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 March 31, 2023
OR
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(845 ) 579-5992
(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 | ||||||
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 x No ☐
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 | ☐ | |||||||||||
| ☒ | 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 ☒
As of May 8, 2023, the registrant had outstanding 53,002,750 shares of Class A common stock, par value $0.0001 per share, 21,572 shares of Series C convertible preferred stock, par value $0.0001 per share, and 26,057,600 shares of Class V common stock, par value $0.0001 per share.
Table of Contents
| Page No. | |||||||||||
Part I - Financial Information
Item 1. Financial Statements
STRONGHOLD DIGITAL MINING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| March 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Digital currencies | |||||||||||
| Accounts receivable | |||||||||||
| Inventory | |||||||||||
| Prepaid insurance | |||||||||||
| Due from related parties | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Equipment deposits | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Land | |||||||||||
| Road bond | |||||||||||
| Security deposits | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Financed insurance premiums | |||||||||||
| Current portion of long-term debt, net of discounts and issuance fees | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Due to related parties | |||||||||||
| Total current liabilities | |||||||||||
| Asset retirement obligation | |||||||||||
| Warrant liabilities | |||||||||||
| Long-term debt, net of discounts and issuance fees | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Contract liabilities | |||||||||||
| Total liabilities | |||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 10) | |||||||||||
| REDEEMABLE COMMON STOCK: | |||||||||||
Common Stock – Class V; $ shares issued and outstanding as of March 31, 2023, and December 31, 2022, respectively. | |||||||||||
| Total redeemable common stock | |||||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT): | |||||||||||
Common Stock – Class A; $ shares issued and outstanding as of March 31, 2023, and December 31, 2022, respectively. | |||||||||||
Series C convertible preferred stock; $ issued and outstanding as of March 31, 2023, and December 31, 2022, respectively. | |||||||||||
| Accumulated deficits | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Total stockholders' equity | |||||||||||
| Total redeemable common stock and stockholders' equity | |||||||||||
| TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
STRONGHOLD DIGITAL MINING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | ||||||||||||||
| March 31, 2023 | March 31, 2022 | |||||||||||||
| OPERATING REVENUES: | ||||||||||||||
| Cryptocurrency mining | $ | $ | ||||||||||||
| Energy | ||||||||||||||
| Cryptocurrency hosting | ||||||||||||||
| Capacity | ||||||||||||||
| Other | ||||||||||||||
| Total operating revenues | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||
| Fuel | ||||||||||||||
| Operations and maintenance | ||||||||||||||
| General and administrative | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Loss on disposal of fixed assets | ||||||||||||||
| Realized gain on sale of digital currencies | ( | ( | ||||||||||||
| Impairments on digital currencies | ||||||||||||||
| Impairments on equipment deposits | ||||||||||||||
| Total operating expenses | ||||||||||||||
| NET OPERATING LOSS | ( | ( | ||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Loss on debt extinguishment | ( | |||||||||||||
| Changes in fair value of warrant liabilities | ( | |||||||||||||
| Changes in fair value of forward sale derivative | ( | |||||||||||||
| Other | ||||||||||||||
| Total other income (expense) | ( | ( | ||||||||||||
| NET LOSS | $ | ( | $ | ( | ||||||||||
| NET LOSS attributable to noncontrolling interest | ( | ( | ||||||||||||
| NET LOSS attributable to Stronghold Digital Mining, Inc. | $ | ( | $ | ( | ||||||||||
| NET LOSS attributable to Class A common shareholders: | ||||||||||||||
| Basic | $ | ( | $ | ( | ||||||||||
| Diluted | $ | ( | $ | ( | ||||||||||
| Weighted average number of Class A common shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
STRONGHOLD DIGITAL MINING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred | Noncontrolling Redeemable Preferred | Common A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C Shares | Amount | Series A Shares | Amount | Shares | Amount | Accumulated Deficit | Additional Paid-in Capital | Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance – January 1, 2023 | $ | — | $ | — | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Stronghold Digital Mining, Inc. | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Maximum redemption right valuation [Common V Units] | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Warrants issued and outstanding | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Exercised warrants | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Series C convertible preferred stock | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series C convertible preferred stock | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance – March 31, 2023 | $ | — | $ | — | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred | Noncontrolling Redeemable Preferred | Common A | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C Shares | Amount | Series A Shares | Amount | Shares | Amount | Accumulated Deficit | Additional Paid-in Capital | Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance – January 1, 2022 | — | $ | — | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Stronghold Digital Mining, Inc. | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Maximum redemption right valuation [Common V Units] | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Vesting of restricted stock units | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Warrants issued and outstanding | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance – March 31, 2022 | — | $ | — | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
STRONGHOLD DIGITAL MINING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to cash flows from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Accretion of asset retirement obligation | |||||||||||
| Loss on disposal of fixed assets | |||||||||||
| Change in value of accounts receivable | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Stock-based compensation | |||||||||||
| Loss on debt extinguishment | |||||||||||
| Impairments on equipment deposits | |||||||||||
| Changes in fair value of warrant liabilities | |||||||||||
| Changes in fair value of forward sale derivative | |||||||||||
| Forward sale contract prepayment | |||||||||||
| Other | ( | ||||||||||
| (Increase) decrease in digital currencies: | |||||||||||
| Mining revenue | ( | ( | |||||||||
| Net proceeds from sales of digital currencies | |||||||||||
| Impairments on digital currencies | |||||||||||
| (Increase) decrease in assets: | |||||||||||
| Accounts receivable | |||||||||||
| Prepaid insurance | |||||||||||
| Due from related parties | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Increase (decrease) in liabilities: | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Due to related parties | |||||||||||
| Accrued liabilities | ( | ||||||||||
| Other liabilities, including contract liabilities | ( | ( | |||||||||
| NET CASH FLOWS USED IN OPERATING ACTIVITIES | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||
| Equipment purchase deposits - net of future commitments | ( | ||||||||||
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Repayments of debt | ( | ( | |||||||||
| Repayments of financed insurance premiums | ( | ( | |||||||||
| Proceeds from debt, net of issuance costs paid in cash | |||||||||||
| Proceeds from exercise of warrants | |||||||||||
| NET CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES | ( | ||||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | |||||||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
STRONGHOLD DIGITAL MINING, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NATURE OF OPERATIONS
Stronghold Digital Mining, Inc. ("Stronghold Inc." or the "Company") is a low-cost, environmentally beneficial, vertically integrated crypto asset mining company currently focused on mining Bitcoin and environmental remediation and reclamation services. The Company wholly owns and operates two coal refuse power generation facilities that it has upgraded: (i) the Company's first reclamation facility located on a 650 -acre site in Scrubgrass Township, Venango County, Pennsylvania, which the Company acquired the remaining interest of in April 2021, and has the capacity to generate approximately 83.5 megawatts (“MW”) of electricity (the "Scrubgrass Plant"); and (ii) a facility located near Nesquehoning, Pennsylvania, which the Company acquired in November 2021, and has the capacity to generate approximately 80 MW of electricity (the "Panther Creek Plant, and collectively with Scrubgrass Plant, the "Plants"). Both facilities qualify as an Alternative Energy System because coal refuse is classified under Pennsylvania law as a 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.
Stronghold Inc. operates in two business segments – the Energy Operations segment and the Cryptocurrency Operations segment. This segment presentation is consistent with how the Company's chief operating decision maker evaluates financial performance and makes resource allocation and strategic decisions about the business.
Energy 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 a Professional Services Agreement (“PSA”) with Customized Energy Solutions (“CES”), effective July 27, 2022. Under the PSA, CES agreed to act as the exclusive provider of services for the benefit of the Company related to interfacing with PJM, including handling daily marketing, energy scheduling, telemetry, capacity management, reporting, and other related services for the Plants. The initial term of the agreement is two years , and then will extend automatically on an annual basis unless terminated by either party with 60 days written (or electronic) notice prior to the current term end. The Company’s primary fuel source is waste coal which is provided by various third parties. Waste coal tax credits are earned by the Company by generating electricity utilizing coal refuse.
Cryptocurrency Operations
The Company is also a vertically-integrated digital currency mining business. The Company buys and maintains a fleet of Bitcoin mining equipment and the required infrastructure and provides power to third-party digital currency miners under power purchase and hosting agreements. 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.
NOTE 1 – BASIS OF PRESENTATION
The unaudited condensed consolidated balance sheet as of March 31, 2023, the unaudited condensed consolidated statements of operations, stockholders' equity and cash flows for the three months ended March 31, 2023, and 2022, have been prepared by the Company. In the opinion of management, all adjustments, consisting of only normal and recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented, have been made. The results of operations for the three months ended March 31, 2023, are not necessarily indicative of the operating results expected for the full year.
The condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Certain information and footnote disclosures normally included in the annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), have been condensed or omitted. Certain reclassifications of amounts previously reported have been made to the accompanying condensed consolidated financial statements in order to conform to current presentation.
6
Cash and Cash Equivalents
As of March 31, 2023, cash and cash equivalents includes $900,000 of restricted cash, which represents a continuous bond in place of $400,000 to mitigate fees charged by customs brokerage companies associated with importing miners and a $500,000 letter of credit required to finance the Company's directors and officers insurance policy.
| Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2022 | June 30, 2022 | September 30, 2022 | December 31, 2022 | |||||||||||||||||||||||
| Energy revenues - previously disclosed | $ | $ | $ | $ | ||||||||||||||||||||||
| Reclassification: imported power charges | ||||||||||||||||||||||||||
| Energy revenues - restated | $ | $ | $ | $ | ||||||||||||||||||||||
| Fuel expenses - previously disclosed | $ | $ | $ | $ | ||||||||||||||||||||||
| Reclassification: imported power charges | ||||||||||||||||||||||||||
| Fuel expenses - restated | $ | $ | $ | $ | ||||||||||||||||||||||
Recently Implemented Accounting Pronouncements
In September 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments – Credit Losses, which adds a new impairment model, known as the current expected credit loss ("CECL") model, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes an allowance for its estimate of expected credit losses at the initial recognition of an in-scope financial instrument and applies it to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. Since the Company is a smaller reporting company, as defined by the U.S. Securities and Exchange Commission (the "SEC"), the new guidance became effective on January 1, 2023. The Company adopted ASU 2016-13 effective January 1, 2023, but the adoption of ASU 2016-13 did not have an impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
There have been no recently issued accounting pronouncements applicable to the Company.
NOTE 2 – DIGITAL CURRENCIES
As of March 31, 2023, the Company held an aggregate amount of $672,852 in digital currencies comprised of unrestricted Bitcoin. Changes in digital currencies consisted of the following for the three months ended March 31, 2023, and 2022:
| March 31, 2023 | March 31, 2022 | ||||||||||
| Digital currencies at beginning of period | $ | $ | |||||||||
| Additions of digital currencies | |||||||||||
| Realized gain on sale of digital currencies | |||||||||||
| Impairment losses | ( | ( | |||||||||
| Proceeds from sale of digital currencies | ( | ( | |||||||||
| Digital currencies at end of period | $ | $ | |||||||||
7
NOTE 3 – INVENTORY
Inventory consisted of the following components as of March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Waste coal | $ | $ | |||||||||
| Fuel oil | |||||||||||
| Limestone | |||||||||||
| Inventory | $ | $ | |||||||||
NOTE 4 – EQUIPMENT DEPOSITS
Equipment deposits represent contractual agreements with vendors to deliver and install miners at future dates. The following details the vendor, miner model, miner count, and expected delivery month(s).
In March 2022, the Company evaluated the MinerVa Semiconductor Corp ("MinerVa") equipment deposits for impairment under the provisions of ASC 360, Property, Plant and Equipment. As a result of the evaluation, the Company determined an indicator for impairment was present under ASC 360-10-35-21. The Company undertook a test for recoverability under ASC 360-10-35-29 and a further fair value analysis in accordance with ASC 820, Fair Value Measurement. The difference between the fair value of the MinerVa equipment deposits and the carrying value resulted in the Company recording an impairment charge of $12,228,742 in the first quarter of 2022 and an additional $5,120,000 in the fourth quarter of 2022, as summarized in the table below.
The following table details the total equipment deposits of $5,422,338 as of March 31, 2023:
| Vendor | Model | Count | Delivery Timeframe | Total Commitments | Transferred to PP&E [A] | Impairment | Sold | Equipment Deposits | ||||||||||||||||||||||||||||||||||||||||||
| MinerVa | MinerVa MV7 | Oct '21 - TBD | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||
[A] Miners that are delivered and physically placed in service are transferred to a fixed asset account at the respective unit price as defined in the agreement.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of March 31, 2023, and December 31, 2022:
Useful Lives (Years) | March 31, 2023 | December 31, 2022 | |||||||||||||||
| Electric plant | $ | $ | |||||||||||||||
| Strongboxes and power transformers | |||||||||||||||||
| Machinery and equipment | |||||||||||||||||
| Rolling stock | |||||||||||||||||
| Cryptocurrency machines and powering supplies | |||||||||||||||||
| Computer hardware and software | |||||||||||||||||
| Vehicles and trailers | |||||||||||||||||
| Construction in progress | Not Depreciable | ||||||||||||||||
| Asset retirement cost | |||||||||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||||||||
| Property, plant and equipment, net | $ | $ | |||||||||||||||
Construction in progress consists of various projects to build out the cryptocurrency machine power infrastructure and is not depreciable until the asset is considered in service and successfully powers and runs the attached cryptocurrency machines. Completion of these projects will have various rollouts of energized transformed containers and are designed to
8
calibrate power from the plant to the container that houses multiple cryptocurrency machines. Currently, the balance of $11,099,409 as of March 31, 2023, represents open contracts for future projects.
Depreciation and amortization expense charged to operations was $7,722,841 and $12,319,581 for the three months ended March 31, 2023, and 2022, respectively, including depreciation of assets under finance leases of $133,382 and $94,262 for the three months ended March 31, 2023, and 2022, respectively.
NOTE 6 – ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Accrued legal and professional fees | $ | $ | |||||||||
| Accrued interest | |||||||||||
| Accrued sales and use tax | |||||||||||
| Other | |||||||||||
| Accrued liabilities | $ | $ | |||||||||
NOTE 7 – DEBT
Total debt consisted of the following as of March 31, 2023, and December 31, 2022:
| March 31, 2023 | December 31, 2022 | ||||||||||
$ | $ | $ | |||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
$ | |||||||||||
| Total outstanding borrowings | $ | $ | |||||||||
| Current portion of long-term debt, net of discounts and issuance fees | |||||||||||
| Long-term debt, net of discounts and issuance fees | $ | $ | |||||||||
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”), effectively terminating the WhiteHawk Financing Agreement. Upon closing, the Credit Agreement consisted of $35.1 million in term loans and $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.
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On February 6, 2023, the Company, Stronghold LLC, as borrower, their subsidiaries and WhiteHawk Capital Partners LP ("WhiteHawk Capital"), as collateral agent and administrative agent, and the other lenders thereto, entered into an amendment to the Credit Agreement (the “First Amendment”) in order to modify certain covenants and remove certain prepayment requirements contained therein. As a result of the First Amendment, amortization payments for the period from February 2023 through July 2024 will not be required, with monthly amortization resuming July 31, 2024. Beginning June 30, 2023, following a five-month holiday, Stronghold LLC will make monthly prepayments of the loan in an amount equal to 50 % of its average daily cash balance (including cryptocurrencies) in excess of $7,500,000 for such month. The First Amendment also modified the financial covenants to (i) in the case of the requirement of the Company to maintain a leverage ratio no greater than 4.0 :1.00, such covenant will not be tested until the fiscal quarter ending September 30, 2024, and (ii) in the case of the minimum liquidity covenant, modified to require minimum liquidity at any time to be not less than: (A) until March 31, 2024, $2,500,000 ; (B) during the period beginning April 1, 2024, through and including December 31, 2024, $5,000,000 ; and (C) from and after January 1, 2025, $7,500,000 . The Company was in compliance with all applicable covenants under the WhiteHawk Refinancing Agreement as of March 31, 2023.
The borrowings under the WhiteHawk Refinancing Agreement mature on October 26, 2025, and bear interest at a rate of either (i) the Secured Overnight Financing Rate ("SOFR") plus 10 % or (ii) a reference rate equal to the greater of (x) 3 %, (y) the federal funds rate plus 0.5 % and (y) the term SOFR rate plus 1 %, plus 9 %. Borrowings under the WhiteHawk Refinancing Agreement may also be accelerated in certain circumstances.
Convertible Note Exchange
On December 30, 2022, the Company entered into an exchange agreement with the holders (the “Holders”) of the Company’s Amended and Restated 10 % Notes (the “Notes”), providing for the exchange of the Notes (the “Exchange Transaction”) for shares of the Company’s newly-created Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”). On February 20, 2023, the Exchange Transaction was consummated, and the Notes were deemed paid in full. Approximately $16.9 million of principal amount of debt was extinguished in exchange for the issuance of the shares of Series C Preferred Stock. As a result of this transaction, the Company incurred a loss on debt extinguishment of approximately $29 million for the three months ended March 31, 2023.
On February 20, 2023, in connection with the consummation of the Exchange Transaction, the Company entered into a Registration Rights Agreement with the Holders (the “Registration Rights Agreement”) whereby it agreed to, among other things, (i) file within two business days following the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, a resale registration statement (the “Resale Registration Statement”) with the SEC covering all shares of the Company’s Class A common stock issuable upon conversion of the Series C Preferred Stock or upon exercise of the pre-funded warrants that may be issued in lieu of Class A common stock upon conversion of the Series C Preferred Stock, and (ii) to cause the Resale Registration Statement to become effective within the timeframes specified in the Registration Rights Agreement.
Bruce & Merrilees Promissory Note
On March 28, 2023, the Company and Stronghold LLC entered into a settlement agreement (the “B&M Settlement”) with 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 3,000,000 shares of Class A common stock (the "B&M Warrant"). The B&M Note has no definitive payment schedule or term. Pursuant to the B&M Settlement, B&M released ten (10 ) 3000kva transformers to the Company and fully cancelled ninety (90 ) transformers remaining under a pre-existing order with a third-party supplier. The terms of the B&M Settlement included a mutual release of all claims. Simultaneous with the B&M Settlement, the Company and each of its subsidiaries entered into a subordination agreement with B&M and WhiteHawk Capital pursuant to which all obligations, liabilities and indebtedness of every nature of the Company and each of its subsidiaries owed to B&M shall be subordinate and subject in right and time of payment, to the prior payment of full of the Company's obligation to WhiteHawk Capital pursuant to the Credit Agreement.
Pursuant to the B&M Note, the first $500,000 of the principal amount of the loan shall be payable in four equal monthly installments of $125,000 beginning on April 30, 2023, so long as (i) no default or event of default has occurred or is occurring under the WhiteHawk Credit Agreement and (ii) no PIK Option (as such term is defined in the WhiteHawk Refinancing Agreement) has been elected by the Company. The principal amount under the B&M Note bears interest at seven and one-half percent (7.5 %).
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NOTE 8 – RELATED-PARTY TRANSACTIONS
Waste Coal Agreement
The Company is obligated under a Waste Coal Agreement (the “WCA”) to take minimum annual delivery of 200,000 tons of waste coal as long as there is a sufficient quantity of waste coal that meets the Average Quality Characteristics (as defined in the WCA). Under the terms of the WCA, the Company is not charged for the waste coal itself but is charged a $6.07 per ton base handling fee as it is obligated to mine, process, load, and otherwise handle the waste coal for itself and also for other customers of Coal Valley Sales, LLC (“CVS”) from the Company's Russellton site specifically. The Company is also obligated to unload and properly dispose of ash at its Russellton site. The Company is charged a reduced handling fee of $1.00 per ton for any tons in excess of the minimum take of 200,000 tons. The Company is the designated operator of the Russellton site, and therefore, is responsible for complying with all state and federal requirements and regulations.
The Company purchases coal from Coal Valley Properties, LLC, a single-member limited liability company which is entirely owned by one individual who has ownership in Q Power LLC ("Q Power"), and from CVS. CVS is a single-member limited liability company which is owned by a coal reclamation partnership of which an owner of Q Power has a direct and an indirect interest in the partnership of 16.26 %.
The Company expensed $150,000 and $303,500 for the three months ended March 31, 2023, and 2022, respectively, associated with coal purchases from CVS, which is included in fuel expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Fuel Service and Beneficial Use Agreement
The Company has a Fuel Service and Beneficial Use Agreement (“FBUA”) with Northampton Fuel Supply Company, Inc. (“NFS”), a wholly owned subsidiary of Olympus Power. The Company buys fuel from and sends ash to NFS, for the mutual benefit of both facilities, under the terms and rates established in the FBUA. The FBUA expires on December 31, 2023. The Company expensed $1,157,927 and $379,646 for the three months ended March 31, 2023, and 2022, respectively, which is included in fuel expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Fuel Management Agreements
Panther Creek Fuel Services LLC
Effective August 1, 2012, the Company entered into the Fuel Management Agreement (the “Panther Creek Fuel Agreement”) with Panther Creek Fuel Services LLC, a wholly owned subsidiary of Olympus Services LLC which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the Panther Creek Fuel Agreement, Panther Creek Fuel Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The Company expensed $478,621 and $398,769 for the three months ended March 31, 2023, and 2022, respectively, which is included in operations and maintenance expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Scrubgrass Fuel Services, LLC
Effective February 1, 2022, the Company entered into the Fuel Management Agreement (the “Scrubgrass Fuel Agreement”) with Scrubgrass Fuel Services LLC, a wholly owned subsidiary of Olympus Services LLC, which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the Scrubgrass Fuel Agreement, Scrubgrass Fuel Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The Company expensed $276,119 and $96,624 for the three months ended March 31, 2023, and 2022, respectively, which is included in operations and maintenance expense in the condensed consolidated statements of operations. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
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O&M Agreements
Olympus Power LLC
On November 2, 2021, Stronghold LLC entered into an Operations, Maintenance and Ancillary Services Agreement (the “Omnibus Services Agreement”) with Olympus Stronghold Services, LLC (“Olympus Stronghold Services”), whereby Olympus Stronghold Services currently provides certain operations and maintenance services to Stronghold LLC and currently employs certain personnel to operate the Plants. Stronghold LLC reimburses Olympus Stronghold Services for those costs incurred by Olympus Stronghold Services and approved by Stronghold LLC in the course of providing services under the Omnibus Services Agreement, including payroll and benefits costs and insurance costs. The material costs incurred by Olympus Stronghold Services shall be approved by Stronghold LLC. From November 2, 2021, until October 1, 2023, Stronghold LLC also agreed to pay Olympus Stronghold Services a management fee at the rate of $1,000,000 per year, payable monthly for services provided at each of the Plants, and an additional one-time mobilization fee of $150,000 upon the effective date of the Omnibus Services Agreement, which has been deferred. Effective October 1, 2022, Stronghold LLC began paying Olympus Stronghold Services a management fee for the Panther Creek Plant in the amount of $500,000 per year, payable monthly for services provided at the Panther Creek Plant. This is a reduction of $500,000 from the $1,000,000 per year management fee that the Company was previously scheduled to pay Olympus Stronghold Services. The Company expensed $235,376 and $228,598 for the three months ended March 31, 2023, and 2022, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll, benefits and insurance. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
Panther Creek Energy Services LLC
Effective August 2, 2021, the Company entered into the Operations and Maintenance Agreement (the “O&M Agreement”) with Panther Creek Energy Services LLC, a wholly owned subsidiary of Olympus Services LLC which, in turn, is a wholly owned subsidiary of Olympus Power LLC. Under the O&M Agreement, Panther Creek Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Panther Creek Energy Services LLC for actual wages and salaries. The Company also agreed to pay a management fee of $175,000 per operating year, which is payable monthly, and is adjusted by the consumer price index on each anniversary date of the effective date. The Company expensed $910,394 and $887,824 for the three months ended March 31, 2023, and 2022, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll, benefits and insurance. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
In connection with the equity contribution agreement, effective July 9, 2021 (the "Equity Contribution Agreement"), the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Amended O&M Agreement”) with Panther Creek Energy Services LLC. Under the Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Amended O&M Agreement was the closing date of the Equity Contribution Agreement.
Scrubgrass Energy Services, LLC
Effective February 1, 2022, the Company entered into the Operations and Maintenance Agreement (the “Scrubgrass O&M Agreement”) with Scrubgrass Energy Services LLC, a wholly-owned subsidiary of Olympus Services LLC which, in turn, is a wholly-owned subsidiary of Olympus Power LLC. Under the Scrubgrass O&M Agreement, Scrubgrass Energy Services LLC provides the Company with operations and maintenance services with respect to the Facility. The Company reimburses Scrubgrass Energy Services LLC for actual wages and salaries. The Company also agreed to pay a management fee of $175,000 per operating year, which is payable monthly, and is adjusted by the consumer price index on each anniversary date of the effective date. The Company expensed $1,724,112 and $857,913 for the three months ended March 31, 2023, and 2022, respectively, which includes the monthly management fees plus reimbursable costs incurred by Olympus Stronghold Services for payroll, benefits and insurance. See the composition of the due to related parties balance as of March 31, 2023, and December 31, 2022, below.
In connection with the Equity Contribution Agreement effective July 9, 2021, the Company entered into the Amended and Restated Operations and Maintenance Agreement (the “Scrubgrass Amended O&M Agreement”) with Scrubgrass Energy Services LLC. Under the Scrubgrass Amended O&M Agreement, the management fee is $250,000 for the twelve-month period following the effective date and $325,000 per year thereafter. The effective date of the Scrubgrass Amended O&M Agreement is the closing date of the Equity Contribution Agreement.
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Effective October 1, 2022, Stronghold LLC no longer pays Olympus Stronghold Services a management fee for the Scrubgrass Plant.
Management Services Agreement
On May 10, 2021, a new management and advisory agreement was entered into between Q Power and William Spence (the "Spence Agreement"). In consideration of the consultant’s performance of the services thereunder, Q Power will pay Mr. Spence a fee at the rate of $50,000 per complete calendar month (pro-rated for partial months) that Mr. Spence provides services thereunder, payable in arrears. The previous agreement requiring monthly payments of $25,000 was terminated. Q Power will not be liable for any other payments to Mr. Spence including, but not limited to, any cost or expenses incurred by Mr. Spence in the course of performing his obligations thereunder. Under the Spence Agreement, the Company expensed $150,000
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 of directors (the "Board") (the "Spence Consulting Agreement"), Mr. Spence's annualized salary 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 Spence Agreement was terminated in connection with entry into the Spence Consulting Agreement. In April 2023, as part of the compensation pursuant to the Spence Consulting Agreement, Mr. Spence also received a one-time grant of 2,500,000 fully vested shares of the Company's Class A common stock.
Warrants
On September 13, 2022, the Company entered into a Securities Purchase Agreement with Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of 602,409 shares of Class A common stock and warrants to purchase 602,409 shares of Class A common stock, at an initial exercise price of $1.75 per share. Refer to Note 15 – Private Placements for additional details.
Additionally, on April 20, 2023, Mr. Beard invested $1.0 million in exchange for 1,000,000 shares of Class A common stock and 1,000,000 pre-funded warrants. Refer to Note 15 – Private Placements for additional details.
Amounts due to related parties as of March 31, 2023, and December 31, 2022, were as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| Coal Valley Properties, LLC | $ | $ | |||||||||
| Q Power LLC | |||||||||||
| Coal Valley Sales, LLC | |||||||||||
| Panther Creek Energy Services LLC | |||||||||||
| Panther Creek Fuel Services LLC | |||||||||||
| Northampton Generating Fuel Supply Company, Inc. | |||||||||||
| Olympus Power LLC and other subsidiaries | |||||||||||
| Scrubgrass Energy Services LLC | |||||||||||
| Scrubgrass Fuel Services LLC | |||||||||||
| Due to related parties | $ | $ | |||||||||
NOTE 9 – CONCENTRATIONS
Credit risk is the risk of loss the Company would incur if counterparties fail to perform their contractual obligations (including accounts receivable). The Company primarily conducts business with counterparties in the cryptocurrency mining and energy industry. This concentration of counterparties may impact the Company’s overall exposure to credit risk, either positively or negatively, in that its counterparties may be similarly affected by changes in economic, regulatory or other conditions. The Company mitigates potential credit losses by dealing, where practical, with counterparties that are rated at investment grade by a major credit agency or have a history of reliable performance within the cryptocurrency mining and energy industry.
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable. Cash and cash equivalents customarily exceed federally insured limits. The Company’s significant credit risk is primarily concentrated with CES. Over the course of 2022, the Company transitioned entirely to CES from Direct Energy Business Marketing, LLC. CES accounted for 100 % of the Company's energy operations segment revenues for the three months ended March 31, 2023. Additionally, CES accounted for approximately 100 % of the Company’s
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accounts receivable balance as of March 31, 2023, including approximately $3.7 million CES expects to receive from PJM on the Company's behalf, and forward to the Company upon receipt. During the first quarter of 2023, following an updated calculation from PJM revising the expected December 2022 performance assessment interval account receivable, the Company recorded a decrease in the value of accounts receivable of $1,002,750 within general and administrative expenses in the condensed consolidated statement of operations. The Company expects to receive the approximately $3.7 million of remaining accounts receivable from PJM (via CES) during the remainder of 2023.
For the three months ended March 31, 2023, and 2022, respectively, the Company purchased 19 % and 13 % of coal from two 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 June 2, 2021. As of March 31, 2023, 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 in the first quarter of 2022. Furthermore, in the fourth quarter of 2022, the difference between the fair value of the MinerVa equipment deposits and the carrying value resulted in the Company recording an additional impairment charge of $5,120,000 .
As of March 31, 2023, MinerVa had delivered, refunded cash, or swapped into deliveries of industry-leading miners of equivalent value to approximately 12,700 of the 15,000 miners. The aggregate purchase price does not include shipping costs, which are the responsibility of the Company and shall be determined at which time the miners are ready for shipment. While the Company continues to engage in discussions with MinerVa on the delivery of the remaining miners, it does not know when the remaining miners will be delivered, if at all. On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60 ) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60 ) days, Stronghold Inc. may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. As the 60 -day period has expired, the Company is evaluating all available remedies under the MinerVa Purchase Agreement.
Contingencies:
Legal Proceedings
The Company experiences litigation in the normal course of business. Management is of the belief that none of this routine litigation will have a material adverse effect on the Company’s financial position or results of operations.
McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs. Scrubgrass Generating Company, L.P.
On January 31, 2020, McClymonds Supply and Transit Company, Inc. (“McClymonds”) made a Demand for Arbitration, as required by the terms of the Transportation Agreement between McClymonds and Scrubgrass Generating Company, L.P. ("Scrubgrass") dated April 8, 2013 (the “Agreement”). In its demand, McClymonds alleged damages in the amount of $5,042,350 for failure to 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
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managing members of Q Power have executed a binding document to pay the full amount of the award and have begun to pay the full amount of the award, such that there will be no effect on the financial condition of the Company. McClymonds shall have no recourse to the Company with respect to the award.
Allegheny Mineral Corporation v. Scrubgrass Generating Company, L.P., Butler County Court of Common Pleas, No. AD 19-11039
In November 2019, Allegheny Mineral Corporation ("Allegheny Mineral") filed suit against the Company seeking payment of approximately $1,200,000 in outstanding invoices. In response, the Company filed counterclaims against Allegheny Mineral asserting breach of contract, breach of express and implied warranties, and fraud in the amount of $1,300,000 . After unsuccessful mediation in August 2020, the parties again attempted to mediate the case on October 26, 2022, which led to a mutual agreement to settlement terms of a $300,000 cash payment, and a supply agreement for limestone. Subject to completion of the settlement terms, this matter has been stayed in Butler County Court and the outstanding litigation has been terminated.
Federal Energy Regulatory Commission ("FERC") Matters
On November 19, 2021, Scrubgrass received a notice of breach from PJM Interconnection, LLC alleging that Scrubgrass breached Interconnection Service Agreement – No. 1795 (the “ISA”) by failing to provide advance notice to PJM Interconnection, LLC and Mid-Atlantic Interstate Transmission, LLC pursuant to ISA, Appendix 2, section 3, of modifications made to the Scrubgrass Plant. On December 16, 2021, Scrubgrass responded to the notice of breach and respectfully disagreed that the ISA had been breached. On January 7, 2022, Scrubgrass participated in an information gathering meeting with representatives from PJM regarding the notice of breach and Scrubgrass continues to work with PJM regarding the dispute, including conducting a necessary study agreement with respect to the Scrubgrass Plant. On January 20, 2022, the Company sent PJM a letter regarding the installation of a resistive computational load bank at the Panther Creek Plant. On March 1, 2022, the Company executed a necessary study agreement with respect to the Panther Creek Plant. On May 11, 2022, the Division of Investigations of the FERC Office of Enforcement (“OE”) informed the Company that the Office of Enforcement is conducting a non-public preliminary investigation concerning Scrubgrass’ compliance with various aspects of the PJM tariff. The OE requested that the Company provide certain information and documents concerning Scrubgrass’ operations by June 10, 2022. On July 13, 2022, after being granted an extension to respond by the OE, the Company submitted a formal response to the OE's request. Since the Company submitted its formal response to the OE's request, the Company has had further discussions with the OE regarding the Company's formal response. The OE's investigation, and discussions between the OE and the Company, regarding potential instances of non-compliance is continuing. The Company does not believe the PJM notice of breach, the Panther Creek necessary study agreement, or the preliminary investigation by the OE will have a material adverse effect on the Company’s reported financial position or results of operations, although the Company cannot predict with certainty the final outcome of these proceedings.
Winter v. Stronghold Digital Mining Inc., et al., U.S. District Court for the Southern District of New York
On April 14, 2022, the Company, and certain of our current and former directors, officers and underwriters were named in a putative class action complaint filed in the United States District Court for the Southern District of New York. In the complaint, the plaintiffs allege that the Company made misleading statements and/or failed to disclose material facts in violation of Section 11 of the Securities Act, 15 U.S.C. §77k and Section 15 of the Securities Act, about the Company’s business, operations, and prospects in the Company’s registration statement on Form S-1 related to its initial public offering, and when subsequent disclosures were made regarding these operational issues when the Company announced its fourth quarter and full year 2021 financial results, the Company’s stock price fell, causing significant losses and damages. As relief, the plaintiffs are seeking, among other things, compensatory damages. On August 4, 2022, co-lead plaintiffs were appointed. On October 18, 2022, the plaintiffs filed an amended complaint. On December 19, 2022, the Company filed a Motion to Dismiss. On February 17, 2023, the plaintiffs filed an opposition to the defendant's motion to dismiss. On March 20, 2023, the Company filed a reply brief in further support of its motion to dismiss. The Company cannot predict when the court will rule on its motion. The defendants believe the allegations in the initial complaint are without merit and intend to defend the suit vigorously.
Mark Grams v. Treis Blockchain, LLC, Chain Enterprises, LLC, Cevon Technologies, LLC, Stronghold Digital Mining, LLC, David Pence, Michael Bolick, Senter Smith, Brian Lambretti and John Chain
On May 4, 2023, Stronghold Digital Mining, LLC, a subsidiary of the Company, was named as one of several defendants in a complaint filed in the United States District Court for the Middle District of Alabama Eastern Division (the "Grams Complaint"). The Grams Complaint alleges that certain Bitcoin miners that the Company purchased from Treis Blockchain,
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NOTE 11 – REDEEMABLE COMMON STOCK
Class V common stock represented 38.8 % and 45.1 % ownership of Stronghold LLC, as of March 31, 2023, and December 31, 2022, respectively, granting the 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 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 March 31, 2023.
The Company recorded redeemable common stock as presented in the table below.
| Common - Class V | |||||||||||
| Shares | Amount | ||||||||||
| Balance - December 31, 2022 | $ | ||||||||||
| Net loss attributable to noncontrolling interest | — | ( | |||||||||
Maximum redemption right valuation | — | ||||||||||
| Balance - March 31, 2023 | $ | ||||||||||
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 38.8 % and 45.1 % ownership of Stronghold LLC, as of March 31, 2023, and December 31, 2022, respectively, granting the owners of Q Power economic rights and, as a holder, 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.
| Class V Common Stock Outstanding | Fair Value Price | Temporary Equity Adjustments | |||||||||
| Balance - December 31, 2022 | $ | $ | |||||||||
| Net loss for the three months ended March 31, 2023 | ( | ||||||||||
Adjustment of temporary equity to redemption amount (1) | |||||||||||
| Balance - March 31, 2023 | $ | $ | |||||||||
(1) Temporary equity adjustment based on Class V common stock outstanding at fair value price at each quarter end, using a 10-day variable weighted average price ("VWAP") of trading dates including the closing date. | |||||||||||
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NOTE 13 – STOCK-BASED COMPENSATION
Stock-based compensation expense was $2,449,324 and $2,592,995 for the three months ended March 31, 2023, and 2022, respectively. There was no income tax benefit related to stock-based compensation expense due to the Company having a full valuation allowance recorded against its deferred income tax assets.
On March 15, 2023, the Company entered into award agreements with certain executive officers. In total, the executive officers were granted 2,725,000 restricted stock units in exchange for the cancellation of 986,688 stock options and 250,000 performance share units previously granted to the executive officers. All restricted stock units were granted under the Company’s previously adopted Omnibus Incentive Plan, dated October 19, 2021. The Company evaluated this modification under ASC 718, Compensation – Stock Compensation, and determined there was no significant impact on the Company's results of operations for the three months ended March 31, 2023.
NOTE 14 – WARRANTS
The following table summarizes outstanding warrants as of March 31, 2023.
| Number of Warrants | |||||
| Outstanding as of December 31, 2022 | |||||
| Issued | |||||
| Exercised | ( | ||||
| Outstanding as of March 31, 2023 | |||||
B&M Warrant
On March 28, 2023, as part of the B&M Settlement described in Note 7 – Debt, the Company issued a stock purchase warrant to B&M providing for the right to purchase from the Company 3,000,000 shares of Class A common stock, par value $0.0001 per share, at an exercise price of $0.0001 per warrant share.
May 2022 Private Placement
On May 15, 2022, the Company entered into a note and warrant purchase agreement, by and among the Company and the purchasers thereto, whereby the Company agreed to issue and sell (i) $33,750,000 aggregate principal amount of 10.00 % unsecured convertible promissory notes and (ii) warrants representing the right to purchase up to 6,318,000 shares of Class A common stock of the Company with an exercise price per share equal to $2.50 . The promissory notes and warrants were sold for aggregate consideration of approximately $27 million.
On August 16, 2022, the Company amended the note and warrant purchase agreement, such that $11.25 million of the outstanding principal was exchanged for the execution of an amended and restated warrant agreement pursuant to which the strike price of the 6,318,000 warrants was reduced from $2.50 to $0.01 . Refer to Note 15 – Private Placements for additional details.
During the three months ended March 31, 2023, 2,277,000 of warrants issued in connection with the May 2022 Private Placement, or subsequent transactions associated with the unsecured convertible promissory notes, were exercised.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements with Armistice Capital Master Fund Ltd. ("Armistice") and Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of 2,274,350 and 602,409 shares of Class A common stock, respectively, and warrants to purchase an aggregate of 5,602,409 shares of Class A common stock, at an initial exercise price of $1.75 per share. Refer to Note 15 – Private Placements for additional details. As part of the transaction, Armistice purchased the pre-funded warrants for 2,725,650 shares of Class A
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common stock at a purchase price of $1.60 per warrant. The pre-funded warrants have an exercise price of $0.0001 per warrant share.
As of and during the three months ended March 31, 2023, the pre-funded warrants for 2,725,650 shares of Class A common stock have been exercised.
In April 2023, the Company, Armistice and Mr. Beard entered into amendments to, among other things, adjust the strike price of the remaining outstanding warrants from $1.75 per share to $1.01 per share. Refer to Note 15 – Private Placements for additional details.
April 2023 Private Placement
On April 20, 2023, the Company entered into Securities Purchase Agreements with an institutional investor and Greg Beard for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $1.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $1.10 per share (the “April 2023 Private Placement”). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 9,000,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 1,000,000 shares of Class A common stock, in each case at a price of $1.00 9,000,000 shares and 1,000,000 shares, respectively, of Class A common stock. Refer to Note 15 – Private Placements for additional details.
NOTE 15 – PRIVATE PLACEMENTS
May 2022 Private Placement
On May 15, 2022, the Company entered into a note and warrant purchase agreement (the “Purchase Agreement”), by and among the Company and the purchasers thereto (collectively, the “May Purchasers”), whereby the Company agreed to issue and sell to the May Purchasers, and the May Purchasers agreed to purchase from the Company, (i) $33,750,000 aggregate principal amount of 10.00 % unsecured convertible promissory notes (the “May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the right to purchase up to 6,318,000 shares of Class A common stock, of the Company with an exercise price per share equal to $2.50 , on the terms and subject to the conditions set forth in the Purchase Agreement (collectively, the “2022 Private Placement”). The Purchase Agreement contained representations and warranties by the Company and the May Purchasers that are customary for transactions of this type. The May 2022 Notes and the May 2022 Warrants were sold for aggregate consideration of approximately $27.0 million.
In connection with the 2022 Private Placement, the Company undertook to negotiate with the May Purchasers and to file a certificate of designation with the State of Delaware, following the closing of the 2022 Private Placement, for the terms of a new series of preferred stock.
In connection with the 2022 Private Placement, the May 2022 Warrants were issued pursuant to the Warrant Agreement. The May 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. The May 2022 Warrants are exercisable for a five-year period from the closing.
The issuance of the May 2022 Notes was within the scope of ASC 480-10 and, therefore, was initially measured at fair value (consistent with ASC 480-10-30-7). Additionally, under the guidance provided by ASC 815-40-15-7, the Company determined that the May 2022 Warrants were indexed to the Company's stock. As a result, the May 2022 Warrants were initially recorded at their fair value within equity. The May 2022 Notes were valued using the gross yield method under the income approach. As of the issuance date of May 15, 2022, a calibration analysis was performed by back solving the implied yield associated with the May 2022 Notes, such that the total value of the May 2022 Notes and the May 2022 Warrants equaled the purchase amount. The calibrated yield was then rolled forward for changes to the risk-free rate and option-adjusted spreads to the August 16, 2022, valuation date to value the May 2022 Notes.
On August 16, 2022, the Company entered into an amendment to the Purchase Agreement, by and among the Company and the May Purchasers, whereby the Company agreed to amend the Purchase Agreement, such that $11.25 million of the outstanding principal was exchanged for the May Purchaser's execution of an amended and restated warrant agreement pursuant to which the strike price of the 6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01 . After giving effect to the principal reduction and amended and restated warrants, the Company was to continue to make subsequent monthly, payments to the May Purchasers on the fifteenth (15th) day of each of November 2022, December 2022, January 2023, and February 2023. The Company was able to elect to pay each such payment (A) in cash or (B) in shares of
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common stock, in each case, at a twenty percent (20 %) discount to the average of the daily VWAPs for each of the twenty (20 ) consecutive trading days preceding the payment date.
Series C Convertible Preferred Stock
On December 30, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with the holders (the “Purchasers”) of the May 2022 Notes (as defined above) whereby the May 2022 Notes were to be exchanged for shares of a new series of convertible preferred stock, par value $0.0001 per share (the “Series C Preferred Stock”) that, among other things, will convert into shares of Class A common stock or pre-funded warrants that may be exercised for shares of Class A common stock, at a conversion rate equal to the stated value of $1,000 per share plus cash in lieu of fractional shares, divided by a conversion price of $0.40 per share of Class A common stock. 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 3,825,000 shares of the Company’s Class A common stock. The rights and preferences of the Series C Preferred Stock are designated in a certificate of designation, and the Company provided certain registration rights to the Purchasers.
September 2022 Private Placement
On September 13, 2022, the Company entered into Securities Purchase Agreements with Armistice and Greg Beard, the Company's chairman and chief executive officer (together with Armistice, the “September 2022 Private Placement Purchasers”), for the purchase and sale of 2,274,350 and 602,409 shares, respectively, of Class A common stock, par value $0.0001 per share at a purchase price of $1.60 and $1.66 , respectively, and warrants to purchase an aggregate of 5,602,409 shares of Class A common stock, at an initial exercise price of $1.75 per share (subject to certain adjustments). Subject to certain ownership limitations, such warrants 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 2,725,650 shares of Class A common stock at a purchase price of $1.60 per pre-funded warrant. The pre-funded warrants have an exercise price of $0.0001 per warrant share. The transaction closed on September 19, 2022. The gross proceeds from the sale of such securities, before deducting offering expenses, was approximately $9.0 million.
The warrant liabilities are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as "changes in fair value of warrant liabilities" in the consolidated statements of operations. The fair value of the warrant liabilities was estimated as of March 31, 2023, using a Black-Scholes model with significant inputs as follows:
| March 31, 2023 | |||||
| Expected volatility | % | ||||
| Expected life (in years) | |||||
| Risk-free interest rate | % | ||||
| Expected dividend yield | % | ||||
| Fair value | $ | ||||
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 $1.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $1.10 per share (subject to certain adjustments in accordance with the terms thereof). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 9,000,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of