Except as otherwise indicated or required by the context, all references in this prospectus to the "Company," "we," "us" or "our" relate toStronghold Digital Mining, Inc. ("Stronghold Inc. ") and its consolidated subsidiaries following the Reorganization. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing in this Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans, expectations and strategy for our business, and operations, includes forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see section above entitled "Cautionary Statement Regarding Forward-Looking Statements." Certain risks may cause actual results, performance or achievements to differ materially from those expressed or implied by the following discussion and analysis. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under the heading "Item 1A.Risk Factors" as filed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 , each as filed with theU.S. Securities and Exchange Commission (the "SEC"), and this Form 10-Q. Except as set forth in Item 1A. "Risk Factors" below, there have been no material changes to the risk factors previously disclosed in the 2021 Form 10-K, or first quarter 2022 Form 10-Q.
Overview
We are a vertically integrated crypto asset mining company currently focused on mining Bitcoin. We wholly own and operate two low-cost, environmentally-beneficial coal refuse power generation facilities that we have upgraded: (i) our first reclamation facility located on a 650-acre site in Scrubgrass Township,Venango County, Pennsylvania , which we acquired the remaining interest of inApril 2021 and currently has the capacity to generate approximately 83.5 megawatts ("MW") of electricity (the "Scrubgrass Plant") and (ii) a facility located nearNesquehoning, Pennsylvania , which we acquired in November of 2021 and which has the capacity to generate approximately 80 megawatts ("MW") of electricity (the "Panther Creek Plant"), each of which is as an Alternative Energy System because coal refuse is classified underPennsylvania law as a Tier II Alternative Energy Source (large-scale hydropower is also classified in this tier). We are committed to generating our energy and managing our assets sustainably, and we believe that we are one of the first vertically integrated crypto asset mining companies with a focus on environmentally beneficial operations. Owning our own source of power helps us to produce Bitcoin at one of the lowest prices among our publicly traded peers. We also believe that owning our own power source makes us a more attractive partner to crypto asset mining equipment purveyors. We intend to leverage these competitive advantages to continue to grow our business through the opportunistic acquisition of additional power generating assets and miners. Bitcoin Mining Growth During 2018 and 2019, we began providing Bitcoin mining services to third parties and also began operating our own Bitcoin mining equipment to generate Bitcoin, which we then exchange forU.S. Dollars. We have been expanding our mining operations since such date. As ofJune 30, 2022 , we operated approximately 32 thousand cryptocurrency mining computers (known as "miners") with hash rate capacity of approximately 3.0 EH/s. As ofJune 30, 2022 , we had entered into definitive agreements with multiple suppliers to deliver approximately 10 thousand additional miners with capacity of approximately 1.0 EH/s through the end of 2022. We intend to house our miners at the Scrubgrass Plant and the Panther Creek Plant data centers. OnAugust 16, 2022 , the Company agreed to sell approximately 26 thousand NYDIG-secured Bitcoin miners to NYDIG, fewer than 19 thousand of which were installed as ofAugust 16, 2022 , to NYDIG in exchange for the NYDIG Debt (as defined below). Refer to Note 33 - Subsequent Events. Acquisitions OnMarch 3, 2021 ,Stronghold Digital Mining LLC ("SDM") entered into a non-binding letter of intent (the "Olympus LOI") withOlympus Power, LLC (together with its affiliates, "Olympus")for the purchase of (i) the ownership interest inScrubgrass Reclamation Company, L.P. (f/k/aScrubgrass Generating Company, L.P. ) ("Scrubgrass LP ") held byAspen Scrubgrass Participant, LLC (the "Aspen Interest"), (ii) the Panther Creek Plant, and (iii) a third coal refuse power generation facility (the "Third Plant").
On
50 -------------------------------------------------------------------------------- Panther Creek Plant. The Panther Creek Plant is a coal refuse reclamation facility with 80 MW of net electricity generation capacity located nearNesquehoning, Pennsylvania . We completed the Panther Creek Acquisition onNovember 2, 2021 . The consideration for the Panther Creek Plant was approximately$2.2 million ($3 million less$800 thousand in shared land closing costs) in cash and 1,152,000 Class A common units ofStronghold LLC ("Stronghold LLC Units"), together with a corresponding number of shares of Class V common stock. EffectiveNovember 2, 2021 , we closed on this acquisition. We continue to evaluate the acquisition of the Third Plant as contemplated by the Olympus LOI, although we do not consider this acquisition to be probable at this time. The acquisition of the Third Plant is subject to further due diligence and the negotiation of a definitive agreement, and there is no assurance that the acquisition will be completed.
Initial Public Offering
We completed the issuance and sale of our Class A common stock, par value$.0001 per share, in an initial public offering (the "IPO") onOctober 22, 2021 , and our Class A common stock is listed on Nasdaq under the symbol "SDIG."
Stock Split
We effected 2.88-for-1 stock split onOctober 22, 2021 , pursuant to which each share of common stock held of record by the holder thereof was reclassified into approximately 2.88 shares of common stock. No fractional shares were issued. Pursuant to the Second Amended and Restated Limited Liability Company Agreement ofStronghold LLC , as amended from time to time, each "Stronghold LLC Unit" was also split on a corresponding 2.88-for-1 basis, such that there are an equivalent number of Stronghold LLC Units outstanding as the aggregate number of shares of Class V common stock and Class A common stock outstanding following the stock split. We refer to this collectively as the "Stock Split."
Bitmain
OnOctober 28, 2021 , we entered into an agreement withBitmain Technologies Limited ("Bitmain") to purchase 12,000 miners, which will be delivered in six equal batches on a monthly basis beginning inApril 2022 (the "First Bitmain Purchase Agreement"). Per the First Bitmain Purchase Agreement, onOctober 29, 2021 , we made an initial payment of$23,300,000 to Bitmain for the miners, OnNovember 18, 2021 , we made an additional payment of$4,550,000 . Subsequent payments will be made in the future in connection with additional deliveries of miners under the First Bitmain Purchase Agreement. OnNovember 16, 2021 , we entered into a second agreement with Bitmain to purchase 1,800 miners, which will be delivered in six equal batches on a monthly basis beginning inJuly 2022 (the "Second Bitmain Purchase Agreement"). Per the Second Bitmain Purchase Agreement, onNovember 18, 2021 , we made an initial payment of$6,835,000 to Bitmain for the miners. Subsequent payments will be made in the future in connection with additional deliveries of miners under the Second Bitmain Purchase Agreement.
The miners purchased pursuant to the two agreements with Bitmain will have an aggregate hash rate capacity of approximately 1,450 PH/s.
OnMay 13, 2022 , we entered into a purchase order to transfer the Second Bitmain Purchase Agreement for 1,800 Bitmain Antminer S19 XP miners (the "Bitmain Sale") toCryptech Solutions, Inc. ("Cryptech") for a total value of$12,600,000 , including a$5,638,500 payment to the Company.
We paid for two separate purchases of miners fromNowlit Solutions Corp. The first purchase payment was made onNovember 23, 2021 , in the amount of$1,605,360 for 190 miners. The second purchase payment was made onNovember 26, 2021 , in the amount of$2,486,730 for an additional 295 miners.
We paid for three separate purchases of miners fromLuxor Technology Corporation ("Luxor"). The first purchase payment was made onNovember 26, 2021 , in the amount of$4,312,650 for 770 miners. The second and third purchase payments were made onNovember 29, 2021 , in the amount of$5,357,300 and$3,633,500 respectively; for an additional 750 and 500 miners. 51 -------------------------------------------------------------------------------- OnNovember 30, 2021 , we entered into a fourth purchase agreement with Luxor to acquire 400 Antminer T19 miners with a hash rate of 84 TH/s and 400 Antminer T19 miners with a hash rate of 88 TH/s for a total purchase price of$6,260,800 .
Cryptech Purchase Agreement
OnDecember 7, 2021 , we entered into a Hardware Purchase and Sales Agreement (the "Cryptech Purchase Agreement") with Cryptech to acquire 1,000 Bitmain S19a miners with a hash rate of 96 TH/s for a total purchase price of$8,592,000 . Pursuant to the Cryptech Purchase Agreement, all hardware will be paid for in advance of being shipped to the Company.
Supplier Purchase Agreements
OnDecember 10, 2021 , we entered into a Hardware Purchase and Sale Agreement (the "First Supplier Purchase Agreement") to acquire 3,000 MicroBT WhatsMiner M30S miners (the "M30S Miners") with a hash rate per unit of 87 TH/s. Pursuant to the First Supplier Purchase Agreement, the unit price per M30S Miner is$6,960 for a cumulative purchase price of$20,880,000 that was paid in full within five business days of the execution of the First Supplier Purchase Agreement. OnDecember 16, 2021 , we entered into a Second Hardware Purchase and Sale Agreement (the "Second Supplier Purchase Agreement") to acquire a cumulative amount of approximately 4,280 M30S Miners and MicroBT WhatsMiner M30S+ miners with a hash rate per unit of 100 TH/s (the "M30S+ Miners"). Pursuant to the Second Supplier Purchase Agreement, the unit price per M30S Miner is$2,714 and the unit price per M30S+ Miner is$3,520 for a cumulative purchase price of$11,340,373 .
OnDecember 15, 2021 , we entered into a Master Equipment Finance Agreement (the "Second NYDIG Financing Agreement") withNYDIG ABL LLC ("NYDIG") whereby NYDIG agreed to lendStronghold Digital Mining BT, LLC ("Digital Mining BT") up to$53,952,000 to finance the purchase of certain Bitcoin miners and related equipment (the "Second NYDIG-Financed Equipment"). Outstanding borrowings under the Second NYDIG Financing Agreement are secured by the Second NYDIG-Financed Equipment, contracts to acquire Second NYDIG-Financed Equipment, and the Bitcoin mined by the Second NYDIG-Financed Equipment. The Second NYDIG Financing Agreement includes customary restrictions on additional liens on the Second NYDIG-Financed Equipment. The NYDIG Second Financing Agreement may not be terminated by Digital Mining BT or prepaid in whole or in part.
O&M Agreement
OnNovember 2, 2021 , we entered into the Operations, Maintenance and Ancillary Services Agreement (the "Omnibus Services Agreement") withOlympus Stronghold Services, LLC ("Olympus Stronghold Services"), whereby Olympus Stronghold Services will provide certain operations and maintenance services toStronghold LLC , as well as employ certain personnel to operate the Panther Creek Plant and the Scrubgrass Plant.Stronghold LLC will reimburse Olympus Stronghold Services for those costs incurred by Olympus Stronghold Services and approved byStronghold 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 byStronghold LLC .Stronghold LLC will also pay Olympus Stronghold Services a management fee at the rate of$1,000,000 per year, payable monthly, and an additional one-time mobilization fee of$150,000 upon the effective date of the Omnibus Services Agreement. Miner Sales Agreement During the second quarter of 2022, the Company entered into multiple miner sales agreements with multiple buyers. The Company previously disclosed its effort to optimize its Bitcoin miner fleet through its sale of 3,425 miners (approximately 411 PH/s) with a historical carrying value of$21.9 million , or$50.70 per TH/s. The Company recognized a loss of approximately$8.0 million on these miners during the second quarter of 2022. The Company undertook these sales due to its priorities of improving its liquidity position and improved returns over growth. The loss was recorded in Realized gain (loss) on sale of miner assets on the consolidated statements of operations. The various buyers paid the Company an aggregate of$13.8 million up front and took over the remaining installment payment obligations upon transfer of the contract, relieving the Company of the outstanding purchase obligation. 52 --------------------------------------------------------------------------------
Reorganization
On
Trends and Other Factors Impacting Our Performance
COVID-19 and Supply Chain Constraints
The coronavirus ("COVID-19") global pandemic has resulted and is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Among other things, the COVID-19 pandemic has caused supply chain disruptions that may have lasting impacts. Additionally, the global supply chain for Bitcoin miners is presently further constrained due to unprecedented demand coupled with a global shortage of mining equipment and mining equipment parts. Based on our current assessments, however, we do not expect any material impact on long-term development, operations, or liquidity due to the spread of COVID-19. However, we are actively monitoring this situation and the possible effects on its financial condition, liquidity, operations, suppliers, and industry.
InMay 2021 , the Chinese government called for a crackdown on Bitcoin mining and trading. Following this, the majority of Bitcoin miners inChina were taken offline. This resulted in (i) a significant reduction in the Bitcoin global network hash rate, (ii) an increase in the availability of Bitcoin miners for purchase and (iii) an increase in the demand for power outside ofChina . Further, inSeptember 2021 , Chinese regulators instituted a blanket ban on all crypto mining and transactions, including overseas crypto exchange services taking place inChina , effectively making all crypto-related activities illegal inChina . The reduction in network hash rate has improved Bitcoin mining profitability (not factoring in underlying Bitcoin prices), with plugged-in Bitcoin miners representing a larger percentage of the global hash rate. We do not believe that higher demand for power will have a negative impact on our business because we own and operate our power sources.
Scrubgrass Plant
During the fourth quarter of 2021 and continuing into the second quarter of 2022, the Scrubgrass Plant had downtime that was greater than anticipated, driven largely by mechanical failures. The upgrades and maintenance that are necessary have taken longer and are more extensive than originally anticipated. We expect these investments to be completed in the second half of 2022. Once finished, the Scrubgrass Plant is expected to be operational at nameplate capacity with high uptime and low operating costs. During the first half of 2022, higher than anticipated requirements fromPJM Interconnection LLC ("PJM") resulted in unplanned and extended outages of our mining operations at the Scrubgrass Plant, diverting capacity away from our mining operations at a time that was not economical for our business strategy. These diversions of power away from our mining operations during the first and second quarters had a material adverse effect on our business, financial condition and results of operations. The Scrubgrass Plant also experienced higher than expected cost capping, as the result of its role as a capacity resource, from PJM which obligated the Scrubgrass Plant to supply power to the PJM grid at pre-set prices in an effort to stabilize PJM grid pricing. Starting in June, Scrubgrass Plant was no longer classified as a capacity resource, and is now an energy resource, which will allow the plant to sell power to the grid at market prices.
In the third quarter of 2022, the Scrubgrass Plant will undergo planned maintenance for approximately seven to ten days, during which time it will not be generating power.
During the second quarter of 2022, the Panther Creek Plant's mining operations were offline for ten days due to the failure of a switchgear and the need to source, deliver and install a new piece of equipment, causing ten days of no mining revenue generation at the facility and resulting in an estimated loss of approximately$1.4 million . The operation of our power generation facilities, information technology systems and other assets and conduct of other activities subjects us to a variety of risks, including the breakdown or failure of equipment, accidents, security breaches, viruses or outages affecting information technology systems, labor disputes, obsolescence, delivery/transportation problems and disruptions of fuel supply, failure to receive spare parts in a timely manner, and performance below expected levels. 53 -------------------------------------------------------------------------------- As previously disclosed on the Company's Form 8-K datedJuly 25, 2022 , the Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in the month of June from damaged transmission lines caused by a storm, and other plant maintenance issues. The Company estimates the financial impact of the June outages to be lost revenue of$1.8 million and a net income impact of$1.4 million .
In the third quarter of 2022, the Panther Creek Plant will undergo planned maintenance for approximately one week, during which time it will not be generating power.
Bitcoin Price Volatility
The market price of Bitcoin has historically and recently been volatile. For example, the price of Bitcoin ranged from a low of approximately$29,000 to a high of approximately$69,000 during 2021 and has ranged from approximately$18,000 to approximately$48,000 year-to-date as ofAugust 12, 2022 . Since the IPO, the price of Bitcoin has dropped over 70%, resulting in an adverse effect on our results of operations, liquidity and strategy, and resulting in increased credit pressures on the cryptocurrency industry. Our operating results depend on the value of Bitcoin because it is the only crypto asset we currently mine. We cannot accurately predict the future market price of Bitcoin and, as such, we cannot accurately predict potential adverse effects, including whether we will record impairment of the value of our Bitcoin assets. The future value of Bitcoin will affect the revenue from our operations, and any future impairment of the value of the Bitcoin we mine and hold for our account would be reported in our financial statements and results of operations as charges against net income, which could have a material adverse effect on the market price for our securities. Recent Developments Northern Data OnAugust 17, 2021 ,Stronghold LLC entered into an agreement withNorthern Data PA, LLC ("Northern Data") whereby Northern Data will construct and operate a colocation data center facility located on the Scrubgrass Plant (the "Hosting Agreement"), the primary business purpose of which will be to provide hosting services and support the cryptocurrency miners that we have purchased but not yet received entirely from Northern Data. OnMarch 28, 2022 , we restructured the Hosting Agreement to obtain an additional 2,675 miners at cost of$37.5 per terahash (to be paid five months after delivery) and temporarily reduced the profit share for Northern Data while incorporating performance thresholds until the data center build-out is complete. OnAugust 10, 2022 the Company and Northern Data terminated the provision of the restructured Hosting Agreement related to the additional 2,675 miners and the Company shall neither make payment for such additional miners nor obtain title to such additional miners.
MinerVa
OnApril 2, 2021 , we entered into a purchase agreement with MinerVa (the "MinerVa Purchase Agreement") for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner equipment (miners) with a total terahash to be delivered equal to 1.5 million terahash. InDecember 2021 , we extended the deadline for delivery of the MinerVa miners toApril 2022 . As ofJune 30, 2022 , MinerVa has delivered, refunded cash, or swapped into deliveries of industry leading miners of equivalent value to approximately 7,200 of the 15,000 miners. As ofAugust 12, 2022 , the Company has received approximately 8,500 of the miners or equivalent value from MinerVa. We do not know when the remaining MinerVa miners will be received, if at all. As a result, an impairment totaling$12,228,742 was recognized onMarch 31, 2022 . OnJuly 18, 2022 , the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60) days, Stronghold may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement.
Second WhiteHawk Amendment
OnMarch 28, 2022 ,Equipment LLC andWhiteHawk Finance LLC ("WhiteHawk") amended the WhiteHawk Financing Agreement (as defined below) for a second time (the "Second WhiteHawk Amendment") to exchange the collateral under the WhiteHawk Financing Agreement. Pursuant to the Second WhiteHawk Amendment, (i) the approximately 11,700 remaining miners under the MinerVa Purchase Agreement were exchanged as collateral for additional miners received by us from other suppliers and (ii) WhiteHawk agreed to lend to us an additional amount not to exceed$25.0 million to finance certain previously purchased Bitcoin miners and related equipment (the "Second Total 54 -------------------------------------------------------------------------------- Advance"). Pursuant to the Second WhiteHawk Amendment,Equipment, LLC paid an amendment fee in the amount of$275,414.40 and a closing fee with respect to the Second Total Advance of$500,000 . In addition to the purchased Bitcoin miners and related equipment, Panther Creek and Scrubgrass each agreed to a negative pledge of the Panther Creek Plant and Scrubgrass Plant, respectively, and guaranteed the WhiteHawk Financing Agreement. Each of the negative pledge and the guaranty by Panther Creek and Scrubgrass will be released upon payment in full of the Second Total Advance, regardless of whether the Total Advance remains outstanding. In conjunction with the Second WhiteHawk Amendment, we issued a warrant to WhiteHawk to purchase 125,000 shares of Class A common stock, subject to certain antidilution and other adjustment provisions as described in the warrant agreement, at an exercise price of$0.01 per share (the "Second WhiteHawk Warrant"). The Second WhiteHawk Warrant expires onMarch 28, 2032 . 2022 Private Placement OnMay 15, 2022 , we entered into a note and warrant purchase agreement (the "Purchase Agreement"), by and among the Company and the purchasers thereto (collectively, the "Purchasers"), whereby we agreed to issue and sell to Purchasers, and Purchasers agreed to purchase from the Company, (i)$33,750,000 aggregate principal amount of 10.00% unsecured convertible promissory notes (the "May 2022 Notes") and (ii) warrants (the "May 2022 Warrants") representing the right to purchase up to 6,318,000 shares of Class A Common Stock, of the Company with an exercise price per share equal to$2.50 , on the terms and subject to the conditions set forth in the Purchase Agreement (collectively, the "2022 Private Placement"). The Purchase Agreement contained representations and warranties by the Company and the Purchasers that are customary for transactions of this type. TheMay 2022 Notes and theMay 2022 Warrants were offered and sold in reliance on the exemption afforded by Section 4(a)(2) of the Securities Act, and Rule 506(b) of Regulation D promulgated thereunder for aggregate consideration of$27.0 million . In connection with the 2022 Private Placement, the Company undertook to negotiate with the Purchasers, and to file a certificate of designation ("Series C Preferred Certificate of Designation") with theState of Delaware , following the closing of the 2022 Private Placement, the terms of a new series of preferred stock (the "Series C Preferred Stock"). In connection with the 2022 Private Placement, theMay 2022 Warrants were issued pursuant to a Warrant Agreement, dated as ofMay 15, 2022 (the "Warrant Agreement"). TheMay 2022 Warrants are subject to mandatory cashless exercise provisions and have certain anti-dilution provisions. TheMay 2022 Warrants will be exercisable for a five-year period from the closing.
OnMay 9, 2022 , an award in the amount of$5.0 million plus interest computed as ofMay 15, 2022 in the amount of$0.8 million was issued in favor of theMcClymonds Supply & Transit Company, Inc. in the previously disclosed dispute over a trucking contract between the claimant and our subsidiary. The two managing members ofQ Power, LLC , our primary Class V shareholder, have agreed to and begun to pay the full amount of the award such that there will be no effect on the financial condition of the Company.
WhiteHawk Refinancing Agreement
OnAugust 16, 2022 , we entered into a commitment letter (the "Commitment Letter") with WhiteHawk to provide for committed financing to refinance the WhiteHawk Financing Agreement and provide up to$20 million in additional commitments (such additional commitments, the "Delayed Draw Facility") for an aggregate loan not to exceed$60.0 million . Such loans under the Delayed Draw Facility will be available to be drawn for 180 days from the closing date of the WhiteHawk Refinancing Agreement (as defined below). The financing contemplated by the Commitment Letter (such financing, the "WhiteHawk Refinancing Agreement") will be entered into byStronghold LLC as Borrower (the "Borrower") and secured by substantially all of the assets of the Company and its subsidiaries and will be guaranteed by the Company and each of its subsidiaries. The WhiteHawk Refinancing Agreement will require equal monthly amortization payments resulting in full amortization at maturity. The WhiteHawk Refinancing Agreement will have customary representations, warranties and covenants including restrictions on indebtedness, liens, restricted payments and dividends, investments, asset sales and similar covenants and will contain customary events of default. The WhiteHawk Refinancing Agreement will contain a covenant requiring the Borrower and its subsidiaries to maintain a minimum of (x)$7.5 million of liquidity at all times (y) a minimum liquidity of$10 million of average daily liquidity for each calendar month (rising to$20 million beginningJuly 1, 2023 ) and (z) a maximum total leverage ratio covenant of (i) 7.5:1.0 for the quarter endingDecember 31, 2022 , (ii) 5.0:1.0 for the quarter endingMarch 31, 2023 , (iii) 4.0:1.0 for the quarter endingJune 30, 2023 and (iv) 4.0:1.0 for each quarter ending thereafter. The initial closing of the WhiteHawk Refinancing Agreement will be subject to customary closing conditions. In addition, the initial closing of the WhiteHawk Refinancing Agreement will 55 -------------------------------------------------------------------------------- subject to the full extinguishment and termination of all of the NYDIG Debt (as defined below) and other obligations of the Company and its affiliates under the NYDIG Agreements (as defined below), whether pursuant to the Asset Purchase Agreement (as defined below) or otherwise. The borrowings under the WhiteHawk Refinancing Agreement will mature 36 months after the closing date of the WhiteHawk Refinancing Agreement and will bear interest at a rate of Secured Overnight Financing Rate plus 10%. The loans under the Delayed Draw Facility will be issued with 3% "original issue discount" on all drawn amounts, payable when such amounts are drawn, and undrawn commitments thereunder will incur a commitment fee, paid monthly, equal to 1% per annum. Amounts drawn on the WhiteHawk Refinancing Agreement will be subject to a prepayment premium such that the lenders thereunder achieve a 20% return on invested capital. We agreed to issue a stock purchase warrant to WhiteHawk in conjunction with the closing of the WhiteHawk Refinancing Agreement, which provides for the purchase of an additional 2,000,000 shares of Class A common stock at$0.01 per share.
NYDIG Asset Purchase Agreement
OnAugust 16, 2022 , the Company,Stronghold LLC ,Stronghold Digital Mining LLC , aDelaware limited liability company ("SD Mining") andStronghold Digital Mining BT, LLC , aDelaware limited liability company ("SD Mining BT", and together with SD Mining, the "APA Sellers" and, together with the Company andStronghold LLC , the "APA Seller Parties"), entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") withNYDIG ABL LLC , aDelaware limited liability company formerly known asArctos Credit, LLC ("NYDIG"), andThe Provident Bank , aMassachusetts savings bank ("BankProv" and together with NYDIG, "Purchasers" and each, a "Purchaser"). Pursuant to the Arctos/NYDIG Financing Agreement and the Second NYDIG Financing Agreement (collectively, the "NYDIG Agreements"), certain miners are pledged as collateral under such agreements (and together with certain related agreements to purchase miners, the "APA Collateral"). Under the Asset Purchase Agreement, the APA Seller Parties have agreed to sell, and the Purchasers (or their respective designee) have agreed to purchase, the APA Collateral in a private disposition in exchange for the forgiveness, reduction and release of all principal, interest, and fees owing under each of the NYDIG Agreements (collectively, the "NYDIG Debt"). The Sellers have agreed to clean, service, package, ship and deliver the APA Collateral and to bear the costs associated with such activities. Following (i) delivery of the APA Collateral pursuant to the Purchasers or their designees to a master bill of sale and (ii) a subsequent inspection period of up to 14 days (which may be extended up to seven additional days), upon acceptance of the APA Collateral, the related portion of the NYDIG Debt will be assigned to the Sellers and cancelled pursuant to the terms of the Asset Purchase Agreement (each, a "Settlement"). A Settlement is subject to certain conditions, including the delivery of certain milestone schedules to a master bill of sale and the completion of an inspection of the APA Collateral by the Purchasers, and, in the event of certain failures to satisfy the inspection conditions, the obligation of the Company to replace such APA Collateral with comparable assets, provided that such obligation only applies once the aggregate value of such APA Collateral exceeds$173,650.68 , with respect to BankProv, and$252,532.33 , with respect to NYDIG. Prior to the date on which (i) APA Seller Parties first breaches a material obligation under the Asset Purchase Agreement, (ii) the date on which the Asset Purchase Agreement is terminated or if a Seller elects not to sell any or all of its APA Collateral, or (iii) an insolvency or liquidation proceeding is commenced by or against the APA Sellers (the "Non-Interference Period"), the Purchasers have agreed not to foreclose on any of the APA Collateral under such NYDIG Agreements. The APA Seller Parties also granted certain indemnification rights to the Purchasers. The Asset Purchase Agreement also provides for certain termination rights. Pursuant to the Asset Purchase Agreement, the Seller Parties have granted a release from certain claims arising out of or in connection with the Asset Purchase Agreement and the transactions contemplated thereunder. Further, except for the payment of accrued but unpaid interest through the date of signing of the Asset Purchase Agreement, prior to the earlier of (i) the termination of the Asset Purchase Agreement, (ii) the end of the Non-Interference Period, or (iii) a Seller electing not to sell any of its APA Collateral required to be sold at a settlement, the Sellers will not be required to make payments pursuant to the NYDIG Agreements (although interest shall accrue but not be due and payable) and each Purchaser, in its capacity as the respective lender under the NYDIG Agreements, will not exercise any remedies available as a lender or declare any event of default as a result of the Sellers taking any actions required or directly contemplated by the Asset Purchase Agreement. Private Placement Amendment OnAugust 16, 2022 , the Company entered into an amendment to the note and warrant purchase agreement (the "Purchase Agreement"), by and among the Company and the purchasers thereto (collectively, the "Purchasers"), whereby the Company agreed to amend the Purchase Agreement such that$11.25 million of the outstanding principal has been exchanged for the Purchaser's execution of an amended and restated warrant agreement pursuant to which the strike price 56 -------------------------------------------------------------------------------- of the 6,318,000May 2022 Warrants was reduced from$2.50 to$0.01 . After giving effect to the principal reduction and amended and restated warrants, the Company will continue to make subsequent monthly, payments to the Purchasers on the fifteenth (15th) day of each ofNovember 2022 ,December 2022 ,January 2023 andFebruary 2023 . The Company may 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.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America (GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, investments, intangible assets, stock-based compensation and business combinations. Our financial position, results of operations and cash flows are impacted by the accounting policies we have adopted. In order to get a full understanding of our financial statements, one must have a clear understanding of the accounting policies employed.
A summary of our critical accounting policies follows:
Fair Value Measurements
We measure at fair value certain of our financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data; and
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity's own assumptions.
A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Cryptocurrency Machines
Management has assessed the basis of depreciation of our cryptocurrency machines used to verify digital currency transactions and generate digital currencies and believes they should be depreciated over a three-year period. The rate at which we generate digital assets and, therefore, consume the economic benefits of our Bitcoin miners, is influenced by a number of factors including the following:
1.The complexity of the Bitcoin mining process which is driven by the algorithms contained within the Bitcoin open-source software;
2.The general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured in petahash units); and
3.Technological obsolescence reflecting rapid development in the Bitcoin miner industry such that more recently developed hardware is more economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs, (i.e., the speed of hardware evolution in the industry is such that later 57 --------------------------------------------------------------------------------
hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase).
We operate in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Management has determined that three years best reflects the current expected useful life of Bitcoin miners. This assessment takes into consideration the availability of historical data and management's expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate annually and will revise such estimate as and when data becomes available. To the extent that any of the assumptions underlying management's estimate of useful life of its Bitcoin miners are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets. Revenue Recognition We recognize revenue under ASC 606, Revenue from Contracts with Customers. The core principle of this revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
1.Step 1: Identify the contract with the customer
2.Step 2: Identify the performance obligations in the contract
3.Step 3: Determine the transaction price
4.Step 4: Allocate the transaction price to the performance obligations in the contract
5.Step 5: Recognize revenue when we satisfy a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
When determining the transaction price, an entity must consider the effects of all of the following:
•Variable consideration
•Constraining estimates of variable consideration
•The existence of a significant financing component in the contract
•Noncash consideration
58 --------------------------------------------------------------------------------
•Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. There were no revenue streams with variable consideration during the six months endedJune 30, 2022 , and 2021. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by theFinancial Accounting Standards Board (the "FASB"), we may be required to change our policies, which could have an effect on our condensed consolidated financial position and results from operations. The Company has determined that the Bitcoin that are awarded through its Bitcoin mining operations are a current asset and should be accounted for in Cash Flow from Operations due to the fact that it has been selling coins on a regular basis in order to fund Operations. As such, any changes in the balance of the current asset account, including those resulting from mining revenue, sales of Bitcoin and any associated gains and losses, and impairments, should be accounted for in Operations as opposed to Investing, where sales of Bitcoin had appeared previously.
Fair value of the digital asset award received is determined using the quoted price of the related cryptocurrency at the time of receipt.
Our policies with respect to our revenue streams are detailed below.
Energy Revenue
We operate as a market participant throughPJM Interconnection , aRegional Transmission Organization ("RTO") that coordinates the movement of wholesale electricity. We sell energy in the wholesale generation market in the PJM RTO. Energy revenues are delivered as a series of distinct units that are substantially the same and that have the same pattern of transfer to the customer over time and are therefore accounted for as a distinct performance obligation. The transaction price is based on pricing published in the day ahead market which constitute the stand-alone selling price. Energy revenue is recognized over time as energy volumes are generated and delivered to the RTO (which is contemporaneous with generation), using the output method for measuring progress of satisfaction of the performance obligation. We apply the invoice practical expedient in recognizing energy revenue. Under the invoice practical expedient, energy revenue is recognized based on the invoiced amount which is considered equal to the value provided to the customer for our performance obligation completed to date.
Reactive energy power is provided to maintain a continuous voltage level. Revenue from reactive power is recognized ratably over time as we stand ready to provide it if called upon by the PJM RTO.
Capacity Revenue
We provide capacity to a customer through participation in capacity auctions held by the PJM RTO. Capacity revenues are a series of distinct performance obligations that are substantially the same and that have the same pattern of transfer to the customer over time and are therefore accounted for as a distinct performance obligation. The transaction price for capacity is market-based and constitutes the stand-alone selling price. As capacity represents our stand-ready obligation, capacity revenue is recognized as the performance obligation is satisfied ratably over time, on a monthly basis, since we stand ready equally throughout the period to deliver power to the PJM RTO if called upon. We apply the invoice practical expedient in recognizing capacity revenue. Under the invoice practical expedient, capacity revenue is recognized based on the invoiced amount which is considered equal to the value provided to the customer for our performance obligation completed to date. Penalties may be assessed by the PJM RTO against generation facilities if the facility is not available during the capacity period. The penalties assessed by the PJM RTO, if any, are recorded as a reduction to capacity revenue when incurred. 59 --------------------------------------------------------------------------------
Cryptocurrency Hosting
We have entered into customer hosting contracts whereby we provide electrical power to cryptocurrency mining customers, and the customers pay a stated amount per MWh ("Contract Capacity"). This amount is paid monthly in advance. Amounts used in excess of the Contract Capacity are billed based upon calculated formulas as contained in the contracts. If any shortfalls occur due to outages, make-whole payment provisions contained in the contracts are used to offset the billings to the customer which prevented them from cryptocurrency mining. Advanced payments and customer deposits are reflected as contract liabilities.
Cryptocurrency Mining
We have entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and our enforceable right to compensation only begins when we provide computing power to the mining pool operator. In exchange for providing computing power, we are entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. Our fractional share is based on the proportion of computing power we contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power in Bitcoin miners is an output of our ordinary activities. The provision of providing such computing power is the only performance obligation in our contracts with mining pool operators. The transaction consideration we receive, if any, is noncash consideration, which we measure at fair value on the date received, which is not materially different than the fair value at contract inception or the time we have earned the award from the pools. The consideration is not variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and we receive confirmation of the consideration we will receive, at which time revenue is recognized. There is no significant financing component in these transactions. Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, we may be required to change our policies, which could have an effect on our consolidated financial position and results from operations.
Asset Retirement Obligations
Asset retirement obligations, including those conditioned on future events, are recorded at fair value in the period in which they are incurred, if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset in the same period. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the EUL of the long-lived asset. If the asset retirement obligation is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement. Our asset retirement obligation represents the cost we would incur to perform environmental clean-up or dismantle certain portions of the Facility.
Impairment of long-lived assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A long-lived asset (group) that is held and used must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable (i.e., information indicates that an impairment might exist). We are responsible for routinely assessing whether impairment indicators are present and should have systems or processes to assist in the identification of potential impairment indicators. 60 -------------------------------------------------------------------------------- We are not required to perform an impairment analysis (i.e., test the asset (group) for recoverability and potentially measure an impairment loss) if indicators of impairment are not present. We have assessed the need for an impairment write-down only if an indicator of impairment (e.g., a significant decrease in the market value of a long-lived asset (group)) is present. The Company performed an impairment test on its long-lived assets and$4,990,000 was recognized as expenses for both the three and six months endedJune 30, 2022 . No impairment indicators existed as of the three and six months endedJune 30, 2021 that would require impairment testing of our long-lived assets.
Derivative Contracts
In accordance with guidance on accounting for derivative instruments and hedging activities all derivatives should be recognized at fair value. Derivatives or any portion thereof, that are not designated as, and effective as, hedges must be adjusted to fair value through earnings. Derivative contracts are classified as either assets or liabilities on the accompanying combined balance sheets. Certain contracts that require physical delivery may qualify for and be designated as normal purchases/normal sales. Such contracts are accounted for on an accrual basis. We use derivative instruments to mitigate our exposure to various energy commodity market risks. We do not enter into any derivative contracts or similar arrangements for speculative or trading purposes. We will, at times, sell our forward unhedged electricity capacity to stabilize its future operating margins. We also use derivative instruments to mitigate the risks of Bitcoin market pricing volatility. We entered into a variable prepaid forward sale contract that mitigates Bitcoin market pricing volatility risks between a low and high collar of Bitcoin market prices during the contract term. This contract settles inSeptember 2022 . The contract meets the definition of a derivative transaction pursuant to guidance under ASC 815 and is considered a compound derivative instrument which is required to be presented at fair value subject to remeasurement each reporting period. The change in fair value is recorded as changes in fair value of forward sale derivative as part of earnings.
Stock Based Compensation
For equity-classified awards, compensation expense is recognized over the requisite service period based on the computed fair value on the grant date of the award. Equity classified awards include the issuance of stock options and restricted stock units ("RSUs").
Notes Payable
We record notes payable net of any discounts or premiums. Discounts and premiums are amortized as interest expense or income over the life of the note in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.
Warrant Liabilities
We record warrant liabilities at their fair value as of the balance sheet date, and recognizes changes in the balances, over the comparative periods of either the issuance date or the last reporting date, as part of changes in fair value of warrant liabilities expense. At the issuance date, each series of warrants were convertible and redeemable to preferred stock.
Loss per share
Basic net (loss) income per share ("EPS") of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding or shares subject to exercise for a nominal value during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Income Taxes The amount of income taxes we record requires interpretations of complex rules and regulations of federal, state, and local tax jurisdictions. We use the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying values and the tax bases of existing assets and liabilities, and for operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when 61 -------------------------------------------------------------------------------- those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized after considering all positive and negative evidence available concerning the realizability of our deferred tax assets. As ofJune 30, 2022 andDecember 31, 2021 , we maintained a valuation allowance on our deferred tax assets. The valuation allowance remains in place based on the uncertainty of future events, including the Company's ability to generate future taxable income in light of its recent losses, and management considered this and other factors in evaluating the realizability of our deferred tax assets. Any changes in the positive or negative evidence evaluated when determining if our deferred tax assets will be realized could result in a material change to our consolidated financial statements. The accruals for deferred tax assets and liabilities are often based on assumptions that are subject to a significant amount of judgment by management. These assumptions and judgments are reviewed and adjusted as facts and circumstances change. Material changes to our income tax accruals may occur in the future based on the potential for income tax audits, changes in legislation or resolution of pending matters.
Post IPO Taxation and Public Company Costs
Stronghold LLC is and has been organized as a pass-through entity forU.S. federal income tax purposes and is therefore not subject to entity-levelU.S. federal income taxes.Stronghold Inc. was incorporated as aDelaware corporation onMarch 19, 2021 and therefore is subject toU.S. federal income taxes and state and local taxes at the prevailing corporate income tax rates, including with respect to its allocable share of any taxable income ofStronghold LLC . In addition to tax expenses,Stronghold Inc. also incurs expenses related to its operations, plus payment obligations under the Tax Receivable Agreement entered into between the Company,Q Power LLC ("Q Power ") and an agent named byQ Power , datedApril 1, 2021 (the "TRA"), which are expected to be significant. To the extentStronghold LLC has available cash and subject to the terms of any current or future debt instruments, the Fourth Amended and Restated Limited Liability Company Agreement ofStronghold LLC , as amended from time to time (the "Stronghold LLC Agreement") requiresStronghold LLC to make pro rata cash distributions to holders of Stronghold LLC Units ("Stronghold Unit Holders"), includingStronghold Inc. , in an amount sufficient to allowStronghold Inc. to pay its taxes and to make payments under the TRA. In addition, the Stronghold LLC Agreement requiresStronghold LLC to make non-pro rata payments toStronghold Inc. to reimburse it for its corporate and other overhead expenses, which payments are not treated as distributions under theStronghold LLC Agreement. See "Tax Receivable Agreement" herein for additional information. In addition, we have incurred, and expect to continue to incur incremental, non-recurring costs related to our transition to a publicly traded corporation, including the costs of the IPO and the costs associated with the initial implementation of our internal control reviews and testing pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). We have also incurred, and expect to continue to incur additional significant and recurring expenses as a publicly traded corporation, including costs associated with compliance under the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), annual and quarterly reports to common stockholders, registrar and transfer agent fees, national stock exchange fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation. Our financial statements following the IPO will continue to reflect the impact of these expenses.
Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations
Our historical financial results discussed below may not be comparable to our future financial results for the reasons described below.
Stronghold Inc. is subject toU.S. federal, state and local income taxes as a corporation. Our accounting predecessor was treated as a partnership forU.S. federal income tax purposes, and as such, was generally not subject toU.S. federal income tax at the entity level. Rather, the tax liability with respect to its taxable income was passed through to its members. Accordingly, the financial data attributable to our predecessor contains no provision forU.S. federal income taxes or income taxes in any state or locality. Due to cumulative and current losses as well as an evaluation of other sources of income as outlined in ASC 740, management has determined that the utilization of our deferred tax assets is not more likely than not, and therefore we have recorded a valuation allowance against our net deferred tax assets. Management continues to evaluate the likelihood of the Company utilizing its deferred taxes, and while the valuation allowance remains in place, we expect to record no deferred income tax expense or benefit. Should the valuation allowance no longer be required, the 21% statutory federal income tax rate as well as state and local income taxes at their respective rates will apply to income allocated toStronghold Inc. 62 -------------------------------------------------------------------------------- As we further implement controls, processes and infrastructure applicable to companies with publicly traded equity securities, it is likely that we will incur additional selling, general and administrative ("G&A") expenses relative to historical periods. Our future results will depend on our ability to efficiently manage our consolidated operations and execute our business strategy.
As we continue to acquire miners and utilize our power generating assets to power such miners, we anticipate that a great proportion of our revenue and expenses will relate to crypto asset mining.
As previously discussed in the Critical Accounting Policies section, the preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America (GAAP) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with revenue recognition, investments, intangible assets, stock-based compensation and business combinations. The Company's financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the Company's financial statements, one must have a clear understanding of the accounting policies employed. 63 --------------------------------------------------------------------------------
Results of Operations
Highlights of our consolidated results of operations for the three and six
months ended
Operating Revenue Revenue increased$25.0 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to a$18.9 million increase in cryptocurrency mining revenue from deploying additional miners, and a$5.6 million increase in energy revenue driven by higher prevailing power prices per MW and higher MW generation as a result of theNovember 2021 Panther Creek Acquisition. Capacity revenue also increased$1.1 million due to the Panther Creek Acquisition. Revenue increased$50.0 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to a$36.6 million increase in cryptocurrency mining revenue from deploying additional miners, and a$12.0 million increase in energy revenue driven by higher prevailing market rates per MW and higher MW generation as a result of theNovember 2021 Panther Creek Acquisition. Capacity revenue also increased$2.4 million due to the Panther Creek Acquisition.
Operating Expenses
Total operating expenses increased$51.8 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily driven by (1) a$14.8 million increase in operations and maintenance expense as a result of theNovember 2021 Panther Creek Acquisition, higher labor and maintenance costs at the Scrubgrass Plant associated with increased plant uptime, and the ramp up of cryptocurrency mining operations including higher lease expenses for our hosting services agreement, (2) a$11.9 million increase in depreciation and amortization primarily from deploying additional miners and transformers, (3) a$8.9 million increase in general and administrative expenses due to legal and professional fees, insurance costs, and compensation as we continue to organize and scale operations, (4) a$6.5 million increase in fuel expenses driven by higher MW generation, primarily due to theNovember 2021 Panther Creek Acquisition, and increased fuel delivery costs from higher diesel prices, and (5) a$5.0 million impairment on miner assets attributable to the decline in the price of Bitcoin. Impairments on digital currencies of$5.2 million were primarily attributable to the June decline in the price of Bitcoin. Total operating expenses increased$105.5 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily driven by (1) a$24.7 million increase in operations and maintenance expense driven by major maintenance costs and labor at the Scrubgrass Plant associated with increasing plant uptime, higher costs as a result of theNovember 2021 Panther Creek Acquisition, and the ramp up of cryptocurrency mining operations including higher lease expenses for our hosting services agreement, (2) a$23.7 million increase in depreciation and amortization primarily from deploying additional miners and transformers, (3) a$18.6 million increase in general and administrative expenses due to legal and professional fees, insurance costs, and compensation as we continue to organize and scale operations, (4) a$13.9 million increase in fuel expenses driven by higher MW generation and increased fuel delivery costs from higher diesel prices, and (5) a$12.2 million impairment on equipment deposits for MinerVa miners discussed in Note 4 - Equipment Deposits andMiner Sales and Note 8 - Contingencies and Commitments. Impairments on digital currencies of$7.7 million were primarily attributed to the June decline in the price of Bitcoin. InMarch 2022 , the Company evaluated the MinerVa equipment deposits for impairment and determined an impairment charge of$12.2 million based on lack of miner delivery per agreement. InJune 2022 , the Company evaluated miner assets and determined an impairment charge of$5.0 million for certain miners attributable to the decline in the price of Bitcoin.
Other Income (Expense)
Total other income (expense) decreased$10.2 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily driven by (1) a$8.0 million realized loss on the sale of miner assets discussed in Note 4 - Equipment Deposits andMiner Sales , (2) a$4.5 million increase in interest expense on additional financing agreements used to fund the growth of cryptocurrency operations, (3) a$1.7 million realized loss on the disposal of fixed assets, and (4) a$0.8 million increase in other income from the one-time gain on extinguishment of PPP loan, partially offset by (5) a$3.9 million increase from a change in value of the forward sale derivative. See Note 4 - Equipment Deposits andMiner Sales regarding the sale of miner assets. See Note 6 - Long-Term Debt and Note 14 - Stock Issued Under Master Financing Agreements and Warrants in the notes to our financial statements for further information on financing agreements. 64 -------------------------------------------------------------------------------- Total other income (expense) decreased$13.6 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily driven by (1) a$8.0 million realized loss on the sale of miner assets, (2) a$7.3 million increase in interest expense on additional financing agreements used to fund the growth of cryptocurrency operations, (3) a$3.4 million increase from a change in value of the forward sale derivative, and (4) a$0.6 million increase in realized losses on the sale of digital currencies. See Note 6 - Long-Term Debt and Note 14 - Stock Issued Under Master Financing Agreements and Warrants in the notes to our financial statements for further information on financing agreements. Segment Results
The below presents summarized results for our operations for the two reporting segments: Energy Operations and Cryptocurrency Operations.
Three Months Ended, Six Months Ended, June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 (unaudited) (unaudited) (unaudited) (unaudited) Operating Revenues Energy Operations$ 8,829,741 $
2,173,108
20,348,708 2,011,416 38,620,777 3,083,421 Total Operating Revenues$ 29,178,449 $
4,184,524
$ (11,731,620) $
(2,570,168)
(18,123,022) (467,593) (35,663,263) (221,239) Net Operating Income/(Loss)$ (29,854,642) $
(3,037,761)
$ (10,383,933) $
(205,248)
$ (40,238,575) $
(3,243,009)
$ (1,326,552) $
(137,904)
(11,340,748) (649,827) (22,404,228) (1,023,636)
Total Depreciation & Amortization
$ (24,547) $
(27,048)
(4,484,236) (28,395) (7,364,166) (65,777) Total Interest Expense$ (4,508,783) $
(55,443)
(a)We do not allocate other income, net for segment reporting purposes. Amount
is shown as a reconciling item between net operating income/(losses) and
consolidated income before taxes. Refer to our consolidated statement of
operations for the six months ended
65 -------------------------------------------------------------------------------- Energy Operations Segment Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change 2022 2021 $ Change (unaudited) (unaudited) (unaudited) (unaudited) OPERATING REVENUES Energy$ 7,129,732 $ 1,570,966 $ 5,558,766 $ 15,492,533 $ 3,486,822 $ 12,005,711 Capacity 1,668,001 595,545 1,072,456 3,712,428 1,283,236 2,429,192 Other 32,008 6,597 25,411 52,770 33,123 19,647 Total operating revenues 8,829,741 2,173,108 6,656,633 19,257,731 4,803,181 14,454,550 OPERATING EXPENSES Fuel - net of crypto segment subsidy1 4,752,332 1,825,716 2,926,616 11,559,912 3,601,815 7,958,097 Operations and maintenance 11,122,830 1,796,119 9,326,711 21,469,517 3,093,697 18,375,820 General and administrative 316,563 - 316,563 757,690 - 757,690 Depreciation and amortization 1,326,552 137,904 1,188,648 2,582,653 281,538 2,301,115 Total operating expenses$ 17,518,277 $ 3,759,739 $ 13,758,538 $ 36,369,772 $ 6,977,050 $ 29,392,722 NET OPERATING LOSS EXCLUDING CORPORATE OVERHEAD (8,688,536)$ (1,586,631) (7,101,905) (17,112,041)$ (2,173,869) (14,938,172) Corporate overhead 3,043,084 983,537 2,059,547 6,716,704 1,611,936 5,104,768 NET OPERATING LOSS$ (11,731,620) $ (2,570,168) $ (9,161,452) $ (23,828,745) $ (3,785,805) $ (20,042,940) INTEREST EXPENSE$ (24,547) $ (27,048) $ 2,501 $ (56,069) $ (68,306) $ 12,237 1 Cryptocurrency operations consumed$3.9 million and$6.5 million of electricity generated by the Energy Operations segment for the three and six months endedJune 30, 2022 and$0.4 million and$0.5 million for the three and six months endedJune 30, 2021 . For segment reporting, this intercompany electric charge is recorded as a contra-expense to offset fuel costs within the Energy Operations segment. Operating Revenues Total operating revenue increased$6.7 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to a$5.6 million increase in energy revenue driven by higher prevailing market rates per MW and higher MW generation. Capacity revenue increased$1.1 million as a result of theNovember 2021 Panther Creek Acquisition. EffectiveJune 1, 2022 throughMay 31, 2024 , both plants strategically reduced their exposure to the capacity markets, and the resulting cost-capping and operational requirements in the day ahead market by PJM. The Company chose to be an energy resource after achieving its RegA certification, which will reduce monthly capacity revenue and the frequency with which the plants will be mandated to sell power at non-market rates, in exchange for the opportunity to sell power to the grid at prevailing market rates, which management expects will more than make up for lost capacity revenue. This also gives our plants the ability to provide fast response energy to the grid in the real time market when needed without having to comply with day ahead power commitments. Over the course of 2022, the PJM grid has seen stronger around the clock prices, and stronger daily "peak" prices suggesting tight supply and demand grid conditions. When high power prices call for more electricity to be supplied by our plants, and those prices are in excess of Bitcoin-equivalent power prices, the Company may shut off its data center Bitcoin mining load in order to sell power to the grid. The Company believes that this integration should allow it to optimize for both Revenue as well as grid support over time. Total operating revenue increased$14.5 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to a$12.0 million increase in energy revenue driven by higher prevailing market rates per MW and higher MW generation. Capacity revenue increased$2.4 million resulting from theNovember 2021 Panther Creek Acquisition. Full plant power utilization is optimal for our revenue growth as it also drives a higher volume of Tier II Renewable Energy Credits ("RECs"), waste coal tax credits, and beneficial use ash sales, as well as the increased electricity supply for the crypto asset operations.
Operating Expenses
Total operating expenses increased$13.8 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to the incremental expenses associated with operating the Panther Creek Plant after its 66 --------------------------------------------------------------------------------November 2021 acquisition. Operations and maintenance expense increased$9.3 million primarily driven by higher labor, plant maintenance and one-time upgrades. Fuel expenses increased$2.9 million primarily due to higher MW generation resulting from theNovember 2021 Panther Creek Acquisition and increased fuel delivery costs from higher diesel prices, partially offset by higher costs being allocated to the Cryptocurrency Segment due to higher electric consumption for bitcoin mining operations, and greater REC sales. REC sales of$2.1 million and$0.6 million were recognized as contra-expense to offset fuel expenses for the three months endedJune 30, 2022 , and 2021, respectively. Depreciation and amortization expense increased$1.2 million primarily due to the Panther Creek Acquisition. Corporate overhead increased$2.1 million primarily due to higher legal and professional fees, directors' and officers' liability insurance, and payroll expenses, which have been allocated to the two segments using a "fair-share" of revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments. Total operating expenses increased$29.4 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to the incremental operations and maintenance and fuel expenses associated with operating the Panther Creek Plant after itsNovember 2021 acquisition. Operations and maintenance increased$18.4 million primarily driven by payroll, major maintenance and upgrade expenditures. Fuel expenses increased$8.0 million primarily due to higher MW generation resulting from theNovember 2021 Panther Creek Acquisition and increased fuel delivery costs from higher diesel prices, partially offset by higher costs being allocated to the Cryptocurrency Segment due to higher electric consumption for bitcoin mining operations, and greater REC sales. REC sales of$2.6 million and$0.8 million were recognized as contra-expense to offset fuel expenses for the six months endedJune 30, 2022 , and 2021, respectively. Depreciation and amortization expense increased$2.3 million primarily due to the Panther Creek Acquisition. Corporate overhead increased$5.1 million primarily due to higher legal and professional fees, directors' and officers' liability insurance, and payroll expenses, which have been allocated to the two segments using a "fair-share" of revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments. 67 --------------------------------------------------------------------------------
Cryptocurrency Operations Segment
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 $ Change 2022 2021 $ Change (unaudited) (unaudited) (unaudited) (unaudited) OPERATING REVENUES Cryptocurrency mining$ 20,227,536 $ 1,324,645 $ 18,902,891 $ 38,431,729 $ 1,840,903 $ 36,590,826 Cryptocurrency hosting 121,172 686,771 (565,599) 189,048 1,242,518 (1,053,470) Total operating revenues 20,348,708 2,011,416 18,337,292 38,620,777 3,083,421
35,537,356
OPERATING EXPENSES Electricity - purchased from energy segment 3,927,782 402,451 3,525,331 6,458,596 498,706 5,959,890 Operations and maintenance 5,463,926 38,051 5,425,875 6,451,572 111,161 6,340,411 General and administrative 511,058 34,731 476,327 569,545 70,118 499,427 Impairments on digital currencies 5,205,045 375,246 4,829,799 7,711,217 375,246
7,335,971
Impairments on equipment deposits - - - 12,228,742 - 12,228,742 Impairments on miner assets 4,990,000 - 4,990,000 4,990,000 - 4,990,000 Depreciation and amortization 11,340,748 649,827 10,690,921 22,404,228 1,023,636 21,380,592 Total operating expenses$ 31,438,559 $ 1,500,306 $ 29,938,253 $ 60,813,900 $ 2,078,867 $ 58,735,033 NET OPERATING LOSS EXCLUDING CORPORATE OVERHEAD (11,089,851) 511,110 (11,600,961) (22,193,123) 1,004,554 (23,197,677) Corporate overhead 7,033,171 978,703 6,054,468 13,470,140 1,225,793 12,244,347 NET OPERATING LOSS$ (18,123,022) $ (467,593) $ (17,655,429) $ (35,663,263) $ (221,239) $ (23,197,677) INTEREST EXPENSE$ (4,484,236) $ (28,395) $ (4,455,841) $ (7,364,166) $ (65,777) $ (7,298,389) Operating Revenues Total operating revenues increased by$18.3 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to increased cryptocurrency mining revenue as a result of purchasing and deploying additional miners throughout 2021 and the six-month period endedJune 30, 2022 . The increased quantity of miners increased total hash rates and Bitcoin awards. The Company's Bitcoin mining operations were awarded 637 coins during the second quarter, a 45% increase versus the 438 Bitcoin it was awarded in the first quarter of 2022. Cryptocurrency hosting revenue decreased by$0.6 million due to the strategic termination of several agreements of generated power sales to crypto asset mining customers for which we were providing hosting services. Total operating revenues increased by$35.5 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to increased cryptocurrency mining revenue as a result of purchasing and deploying additional miners throughout 2021 and the six-month period endedJune 30, 2022 . The increased quantity of miners increased total hash rates and Bitcoin awards. Cryptocurrency hosting revenue decreased by$1.1 million due to the strategic termination of several agreements of generated power sales to crypto asset mining customers for which we were providing hosting services.
Operating Expenses
Total operating expenses increased by$29.9 million for the three-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to (1) a$10.7 million increase in depreciation and amortization resulting from the deployment of miners and infrastructure assets, (2) a$5.0 million impairment on miner assets attributable to the decline in the price of Bitcoin, (3) a$5.4 million increase in operations and maintenance due to higher lease expenses from the ramp up of the Northern Data Hosting Agreement, purchases of power supplies and labor, (4) a$4.8 million increase in Impairments on digital currencies related to theJune 2022 decrease in Bitcoin pricing, and (5) a$3.5 million increase of intercompany electric charges related to the ramp up of cryptocurrency mining operations. Corporate overhead increased by$6.1 million primarily due to higher legal and professional fees, directors' and officers' liability insurance, and payroll expenses, which have been allocated to the two segments using a "fair-share" of 68 -------------------------------------------------------------------------------- revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments. Total operating expenses increased by$58.7 million for the six-month period endedJune 30, 2022 , as compared to the same period in 2021, primarily due to (1) a$21.4 million increase in depreciation and amortization resulting from the deployment of miners and infrastructure assets, (2) a$12.2 million impairment on equipment deposits for MinerVa miners, (3) a$7.3 million increase in Impairments on digital currencies primarily related to theJune 2022 decrease in Bitcoin pricing, (4) a$6.3 million increase in Operations and maintenance due to higher lease expenses from the ramp up of the Northern Data Hosting Agreement, purchases of power supplies and labor, (5) a$6.0 million increase of intercompany electric charges related to the ramp up of cryptocurrency mining operations, and (6) a$5.0 million impairment on miner assets attributable to the decline in the price of Bitcoin. Corporate overhead increased by$12.2 million primarily due to higher legal and professional fees, directors' and officers' liability insurance, and payroll expenses, which have been allocated to the two segments using a "fair-share" of revenues approach, where the revenue for the segment is divided by the total combined revenues of the segments and is then multiplied by the shared general and administrative costs for the combined segments.
Impairment on Digital Currencies
Impairments on digital currencies of$5.2 million and$7.7 million were recognized for the three and six-months endedJune 30, 2022 , respectively, as a result of the negative impacts from the crypto coin spot market declines. As ofJune 30, 2022 , the Company held approximately 268 Bitcoin on its balance sheet at carrying value, of which 250 were restricted. The spot market price of Bitcoin was$19,986 as ofJune 30, 2022 , per Coinbase Global Inc.
Interest Expense
Interest expense increased$4.5 million and$7.3 million for the three and six months endedJune 30, 2022 , as compared to the same period in 2021, primarily due to the borrowings from our WhiteHawk promissory notes and draws against the Arctos/NYDIG Financing Agreement discussed in Note 14 - Stock Issued Under Master Financing Agreements and Warrants in the notes to our financial statements.
Liquidity and Capital Resources
Overview
Stronghold Inc. is a holding company with no operations and is the sole managing member ofStronghold LLC . Our principal asset consists of units ofStronghold LLC . Our earnings and cash flows and ability to meet any debt obligations will depend on the cash flows resulting from the operations of our operating subsidiaries, and the payment of distributions to us by such subsidiaries. Our cash needs are primarily for growth through acquisitions, capital expenditures and working capital to support equipment financing and the purchase of additional miners. We have incurred and may continue to incur significant expenses in servicing and maintaining our power generation facilities. If we were to acquire additional facilities in the future, capital expenditures may include improvements, maintenance, and build out costs associated with equipping such facilities to house miners to mine Bitcoin. We have historically relied on funds from equity issuances, equipment financings, and revenue from sales of Bitcoin and power generated at our power plants to provide for our liquidity needs. During 2021 and the first quarter of 2022, we received$63.2 million (net of loan fees and debt issuance costs) in proceeds from the financing agreements with WhiteHawk and NYDIG, net proceeds of$131.5 million from the IPO, net proceeds of$96.8 million from two private placements of convertible preferred securities, and an additional$25.0 million from WhiteHawk as a result of the Second WhiteHawk Amendment. Additionally, onMay 15, 2022 , the Company received$33.75 million (net of loan fees and debt issuance costs) pursuant to the 2022 Private Placement. Please see "-Debt Agreements - Equipment Financing Transactions" for more information regarding our financing arrangements. These cash sources provided additional short and long-term liquidity to support our operations in fiscal year 2021 and through the second quarter of 2022.
As of
69 -------------------------------------------------------------------------------- referenced 250 Bitcoin pledged as collateral and associated with the agreement. As ofJune 30, 2022 andAugust 12, 2022 , we had approximately$33.3 million and$27.5 million of cash and cash equivalents on our balance sheet, which included 18 and 44 unrestricted Bitcoin, respectively. As ofJune 30, 2022 andAugust 12, 2022 , we had outstanding indebtedness of$127.9 million and$141.0 million , respectively, and availability under our financing agreements of$7.2 million and$3.6 million , respectively. If our cash flows from operations continue to fall short of uses of capital, we may need to seek additional sources of capital to fund our short-term and long-term capital needs. We may further sell assets or seek potential additional debt or equity financing to fund our short-term and long-term needs. If we are unable to raise additional capital, there is a risk that we could default on our obligations and could be required to discontinue or significantly reduce the scope of our operations, including through the sale of our assets, if no other means of financing options are available. Operations have not yet established a consistent record of covering our operating expenses and we incurred a net loss of$40.2 million and$72.5 million for the three and six months endedJune 30, 2022 , respectively, and an accumulated deficit of$155.7 million as ofJune 30, 2022 . We experienced a number of previously disclosed setbacks and unexpected challenges, including a longer-than-expected and continuing delay of the MinerVa miners and longer than expected downtime at our Scrubgrass Plant for maintenance, the Panther Creek Plant's mining operations shutdown inApril 2022 and the outages of our mining operations due to higher than anticipated requirements from PJM. As a result of the delay in delivery of the MinerVa miners, we were at risk of defaulting on our obligations under the WhiteHawk debt facility because those miners were to be provided as collateral to WhiteHawk byApril 30, 2022 . Pursuant to the Second WhiteHawk Amendment, the MinerVa miners were exchanged for collateral for additional miners received by the Company. Due to the delay, we determined an impairment charge totaling$12.2 million that was recognized onMarch 31, 2022 . We spent approximately$5.1 million in fiscal year 2021 on maintenance and repair costs at the Scrubgrass Plant, and we estimate that we will spend an aggregate of approximately$5 million on major repairs and upgrades during fiscal year 2022. In addition to incurred expenses, we were also unable to mine Bitcoin at the Scrubgrass Plant during such downtime, which directly and negatively affects our results of operations. As previously disclosed, the Panther Creek Plant's mining operations were offline for ten days in April due to the failure of a switchgear and the need to source, deliver and install a new piece of equipment, causing ten days of no mining revenue generation at the facility and resulting in an estimated loss of approximately$1.4 million . As previously disclosed in the Company's Form 8-K datedJuly 25, 2022 , the Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in the month of June from damaged transmission lines caused by a storm, and other plant maintenance issues. The Company estimates the financial impact of the June outages to be lost revenue of$1.8 million and a net income impact of$1.4 million . Taking into account the Second WhiteHawk Amendment, 2022 Private Placement, the Bitmain Sale, other miner sales, and transactions subsequent to theJune 30, 2022 quarter end which include the WhiteHawk Refinancing Agreement, NYDIG debt extinguishment and equitization of theMay 2024 Convertible Notes, we believe our liquidity position, combined with expected improvements in operating cash flows, and the proceeds of additional asset sales, will be sufficient to meet our existing commitments and fund our operations for the next twelve months.
We have no material off balance sheet arrangements.
Cash Flows
Analysis of Cash Flow Changes Between the Six Months Ended
The following table summarizes our cash flows for the periods indicated:
Six Months Ended June 30, 2022 2021 Change ($ in thousands) (in thousands) Net cash provided by (used in) operating activities$ (7,628.2) $ 2,225.2 $ (9,853.4) Net cash provided by (used in) investing activities (55,303.8) (91,457.2) 36,153.4
Net cash provided by (used in) financing activities 64,129.1 132,643.6
(68,514.5) Net change in cash$ 1,197.1 $
43,411.6
Operating Activities. Net cash used in operating activities was$7.6 million for the six months endedJune 30, 2022 compared to$2.2 million provided by operating activities for the six months endedJune 30, 2021 . The$9.9 million net 70 -------------------------------------------------------------------------------- decrease in cash from operating activities was primarily due to increases in operations and maintenance expenses related to theNovember 2021 Panther Creek Acquisition and increases in general and administrative expenses from higher legal and professional fees, insurance costs, and compensation as we continue to organize and scale operations. Interest expense increased for the same period driven by incremental borrowings discussed in Note 6 - Long-Term Debt in the notes to our financial statements. These increases in cash paid were partially offset by higher proceeds from the sale of digital currencies and higher energy revenue after the acquisition of the Panther Creek Plant. Investing Activities. Net cash used in investing activities was$55.3 million for the six months endedJune 30, 2022 compared to$91.5 million used in investing activities for the six months endedJune 30, 2021 . The$36.2 million decrease in net cash used in investing activities was primarily attributable to lower outflows for equipment deposits, partially offset by higher outflows for the purchase of property, plant and equipment for the continued ramp up of cryptocurrency mining operations. These investments require significant deposits to be made with equipment vendors as commitments for future deliveries of miners and cryptocurrency mining infrastructure. Cash outflows were partially offset by the sale of some of our unproductive, excess or not-in-use assets. See Note 4 - Equipment Deposits andMiner Sales . Financing Activities. Net cash provided by financing activities was$64.1 million for the six months endedJune 30, 2022 compared to$132.6 million provided by financing activities for the six months endedJune 30, 2021 . The$68.5 million net decrease in cash provided by financing activities was due to lower proceeds from private placements in 2022 payments on long-term debt and financed insurance premiums, partially offset by higher proceeds from debt, net of issuance costs paid in cash and payments on long-term debt. See the promissory note, equipment financing agreements and convertible note discussed in Note 6 - Long-Term Debt and Note 14 - Stock Issued Under Master Financing Agreements and Warrants and Note 32 - Convertible Note.
Debt Agreements
We have entered into various debt agreements used to purchase equipment to operate our business.
We entered into the WhiteHawk Financing Agreement onJune 30, 2021 and amended the agreement onDecember 31, 2021 andMarch 28, 2022 . As ofJune 30, 2022 , the amount owed under the debt agreements totaled$65.0 million with repayment terms extending throughMarch 31, 2024 . As ofJune 30, 2022 , the repayment amounts, including interest, totaled$46.4 million . For additional information, see Note 6 - Long-Term Debt in the notes to our financial statements. Four draws against the Arctos/NYDIG Financing Agreement (as defined below) totaled$37.3 million (net of debt issuance costs) secured by our equipment contract commitments for future miner deliveries. As ofJune 30, 2022 , the amount owed under the debt agreements totaled$20.9 million with repayment terms extending throughOctober 25, 2023 . Of the total amount outstanding of$20.9 million ,$19.5 million was classified as current portion of long-term debt (less discounts and debt issuance costs) and will be repaid as ofJune 30, 2023 . The remaining portion of long-term debt is$1.3 million (less discounts and debt issuance costs). As ofJune 30, 2022 , the repayment amounts, including interest, totaled$23.5 million . For additional information, see Note 6 - Long-Term Debt in the notes to our financial statements. Three draws against the Second NYDIG Financing Agreement totaled$46.8 million (net of debt issuance costs) secured by our equipment contract commitments for future miner deliveries. As ofJune 30, 2022 , the amount owed under the debt agreements totaled$44.1 million with repayment terms extending throughJanuary 25, 2024 . Of the total amount outstanding of$44.1 million ,$31.5 million was classified as current portion of long-term debt (less discounts and debt issuance costs) and will be repaid as ofJune 30, 2023 . The remaining portion of long-term debt is$12.6 million (less discounts and debt issuance costs). As ofJune 30, 2022 , the repayment amounts, including interest, totaled$49.5 million . For additional information, see Note 6 - Long-Term Debt in the notes to our financial statements.
Total net obligations under all debt agreements as of
EffectiveOctober 21, 2021 , we entered into a director and officer insurance policy with annual premiums totaling$6.9 million . We have executed a Commercial Premium Finance Agreement withAFCO Premium Credit LLC over a term of nine months, with an annual interest rate of 3.454%, that finances the payment of the total premiums owed. The agreement requires a$1.4 million down payment, with the remaining$5.5 million plus interest paid over nine months. Monthly payments of$621.3 thousand startedNovember 21, 2021 and endJuly 21, 2022 . As ofJune 30, 2022 , the premiums were paid in full. 71 -------------------------------------------------------------------------------- EffectiveApril 29, 2022 , we entered into a commercial property insurance policy with annual premiums totaling$523,076 . The Company has executed a Commercial Premium Finance Agreement withAFCO Premium Credit LLC , over a term of eleven months, with an annual interest rate of 5.99%, that finances the payment of the total premiums owed. The agreement requires a$44,793 down payment, with the remaining$478,283 plus interest paid over eleven months. Monthly payments of$44,793 startedMay 29, 2022 and endMarch 29, 2023 . As ofJune 30, 2022 , the unpaid balance is$393,260 .May 2022 Notes OnMay 15, 2022 , we issued$33.75 million aggregate principal amount ofMay 2022 Notes to the Purchasers (the "May 2022 Notes"), bearing an interest rate of 10.00% per annum (in arrears) and a maturity date ofMay 15, 2024 . The maturity date for theMay 2022 Notes may be accelerated upon certain instances, and theMay 2022 Notes may be prepaid at any time in whole or in part, at our election. The holders of theMay 2022 Notes (the "Holders") have certain conversion rights. In the event that we, bySeptember 30th, 2022 , (i) have achieved a total equity market capitalization of at least$400 million , based on the 20-day VWAP of our common stock and (ii) have at least 60 million shares of common stock outstanding, the full amount outstanding and accrued but unpaid interest on theMay 2022 Notes shall automatically convert into a number of shares of Series C Preferred Stock, provided that the Series C Preferred Certificate of Designation has been filed. Upon such conversion, dividends will accrue at a rate of 8.0% per annum on the Series C Preferred Stock. BeginningOctober 1, 2022 , if theMay 2022 Notes have not converted into shares of Series C Preferred Stock, we will begin paying off theMay 2022 Notes in quarterly installments in amounts equal to the greater of (i) 8% of our consolidated revenue from each trailing quarter or (ii)$5.4 million , payable at our option in either cash or up to 50% of the shares of common stock at a 20% discount to the 20-day VWAP. Each of our subsidiaries, subject to the exclusions therein, executed a guaranty agreement with the Holders to guaranty our obligations under theMay 2022 Notes.
Equipment Purchase and Financing Transactions
MinerVa Semiconductor Corp Purchase Agreement
OnApril 2, 2021 , we entered into the MinerVa Purchase Agreement for the acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner equipment (miners) with a total terahash to be delivered equal to 1.5 million terahash. The price per miner is$4,892.50 for an aggregate purchase price of$73,387,500 to be paid in installments. The first installment of 60% of the purchase price, or$44,032,500 , was paid onApril 2, 2021 , and an additional payment of 20% of the purchase price, or$14,677,500 , was paid onJune 2, 2021 . As ofDecember 31, 2021 , there are no remaining deposits owed. InDecember 2021 , we extended the deadline for delivery of the MinerVa miners toApril 2022 . InMarch 2022 , MinerVa was again unable to meet its delivery date and had only delivered approximately 3,350 of the 15,000 miners. We do not know when the remaining MinerVa miners will be received, if at all. As a result, we may write off some or all of the approximately 7,800 undelivered MinerVa miners. Refer to Note 30 - Covenants that describes covenants referencing the anticipated final delivery timeframe ofApril 2022 . OnJuly 18, 2022 , the Company provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement obligating the Company and MinerVa to work together in good faith towards a resolution for a period of sixty (60) days. In accordance with the MinerVa Purchase Agreement, if no settlement has been reached after sixty (60) days, Stronghold may end discussions and declare an impasse and adhere to the dispute resolution provisions of the MinerVa Purchase Agreement. The aggregate purchase price does not include shipping costs, which are our responsibility and shall be determined at which time the miners are ready for shipment.
Nowlit Solutions Corp Purchase Agreement
We entered into a hardware purchase and sales agreement withNowlit Solutions Corp effectiveApril 1, 2021 . Hardware includes, but is not limited to, ASIC miners, power supply units, power distribution units and replacement fans for ASIC miners. All hardware must be paid for in advance before it is shipped to us. We made payments totaling$5,657,432 inApril 2021 and costs have been capitalized and reported as property and equipment. We also entered into two additional separate purchases of miners fromNowlit Solutions Corp. The first purchase payment was made onNovember 23, 2021 , in the amount of$1,605,360 for 190 miners. The second purchase payment was made onNovember 26, 2021 , in the amount of$2,486,730 for an additional 295 miners.
Cryptech Solutions Purchase Agreement
72 -------------------------------------------------------------------------------- We entered into a hardware purchase and sales agreement with Cryptech effectiveApril 1, 2021 . Hardware includes, but is not limited to, ASIC miners, power supply units, power distribution units and replacement fans for ASIC miners. Total purchase price is$12,660,000 for 2,400 BitmainS19j miners to be delivered monthly in equal quantities (200 per month) fromNovember 2021 throughOctober 2022 . All hardware must be paid for in advance before it is shipped to us. We made a 30% down payment of$3,798,000 onApril 1, 2021 with the remaining 70% or$8,862,000 , agreed to be paid in 17 installments. OnDecember 7, 2021 , we entered into the Cryptech Purchase Agreement with Cryptech to acquire the Cryptech miners with a hash rate of 96 TH/s for a total purchase price of$8,592,000 . Pursuant to the Cryptech Purchase Agreement, all hardware will be paid for in advance of being shipped to the Company.
Supplier Purchase Agreements
OnApril 14, 2021 , we entered into an agreement with a supplier to provide approximately 9,900 miners for$21,011,287 . We were required to make an initial payment on the miners that are currently being delivered starting inOctober 2021 (refer to Note 33 - Subsequent Events in the notes to our financial statements for further discussions). We made a 75% deposit of$15,758,432 inApril 2021 , and the remaining 25%, or$5,252,755 plus sales taxes has been invoiced inOctober 2021 . Once operational, after deducting an amount equal to$0.027 per kWh for the actual power used, 65% of all cryptocurrency revenue generated by the miners in the supplier's pods shall be payable to us and 35% of all cryptocurrency revenue generated by the miners shall be payable to this party or its designee. As ofJune 30, 2022 , there are no miners operating that will contractually obligate the Company to pay the 35% revenue share (refer to Note 33 - Subsequent Events in the notes to our financial statements for further discussions). OnDecember 10, 2021 , we entered into a Hardware Purchase and Sale Agreement (the "First Supplier Purchase Agreement") to acquire 3,000 M30S Miners with a hash rate per unit of 87 TH/s. Pursuant to the First Supplier Purchase Agreement, the unit price per M30S Miner is$6,960 for a cumulative purchase price of$20,880,000 that was paid in full within five business days of the execution of the First Supplier Purchase Agreement. OnDecember 16, 2021 , we entered into a Second Hardware Purchase and Sale Agreement (the "Second Supplier Purchase Agreement") to acquire a cumulative amount of approximately 4,280 M30S+ Miners. Pursuant to the Second Supplier Purchase Agreement, the unit price per M30S Miner is$2,714 and the unit price per M30S+ Miner is$3,520 for a cumulative purchase price of$11,340,373 .
Bitmain Technologies Limited Purchase Agreement
OnOctober 28, 2021 , we entered into the first of two Non-Fixed Price Sales and Purchase Agreements with Bitmain. This first agreement covers six batches of 2,000 miners, or 12,000 in total, arriving on a monthly basis from April throughSeptember 2022 . Each batch has an assigned purchase price that totals to$75,000,000 , to be paid in three installments of 25%, 35% and 40% over the six-month delivery period. Per the agreement, onOctober 29, 2021 , the Company made a$23,300,000 payment comprised of the 25% installment payment plus 35% of theApril 2022 batch of 2,000 miners that have an assigned purchase price of$13,000,000 . OnNovember 18, 2021 , the Company made an additional payment of 35% or$4,550,000 towards theApril 2022 batch of miners. During the three-month period endingJune 30, 2022 , the Company paid installments totaling$17.4 million . OnNovember 16, 2021 , we entered into the second Non-Fixed Price Sales and Purchase Agreement with Bitmain. This second agreement covers six batches of 300 miners, or 1,800 in total, arriving on a monthly basis fromJuly 2022 throughDecember 2022 . Each batch has an assigned purchase price that totals$19,350,000 , to be paid in three installments of 35%, 35%, and 30% of the total purchase price over the six-month delivery period. Per the second Non-Fixed Price Sales and Purchase Agreement, onNovember 18, 2021 , the Company paid the first installment payment of 35% or$6,835,000 . During the three-month period endingMarch 31, 2022 , the Company paid three installments totaling$3,528,000 .
The miners purchased pursuant to the two agreements with Bitmain will have an aggregate hash rate capacity of approximately 1,450 PH/s.
Luxor Technology Corporation Purchase Agreement
73 -------------------------------------------------------------------------------- We paid for three separate purchases of miners from Luxor. The first purchase payment was made onNovember 26, 2021 , in the amount of$4,312,650 for 770 miners. The second and third purchase payments were made onNovember 29, 2021 , in the amount of$5,357,300 and$3,633,500 respectively; for an additional 750 and 500 miners. OnNovember 30, 2021 , we entered into a fourth purchase agreement with Luxor to acquire 400 Antminer T19 miners with a hash rate of 84 TH/s and 400 Antminer T19 miners with a hash rate of 88 TH/s for a total purchase price of$6,260,800 .
Arctos/NYDIG Financing Agreement
OnJune 25, 2021 , we entered into a$34,481,700 ("Maximum Advance Amount") master equipment financing agreement with an affiliate ofArctos Credit, LLC ("Arctos," now known as "NYDIG") (the "Arctos/NYDIG Financing Agreement. The aggregate principal outstanding bears interest of 10% and will be repaid in 24 monthly payments, with a 1.25% fee due if the Maximum Advance Amount is not requested prior toAugust 15, 2021 . Outstanding borrowings under the Arctos/NYDIG Financing Agreement are secured by certain miners and the contracts to acquire such miners. The Arctos/NYDIG Financing Agreement includes customary restrictions on additional liens on the Arctos/NYDIG Financed Equipment. As ofJune 30, 2022 ,$35.7 million (net of debt issuance costs) has been borrowed, leaving zero funds available to be drawn under the Arctos/NYDIG Financing Agreement. The Arctos/NYDIG Financing Agreement may not be terminated by us or prepaid in whole or in part. In conjunction with the Arctos/NYDIG Financing Agreement, we issued 126,273 shares of Class A common stock to Arctos (adjusted for the Stock Split) and may issue additional shares of Class A common stock to Arctos in consideration of future financings. OnJanuary 31, 2022 , we and NYDIG amended the Arctos/NYDIG Financing Agreement (the "NYDIG Amendment") to include (i) 2,140 M30S+ Miners and (ii) 2,140 M30S Miners we purchased pursuant to a purchase agreement datedDecember 16, 2021 , totaling$12,622,816 of additional borrowing capacity. We will pay an aggregate closing fee of$504,912 to NYDIG. The NYDIG Amendment requires that we maintain a blocked wallet or other account for deposits of all mined currency.
OnDecember 15, 2021 , we entered into the Second NYDIG Financing Agreement with NYDIG whereby NYDIG agreed to lend us up to$53,952,000 to finance the purchase of the Second NYDIG-Financed Equipment. Outstanding borrowings under the Second NYDIG Financing Agreement are secured by the Second NYDIG-Financed Equipment, contracts to acquire Second NYDIG-Financed Equipment, and the Bitcoin mined by the Second NYDIG-Financed Equipment. The Second NYDIG Financing Agreement includes customary restrictions on additional liens on the Second NYDIG-Financed Equipment. The Second NYDIG Financing Agreement may not be terminated by us or prepaid in whole or in part. WhiteHawk Financing Agreement OnJune 30, 2021 , we entered into an equipment financing agreement (the "WhiteHawk Financing Agreement") with WhiteHawk whereby WhiteHawk agreed to lend to us an aggregate amount not to exceed$40.0 million (the "Total Advance") to finance the purchase of certain Bitcoin miners and related equipment (the "WhiteHawk-Financed Equipment"). AtAugust 30, 2021 , the entirety of the Total Advance was drawn under the WhiteHawk Financing Agreement. The aggregate principal outstanding bears interest of 10% and will be repaid in 24 monthly payments. Outstanding borrowings under the WhiteHawk Financing Agreement are secured by the WhiteHawk Financed Equipment and the contracts to acquire the WhiteHawk-Financed Equipment. The WhiteHawk Financing Agreement includes customary restrictions on additional liens on the WhiteHawk-Financed Equipment and is guaranteed by the Company. The WhiteHawk Financing Agreement may be terminated early if we, among other things, pay the Early Termination Fee (as defined therein). In conjunction with the WhiteHawk Financing Agreement, we issued a stock purchase warrant to WhiteHawk, which provides for the purchase of a number of shares of Class A common stock at$0.01 per share, equal to approximately$2.0 million , subject to adjustment as described in the warrant agreement (the "WhiteHawk Warrant"). The WhiteHawk Warrant expires onJune 30, 2031 . OnDecember 31, 2021 , we amended the WhiteHawk Financing Agreement (the "WhiteHawk Amendment") to extend the final MinerVa delivery date fromDecember 31, 2021 toApril 30, 2022 . Pursuant to the WhiteHawk Amendment,Equipment, LLC paid an amendment fee in the amount of$250,000 to WhiteHawk. OnMarch 28, 2022 ,Equipment LLC and WhiteHawk again amended the WhiteHawk Financing Agreement to exchange the collateral under the WhiteHawk Financing Agreement. Pursuant to the Second WhiteHawk Amendment, (i) the approximately 11,700 remaining miners 74 -------------------------------------------------------------------------------- under the MinerVa Purchase Agreement were exchanged as collateral for additional miners received by us from other suppliers and (ii) WhiteHawk agreed to lend to us the Second Total Advance. Pursuant to the Second WhiteHawk Amendment,Equipment, LLC paid an amendment fee in the amount of$275,414.40 and a closing fee with respect to the Second Total Advance of$500,000 . In addition to the purchased Bitcoin miners and related equipment, Panther Creek and Scrubgrass each agreed to a negative pledge of the Panther Creek Plant and Scrubgrass Plant, respectively, and guaranteed the WhiteHawk Financing Agreement. Each of the negative pledge and the guaranty by Panther Creek and Scrubgrass will be released upon payment in full of the Second Total Advance, regardless of whether the Total Advance remains outstanding. In conjunction with the Second WhiteHawk Amendment, we issued a warrant to WhiteHawk to purchase 125,000 shares of Class A common stock, subject to certain antidilution and other adjustment provisions as described in the Second WhiteHawk Warrant, at an exercise price of$0.01 per share. The Second WhiteHawk Warrant expires onMarch 28, 2032 . While we continue to engage in discussions with MinerVa on the delivery of the remaining miners, we do not know when the remaining miners will be delivered, if at all.
Tax Receivable Agreement
The TRA generally provides for the payment byStronghold Inc. to certain of the Stronghold Unit Holders of 85% of the net cash savings, if any, inU.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) thatStronghold Inc. actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain increases in tax basis that occur as a result ofStronghold Inc.'s acquisition (or deemed acquisition forU.S. federal income tax purposes) of all or a portion of such holder's Stronghold LLC Units pursuant to an exercise of Redemption Right or the Call Right and (ii) imputed interest deemed to be paid byStronghold Inc. as a result of, and additional tax basis arising from, any paymentsStronghold Inc. makes under the TRA.Stronghold Inc. will retain the remaining net cash savings, if any. The TRA generally provides for payments to be made asStronghold Inc. realizes actual cash tax savings from the tax benefits covered by the TRA. However, the TRA provides that ifStronghold Inc. elects to terminate the TRA early (or it is terminated early due toStronghold Inc.'s failure to honor a material obligation thereunder or due to certain mergers, asset sales, other forms of business combinations or other changes of control),Stronghold Inc. is required to make an immediate payment equal to the present value of the future payments it would be required to make if it realized deemed tax savings pursuant to the TRA (determined by applying a discount rate equal to one-year LIBOR (or an agreed successor rate, if applicable) plus 100 basis points, and using numerous assumptions to determine deemed tax savings), and such early termination payment is expected to be substantial and may exceed the future tax benefits realized byStronghold Inc. The actual timing and amount of any payments that may be made under the TRA are unknown at this time and will vary based on a number of factors. However,Stronghold Inc. expects that the payments that it will be required to make toQ Power (or its permitted assignees) in connection with the TRA will be substantial. Any payments made byStronghold Inc. toQ Power (or its permitted assignees) under the TRA will generally reduce the amount of cash that might have otherwise been available toStronghold Inc. orStronghold LLC . To the extentStronghold LLC has available cash and subject to the terms of any current or future debt or other agreements, the Stronghold LLC Agreement will requireStronghold LLC to make pro rata cash distributions to holders ofStronghold LLC Units, includingStronghold Inc. , in an amount sufficient to allowStronghold Inc. to pay its taxes and to make payments under the TRA.Stronghold Inc. generally expectsStronghold LLC to fund such distributions out of available cash. However, except in cases whereStronghold Inc. elects to terminate the TRA early, the TRA is terminated early due to certain mergers or other changes of control orStronghold Inc. has available cash but fails to make payments when due, generallyStronghold Inc. may defer payments due under the TRA if it does not have available cash to satisfy its payment obligations under the TRA or if its contractual obligations limit its ability to make these payments. Any such deferred payments under the TRA generally will accrue interest at the rate provided for in the TRA, and such interest may significantly exceedStronghold Inc.'s other costs of capital. IfStronghold Inc. experiences a change of control (as defined under the TRA, which includes certain mergers, asset sales and other forms of business combinations), and in certain other circumstances, payments under the TRA may be accelerated and/or significantly exceed the actual benefits, if any,Stronghold Inc. realizes in respect of the tax attributes subject to the TRA. In the case of such an acceleration in connection with a change of control, where applicable,Stronghold Inc. generally expects the accelerated payments due under the TRA to be funded out of the proceeds of the change of control transaction giving rise to such acceleration, which could have a significant impact on our ability to consummate a change of control or reduce the proceeds received by our stockholders in connection with a change of control. However,Stronghold Inc. may be required to fund such payment from other sources, and as a result, any early termination of the TRA could have a substantial negative impact on our liquidity or financial condition. 75 --------------------------------------------------------------------------------
Recent Accounting Pronouncements
As an "emerging growth company", the Jumpstart Our Business Startups Act ("JOBS Act") allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election. InFebruary 2016 , FASB issued ASU 2016-02, Leases ("Topic 842"), which supersedes ASC Topic 840, Leases. Topic 842 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. Topic 842 will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. InNovember 2020 , FASB deferred the effective date for implementation of Topic 842 by one year and, inJune 2020 , FASB deferred the effective date by an additional year. Beginning afterDecember 15, 2021 and the six months endedJune 30, 2021 , the guidance under Topic 842 is effective. We are still in the process of developing our new accounting policies and determining the potential aggregate impact this guidance is likely to have on our unaudited consolidated financial statements as of its adoption date.
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