Stronghold Digital Mining(SDIG) - 2023 Q1 - Quarterly Report

Part I - Financial Information This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of the company's financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Stronghold Digital Mining, Inc., including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's nature of operations, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of March 31, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (as of March 31, 2023, and December 31, 2022) | Metric | March 31, 2023 | December 31, 2022 | | :----------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $6,353,973 | $13,296,703 | | Digital currencies | $672,852 | $109,827 | | Total current assets | $21,440,709 | $35,641,670 | | Property, plant and equipment, net | $158,366,684 | $167,204,681 | | TOTAL ASSETS | $189,120,417 | $216,955,981 | | Total current liabilities | $27,988,442 | $60,412,158 | | Long-term debt, net | $58,208,207 | $57,027,118 | | Total liabilities | $91,424,823 | $122,176,250 | | Total redeemable common stock | $15,499,219 | $11,754,587 | | Total stockholders' equity | $82,196,375 | $83,025,144 | | TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY | $189,120,417 | $216,955,981 | Condensed Consolidated Statements of Operations This section outlines the company's revenues, expenses, and net loss for the three months ended March 31, 2023, and 2022 Condensed Consolidated Statements of Operations (Three Months Ended March 31, 2023, and 2022) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Cryptocurrency mining revenue | $11,297,298 | $18,204,193 | | Energy revenue | $2,730,986 | $9,044,392 | | Cryptocurrency hosting revenue | $2,325,996 | $67,876 | | Total operating revenues | $17,266,215 | $29,381,650 | | Total operating expenses | $31,882,328 | $58,312,864 | | NET OPERATING LOSS | $(14,616,113) | $(28,931,214) | | Loss on debt extinguishment | $(28,960,947) | — | | NET LOSS | $(46,660,562) | $(32,306,416) | | NET LOSS attributable to Stronghold Digital Mining, Inc. | $(28,541,431) | $(13,408,778) | | Basic EPS | $(0.65) | $(0.66) | | Diluted EPS | $(0.65) | $(0.66) | Condensed Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including net loss and stock issuances, for the three months ended March 31, 2023 Condensed Consolidated Statements of Stockholders' Equity (Three Months Ended March 31, 2023) | Metric | Amount | | :------------------------------------------ | :------------- | | Balance – January 1, 2023 (Stockholders' Equity) | $83,025,144 | | Net loss attributable to Stronghold Digital Mining, Inc. | $(28,541,431) | | Net loss attributable to noncontrolling interest | $(18,119,131) | | Maximum redemption right valuation [Common V Units] | $(3,744,632) | | Stock-based compensation | $2,449,324 | | Issuance of Series C convertible preferred stock | $45,386,946 | | Balance – March 31, 2023 (Stockholders' Equity) | $82,196,375 | Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2023, and 2022 Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2023, and 2022) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Net cash flows used in operating activities | $(3,341,466) | $(4,218,388) | | Net cash flows used in investing activities | $(13,738) | $(44,639,218) | | Net cash flows (used in) provided by financing activities | $(3,587,526) | $42,548,184 | | Net decrease in cash and cash equivalents | $(6,942,730) | $(6,309,422) | | Cash and cash equivalents - beginning of period | $13,296,703 | $31,790,115 | | Cash and cash equivalents - end of period | $6,353,973 | $25,480,693 | NATURE OF OPERATIONS This section describes Stronghold Digital Mining, Inc.'s business as a vertically integrated crypto asset mining company with two power generation facilities - Stronghold Digital Mining, Inc. is a vertically integrated crypto asset mining company focused on Bitcoin mining and environmental remediation, operating two coal refuse power generation facilities (Scrubgrass Plant and Panther Creek Plant) in Pennsylvania[22] - The company operates in two business segments: Energy Operations and Cryptocurrency Operations[23] - Both power generation facilities qualify as Tier II Alternative Energy Systems under Pennsylvania law[22] NOTE 1 – BASIS OF PRESENTATION This section details reclassifications of power charges and the adoption of new accounting standards, noting no material impact on financial statements - The Company reclassified imported power charges from netting against energy revenue to fuel expenses, with no impact on net operating income, earnings per share, or equity[30] - The adoption of ASU 2016-13 (CECL model) effective January 1, 2023, did not have an impact on the Company's consolidated financial statements[32] NOTE 2 – DIGITAL CURRENCIES This section provides information on the company's Bitcoin holdings and changes in digital currencies, including additions, sales, and impairment losses - As of March 31, 2023, the Company held $672,852 in unrestricted Bitcoin[34] Changes in Digital Currencies (Three Months Ended March 31, 2023, and 2022) | Metric | March 31, 2023 | March 31, 2022 | | :-------------------------------- | :------------- | :------------- | | Digital currencies at beginning of period | $109,827 | $10,417,865 | | Additions of digital currencies | $12,921,075 | $18,204,193 | | Realized gain on sale of digital currencies | $326,768 | $751,110 | | Impairment losses | $(71,477) | $(2,506,172) | | Proceeds from sale of digital currencies | $(12,613,341) | $(12,998,410) | | Digital currencies at end of period | $672,852 | $13,868,586 | NOTE 3 – INVENTORY This section details the composition of the company's inventory, including waste coal, fuel oil, and limestone Inventory Composition (as of March 31, 2023, and December 31, 2022) | Component | March 31, 2023 | December 31, 2022 | | :---------- | :------------- | :---------------- | | Waste coal | $4,267,308 | $4,147,369 | | Fuel oil | $60,913 | $143,592 | | Limestone | $372,611 | $180,696 | | Total Inventory | $4,700,832 | $4,471,657 | NOTE 4 – EQUIPMENT DEPOSITS This section outlines impairment charges on MinerVa equipment deposits due to delivery delays and the status of contracted miner deliveries - The Company recorded impairment charges of $12,228,742 in Q1 2022 and an additional $5,120,000 in Q4 2022 on MinerVa equipment deposits due to delivery delays and fair value adjustments[38] - As of March 31, 2023, MinerVa had delivered, refunded cash, or swapped equivalent value for approximately 12,700 of the 15,000 contracted miners[77] Equipment Deposits (as of March 31, 2023) | Vendor | Model | Count | Total Commitments | Transferred to PP&E [A] | Impairment | Sold | Equipment Deposits | | :------- | :---------- | :---- | :---------------- | :-------------------- | :--------- | :--- | :----------------- | | MinerVa | MinerVa MV7 | 15,000 | $68,887,550 | $(37,415,271) | $(17,348,742) | $(8,701,199) | $5,422,338 | NOTE 5 – PROPERTY, PLANT AND EQUIPMENT This section details the composition of property, plant and equipment, net, including electric plant and cryptocurrency machines, and associated depreciation expense Property, Plant and Equipment, Net (as of March 31, 2023, and December 31, 2022) | Component | March 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------- | :---------------- | | Electric plant | $66,490,600 | $66,295,809 | | Cryptocurrency machines and powering supplies | $86,481,239 | $81,945,396 | | Construction in progress | $11,099,409 | $19,553,826 | | Property, plant and equipment, net | $158,366,684 | $167,204,681 | - Depreciation and amortization expense was $7,722,841 for the three months ended March 31, 2023, a decrease from $12,319,581 in the prior year[41] NOTE 6 – ACCRUED LIABILITIES This section presents the breakdown of accrued liabilities, including legal and professional fees, interest, and sales and use tax Accrued Liabilities (as of March 31, 2023, and December 31, 2022) | Component | March 31, 2023 | December 31, 2022 | | :-------------------------- | :------------- | :---------------- | | Accrued legal and professional fees | $886,370 | $1,439,544 | | Accrued interest | $2,992 | $1,343,085 | | Accrued sales and use tax | $5,430,197 | $5,150,659 | | Other | $793,089 | $959,960 | | Total Accrued Liabilities | $7,112,648 | $8,893,248 | NOTE 7 – DEBT This section details the company's total outstanding borrowings, including the WhiteHawk Credit Agreement and the extinguishment of convertible note debt Total Outstanding Borrowings (as of March 31, 2023, and December 31, 2022) | Debt Type | March 31, 2023 | December 31, 2022 | | :---------------------------------------------------------------- | :------------- | :---------------- | | $58,149,411 Credit Agreement (WhiteHawk) | $54,370,570 | $56,114,249 | | $33,750,000 Convertible Note | — | $16,812,500 | | $3,500,000 Promissory Note (B&M) | $3,500,000 | — | | Total outstanding borrowings | $59,203,352 | $74,449,664 | - The WhiteHawk Refinancing Agreement was amended to suspend amortization payments from February 2023 through July 2024, with monthly prepayments resuming June 30, 2023, based on cash balance thresholds[48] - The Company extinguished approximately $16.9 million of Convertible Note debt in exchange for Series C Preferred Stock, resulting in a $29 million loss on debt extinguishment for Q1 2023[50] - A $3,500,000 Promissory Note was issued to Bruce & Merrilees Electric Co. to settle an approximately $11.4 million outstanding payable, along with a stock purchase warrant for 3,000,000 Class A common shares[52] NOTE 8 – RELATED-PARTY TRANSACTIONS This section describes transactions with related parties, including waste coal agreements, fuel purchases, and management fees - The Company has a Waste Coal Agreement with Coal Valley Sales, LLC (CVS), incurring a $6.07 per ton base handling fee for waste coal[54] - Expenses for fuel purchases from CVS were $150,000 in Q1 2023 and $303,500 in Q1 2022[56] - The Company has various Fuel Management and O&M Agreements with subsidiaries of Olympus Power LLC, incurring expenses for services and management fees[58][59][60][61][63] Amounts Due to Related Parties (as of March 31, 2023, and December 31, 2022) | Related Party | March 31, 2023 | December 31, 2022 | | :------------------------------------------ | :------------- | :---------------- | | Coal Valley Properties, LLC | $134,452 | $134,452 | | Q Power LLC | $500,000 | $500,000 | | Northampton Generating Fuel Supply Company, Inc. | $886,135 | $594,039 | | Total Due to Related Parties | $1,612,515 | $1,375,049 | NOTE 9 – CONCENTRATIONS This section highlights significant credit risk concentration with Customized Energy Solutions and coal purchases from related parties - The Company's significant credit risk is primarily concentrated with Customized Energy Solutions (CES), which accounted for 100% of energy operations segment revenues and accounts receivable as of March 31, 2023[71][72] - The Company purchased 19% of coal from two related parties for the three months ended March 31, 2023, compared to 13% in the prior year[73] NOTE 10 – COMMITMENTS AND CONTINGENCIES This section outlines significant commitments and contingencies, including miner delivery delays, arbitration awards, and ongoing legal proceedings - The MinerVa Purchase Agreement for 15,000 miners has experienced significant delivery delays, leading to impairment charges and ongoing dispute resolution efforts[75][76][77] - An arbitration award of $5.0 million plus interest was issued against Scrubgrass, but the managing members of Q Power have committed to pay the full amount, with no effect on the Company's financial condition[79][80] - The Company settled a lawsuit with Allegheny Mineral Corporation for a $300,000 cash payment and a limestone supply agreement[81] - The FERC Office of Enforcement is conducting a non-public preliminary investigation regarding Scrubgrass' compliance with the PJM tariff; the Company does not believe it will have a material adverse effect[82] - The Company is a defendant in a putative class action lawsuit (Winter v. Stronghold Digital Mining Inc., et al.) and a complaint regarding misappropriated firmware in Bitcoin miners (Mark Grams v. Treis Blockchain, LLC, et al.), both of which it intends to vigorously defend[83][84][85] NOTE 11 – REDEEMABLE COMMON STOCK This section describes Class V common stock, its ownership of Stronghold LLC, and its classification as redeemable common stock due to redemption rights - Class V common stock, held by Q Power, represented 38.8% ownership of Stronghold LLC as of March 31, 2023, and includes redemption rights into Class A shares[86] - The Class V common stock is classified as redeemable common stock because the redemption rights are not solely within the Company's control[87] Redeemable Common Stock (as of March 31, 2023) | Metric | Shares | Amount | | :-------------------------------- | :------- | :------------- | | Balance - December 31, 2022 | 26,057,600 | $11,754,587 | | Net loss attributable to noncontrolling interest | — | $(18,119,131) | | Maximum redemption right valuation | — | $21,863,763 | | Balance - March 31, 2023 | 26,057,600 | $15,499,219 | NOTE 12 – NONCONTROLLING INTERESTS This section explains the consolidation of Stronghold LLC and the reporting of noncontrolling interest representing Class V common units held by Q Power - The Company consolidates the financial results of Stronghold LLC and reports a noncontrolling interest representing the common units of Stronghold LLC held by Q Power[90] - Class V common stock represented 38.8% ownership of Stronghold LLC as of March 31, 2023[91] Noncontrolling Interest Adjustments (Three Months Ended March 31, 2023) | Metric | Class V Common Stock Outstanding | Fair Value Price | Temporary Equity Adjustments | | :------------------------------------------ | :------------------------------- | :--------------- | :--------------------------- | | Balance - December 31, 2022 | 26,057,600 | $0.45 | $11,754,587 | | Net loss for the three months ended March 31, 2023 | | | $(18,119,131) | | Adjustment of temporary equity to redemption amount | | | $21,863,763 | | Balance - March 31, 2023 | 26,057,600 | $0.59 | $15,499,219 | NOTE 13 – STOCK-BASED COMPENSATION This section details stock-based compensation expense and the grant of restricted stock units to executive officers - Stock-based compensation expense was $2,449,324 for the three months ended March 31, 2023, compared to $2,592,995 in the prior year[92] - The Company granted 2,725,000 restricted stock units to executive officers in exchange for cancelled stock options and performance share units, with no significant impact on Q1 2023 operations[93] NOTE 14 – WARRANTS This section provides information on outstanding warrants, including those issued as part of the B&M Settlement and those exercised during Q1 2023 Outstanding Warrants (as of March 31, 2023) | Metric | Number of Warrants | | :-------------------------- | :----------------- | | Outstanding as of December 31, 2022 | 15,875,106 | | Issued | 3,000,000 | | Exercised | (5,002,650) | | Outstanding as of March 31, 2023 | 13,872,456 | - The Company issued 3,000,000 stock purchase warrants as part of the B&M Settlement[96] - During Q1 2023, 2,277,000 warrants from the May 2022 Private Placement and 2,725,650 pre-funded warrants from the September 2022 Private Placement were exercised[99][101] - The fair value of warrant liabilities was estimated at $2,846,548 as of March 31, 2023, using a Black-Scholes model[113] NOTE 15 – PRIVATE PLACEMENTS This section details various private placements, including the May 2022 Notes, Series C Preferred Stock exchange, and subsequent April 2023 financing activities - The May 2022 Private Placement involved the issuance of $33.75 million in convertible promissory notes and warrants for 6,318,000 Class A shares, with the strike price later reduced to $0.01 for $11.25 million of principal[104][108] - The Series C Convertible Preferred Stock was issued in exchange for the May 2022 Notes, converting $17,893,750 of principal and accrued interest into 23,102 shares of Series C Preferred Stock[110][111] - The September 2022 Private Placement raised approximately $9.0 million through the sale of Class A common stock and warrants, including pre-funded warrants[112] - The April 2023 Private Placement (subsequent event) raised $10.0 million from an institutional investor and CEO Greg Beard for 10,000,000 Class A shares and 10,000,000 warrants, and adjusted the strike price of September 2022 warrants to $1.01[114][115][116] NOTE 16 – SEGMENT REPORTING This section presents operating revenues and net operating loss broken down by the Energy Operations and Cryptocurrency Operations segments Operating Revenues by Segment (Three Months Ended March 31, 2023, and 2022) | Segment | March 31, 2023 | March 31, 2022 | | :---------------------- | :------------- | :------------- | | Energy Operations | $3,642,921 | $11,109,581 | | Cryptocurrency Operations | $13,623,294 | $18,272,069 | | Total operating revenues | $17,266,215 | $29,381,650 | Net Operating Loss by Segment (Three Months Ended March 31, 2023, and 2022) | Segment | March 31, 2023 | March 31, 2022 | | :---------------------- | :------------- | :------------- | | Energy Operations | $(10,734,947) | $(12,097,125) | | Cryptocurrency Operations | $(3,881,166) | $(16,834,089) | | Total net operating loss | $(14,616,113) | $(28,931,214) | NOTE 17 – EARNINGS (LOSS) PER SHARE This section provides basic and diluted earnings per share calculations, noting the exclusion of anti-dilutive securities Earnings (Loss) Per Share (Three Months Ended March 31, 2023, and 2022) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------------ | :------------- | :------------- | | Net loss attributable to Stronghold Digital Mining, Inc. | $(28,541,431) | $(13,408,778) | | Weighted average number of Class A common shares outstanding | 43,756,137 | 20,206,103 | | Basic net loss per share | $(0.65) | $(0.66) | | Diluted net loss per share | $(0.65) | $(0.66) | - Securities that could potentially dilute earnings per share, including 53,930,000 shares of Series C Preferred Stock, were excluded from diluted EPS calculation as their inclusion would be anti-dilutive[121] NOTE 18 – INCOME TAXES This section discusses the Tax Receivable Agreement, the absence of deferred tax assets, and the effective income tax rate - The Company has a Tax Receivable Agreement (TRA) obligating it to pay TRA Holders 85% of realized cash tax savings from tax basis step-ups[123] - No deferred income tax asset or liability has been recorded for the TRA due to estimated taxable losses and a full valuation allowance against deferred income tax assets[124][125] - The effective income tax rate was zero for the three months ended March 31, 2023, and 2022, primarily due to pre-tax losses attributable to noncontrolling interest and the valuation allowance[126] NOTE 19 – SUPPLEMENTAL CASH AND NON-CASH INFORMATION This section provides supplemental cash flow details and significant non-cash activities, including debt extinguishment and warrant issuances Supplemental Cash Flow Information (Three Months Ended March 31, 2023, and 2022) | Metric | March 31, 2023 | March 31, 2022 | | :------------------ | :------------- | :------------- | | Interest payments | $2,222,350 | $837,174 | | Income tax payments | — | — | - Significant non-cash activities in Q1 2023 included $4,658,970 in reclassifications from deposits to property, plant and equipment, the extinguishment of $16,812,500 convertible note debt, and the issuance of $45,386,944 Series C convertible preferred stock[128] - The B&M Settlement involved non-cash transactions including the issuance of $1,739,882 in warrants, return of $6,007,500 in transformers, issuance of a $3,500,000 note, and elimination of $11,426,720 in accounts payable[128] NOTE 20 – SUBSEQUENT EVENTS This section outlines key events occurring after the reporting period, including private placements, miner acquisitions, and a new hosting agreement - On April 20, 2023, the Company completed an April 2023 Private Placement, raising $10.0 million from an institutional investor and CEO Greg Beard for 10,000,000 Class A shares and 10,000,000 warrants, and adjusted the strike price of September 2022 warrants to $1.01[129][130][131] - On April 20, 2023, Stronghold Inc. acquired 5,000 new MicroBT WhatsMiner M50 miners (600 PH/s), expected to increase total delivered hash rate capacity by over 20% to over 3.2 EH/s[132][134] - On April 27, 2023, the Company signed a two-year hosting agreement with Canaan Inc. for 4,000 Bitcoin miners (400 PH/s), where Stronghold Inc. will receive 50% of Bitcoin mined and 55% of the net cost of power[135] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for the three months ended March 31, 2023, compared to the same period in 2022. It covers the business model, recent developments, market trends, accounting policies, and a detailed analysis of revenues, expenses, and liquidity, highlighting the impact of Bitcoin price volatility and strategic financing activities Overview of the Business This section describes Stronghold Digital Mining's vertically integrated model, focusing on low-cost Bitcoin production and leveraging renewable energy tax credits - Stronghold Digital Mining operates a vertically integrated model, owning power plants and Bitcoin mining data centers, aiming for low-cost Bitcoin production[146] - The Company benefits from Tier II renewable energy tax credits (RECs) and waste coal tax credits, reducing its net cost of power[146] - Net cost of power reached $45-$50 per MWh by Q1 2023, with an expected average of $40-$50 per MWh for the rest of 2023, corresponding to a Bitcoin mining cost of approximately $10,000 to $14,000[147] - As of May 8, 2023, the Company operates over 31,000 Bitcoin miners with a hash rate capacity of approximately 2.8 EH/s, and expects to reach 4 EH/s data center capacity by the end of Q3[149] Bitcoin This section explains Bitcoin as a decentralized digital currency, the company's approach to selling Bitcoin, and its digital asset safeguarding practices - Bitcoin is a decentralized digital currency mined through a proof-of-work consensus method, rewarding miners with newly created Bitcoins and transaction fees[150] - The Company sells Bitcoin to support operations and strategic growth, but does not engage in regular trading or hedging activities[151] - Digital assets are safeguarded using storage solutions provided by Anchorage Digital Bank, requiring multi-factor authentication and utilizing cold and hot storage[151] Recent Developments This section highlights recent strategic actions, including debt settlements, preferred stock exchanges, credit agreement amendments, and Nasdaq compliance efforts - The Bruce and Merrilees Settlement Agreement (March 28, 2023) eliminated an estimated $11.4 million outstanding payable in exchange for a $3.5 million promissory note and warrants for 3,000,000 Class A Common Stock shares[152] - The Series C Convertible Preferred Stock exchange (February 20, 2023) converted $17,893,750 of May 2022 Notes principal and accrued interest into 23,102 shares of Series C Preferred Stock[156] - The WhiteHawk Credit Agreement was amended (February 6, 2023) to modify covenants, remove certain prepayment requirements, suspend amortization payments until July 2024, and require the appointment of an independent director (Thomas Doherty appointed March 7, 2023)[158][161] - The Company received a Nasdaq notification on November 30, 2022, regarding non-compliance with the minimum bid price requirement, and stockholders authorized a reverse stock split to regain compliance[173][175][176] Trends and Other Factors Impacting Our Performance This section discusses the volatility of Bitcoin prices, the increasing network hash rate, and the impact of transaction fees on company performance - The market price of Bitcoin has been highly volatile, ranging from approximately $15,000 to $48,000 in 2022 and $17,000 to $31,000 year-to-date as of May 8, 2023[177] - The Bitcoin network hash rate has increased to approximately 351 EH/s as of May 4, 2023, intensifying competition for block awards[180] - Hash price (revenue per terahash per day) was $0.084 on May 4, 2023, compared to an average year-to-date of $0.075[182] - Bitcoin transaction fees, which averaged ~1.8% of block subsidy from November 2021 to April 2023, rose sharply to ~26% from May 1-8, 2023[183] Critical Accounting Policies and Significant Estimates This section confirms that critical accounting policies and significant estimates remain consistent with the prior annual report - The Company's critical accounting policies and significant estimates remain unchanged from its Annual Report on Form 10-K for the year ended December 31, 2022[185] Post IPO Taxation and Public Company Costs This section addresses the company's tax obligations as a public entity, including U.S. federal and state income taxes and expenses related to the Tax Receivable Agreement - Stronghold Inc. is subject to U.S. federal and state income taxes, unlike its pass-through predecessor, and incurs significant expenses related to operations and Tax Receivable Agreement (TRA) payments[186] - Stronghold LLC makes cash distributions to Stronghold Inc. to cover its tax obligations and TRA payments, and non-pro rata payments for corporate overhead expenses[186] - The Company incurs additional significant and recurring expenses as a publicly traded corporation, including compliance, reporting, and audit fees[187] Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations This section outlines factors impacting future financial results, including changes in corporate tax structure, increased public company expenses, and growing crypto asset mining operations - Stronghold Inc.'s corporate tax structure (subject to federal, state, and local income taxes) differs from its partnership predecessor, impacting future financial results[189] - The Company anticipates increased selling, general, and administrative expenses as it implements controls and infrastructure applicable to publicly traded companies[190] - As the Company acquires more miners and utilizes its power assets, a greater proportion of its revenue and expenses will relate to crypto asset mining[191] Results of Operations This section analyzes the decrease in operating revenue and expenses for Q1 2023, highlighting the impact of lower cryptocurrency mining and energy revenues - Operating revenue decreased by $12.1 million for Q1 2023 compared to Q1 2022, primarily due to a $6.9 million decrease in cryptocurrency mining revenue and a $6.3 million decrease in energy revenue[193] - Total operating expenses decreased by $26.4 million for Q1 2023 compared to Q1 2022, driven by lower impairments on equipment deposits ($12.2 million), depreciation ($4.6 million), and general and administrative expenses ($3.0 million)[194] - Total other income (expense) decreased by $28.7 million for Q1 2023 compared to Q1 2022, primarily due to a $29 million loss on debt extinguishment[195] Segment Results This section provides a breakdown of operating revenues and net operating loss by the Energy Operations and Cryptocurrency Operations segments Operating Revenues by Segment (Three Months Ended March 31, 2023, and 2022) | Segment | March 31, 2023 | March 31, 2022 | | :---------------------- | :------------- | :------------- | | Energy Operations | $3,642,921 | $11,109,581 | | Cryptocurrency Operations | $13,623,294 | $18,272,069 | | Total operating revenues | $17,266,215 | $29,381,650 | Net Operating Loss by Segment (Three Months Ended March 31, 2023, and 2022) | Segment | March 31, 2023 | March 31, 2022 | | :---------------------- | :------------- | :------------- | | Energy Operations | $(10,734,947) | $(12,097,125) | | Cryptocurrency Operations | $(3,881,166) | $(16,834,089) | | Total net operating loss | $(14,616,113) | $(28,931,214) | Energy Operations Segment This section details the decrease in energy operating revenue due to lower market rates and capacity revenue, offset by reduced fuel and operations expenses - Total operating revenue for the Energy Operations segment decreased by $7.5 million in Q1 2023, primarily due to a $6.3 million decrease in energy revenue from lower market rates and a $1.2 million decrease in capacity revenue[199] - The Company strategically reduced its exposure to capacity markets to optimize for selling power to the grid at prevailing market rates and providing fast response energy[200][201] - Total operating expenses decreased by $6.6 million, driven by a $4.8 million decrease in fuel expenses (due to higher REC sales) and a $2.9 million decrease in operations and maintenance expenses[203] - REC sales of $4.9 million in Q1 2023 (vs. $0.5 million in Q1 2022) were recognized as a contra-expense to offset fuel costs[203] Cryptocurrency Operations Segment This section analyzes the decrease in cryptocurrency operating revenues due to lower Bitcoin prices and higher global network hash rates, partially offset by increased hosting revenue - Total operating revenues for the Cryptocurrency Operations segment decreased by $4.6 million in Q1 2023, primarily due to lower cryptocurrency mining revenue from reduced Bitcoin prices and higher global network hash rates, partially offset by a $2.3 million increase in hosting revenue[206] - Total operating expenses decreased by $16.7 million, mainly due to a $12.2 million impairment on equipment deposits in 2022, a $4.7 million decrease in depreciation, and a $2.4 million decrease in digital currency impairments[207] - Intercompany electric charges increased by $2.2 million due to the ramp-up of cryptocurrency mining operations[207] Impairments on Digital Currencies This section discusses the significant decrease in impairment losses on digital currencies, reflecting an upward trend in Bitcoin prices - Impairment losses on digital currencies decreased significantly to $0.1 million in Q1 2023 from $2.5 million in Q1 2022, reflecting an upward trend in Bitcoin prices[209] - As of March 31, 2023, the Company held approximately 24 Bitcoin on its balance sheet, with a spot market price of $28,478 per Bitcoin[209] Interest Expense This section details the decrease in interest expense primarily due to lower debt following the extinguishment of master equipment financing agreements - Interest expense decreased by $0.7 million for Q1 2023 compared to Q1 2022, primarily due to lower debt resulting from the extinguishment of master equipment financing agreements[210] Liquidity and Capital Resources This section assesses the company's cash position, outstanding debt, net loss, and management's outlook on future liquidity and funding for operations - As of March 31, 2023, and May 8, 2023, the Company had approximately $7.0 million and $8.0 million, respectively, of cash and cash equivalents and Bitcoin on its balance sheet[214] - Principal amount outstanding indebtedness was $59.8 million as of March 31, 2023, and $59.6 million as of May 8, 2023[214] - The Company incurred a net loss of $46.7 million for Q1 2023 and an accumulated deficit of $290.8 million as of March 31, 2023[216] - Management believes its liquidity position, combined with expected improvements in operating cash flows and recent financing activities (April 2023 Private Placement, MicroBT Miner Purchase, Canaan Bitcoin Mining Agreement), will be sufficient to meet existing commitments and fund operations for the next twelve months[219] Cash Flows This section analyzes changes in cash flows from operating, investing, and financing activities, highlighting the impact of reduced capital expenditures and financing Cash Flow Changes (Three Months Ended March 31, 2023, and 2022) | Metric | March 31, 2023 | March 31, 2022 | Change | | :------------------------------------------ | :------------- | :------------- | :------- | | Net cash used in operating activities | $(3,341,466) | $(4,218,388) | $876,922 | | Net cash used in investing activities | $(13,738) | $(44,639,218) | $44,625,480 | | Net cash (used in) provided by financing activities | $(3,587,526) | $42,548,184 | $(46,135,710) | | Net change in cash | $(6,942,730) | $(6,309,422) | $(633,308) | - The $0.9 million decrease in net cash used in operating activities was primarily due to lower cash outflows for general and administrative expenses and operations and maintenance[221] - The $44.6 million decrease in net cash used in investing activities was due to lower outflows for the purchase of property, plant and equipment compared to the prior year's ramp-up of cryptocurrency mining operations[222] - The $46.1 million net decrease in cash provided by financing activities was due to less funding from Whitehawk promissory notes and equipment financings in 2023 compared to 2022[223] Debt Agreements This section details the WhiteHawk Credit Agreement and the termination of Amended May 2022 Notes through an exchange for Series C Preferred Stock - The Company entered into the WhiteHawk Credit Agreement on October 27, 2022, refinancing an existing agreement, with $54.4 million owed as of March 31, 2023[225] - Total net obligations under all debt agreements were $59.2 million as of March 31, 2023[226] - The Amended May 2022 Notes, with an aggregate principal of $33.75 million, were subsequently terminated in exchange for shares of Series C Preferred Stock[227] Equipment Purchase and Financing Transactions This section discusses delivery delays and impairment charges related to the MinerVa Purchase Agreement and amendments to the WhiteHawk Refinancing Agreement - The MinerVa Purchase Agreement for 15,000 miners has experienced significant delivery delays, resulting in impairment charges of $12.2 million in Q1 2022 and $5.12 million in Q4 2022[228] - The WhiteHawk Refinancing Agreement was amended to modify covenants and remove certain prepayment requirements, including suspending amortization payments until July 2024[233] Convertible Note Exchange This section describes the exchange of Amended May 2022 Notes for Series C Preferred Stock, resulting in debt extinguishment and a significant loss - On February 20, 2023, the Amended May 2022 Notes were exchanged for Series C Preferred Stock, extinguishing approximately $16.9 million of debt and resulting in a $29 million loss on debt extinguishment for Q1 2023[235] Tax Receivable Agreement This section explains the Tax Receivable Agreement, obligating the company to pay 85% of tax savings from basis step-ups, with potential liquidity impacts - The Tax Receivable Agreement (TRA) obligates Stronghold Inc. to pay TRA Holders 85% of the net cash savings from tax basis step-ups[236] - Payments under the TRA are expected to be substantial and can be accelerated upon early termination or certain changes of control, potentially exceeding actual benefits and significantly impacting liquidity[237][238] Recent Accounting Pronouncements This section refers to Note 1 – Basis of Presentation for information regarding recent accounting pronouncements - Information regarding recent accounting pronouncements is provided in Note 1 – Basis of Presentation[239] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no applicable quantitative and qualitative disclosures about market risk for the Company - Not applicable[240] Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of March 31, 2023[242] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2023[243] Part II - Other Information This section provides additional information including legal proceedings, risk factors, equity sales, defaults, mine safety, and a list of exhibits Item 1. Legal Proceedings This section refers to Note 10 – Commitments and Contingencies for detailed information regarding legal proceedings - Information regarding legal proceedings is contained in Note 10 – Commitments and Contingencies[245] Item 1A. Risk Factors This section states that there have been no material changes to the Risk Factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 - There are no material changes to the Risk Factors contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[246] Item 2. Unregistered Sales of Equity and Use of Proceeds This section indicates that there were no unregistered sales of equity securities and no use of proceeds to report - None[247] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report - None[248] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Not applicable[249] Item 5. Other Information This section indicates that there is no other information to report - None[250] Item 6. Exhibits This section lists all exhibits filed as part of this Quarterly Report on Form 10-Q, including corporate governance documents, warrant forms, credit agreement amendments, registration rights agreements, and various settlement and purchase agreements - Exhibits include the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Certificate of Designations of Series C Convertible Preferred Stock[252] - Key agreements filed as exhibits include the First and Second Amendments to Credit Agreement, Registration Rights Agreements, Settlement Agreement and Mutual Release, Promissory Note, Stock Purchase Warrant, and Securities Purchase Agreements[252] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and Section 1350 are also included[253]