SEC Filing | Stronghold Digital Mining.

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sdig-20230930

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, 2023


☐			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, 28th Floor New York, New York			10022
(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
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 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

☐

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 ☒

As of November 10, 2023, the registrant had outstanding 7,962,361 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 2,405,760 shares of Class V common stock, par value $0.0001 per share. On May 15, 2023, the Company effected a 1-for-10 reverse stock split ("Reverse Stock Split") of its Class A common stock, par value $0.0001 per share, and Class V common stock, par value $0.0001 per share. All share and per share amounts and related stockholders' equity balances presented herein have been retroactively adjusted to reflect the Reverse Stock Split.

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	30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4.	Controls and Procedures	46
Part II	Other Information		48
	Item 1.	Legal Proceedings	48
	Item 1A.	Risk Factors	48
	Item 2.	Unregistered Sales of Equity and Use of Proceeds	51
	Item 3.	Defaults Upon Senior Securities	51
	Item 4.	Mine Safety Disclosures	51
	Item 5.	Other Information	51
	Item 6.	Exhibits	87

Part I - Financial Information

Item 1. Financial Statements

STRONGHOLD DIGITAL MINING, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


	September 30, 2023		December 31, 2022
ASSETS:
Cash and cash equivalents	$	4,979,299	$	13,296,703
Digital currencies	641,999		109,827
Accounts receivable	486,706		10,837,126
Inventory	3,143,284		4,471,657
Prepaid insurance	1,842,250		5,471,498
Due from related parties	97,288		73,122
Other current assets	1,137,834		1,381,737
Total current assets	12,328,660		35,641,670
Equipment deposits	—		10,081,307
Property, plant and equipment, net	156,481,678		167,204,681
Operating lease right-of-use assets	1,552,735		1,719,037
Land	1,748,440		1,748,440
Road bond	211,958		211,958
Security deposits	348,888		348,888
Other noncurrent assets	155,992		—
TOTAL ASSETS	$	172,828,351	$	216,955,981
LIABILITIES:
Accounts payable	$	14,666,753	$	27,540,317
Accrued liabilities	9,638,819		8,893,248
Financed insurance premiums	1,112,558		4,587,935
Current portion of long-term debt, net of discounts and issuance fees	1,654,634		17,422,546
Current portion of operating lease liabilities	748,369		593,063
Due to related parties	451,367		1,375,049
Total current liabilities	28,272,500		60,412,158
Asset retirement obligation	1,062,677		1,023,524
Warrant liabilities	5,434,420		2,131,959
Long-term debt, net of discounts and issuance fees	57,653,823		57,027,118
Long-term operating lease liabilities	899,576		1,230,001
Contract liabilities	560,510		351,490
Total liabilities	93,883,506		122,176,250
COMMITMENTS AND CONTINGENCIES (NOTE 10)
REDEEMABLE COMMON STOCK:
Common Stock – Class V; $0.0001 par value; 34,560,000 shares authorized; 2,405,760 and 2,605,760 shares issued and outstanding as of September 30, 2023, and December 31, 2022, respectively.	10,563,277		11,754,587
Total redeemable common stock	10,563,277		11,754,587
STOCKHOLDERS’ EQUITY (DEFICIT):
Common Stock – Class A; $0.0001 par value; 685,440,000 shares authorized; 7,876,688 and 3,171,022 shares issued and outstanding as of September 30, 2023, and December 31, 2022, respectively.	788		317
Series C convertible preferred stock; $0.0001 par value; 23,102 shares authorized; 21,572 and 0 shares issued and outstanding as of September 30, 2023, and December 31, 2022, respectively.	2		—
Accumulated deficits	(321,126,596)		(240,443,302)
Additional paid-in capital	389,507,374		323,468,129
Total stockholders' equity	68,381,568		83,025,144
Total redeemable common stock and stockholders' equity	78,944,845		94,779,731
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY	$	172,828,351	$	216,955,981

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

STRONGHOLD DIGITAL MINING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
OPERATING REVENUES:
Cryptocurrency mining	$	12,684,894	$	12,283,695	$	37,764,990	$	50,715,424
Energy	1,210,811		13,071,894		4,682,590		29,807,512
Cryptocurrency hosting	3,789,375		93,279		9,195,072		282,327
Capacity	—		878,610		1,442,067		4,591,038
Other	41,877		39,171		142,194		91,941
Total operating revenues	17,726,957		26,366,649		53,226,913		85,488,242
OPERATING EXPENSES:
Fuel	8,556,626		10,084,466		22,262,141		29,292,616
Operations and maintenance	6,961,060		19,528,088		24,206,080		47,449,177
General and administrative	6,598,951		11,334,212		25,145,444		32,848,291
Depreciation and amortization	9,667,213		12,247,245		26,025,021		37,234,126
Loss on disposal of fixed assets	—		461,940		108,367		2,231,540
Realized gain on sale of digital currencies	(131,706)		(185,396)		(725,139)		(936,506)
Realized loss on sale of miner assets	—		—		—		8,012,248
Impairments on miner assets	—		11,610,000		—		16,600,000
Impairments on digital currencies	357,411		465,651		683,241		8,176,868
Impairments on equipment deposits	5,422,338		—		5,422,338		12,228,742
Total operating expenses	37,431,893		65,546,206		103,127,493		193,137,102
NET OPERATING LOSS	(19,704,936)		(39,179,557)		(49,900,580)		(107,648,860)
OTHER INCOME (EXPENSE):
Interest expense	(2,441,139)		(3,393,067)		(7,428,530)		(10,813,302)
Loss on debt extinguishment	—		(28,697,021)		(28,960,947)		(28,697,021)
Impairment on assets held for sale	—		(4,159,004)		—		(4,159,004)
Gain on extinguishment of PPP loan	—		—		—		841,670
Changes in fair value of warrant liabilities	(180,838)		1,302,065		5,580,453		1,302,065
Realized gain on sale of derivative contract	—		90,953		—		90,953
Changes in fair value of forward sale derivative	—		—		—		3,435,639
Changes in fair value of convertible note	—		(1,204,739)		—		(2,167,500)
Other	15,000		20,000		45,000		50,000
Total other income (expense)	(2,606,977)		(36,040,813)		(30,764,024)		(40,116,500)
NET LOSS	$	(22,311,913)	$	(75,220,370)	$	(80,664,604)	$	(147,765,360)
NET LOSS attributable to noncontrolling interest	(5,188,727)		(44,000,155)		(26,663,731)		(86,435,347)
NET LOSS attributable to Stronghold Digital Mining, Inc.	$	(17,123,186)	$	(31,220,215)	$	(54,000,873)	$	(61,330,013)
NET LOSS attributable to Class A common shareholders:
Basic	$	(2.26)	$	(12.67)	$	(8.93)	$	(28.17)
Diluted	$	(2.26)	$	(12.67)	$	(8.93)	$	(28.17)
Weighted average number of Class A common shares outstanding:
Basic	7,569,511		2,463,163		6,047,891		2,177,206
Diluted	7,569,511		2,463,163		6,047,891		2,177,206

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

STRONGHOLD DIGITAL MINING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Three Months Ended September 30, 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 – July 1, 2023	21,572	$	2	—	$	—	6,055,618	$	606	$	(298,199,062)	$	380,538,701	$	82,340,247
Net loss attributable to Stronghold Digital Mining, Inc.	—	—		—	—		—	—		(17,123,186)		—		(17,123,186)
Net loss attributable to noncontrolling interest	—	—		—	—		—	—		(5,188,727)		—		(5,188,727)
Maximum redemption right valuation [Common V Units]	—	—		—	—		—	—		(615,621)		—		(615,621)
Stock-based compensation	—	—		—	—		—	—		—		787,811		787,811
Vesting of restricted stock units	—	—		—	—		83,753	8		—		(8)		—

Exercised warrants	—	—		—	—		474,612	48		—		(48)		—
Redemption of Class V shares	—	—		—	—		—	—		—		—		—
Issuance of common stock to settle payables	—	—		—	—		12,959	1		—		59,994		59,995
Issuance of common stock - April 2023 Private Placement	—	—		—	—		—	—		—		—		—
Issuance of common stock - ATM Agreement	—	—		—	—		1,249,746	125		—		8,120,924		8,121,049
Balance – September 30, 2023	21,572	$	2	—	$	—	7,876,688	$	788	$	(321,126,596)	$	389,507,374	$	68,381,568


	Three Months Ended September 30, 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 – July 1, 2022	—	$	—	1,152,000	$	35,937,061	2,003,488	$	200	$	(155,708,865)	$	255,375,056	$	135,603,452
Net loss attributable to Stronghold Digital Mining, Inc.	—	—		—	—		—	—		(31,220,215)		—		(31,220,215)
Net loss attributable to noncontrolling interest	—	—		—	(1,797,014)		—	—		(42,203,141)		—		(44,000,155)
Maximum redemption right valuation [Common V Units]	—	—		—	—		—	—		17,806,377		—		17,806,377
Stock-based compensation	—	—		—	—		—	—		—		3,377,499		3,377,499
Issuance of common stock - September 2022 Private Placement	—	—		—	—		287,676	30		—		2,241,280		2,241,310
Vesting of restricted stock units	—	—		—	—		15,218	1		—		(1)		—
McClymonds arbitration award - paid by Q Power	—	—		—	—		—	—		—		5,038,122		5,038,122
Warrants issued and outstanding	—	—		—	—		—	—		—		13,380,510		13,380,510
Balance – September 30, 2022	—	$	—	1,152,000	$	34,140,047	2,306,382	$	231	$	(211,325,844)	$	279,412,466	$	102,226,900

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

STRONGHOLD DIGITAL MINING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Nine Months Ended September 30, 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	—	$	—	—	$	—	3,171,022	$	317	$	(240,443,302)	$	323,468,129	$	83,025,144
Net loss attributable to Stronghold Digital Mining, Inc.	—	—		—	—		—	—		(54,000,873)		—		(54,000,873)
Net loss attributable to noncontrolling interest	—	—		—	—		—	—		(26,663,731)		—		(26,663,731)
Maximum redemption right valuation [Common V Units]	—	—		—	—		—	—		(18,690)		—		(18,690)
Stock-based compensation	—	—		—	—		250,000	25		—		7,603,834		7,603,859
Vesting of restricted stock units	—	—		—	—		337,515	34		—		(34)		—
Warrants issued and outstanding	—	—		—	—		—	—		—		1,739,882		1,739,882
Exercised warrants	—	—		—	—		1,608,195	161		—		155		316
Redemption of Class V shares	—	—		—	—		200,000	20		—		1,209,980		1,210,000
Issuance of common stock to settle payables	—	—		—	—		110,289	11		—		1,033,178		1,033,189
Issuance of common stock - April 2023 Private Placement	—	—		—	—		566,661	57		—		941,595		941,652
Issuance of common stock - ATM Agreement	—	—		—	—		1,250,506	125		—		8,123,749		8,123,874
Issuance of Series C convertible preferred stock	23,102	2		—	—		—	—		—		45,386,944		45,386,946
Conversion of Series C convertible preferred stock	(1,530)	—		—	—		382,500	38		—		(38)		—
Balance – September 30, 2023	21,572	$	2	—	$	—	7,876,688	$	788	$	(321,126,596)	$	389,507,374	$	68,381,568


	Nine Months Ended September 30, 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	—	$	—	1,152,000	$	37,670,161	2,001,607	$	200	$	(338,709,688)	$	241,874,549	$	(59,164,778)
Net loss attributable to Stronghold Digital Mining, Inc.	—	—		—	—		—	—		(61,330,013)		—		(61,330,013)
Net loss attributable to noncontrolling interest	—	—		—	(3,530,114)		—	—		(82,905,233)		—		(86,435,347)
Maximum redemption right valuation [Common V Units]	—	—		—	—		—	—		271,619,090		—		271,619,090
Stock-based compensation	—	—		—	—		—	—		—		9,123,124		9,123,124
Issuance of common stock - September 2022 Private Placement	—	—		—	—		287,676	30		—		2,241,280		2,241,310
Vesting of restricted stock units	—	—		—	—		17,099	1		—		(1)		—
McClymonds arbitration award - paid by Q Power	—	—		—	—		—	—		—		5,038,122		5,038,122
Warrants issued and outstanding	—	—		—	—		—	—		—		21,135,392		21,135,392
Balance – September 30, 2022	—	$	—	1,152,000	$	34,140,047	2,306,382	$	231	$	(211,325,844)	$	279,412,466	$	102,226,900

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

STRONGHOLD DIGITAL MINING, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended
	September 30, 2023		September 30, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(80,664,604)	$	(147,765,360)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation and amortization	26,025,021		37,234,126
Accretion of asset retirement obligation	39,153		18,253
Gain on extinguishment of PPP loan	—		(841,670)
Loss on disposal of fixed assets	108,367		2,231,540
Realized loss on sale of miner assets	—		8,012,248
Change in value of accounts receivable	1,867,506		—
Amortization of debt issuance costs	161,093		2,681,039
Stock-based compensation	7,603,859		9,123,124
Loss on debt extinguishment	28,960,947		28,697,021
Impairment on assets held for sale	—		4,159,004
Impairments on equipment deposits	5,422,338		12,228,742
Impairments on miner assets	—		16,600,000
Changes in fair value of warrant liabilities	(5,580,453)		(1,302,065)
Changes in fair value of forward sale derivative	—		(3,435,639)
Realized gain on sale of derivative contract	—		(90,953)
Forward sale contract prepayment	—		970,000
Changes in fair value of convertible note	—		2,167,500
Other	(229,485)		—
(Increase) decrease in digital currencies:
Mining revenue	(43,778,958)		(50,715,424)
Net proceeds from sale of digital currencies	42,563,545		46,209,822
Impairments on digital currencies	683,241		8,176,868
(Increase) decrease in assets:
Accounts receivable	8,129,033		1,336,817
Prepaid insurance	1,399,254		5,321,521
Due from related parties	(91,617)		(58,735)
Inventory	1,328,373		55,538
Other assets	9,666		(866,298)
Increase (decrease) in liabilities:
Accounts payable	(1,445,109)		4,878,600
Due to related parties	(239,230)		781,485
Accrued liabilities	875,203		(407,909)
Other liabilities, including contract liabilities	(211,225)		(55,742)
NET CASH FLOWS USED IN OPERATING ACTIVITIES	(7,064,082)		(14,656,547)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(14,743,269)		(68,052,422)
Proceeds from sale of equipment deposits	—		13,844,780
Equipment purchase deposits - net of future commitments	—		(13,656,428)
NET CASH FLOWS USED IN INVESTING ACTIVITIES	(14,743,269)		(67,864,070)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt	(3,196,644)		(34,490,545)
Repayments of financed insurance premiums	(1,474,889)		(3,992,336)
Proceeds from debt, net of issuance costs paid in cash	(147,385)		97,337,454
Proceeds from private placements, net of issuance costs paid in cash	9,824,567		8,599,440
Proceeds from ATM, net of issuance costs paid in cash	8,483,982		—
Proceeds from exercise of warrants	316		—
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES	13,489,947		67,454,013
NET DECREASE IN CASH AND CASH EQUIVALENTS	(8,317,404)		(15,066,604)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	13,296,703		31,790,115
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	4,979,299	$	16,723,511

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

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 focused on mining Bitcoin and environmental remediation and reclamation services. The Company wholly owns and operates two coal refuse power generation facilities that it has upgraded: (i) the Company's first reclamation facility located on a 650-acre site in Scrubgrass Township, Venango County, Pennsylvania, which the Company acquired the remaining interest of in April 2021, and has the capacity to generate approximately 83.5 megawatts (“MW”) of electricity (the "Scrubgrass Plant"); and (ii) a facility located near Nesquehoning, Pennsylvania, which the Company acquired in November 2021, and has the capacity to generate approximately 80 MW of electricity (the "Panther Creek Plant," and collectively with the Scrubgrass Plant, the "Plants"). Both facilities qualify as an Alternative Energy System because coal refuse is classified under Pennsylvania law as a Tier II Alternative Energy Source (large-scale hydropower is also classified in this tier). The Company is committed to generating energy and managing its assets sustainably, and the Company believes that it is one of the first vertically integrated crypto asset mining companies with a focus on environmentally beneficial operations.

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 miners as well as 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 September 30, 2023, the unaudited condensed consolidated statements of operations and stockholders' equity for the three and nine months ended September 30, 2023, and 2022, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 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 and nine months ended September 30, 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.

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

On May 15, 2023, following approval by the Board of Directors (the "Board") and stockholders of the Company, the Company effected a 1-for-10 reverse stock split ("Reverse Stock Split") of its Class A common stock, par value $0.0001 per share, and Class V common stock, par value $0.0001 per share. The par values of the Company's Class A and Class V common stock were not adjusted as a result of the Reverse Stock Split. All share and per share amounts and related stockholders' equity balances presented herein have been retroactively adjusted to reflect the Reverse Stock Split.

Cash and Cash Equivalents

As of September 30, 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.

Reclassification

During the first quarter of 2023, the Company revised its accounting policy to reclassify the presentation of imported power charges. Imported power charges are now recorded within fuel expenses, whereas they were previously netted against energy revenue. Prior periods have been reclassified to conform to the current period presentation. The reclassification increased 2022 energy revenues and fuel expenses as shown in the table below. The reclassification had no impact on net operating income (loss), earnings per share or equity.


	Three Months Ended
	March 31, 2022		June 30, 2022		September 30, 2022		December 31, 2022
Energy revenues - previously disclosed	$	8,362,801	$	7,129,732	$	11,454,016	$	14,247,688
Reclassification: imported power charges	681,591		561,494		1,617,878		1,329,753
Energy revenues - restated	$	9,044,392	$	7,691,226	$	13,071,894	$	15,577,441

Fuel expenses - previously disclosed	$	9,338,394	$	8,626,671	$	8,466,588	$	2,348,457
Reclassification: imported power charges	681,591		561,494		1,617,878		1,329,753
Fuel expenses - restated	$	10,019,985	$	9,188,165	$	10,084,466	$	3,678,210

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 September 30, 2023, the Company held an aggregate amount of $641,999 in digital currencies comprised of unrestricted Bitcoin. Changes in digital currencies consisted of the following for the three and nine months ended September 30, 2023, and 2022:


	Three Months Ended				Nine Months Ended
	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Digital currencies at beginning of period	$	1,429,653	$	5,131,987	$	109,827	$	10,417,865
Additions of digital currencies	15,069,008		12,283,695		43,778,958		50,715,424
Realized gain on sale of digital currencies	131,706		185,396		725,139		936,506
Impairment losses	(357,411)		(465,651)		(683,241)		(8,176,868)
Proceeds from sale of digital currencies	(15,630,957)		(10,388,828)		(43,288,684)		(47,146,328)
Collateral sold to close derivative	—		(4,559,895)		—		(4,559,895)
Digital currencies at end of period	$	641,999	$	2,186,704	$	641,999	$	2,186,704

Digital currencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital currency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. However, per ASC 350-30-35-18A, given the existence of a quoted price for Bitcoin on active markets, the Company exercises its unconditional option to bypass the qualitative assessment for its indefinite-lived digital currency assets in any period and proceeds directly to performing a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the digital currency asset. Subsequent reversal of impairment losses is not permitted. The Company performed impairment tests on its digital currencies for the periods presented in the table above and recognized impairment losses of $357,411 and $465,651 for the three months ended September 30, 2023, and 2022, respectively, and $683,241 and $8,176,868 for the nine months ended September 30, 2023, and 2022, respectively.

On December 15, 2021, the Company entered into a forward sale with NYDIG Derivatives Trading LLC ("NYDIG Trading") providing for the sale of 250 Bitcoin at a floor price of $28,000 per Bitcoin (such sale, the “Forward Sale”). Pursuant to the Forward Sale, NYDIG Trading paid the Company $7.0 million, an amount equal to the floor price per Bitcoin on December 16, 2021, multiplied by the 250 Bitcoin provided for sale.

On March 16, 2022, the Company executed additional option transactions. The net effect of those transactions was to adjust the capped final sale price to $50,000 from $85,500 per Bitcoin, resulting in $970,000 of proceeds to the Company. On July 27, 2022, the Company exited the variable prepaid forward sale contract derivative with NYDIG Trading. As a result, the Company delivered the restricted digital assets previously pledged as collateral to NYDIG Trading.

NOTE 3 – INVENTORY

Inventory consisted of the following components as of September 30, 2023, and December 31, 2022:


	September 30, 2023		December 31, 2022
Waste coal	$	2,977,652	$	4,147,369
Fuel oil	85,049		143,592
Limestone	80,583		180,696
Inventory	$	3,143,284	$	4,471,657

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 September 2023, the Company evaluated the MinerVa Semiconductor Corp ("MinerVa") equipment deposits for impairment under the provisions of ASC 360, Property, Plant and Equipment. The Company is pursuing legal action through the dispute resolution process, which represents an indicator for impairment per ASC 360-10-35-21, as the

Company no longer expects equipment deliveries. As a result, the Company impaired the remaining MinerVa equipment deposits balance of $5,422,338 during the third quarter of 2023.

During 2022, due to continual delays in the anticipated delivery date of the remaining MinerVa miners, and the Company's declaration of an impasse, and adherence to the dispute resolution provision of the MinerVa Purchase Agreement, the Company undertook a test for recoverability under ASC 360-10-35-29 and a further discounted fair value analysis in accordance with ASC 820, Fair Value Measurement. The difference between the discounted 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 $0 as of September 30, 2023:


Vendor	Model	Count	Delivery Timeframe	Total Commitments		Transferred to PP&E (1)		Impairment		Sold		Equipment Deposits
MinerVa	MinerVa MV7	15,000	Oct '21 - TBD	$	68,887,550	$	(37,415,271)	$	(22,771,080)	$	(8,701,199)	$	—
Totals		15,000		$	68,887,550	$	(37,415,271)	$	(22,771,080)	$	(8,701,199)	$	—

(1) Miners that were delivered and physically placed in service were 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 September 30, 2023, and December 31, 2022:


	Useful Lives (Years)	September 30, 2023		December 31, 2022
Electric plant	10 - 60	$	66,836,615	$	66,295,809
Strongboxes and power transformers	8 - 30	54,588,284		52,318,704
Machinery and equipment	5 - 20	16,187,810		18,131,977
Rolling stock	5 - 7	261,000		261,000
Cryptocurrency machines and powering supplies	2 - 3	101,687,166		81,945,396
Computer hardware and software	2 - 5	86,419		17,196
Vehicles and trailers	2 - 7	659,133		659,133
Leasehold improvements	2 - 3	2,935,855		—
Construction in progress	Not Depreciable	10,781,505		19,553,826
Asset retirement cost	10 - 30	580,452		580,452
		254,604,239		239,763,493
Accumulated depreciation and amortization		(98,122,561)		(72,558,812)
Property, plant and equipment, net		$	156,481,678	$	167,204,681

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 $10,781,505 as of September 30, 2023, represents open contracts for future projects.

Depreciation and amortization expense charged to operations was $9,667,213 and $12,247,245 for the three months ended September 30, 2023, and 2022, respectively, including depreciation of assets under finance leases of $122,762 and $83,642 for the three months ended September 30, 2023, and 2022, respectively.

Depreciation and amortization expense charged to operations was $26,025,021 and $37,234,126 for the nine months ended September 30, 2023, and 2022, respectively, including depreciation of assets under finance leases of $368,285 and $250,927 for the nine months ended September 30, 2023, and 2022, respectively.

The gross value of assets under finance leases and the related accumulated amortization approximated $2,678,265 and $1,304,317 as of September 30, 2023, respectively, and $2,890,665 and $1,074,091 as of December 31, 2022, respectively.

NOTE 6 – ACCRUED LIABILITIES

Accrued liabilities consisted of the following as of September 30, 2023, and December 31, 2022:


	September 30, 2023		December 31, 2022
Accrued legal and professional fees	$	528,757	$	1,439,544
Accrued interest	21,485		1,343,085
Accrued sales and use tax	5,659,897		5,150,659
Accrued plant utilities and fuel	2,166,459		—
Accrued salaries and benefits	145,516		285,300
Other	1,116,705		674,660
Accrued liabilities	$	9,638,819	$	8,893,248

NOTE 7 – DEBT

Total debt consisted of the following as of September 30, 2023, and December 31, 2022:


	September 30, 2023		December 31, 2022
$499,520 loan, with interest at 2.74%, due February 2024.	$	44,748	$	124,023
$499,895 loan, with interest at 3.20%, due November 2023.	22,351		121,470
$517,465 loan, with interest at 4.79%, due November 2024.	210,299		339,428
$585,476 loan, with interest at 4.99%, due November 2025.	388,369		513,334
$431,825 loan, with interest at 7.60%, due April 2024.	54,651		121,460
$58,149,411 Credit Agreement, with interest at 10.00% plus SOFR, due October 2025.	54,239,946		56,114,249
$33,750,000 Convertible Note, with interest at 10.00%, due May 2024.	—		16,812,500
$92,381 loan, with interest at 1.49%, due April 2026.	62,197		79,249
$64,136 loan, with interest at 11.85%, due May 2024.	20,392		39,056
$196,909 loan, with interest at 6.49%, due October 2025.	147,663		184,895
$60,679 loan, with interest at 7.60%, due March 2025.	51,399		—
$3,500,000 Promissory Note, with interest at 7.50%, due October 2025.	3,000,000		—
$1,184,935 Promissory Note, due June 2024.	1,066,442		—
Total outstanding borrowings	$	59,308,457	$	74,449,664

Current portion of long-term debt, net of discounts and issuance fees	1,654,634		17,422,546
Long-term debt, net of discounts and issuance fees	$	57,653,823	$	57,027,118

WhiteHawk Refinancing Agreement

On October 27, 2022, the Company entered into a secured credit agreement (the “Credit Agreement”) with WhiteHawk Finance LLC ("WhiteHawk") to refinance an existing equipment financing agreement, dated June 30, 2021, by and between Stronghold Digital Mining Equipment, LLC and WhiteHawk (the “WhiteHawk Financing Agreement”). Upon closing, the Credit Agreement consisted of $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.

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 are not 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. Consistent with

the First Amendment, the Company made a loan prepayment of $250,000 during the three months ended September 30, 2023. 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 September 30, 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 (z) 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 “Purchasers”) of the Company’s Amended and Restated 10% Notes (the “Amended May 2022 Notes”), providing for the exchange of the Amended May 2022 Notes (the “Exchange Agreement”) for shares of the Company’s newly-created Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”). On February 20, 2023, the transactions contemplated under the Exchange Agreement were consummated, and the Amended May 2022 Notes were deemed paid in full. Approximately $16.9 million of principal amount of debt was extinguished in exchange for the issuance of the shares of Series C Preferred Stock. As a result of this transaction, the Company incurred a loss on debt extinguishment of approximately $29 million during the first quarter of 2023. See Note 21 – Subsequent Events for additional information regarding the Exchange Agreement.

On February 20, 2023, in connection with the consummation of the Exchange Agreement, the Company entered into a Registration Rights Agreement with the Purchasers (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. The Resale Registration Statement on Form S-3 (File No. 333-271151) was filed by the Company on April 5, 2023, and declared effective by the SEC on April 14, 2023.

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 300,000 shares of Class A common stock (the "B&M Warrant"). The B&M Note has no definitive payment schedule or term. Pursuant to the B&M Settlement, B&M released 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 is 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%). As of September 30, 2023, the Company paid $500,000 of principal pursuant to the B&M Note.

Canaan Promissory Note

On July 19, 2023, the Company entered into a Sales and Purchase Contract with Canaan Inc. ("Canaan") whereby the Company purchased 2,000 A1346 Bitcoin miners for a total purchase price of $2,962,337. The purchase price is payable to

Canaan via an upfront payment of $1,777,402 on or before August 1, 2023, which the Company paid on July 25, 2023, and a promissory note of $1,184,935 due to Canaan in ten equal, interest-free installments on the first day of each consecutive month thereafter until the remaining promissory note balance is fully repaid. The miners were delivered and installed during the third quarter of 2023 at the Company's Panther Creek Plant.

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 $195,161 and $278,208 for the three months ended September 30, 2023, and 2022, respectively, and $495,161 and $581,708 for the nine months ended September 30, 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 September 30, 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 $324,925 and $1,304,752 for the three months ended September 30, 2023, and 2022, respectively, and $2,406,726 and $2,225,864 for the nine months ended September 30, 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 September 30, 2023, and December 31, 2022, below.

Fuel Management Agreements

Panther Creek Fuel Services LLC

Effective August 1, 2021, 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 $2,093 and $353,879 for the three months ended September 30, 2023, and 2022, respectively, and $929,942 and $1,204,938 for the nine months ended September 30, 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 September 30, 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 $0 and $247,009 for the three

months ended September 30, 2023, and 2022, respectively, and $374,944 and $580,626 for the nine months ended September 30, 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 September 30, 2023, and December 31, 2022, below.

O&M Agreements

Olympus Power LLC

On November 2, 2021, Stronghold LLC entered into an Operations, Maintenance and Ancillary Services Agreement (the “Omnibus Services Agreement”) with Olympus Stronghold Services, LLC (“Olympus Stronghold Services”), whereby Olympus Stronghold Services provided certain operations and maintenance services to Stronghold LLC and employed certain personnel to operate the Plants. Stronghold LLC reimbursed Olympus Stronghold Services for those costs incurred by Olympus Stronghold Services and approved by Stronghold LLC in the course of providing services under the Omnibus Services Agreement, including payroll and benefits costs and insurance costs. The material costs incurred by Olympus Stronghold Services were to be approved by Stronghold LLC. From November 2, 2021, until October 1, 2023, Stronghold LLC also agreed to pay Olympus Stronghold Services a management fee at the rate of $1,000,000 per year, payable monthly for services provided at each of the Plants, and an additional one-time mobilization fee of $150,000 upon the effective date of the Omnibus Services Agreement, which was deferred. Effective October 1, 2022, Stronghold LLC began paying Olympus Stronghold Services a management fee for the Panther Creek Plant in the amount of $500,000 per year, payable monthly for services provided at the Panther Creek Plant. This was a reduction of $500,000 from the $1,000,000 per year management fee that the Company was previously scheduled to pay Olympus Stronghold Services. The Company expensed $133,499 and $392,761 for the three months ended September 30, 2023, and 2022, respectively, and $603,563 and $1,189,452 for the nine months ended September 30, 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 September 30, 2023, and December 31, 2022, below. The Company expects that the Omnibus Services Agreement will be terminated, to be effective July 1, 2023. The Company expects to enter into a Transition Services Agreement whereby Stronghold LLC or its affiliates will pay a fee to Olympus Stronghold Services for certain limited operations and maintenance services.

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 $10,337 and $886,569 for the three months ended September 30, 2023, and 2022, respectively, and $1,856,501 and $2,911,738 for the nine months ended September 30, 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 September 30, 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 $0 and $2,099,306 for the three months ended September 30, 2023, and 2022, respectively, and $2,269,290 and $4,749,432 for the nine months ended September 30,

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 September 30, 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.

Effective October 1, 2022, Stronghold LLC no longer pays Olympus Stronghold Services a management fee for the Scrubgrass Plant.

Management Services Agreement

On April 19, 2023, pursuant to an independent consulting agreement the Company entered into with William Spence in connection with his departure from the Board (the "Spence Consulting Agreement"), Mr. Spence's annualized management fee of $600,000 decreased to the greater of $200,000 or 10% of any economic benefits derived from the sale of beneficial use ash, carbon sequestration efforts or alternative fuel arrangements, in each case, arranged by Mr. Spence. The previous consulting and advisory agreement with Mr. Spence was terminated in connection with entry into the Spence Consulting Agreement.

In April 2023, as part of the compensation pursuant to the Spence Consulting Agreement, Mr. Spence also received a one-time grant of 250,000 fully vested shares of the Company's Class A common stock, which has been recorded as stock-based compensation for the three and nine months ended September 30, 2023, within general and administrative expense in the condensed consolidated statements of operations.

Warrants

On September 13, 2022, the Company entered into a Securities Purchase Agreement with Greg Beard, the Company's chairman and chief executive officer, for the purchase and sale of 60,241 shares of Class A common stock and warrants to purchase 60,241 shares of Class A common stock, at an initial exercise price of $17.50 per share, subsequently amended to $10.10 per share. Refer to Note 15 – Equity Issuances for additional details.

Additionally, on April 20, 2023, Mr. Beard invested $1.0 million in exchange for 100,000 shares of Class A common stock and 100,000 pre-funded warrants. Refer to Note 15 – Equity Issuances for additional details.

Amounts due to related parties as of September 30, 2023, and December 31, 2022, were as follows:


	September 30, 2023		December 31, 2022
Coal Valley Properties, LLC	$	—	$	134,452
Q Power LLC	20,119		500,000
Coal Valley Sales, LLC	68,172		—
Panther Creek Energy Services LLC	—		10,687
Panther Creek Fuel Services LLC	—		53,482
Northampton Generating Fuel Supply Company, Inc.	363,076		594,039
Olympus Power LLC and other subsidiaries	—		78,302
Scrubgrass Energy Services LLC	—		4,087
Scrubgrass Fuel Services LLC	—		—
Due to related parties	$	451,367	$	1,375,049

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 approximately 100% of the Company's energy operations segment revenues for the three and nine months ended September 30, 2023. Additionally, CES accounted for approximately 100% of the Company's accounts receivable balance as of December 31, 2022, including approximately $5.1 million which CES received from PJM on the Company's behalf and forwarded to the Company upon receipt as of September 30, 2023. During 2023, the Company was notified of updated calculations from PJM and a FERC settlement with various parties that were assessed penalties for failing to deliver on capacity commitments during the performance assessment interval of December 2023. As a result, the Company recorded decreases in the value of accounts receivable of $724,756 and $1,867,506 within general and administrative expense related to expected reduced bonus payments in the condensed consolidated statements of operations for the three and nine months ended September 30, 2023, respectively.

The Company purchased 9% and 28% of coal from two related parties for the three months ended September 30, 2023, and 2022, respectively. For the nine months ended September 30, 2023, and 2022, the Company purchased 17% and 16% of coal, respectively, from the same related parties. See Note 8 – Related Party Transactions for further information.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Commitments:

As discussed in Note 4 – Equipment Deposits, the Company has entered into various equipment contracts to purchase miners. Most of these contracts required a percentage of deposits upfront and subsequent payments to cover the contracted purchase price of the equipment. Details of the outstanding purchase agreement with MinerVa are summarized below.

MinerVa Semiconductor Corp

On April 2, 2021, the Company entered into a purchase agreement (the "MinerVa Purchase Agreement") with MinerVa for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miners with a total terahash to be delivered equal to 1.5 million terahash. The price per miner was $4,892.50 for an aggregate purchase price of $73,387,500 to be paid in installments. The first installment equal to 60% of the purchase price, or $44,032,500, was paid on April 2, 2021, and an additional payment of 20% of the purchase price, or $14,677,500, was paid on June 2, 2021. As of September 30, 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 recorded in the first quarter of 2022. Furthermore, in the fourth quarter of 2022, the difference between the fair value of the MinerVa equipment deposits and the carrying value resulted in the Company recording an additional impairment charge of $5,120,000.

On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement. Under the MinerVa Purchase Agreement, the Company and MinerVa were required to work together in good faith towards a resolution for a period of sixty (60) days following this notice, after which, if no settlement had been reached, the Company could end discussions, declare an impasse, and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. As the 60-day period has expired, the Company is evaluating all available remedies under the MinerVa Purchase Agreement. On October 30, 2023, the Company sent MinerVa a Notice of Impasse. On October 31, 2023, the Company filed a Statement of Claim in Calgary, Alberta against MinerVa for breach of contract related to the MinerVa Purchase Agreement.

As of September 30, 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. As disclosed in Note 4 – Equipment Deposits, the Company is pursuing legal action through the dispute resolution process, and as a result, the Company no longer expects equipment deliveries.

Contingencies:

Legal Proceedings

The Company experiences litigation in the normal course of business. 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 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. PJM's investigation and discussions regarding the notice of breach at the Scrubgrass Plant and Panther Creek Plant and other potential issues related to the computational load banks, including power consumption and potential resettlements of billing statements for certain prior months, are ongoing and discussions between PJM and the Company are continuing.

On May 11, 2022, the Division of Investigations of the FERC Office of Enforcement (“OE”) informed the Company that the OE was conducting a non-public preliminary investigation concerning Scrubgrass’ compliance with various aspects of the PJM tariff. The OE requested that the Company provide certain information and documents concerning Scrubgrass’ operations by June 10, 2022. On July 13, 2022, after being granted an extension to respond by the OE, the Company submitted a formal response to the OE's request. Since the Company submitted its formal response to the OE's request, the Company has had further discussions with the OE regarding the Company's formal response. The OE's investigation, and discussions between the OE and the Company, regarding potential instances of non-compliance is continuing. The Company does not believe that the PJM notice of breach, the Panther Creek necessary study agreement, discussions regarding other potential issues related to the computational load bank, including power consumption and potential resettlements of billing statements for certain prior months, or the preliminary investigation by the OE will have a material adverse effect on the Company’s reported financial position or results of operations, although the Company cannot predict with certainty the final outcome of these proceedings.

Shareholder Securities and Derivative Lawsuits

On April 14, 2022, the Company, and certain of our current and former directors, officers and underwriters were named in a putative class action complaint filed in the United States District Court for the Southern District of New York (Winter v. Stronghold Digital Mining, Case No. 1:22-cv-0088). On August 4, 2022, co-lead plaintiffs were appointed. On October 18, 2022, the plaintiffs filed an amended complaint, alleging that the Company made misleading statements and/or failed to

disclose material facts in violation of Section 11 of the Securities Act, 15 U.S.C. §77k and Section 15 of the Securities Act of 1933, as amended (the "Securities Act"), about the Company’s business, operations, and prospects in the Company’s registration statement on Form S-1 related to its initial public offering, and when subsequent disclosures were made regarding these operational issues when the Company announced its fourth quarter and full year 2021 financial results, the Company’s stock price fell, causing significant losses and damages. As relief, the plaintiffs are seeking, among other things, compensatory damages. The amended complaint also alleged violations of Section 12 of the Securities Act based on alleged false or misleading statements in the Company’s prospectus related to its initial public offering. On December 19, 2022, the Company filed a motion to dismiss, which the court largely denied on August 10, 2023. On September 8, 2023, the Court entered a Case Management Order, which set a number of case deadlines, including the completion of all discovery by April 21, 2025. The defendants continue to believe the allegations in the complaint are without merit and intend to defend the suit vigorously.

On September 5, 2023, and September 15, 2023, respectively, purported shareholders of the Company filed two derivative actions in the United States District Court for the Southern District of New York (Wilson v. Beard, Case No. 1:23-cv-7840, and Navarro v. Beard, Case No. 1:23-cv-08714) against certain of our current and former directors and officers, and the Company as a nominal defendant. The shareholders generally allege that the individual defendants breached their fiduciary duties by making or failing to prevent the misrepresentations alleged in the putative Winter securities class action, and assert claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and for contribution under Section 11 of the Securities Act and Section 21D of the Securities Exchange Act of 1934. The two cases were consolidated on October 24, 2023. The defendants believe the allegations in the complaints 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 ("Stronghold"), was named as one of several defendants in a complaint filed in the United States District Court for the Middle District of Alabama Eastern Division (the "Grams Complaint"). The Grams Complaint alleges that certain Bitcoin miners the Company purchased from Treis Blockchain, LLC ("Treis") in December 2021 contained firmware that is alleged to have constituted “trade secrets” owned by Grams. Principally, the Grams Complaint included allegations of misappropriation of these alleged trade secrets.

The Company believes that the allegations against it and its subsidiaries in the Grams Complaint are without merit and intends to vigorously defend the suit. To that end, the Company has entered into a joint defense agreement with Treis and the other named defendants. The Company has also entered into a tolling agreement with Treis. The Company filed a motion to dismiss the case for lack of personal jurisdiction on June 23, 2023. On October 6, 2023, Grams filed an Amended Complaint, to which the Company filed a renewed Motion to Dismiss for Lack of Personal Jurisdiction, or in the Alternative to Transfer the Case to the District of South Carolina, in addition to a renewed Motion to Dismiss several causes of action alleged in the Amended Complaint.

The Company does not believe the Grams Complaint will have a material adverse effect on the Company's reported financial position or results of operations.

MinerVa Purchase Agreement

On July 18, 2022, the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement. Under the MinerVa Purchase Agreement, the Company and MinerVa were required to work together in good faith towards a resolution for a period of sixty (60) days following this notice, after which, if no settlement had been reached could end discussions, declare an impasse, and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. On October 30, 2023, the Company sent MinerVa a Notice of Impasse. On October 31, 2023, the Company filed a Statement of Claim in Calgary, Alberta against MinerVa for breach of contract related to the MinerVa Purchase Agreement.

NOTE 11 – REDEEMABLE COMMON STOCK

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 September 30, 2023.

The Company recorded redeemable common stock as presented in the table below.


	Common - Class V
	Shares	Amount
Balance - December 31, 2022	2,605,760	$	11,754,587
Net loss attributable to noncontrolling interest	—	(26,663,731)
Redemption of Class V shares	(200,000)	(1,210,000)
Maximum redemption right valuation	—	26,682,421
Balance - September 30, 2023	2,405,760	$	10,563,277

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 23.4% and 45.1% ownership of Stronghold LLC, as of September 30, 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.

The following summarizes the redeemable common stock adjustments pertaining to the noncontrolling interest as of and for the nine months ended September 30, 2023:


	Class V Common Stock Outstanding	Fair Value Price		Temporary Equity Adjustments
Balance - December 31, 2022	2,605,760	$	4.51	$	11,754,587
Net loss attributable to noncontrolling interest	—			(26,663,731)
Redemption of Class V shares	(200,000)			(1,210,000)
Adjustment of temporary equity to redemption amount (1)	—			26,682,421
Balance - September 30, 2023	2,405,760	$	4.39	$	10,563,277

(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.

NOTE 13 – STOCK-BASED COMPENSATION

Stock-based compensation expense for the three months ended September 30, 2023, and 2022, equaled $787,811 and $3,377,499, respectively, and for the nine months ended September 30, 2023, and 2022, equaled $7,603,859 and $9,123,124, 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 272,500 restricted stock units in exchange for the cancellation of 98,669 stock options and 25,000

performance share units previously granted to the executive officers. All restricted stock units were granted under the Company’s previously adopted Omnibus Incentive Plan, dated October 19, 2021.

NOTE 14 – WARRANTS

The following table summarizes outstanding warrants as of September 30, 2023.


			Number of Warrants
Outstanding as of December 31, 2022			1,587,511
Issued			1,803,347
Exercised			(1,610,580)
Outstanding as of September 30, 2023			1,780,278

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 300,000 shares of Class A common stock, par value $0.0001 per share, at an exercise price of $0.001 per warrant share. As of and during the nine months ended September 30, 2023, 200,000 shares of Class A common stock available for purchase pursuant to the B&M Warrant were exercised.

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 631,800 shares of Class A common stock of the Company with an exercise price per share equal to $25.00. 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 631,800 warrants was reduced from $25.00 to $0.10. Refer to Note 15 – Equity Issuances for additional details.

During the nine months ended September 30, 2023, 230,000 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 227,435 and 60,241 shares of Class A common stock, respectively, and warrants to purchase an aggregate of 560,241 shares of Class A common stock, at an initial exercise price of $17.50 per share. Refer to Note 15 – Equity Issuances for additional details. As part of the transaction, Armistice purchased the pre-funded warrants for 272,565 shares of Class A common stock at a purchase price of $16.00 per warrant. The pre-funded warrants have an exercise price of $0.001 per warrant share.

In April 2023, the Company, Armistice and Mr. Beard entered into amendments to, among other things, adjust the strike price of the remaining outstanding warrants from $17.50 per share to $10.10 per share. Refer to Note 15 – Equity Issuances for additional details.

As of and during the nine months ended September 30, 2023, the pre-funded warrants for 272,565 shares of Class A common stock have been exercised.

April 2023 Private Placement

On April 20, 2023, the Company entered into Securities Purchase Agreements with an institutional investor and the Company's Chief Executive Officer, Greg Beard, for the purchase and sale of shares of Class A common stock, par value $0.0001 per share at a purchase price of $10.00 per share, and warrants to purchase shares of Class A common stock, at an initial exercise price of $11.00 per share (the “April 2023 Private Placement”). Pursuant to the Securities Purchase Agreements, the institutional investor invested $9.0 million in exchange for an aggregate of 900,000 shares of Class A common stock and pre-funded warrants, and Mr. Beard invested $1.0 million in exchange for an aggregate of 100,000

shares of Class A common stock, in each case at a price of $10.00 per share equivalent. Further, the institutional investor and Mr. Beard received warrants exercisable for 900,000 shares and 100,000 shares, respectively, of Class A common stock. Refer to Note 15 – Equity Issuances for additional details.

As of and during the nine months ended September 30, 2023, the pre-funded warrants for 433,340 shares of Class A common stock have been exercised.

NOTE 15 – EQUITY ISSUANCES

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 631,800 shares of Class A common stock, of the Company with an exercise price per share equal to $25.00, 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 631,800 May 2022 Warrants was reduced from $25.00 to $0.10. 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 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 the Exchange Agreement with the Purchasers of the Amended May 2022 Notes whereby the Amended May 2022 Notes were to be exchanged for shares of Series C Preferred Stock that, among other things, will convert into shares of Class A common stock or pre-funded warrants that may be exercised for shares of Class A common stock, at a conversion rate equal to the stated value of $1,000 per share plus cash in lieu of fractional shares, divided by a conversion price of $4.00 per share of Class A common stock. Upon the fifth anniversary of the Series C Preferred Stock, each outstanding share of Series C Preferred Stock will automatically and immediately convert into Class A common stock or pre-funded warrants. In the event of a liquidation, the Purchasers shall be entitled to receive an amount per share of Series C Preferred Stock equal to its stated value of $1,000 per share. The Exchange Agreement closed on February 20, 2023. See Note 21 – Subsequent Events for additional information regarding the Exchange Agreement.

Pursuant to the Exchange Agreement, the Purchasers received an aggregate 23,102 shares of the Series C Preferred Stock, in exchange for the cancellation of an aggregate $17,893,750 of principal and accrued interest, representing all of the amounts owed to the Purchasers under the May 2022 Notes. On February 20, 2023, one Purchaser converted 1,530 shares of the Series C Preferred Stock to 382,500 shares of the Company’s Class A common stock. The rights and preferences of the Series C Preferred Stock are designated in a certificate of designation, and the Company provided certain registration rights to the Purchasers. See Note 21 – Subsequent Events for additional information regarding the Exchange Agreement.

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