EIF Scrubgrass LLC (“EIF Scrubgrass”), Falcon Power LLC (“Falcon”) and Scrubgrass Power LLC. Aspen Scrubgrass Participant, LLC ("Aspen") held the remaining 30% of the limited partner interests in Scrubgrass LP (the “Aspen Interest”). Scrubgrass LP is a Delaware limited partnership originally formed on December 1, 1990 under the name of Scrubgrass Generating Company, L.P. SDM is a Delaware limited liability company originally formed on February 12, 2020 under the name Stronghold Power LLC (“Stronghold Power”).

On April 1, 2021 Stronghold Inc. entered into a Series A Preferred Stock Purchase Agreement pursuant to which Stronghold Inc. issued and sold 9,792,000 shares of Series A Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”) in a private offering (the “Series A Private Placement”) at a price of $8.68 per share to various accredited individuals in reliance upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder for aggregate consideration of approximately $85.0 million. In connection with the Series A Private Placement, the Company incurred approximately $6.3 million in fees and $631,897 as debt issuance costs for warrants issued as part of the Series A Private Placement.

Contemporaneously with the Reorganization, Stronghold Inc. acquired the Aspen Interest using 576,000 shares of newly issued Series A Preferred Stock and $2,000,000 from a portion of the proceeds from the Series A Private Placement. The acquisition of the Aspen Interest is a total consideration of $7,000,000 that consists of the $2,000,000 in cash plus a valuation of $5,000,000 for the 576,000 shares of the Series A Preferred Stock at the issuance per share price of $8.68, and are classified as permanent equity and not subject to mandatory redemptions as outlined in Stronghold Inc.'s certificate of incorporation, as amended (the “Charter”). Pursuant to the Reorganization, Q Power contributed all of its ownership interests in EIF Scrubgrass, Falcon and SDM to Stronghold Digital Mining Holdings LLC (“Stronghold LLC”) in exchange for 27,072,000 Class A common units of Stronghold LLC (“Stronghold LLC Units”), Stronghold Inc. contributed cash (using the remaining proceeds from the Series A Private Placement, net of fees, expenses and amounts paid to Aspen), 27,072,000 shares of Class V common stock of Stronghold Inc. and the Aspen Interest to Stronghold LLC in exchange for 10,368,000 preferred units of Stronghold LLC, and Stronghold LLC immediately thereafter distributed the 27,072,000 shares of Class V common stock to Q Power. In addition, effective as of April 1, 2021, Stronghold Inc. acquired 14,400 Stronghold LLC Units held by Q Power (along with an equal number of shares of Class V common stock) in exchange for 14,400 newly issued shares of Class A common stock.

As a result of the Reorganization, the acquisition of the Aspen Interest and the acquisition of Stronghold LLC Units by Stronghold Inc. discussed above, (a) Q Power acquired and retained 27,057,600 Stronghold LLC Units, 14,400 shares of Class A common stock of Stronghold Inc., and 27,057,600 shares of Class V common stock of Stronghold Inc. effectively giving Q Power approximately 69% of the voting power of Stronghold Inc. and approximately 69% of the economic interest in Stronghold LLC, (b) Stronghold Inc. acquired 10,368,000 preferred units of Stronghold LLC and 14,400 Stronghold LLC Units, effectively giving Stronghold Inc. approximately 31% of the economic interest in Stronghold LLC, (c) Stronghold Inc. became the sole managing member of Stronghold LLC and is responsible for all operational, management and administrative decisions relating to Stronghold LLC’s business and will consolidate financial results of Stronghold LLC and its subsidiaries, (d) Stronghold Inc. became a holding company whose only material asset consists of membership interests in Stronghold LLC, and (e) Stronghold LLC directly or indirectly owns all of the outstanding equity interests in the subsidiaries through which we operate the Company's assets, including Scrubgrass LP and SDM.

On May 14, 2021, the Company completed a private placement of shares of the Company’s Series B Convertible Redeemable Preferred Stock of Stronghold Inc. (the “Series B Preferred Stock,” and, together with the Series A Preferred

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Stock, the “Preferred Stock”) (the “Series B Private Placement,” and, together with the Series A Private Placement, the “Private Placements”). The terms of the Series B Preferred Stock are substantially similar to the Series A Preferred Stock, except for differences in the stated value of such shares in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or certain deemed liquidation events. In connection with the Series B Private Placement, the Company sold 1,817,035 shares of its Series B Preferred Stock for an aggregate purchase price of $20.0 million. In connection with the Series B Private Placement, the Company incurred approximately $1.6 million in fees and expenses and $148,575 as debt issuance costs for warrants issued as part of the Series B Private Placement.

Pursuant to the terms of the Preferred Stock, on (i) the date that a registration statement registering the shares of Class A common stock issuable upon the conversion of the Preferred Stock is declared effective by the U.S. Securities and Exchange Commission (the "SEC") or (ii) the date on which a “Significant Transaction Event” occurs, as defined in the Company's amended and restated certificate of incorporation, such shares of Preferred Stock will automatically convert into shares of Class A common stock of Stronghold Inc. on a one-to-one basis, subject to certain adjustments as set forth in the Charter. Correspondingly, pursuant to the Third Amended and Restated Limited Liability Company Agreement of Stronghold LLC, as amended from time to time (the “Stronghold LLC Agreement”), preferred units in Stronghold LLC automatically convert into Stronghold LLC Units on a one-to-one basis under like circumstances (subject to corresponding adjustments). On October 20, 2021, the registration statement registering the shares of Class A common stock issuable upon conversion of the Preferred Stock was declared effective by the SEC, and all of the outstanding shares of Preferred Stock converted into shares of Class A common stock at that time. Correspondingly, all of the preferred units in Stronghold LLC converted into Stronghold LLC Units.

On June 29, 2021, Stronghold LLC formed Stronghold Digital Mining Equipment, LLC (“Equipment LLC”).

Prior to the Reorganization

Prior to the Reorganization date of April 1, 2021, Scrubgrass Generating Company, L.P. (“Scrubgrass”) existed as a Delaware limited partnership formed on December 1, 1990. Q Power, LLC existed as a multi-member limited liability company and indirectly held limited and general partner interests of Scrubgrass. Additionally, Aspen, a wholly-owned subsidiary of Olympus Power, LLC (together with its affiliates “Olympus”), was a limited partner of Scrubgrass.

Scrubgrass had two subsidiaries: Clearfield Properties, Inc. (“Clearfield”), which was formed for the purpose of purchasing a 175-acre site in Clearfield County, Pennsylvania, and acquiring access to certain coal material; and Leechburg Properties, Inc. (“Leechburg”), which was formed for the purpose of acquiring access rights to certain waste coal sites. Leechburg was a dormant entity as of September 30, 2021 and December 31, 2020.

Pursuant to an equity Assignment and Assumption agreement dated September 24, 2020, Q Power assigned a 50%-member interest to a second individual. As a result, two individuals were the sole members of Q Power. Stronghold Power was established on February 12, 2020 as a Delaware Limited Liability Company and is 100% owned by Q Power. Stronghold Power was created to pursue opportunities involving cryptocurrency mining as well as providing hosting services for third-party miners.

Scrubgrass and Stronghold Power were under common control prior to the Reorganization date of April 1, 2021, and consolidated results reported as of December 31, 2020, and included in the consolidated results for the nine months ended September 30, 2021 and 2020.

NOTE 2 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

In most instances, Stronghold Inc., Scrubgrass, SDM, and Equipment LLC will collectively be referred to as the “Company” if a discussion applies to all. Where it may not apply to all, then each company, described as itself, will be specifically noted. “The reported financial statements” assumes both comparative periods are referenced as well as consolidated for each of the respective comparative periods.

Nature of Operations

The Company operates as a qualifying cogeneration facility (“Facility”) under the provisions of the Public Utilities Regulatory Policies Act of 1978 and sells its electricity into the PJM Interconnection Merchant Market (“PJM”) under an Energy Management Agreement (“EMA”) with Direct Energy Business Marketing, LLC (“DEBM”) effective February 1, 2015. The Company’s primary fuel source is waste coal which is provided by various third parties. Waste coal credits are earned by the Company by generating electricity utilizing coal refuse.

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Under the EMA, which was entered into as of January 23, 2015, DEBM agreed to act as the exclusive provider of services for the benefit of the Company related to interfacing with PJM, including handling daily operations of the facility, daily marketing and managing of a certain electric generating facility located in Kennerdell, Pennsylvania, energy management, capacity management and providing market and system information. The term of the agreement was initially through January 31, 2018, with three additional automatic renewal terms that now extends through January 31, 2022. DEBM was paid a monthly fee of $7,500 in satisfaction of its performance obligation during the term. The total revenue recognized under the EMA is 100% of the reported energy revenue and the total transaction price for the performance obligations varies depending upon market conditions and demand; such as usage and available capacities.

The Company is also a vertically integrated digital currency mining business. The Company buys and maintains a fleet of digital/cryptocurrency mining equipment and the required infrastructure, it also provides power to third party digital currency miners under favorable Power Purchase Agreement (“PPA”) agreements, and it sells energy as a merchant power producer and receives capacity payments from PJM for making its energy available to the grid. The Digital currency mining operations are in their early stages, and digital currencies and energy pricing mining economics are volatile and subject to uncertainty. The Company’s current strategy will continue to expose it to the numerous risks and volatility associated with the digital mining and power generation sectors, including fluctuating Bitcoin-to-U.S.-Dollar prices, the costs and availability of miners, the number of market participants mining Bitcoin, the availability of other power generation facilities to expand operations and regulatory changes.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the annual financial statements. These financial statements reflect the consolidated accounts of the Company and wholly owned subsidiaries.

In addition, certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements in order to conform to current presentation. The Company operates on a calendar year basis with the first day of the calendar year being January 1, and the last day of the year ending on December 31.

Additionally, since there are no differences between net income and comprehensive income, all references to comprehensive income have been excluded from the condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash

Cash and cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less. The Company maintains its cash in non-interest bearing accounts that are insured by the Federal Deposit Insurance Company up to $250,000. The Company’s deposits may, from time to time, exceed the $250,000 limit; however, management believes that there is no unusual risk present, as the Company places its cash with financial institutions which management considers being of high quality.

Digital Currencies

Digital currencies are included in current assets in the reported balance sheets. Digital currencies are recorded at cost less any impairment. Currently Bitcoin constitutes the only cryptocurrency the Company mines or holds in material amounts.

An intangible asset with an indefinite useful life is not amortized but assessed for impairment quarterly as well as annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a

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quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. The Company accounts for its gains or losses in accordance with the first-in, first-out (FIFO) method of accounting.

The Company performed an impairment test on its digital currencies and $(91,040) and $(466,286) are recognized as expenses for the three and nine months ended September 30, 2021, respectively.

The following table presents the activities of the digital currencies for the nine months ended September 30, 2021 and the year ended December 31, 2020:


	September 30, 2021		December 31, 2020
	(unaudited)
Digital currencies at beginning of year	$	228,087	$	15,436
Additions of digital currencies	3,901,426		339,456
Realized gain (loss) on sale of digital currencies	149,858		31,810
Impairments	(466,286)		—
Proceeds from Sale of digital currencies	(584,387)		(158,615)
Digital currencies at month ending	$	3,228,698	$	228,087

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from balances outstanding at year end. An allowance for doubtful accounts is provided when necessary and is based upon management’s evaluation of outstanding accounts receivable at year end. The potential risk is limited to the amount recorded in the financial statements. For the three and nine months ended September 30, 2021, an outstanding customer balance of $150,162 was considered not collectable and was written off to bad debts expense. No further allowance was considered necessary as of September 30, 2021 and December 31, 2020.

Inventory

Waste coal, fuel oil and limestone are valued at the lower of average cost or net realizable value and includes all related transportation and handling costs.

The Company performs periodic assessments to determine the existence of obsolete, slow-moving, and unusable inventory and records necessary provisions to reduce such inventories to net realizable value.

Spare parts inventory is expensed when purchased.

Derivative Contracts

In accordance with guidance on accounting for derivative instruments and hedging activities all derivatives should be recognized at fair value. Derivatives or any portion thereof, that are not designated as, and effective as, hedges must be adjusted to fair value through earnings. Derivative contracts are classified as either assets or liabilities on the accompanying combined balance sheets. Certain contracts that require physical delivery may qualify for and be designated as normal purchases/normal sales. Such contracts are accounted for on an accrual basis.

The Company uses derivative instruments to mitigate its exposure to various energy commodity market risks. The Company does not enter into any derivative contracts or similar arrangements for speculative or trading purposes. The Company will, at times, sell its forward unhedged electricity capacity to stabilize its future operating margins.

As of September 30, 2021 and December 31, 2020, all derivative contracts were settled.

Fair Value Measurements

The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the

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measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities;

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data; and

Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. As of September 30, 2021 the Company’s redeemable preferred warrants are recorded at fair value – refer to Note 14 – Stock Issued Under Master Financing Agreements and Warrants. As of December 31, 2020, the Company did not have any assets or liabilities remeasured at fair value.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. The Company records all assets associated with the cryptocurrency hosting operations at cost. These assets are comprised of storage trailers and the related electrical components. When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Depreciation is provided over the remaining estimated useful lives (“EUL”) of the related assets using the straight-line method.

The Company’s depreciation is based on its Facility being considered a single property unit. Certain components of the Facility may require replacement or overhaul several times over its estimated life. Costs associated with overhauls are recorded as an expense in the period incurred. However, in instances where a replacement of a Facility component is significant and the Company can reasonably estimate the original cost of the component being replaced, the Company will write-off the replaced component and capitalize the cost of the replacement. The component will be depreciated over the lesser of the EUL of the component or the remaining useful life of the Facility.

The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of property and equipment may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of property and equipment. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property and equipment is used, and the effects of obsolescence, demand, competition, and other economic factors.

Cryptocurrency Machines

Management has assessed the basis of depreciation of the Company’s cryptocurrency machines used to verify digital currency transactions and generate digital currencies and believes they should be depreciated over a two-year period. The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its transaction verification servers, is influenced by a number of factors including the following:

1.The complexity of the transaction verification process which is driven by the algorithms contained within the Bitcoin open source software;

2.The general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured in Petahash units); and

3.Technological obsolescence reflecting rapid development in the transaction verification server industry such that more recently developed hardware is more economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs, (i.e., the speed of hardware evolution in the industry is such that later hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase).

The Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Management has determined that two years best reflects the current expected

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useful life of transaction verification servers. This assessment takes into consideration the availability of historical data and management’s expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate annually and will revise such estimate as and when data becomes available.

To the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.

Asset Retirement Obligations

Asset retirement obligations, including those conditioned on future events, are recorded at fair value in the period in which they are incurred, if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset in the same period. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the EUL of the long-lived asset. If the asset retirement obligation is settled for other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company’s asset retirement obligation represents the cost the Company would incur to perform environmental clean-up or dismantle certain portions of the Facility.

Revenue Recognition

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:

1.Step 1: Identify the contract with the customer

2.Step 2: Identify the performance obligations in the contract

3.Step 3: Determine the transaction price

4.Step 4: Allocate the transaction price to the performance obligations in the contract

5.Step 5: Recognize revenue when the Company satisfies a performance obligation

In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).

If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.

When determining the transaction price, an entity must consider the effects of all of the following:

•Variable consideration

•Constraining estimates of variable consideration

•The existence of a significant financing component in the contract

•Noncash consideration

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•Consideration payable to a customer

Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. There were no revenue streams with variable consideration during the nine months ended September 30, 2021 and 2020.

There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (the "FASB"), the Company may be required to change its policies, which could have an effect on the Company’s condensed consolidated financial position and results from operations.

Fair value of the digital asset award received is determined using the quoted price of the related cryptocurrency at the time of receipt.

The Company’s policies with respect to its revenue streams are detailed below.

Energy Revenue

The Company operates as a market participant through PJM Interconnection, a Regional Transmission Organization (“RTO”) that coordinates the movement of wholesale electricity. The Company sells energy in the wholesale generation market in the PJM RTO. Energy revenues are delivered as a series of distinct units that are substantially the same and that have the same pattern of transfer to the customer over time and are therefore accounted for as a distinct performance obligation. The transaction price is based on pricing published in the day ahead market which constitute the stand-alone selling price.

Energy revenue is recognized over time as energy volumes are generated and delivered to the RTO (which is contemporaneous with generation), using the output method for measuring progress of satisfaction of the performance obligation. The Company applies the invoice practical expedient in recognizing energy revenue. Under the invoice practical expedient, energy revenue is recognized based on the invoiced amount which is considered equal to the value provided to the customer for the Company’s performance obligation completed to date.

Reactive energy power is provided to maintain a continuous voltage level. Revenue from reactive power is recognized ratably over time as the Company stands ready to provide it if called upon by the PJM RTO.

Capacity Revenue

The Company provides capacity to a customer through participation in capacity auctions held by the PJM RTO. Capacity revenues are a series of distinct performance obligations that are substantially the same and that have the same pattern of transfer to the customer over time and are therefore accounted for as a distinct performance obligation. The transaction price for capacity is market-based and constitutes the stand-alone selling price. As capacity represents the Company’s stand-ready obligation, capacity revenue is recognized as the performance obligation is satisfied ratably over time, on a monthly basis, since the Company stands ready equally throughout the period to deliver power to the PJM RTO if called upon. The Company applies the invoice practical expedient in recognizing capacity revenue. Under the invoice practical expedient, capacity revenue is recognized based on the invoiced amount which is considered equal to the value provided to the customer for the Company’s performance obligation completed to date. Penalties may be assessed by the PJM RTO against generation facilities if the facility is not available during the capacity period. The penalties assessed by the PJM RTO, if any, are recorded as a reduction to capacity revenue when incurred.

Cryptocurrency Hosting

The Company has entered into customer hosting contracts whereby the Company provides electrical power to cryptocurrency mining customers, and the customers pay a stated amount per megawatt-hour (“MWh”) (“Contract Capacity”). This amount is paid monthly in advance. Amounts used in excess of the Contract Capacity are billed based upon calculated formulas as contained in the contracts. If any shortfalls occur to due to outages, make-whole payment provisions contained in the contracts are used to offset the billings to the customer which prevented them from cryptocurrency mining. Advanced payments and customer deposits are reflected as contract liabilities.

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Cryptocurrency Mining

The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company’s enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.

Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Company’s contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.

Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.

Waste Coal Credits

Waste coal credits are issued by the Commonwealth of Pennsylvania. Facilities that generate electricity by using coal refuse for power generation, control acid gases for emission control, and use the ash produced to reclaim mining-affected sites are eligible for such credits. Income related to these credits is recorded upon cash receipt and within other income.

Renewable Energy Credits (“RECs”)

The Company uses coal refuse, which is classified as a Tier II Alternative Energy Source under Pennsylvania law, to produce energy to sell to the open market (“the grid”). A third party acts as the benefactor, on behalf of the Company, in the open market and is invoiced as RECs are realized. These credits are recognized as a contra-expense to offset the fuel costs to produce this refuse. This is per GAAP guidance that these costs held in inventory to then produce the energy to qualify for the credits are a compliance cost and should offset operating costs when expensed. Refer to Note 18 – Renewable Energy Credits.

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Stock Based Compensation

For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units (“RSUs”).

Notes Payable

The Company records notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.

Warrant Liabilities

The Company records warrant liabilities at their fair value as of the balance sheet date, and recognizes changes in the balances, over the comparative periods of either the issuance date or the last reporting date, as part of changes in fair value of warrant liabilities expense.

Segments

Accounting guidance establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires enterprises to report selected information about operating segments in financial reports issued to stockholders. The Company has reorganized into two operating segments, which consist of Energy Operations and Cryptocurrency Operations. See Note 12 – Segment Reporting.

Mezzanine Equity

Redeemable Preferred Stock

The Preferred Stock is reported as a mezzanine obligation between liabilities and stockholders’ equity due to certain redemption features being outside the control of the Company. See Note 15 – Mezzanine Equity.

Common Stock – Class V

The Common Stock – Class V shares (as described in Note 15 – Mezzanine Equity) is reported as a mezzanine obligation between liabilities and stockholders’ equity due to certain redemption features being outside the control of the Company.

The Company accounts for the 68.9% interest represented by the Class V common stock as mezzanine equity as a result of certain redemption rights held by the holders thereof as discussed in "Note 15 – Mezzanine Equity." As such, the Company adjusts mezzanine equity to its maximum redemption amount at the balance sheet date, if higher than the carrying amount. The redemption amount is based a third-party valuation methodology of the Company’s Class A common stock at the end of the reporting period. Changes in the redemption value are recognized immediately as they occur, as if the end of the reporting period was also the redemption date for the instrument, with an offsetting entry to accumulated deficits.

For each share of Class V common stock outstanding, there is a corresponding outstanding Class A common unit of Stronghold LLC. The redemption of any share of Class V common stock would be accompanied by a concurrent redemption of the corresponding Class A common unit of Stronghold LLC, such that both the share of Class V common stock and the corresponding Class A common unit of Stronghold LLC are redeemed as a combined unit in exchange for either a single share of Class A common stock or cash of equivalent value based on the fair market value of the Class A common stock at the time of the redemption. For accounting purposes, the value of the Class A common units of Stronghold LLC is attributed to the corresponding shares of Class V common stock on the September 30, 2021 balance sheet.

Loss per share

Basic net (loss) income per share (“EPS”) of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding or shares subject to exercise for a nominal value during the period. Diluted

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EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Since the Company has incurred a loss for the period ended September 30, 2021, basic and diluted net loss per share is the same. At December 31, 2020 there were no potential dilutive securities outstanding. See Note 17 – Earnings (Loss) Per Share.

Income Taxes

Reorganization

Upon completion of the Reorganization, the Company is organized as an “Up-C” structure in which substantially all of the assets and business of the consolidated Company are held by Stronghold Inc. through its subsidiaries, and the Company’s direct assets largely consist of cash and investments in subsidiaries. For income tax purposes, the portion of the Company’s earnings allocable to Stronghold Inc. is subject to corporate level tax rates at the federal and state levels. Therefore, the income taxes recorded prior to the Reorganization are not representative of the income taxes after the Reorganization.

Stronghold Inc. and its indirectly owned corporate subsidiaries, Clearfield and Leechburg, account for income taxes under the asset and liability method, in which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable. Based on the Company’s evaluation and application of ASC Topic 740, Income Taxes (“ASC 740”), the Company has determined that the utilization of the deferred tax assets is not more likely than not, and therefore the Company has recorded a valuation allowance against the net deferred tax assets of the Company as well as Clearfield and Leechburg. Factors contributing to this assessment are the Company’s cumulative and current losses, as well as the evaluation of other sources of income as outlined in ASC 740. The Company continues to evaluate the likelihood of the utilization of deferred tax assets, and while the valuation allowance remains in place, we expect to record no income tax expense or benefit.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition. Based on the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.

Stronghold Inc.’s subsidiaries Scrubgrass and SDM are structured as flow-through entities; and therefore the taxable income or loss of Scrubgrass and SDM is included in the income tax returns of the partners, including Stronghold Inc. Application of ASC 740 to these entities results in no recognition of federal or state income taxes at the entity level. The portion of Scrubgrass and SDM’s activities that are allocable to the Company will increase the Company’s taxable income or loss and be accounted for under ASC 740 at the Company.

Based on the Company's evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position. Although the Company has not filed a corporate tax return, the basis of tax positions applied to our tax provisions substantially comply with applicable federal and state tax regulations, and we acknowledge the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision or benefit for income taxes in the period in which a final determination is made.

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Prior to the Reorganization

Scrubgrass and Stronghold were structured as a limited partnership and limited liability company, respectively; therefore the taxable income or loss of the Company is included in the income tax returns of the individual partners. Accordingly, no recognition has been given to federal or state income taxes in the accompanying financial statements.

Scrubgrass' two subsidiaries, Clearfield and Leechburg, are corporations for federal and state income tax purposes. Income taxes attributable to Clearfield and Leechburg are provided based on the asset and liability method of accounting pursuant to the Income Taxes Topic of FASB ASC 740. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all, of the deferred tax asset will not be realized. Clearfield and Leechburg have not recorded any temporary differences resulting in either a deferred tax asset or liability as of December 31, 2020.

Clearfield and Leechburg follow the Accounting for Uncertainty in Income Taxes Sub-Topic of FASB ASC 740 which governs the accounting for uncertainty in income taxes. Pursuant to this Sub-Topic, a tax position can be recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured as the largest amount of benefit that will more likely than not be realized upon settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. Clearfield and Leechburg did not recognize an impact under this Sub-Topic for the years ending December 31, 2020. As of December 31, 2020, the tax years ended December 31, 2017 through 2020 are open for potential examination by taxing authorities.

NOTE 3 - INVENTORIES

Inventories consist of the following components as of September 30, 2021 and December 31, 2020:


	September 30, 2021		December 31, 2020
	(unaudited)
Waste coal	$	304,202	$	342,476
Fuel oil	49,508		33,243
Limestone	13,891		21,173
TOTALS	$	367,601	$	396,892

NOTE 4 – EQUIPMENT DEPOSITS

Equipment deposits are contractual agreements with three vendors to deliver and install miners at future dates. The following details the vendors, miner models, miner counts, and expected delivery months. The Company is contractually committed to take future deliveries, and portions of the equipment are collateralized against the WhiteHawk Promissory Note (as defined below) as disclosed in Note 6 – Long-Term Debt. With the exception of Cryptech Solutions ("Cryptech"), where there is an installment payments plan, all unpaid deposits will be made on the last month referenced in the timeframe below. The delivery timeframe for the 2,400 Cryptech miners will be in equal installments of 200 per month for 12 months starting in November 2021. Deliveries for the other vendors vary within the referenced timeframes.


Vendor	Model	Count	Delivery Timeframe	Total Commitments		Unpaid [A]		Equipment Deposits
MinerVa	MinerVA	15,000	Oct ‘21 - Dec '21	$	73,387,500	(14,677,500)		58,710,000
Cryptech	Bitmain	2,400	Nov ‘21 - Oct ‘22	12,660,000		(7,807,000)		4,853,000
Northern Data	MicroBT	9,900	Oct ‘21 - Nov '21	22,061,852		—		22,061,852
Totals		27,300		$	108,109,352	$	(22,484,500)	$	85,624,852

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[A] Future commitments still owed to each vendor. Refer to Note 8 – Contingencies and Commitments for further details. Refer to Note 25 –Subsequent Events for disclosure of the final MinerVa deposit payment being made after September 30, 2021.

NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following as of September 30, 2021 and December 31, 2020:


	Useful Lives (Years)	September 30, 2021		Dec 31, 2020
		(unaudited)
Electric Plant	60	$	30,288,979	$	30,288,979
Power Transformers	30	2,162,386		—
Machinery and equipment	5 - 20	5,436,333		2,862,736
Cryptocurrency Machines & Powering Supplies	2 - 3	6,387,432		—
Computer hardware and software	3 - 5	4,236		5,062
Vehicles & Trailers	5 - 7	81,733		81,733
Construction in progress	Not Depreciable	25,157,279		1,544,536
Asset retirement obligation	5	79,848		79,848
		69,598,226		34,862,894
Accumulated depreciation and amortization		(29,483,439)		(27,048,695)
TOTALS		$	40,114,787	$	7,814,199

Construction in Progress

Construction in progress consists of various projects to build out the cryptocurrency machine power infrastructure and is not depreciable until the asset is considered in service and successfully powers and runs the attached cryptocurrency machines. Completion of these projects will have various rollouts of energized transformed containers and are designed to calibrate power from the plant to the container that houses multiple cryptocurrency machines. Currently, the balance of $25,157,279, as of September 30, 2021, represents open contracts with a vendor that have future completion dates scheduled for the remainder of the year.

Depreciation and Amortization

Depreciation and amortization charged to operations was $2,463,549 and $422,603 for the nine months ended September 30, 2021 and September 30, 2020 respectively.

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NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following as of September 30, 2021 and December 31, 2020:


	September 30, 2021	Dec 31, 2020
$