Stronghold Digital Mining(SDIG) - 2023 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed notes for the periods ended September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | ASSETS: | | | | Cash and cash equivalents | $4,979,299 | $13,296,703 | | Digital currencies | $641,999 | $109,827 | | Total current assets | $12,328,660 | $35,641,670 | | Property, plant and equipment, net | $156,481,678 | $167,204,681 | | TOTAL ASSETS | $172,828,351 | $216,955,981 | | LIABILITIES: | | | | Total current liabilities | $28,272,500 | $60,412,158 | | Total liabilities | $93,883,506 | $122,176,250 | | EQUITY: | | | | Total stockholders' equity | $68,381,568 | $83,025,144 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (Three Months Ended Sep 30, 2023 vs. 2022) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Total operating revenues | $17,726,957 | $26,366,649 | | Total operating expenses | $37,431,893 | $65,546,206 | | NET OPERATING LOSS | $(19,704,936) | $(39,179,557) | | Total other income (expense) | $(2,606,977) | $(36,040,813) | | NET LOSS | $(22,311,913) | $(75,220,370) | | NET LOSS attributable to Stronghold Digital Mining, Inc. | $(17,123,186) | $(31,220,215) | | Basic EPS | $(2.26) | $(12.67) | Condensed Consolidated Statements of Operations (Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Total operating revenues | $53,226,913 | $85,488,242 | | Total operating expenses | $103,127,493 | $193,137,102 | | NET OPERATING LOSS | $(49,900,580) | $(107,648,860) | | Total other income (expense) | $(30,764,024) | $(40,116,500) | | NET LOSS | $(80,664,604) | $(147,765,360) | | NET LOSS attributable to Stronghold Digital Mining, Inc. | $(54,000,873) | $(61,330,013) | | Basic EPS | $(8.93) | $(28.17) | Condensed Consolidated Statements of Stockholders' Equity - Net loss attributable to Stronghold Digital Mining, Inc. for the three months ended September 30, 2023, was $(17,123,186), and for the nine months ended September 30, 2023, was $(54,000,873)[14][18] - Additional paid-in capital increased from $323,468,129 as of January 1, 2023, to $389,507,374 as of September 30, 2023, driven by equity issuances including stock-based compensation, warrants, and ATM Agreement proceeds[18] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Net cash flows used in operating activities | $(7,064,082) | $(14,656,547) | | Net cash flows used in investing activities | $(14,743,269) | $(67,864,070) | | Net cash flows provided by financing activities | $13,489,947 | $67,454,013 | | Net decrease in cash and cash equivalents | $(8,317,404) | $(15,066,604) | | Cash and cash equivalents - End of Period | $4,979,299 | $16,723,511 | Note 1 – Basis of Presentation - The Company operates in two business segments: Energy Operations and Cryptocurrency Operations, consistent with how the chief operating decision maker evaluates financial performance[24] - A 1-for-10 reverse stock split of Class A and Class V common stock was effected on May 15, 2023, with all share and per share amounts retroactively adjusted[30] - The Company reclassified imported power charges from netting against energy revenue to fuel expenses in Q1 2023, with prior periods restated, having no impact on net operating income, EPS, or equity[32] Note 2 – Digital Currencies - As of September 30, 2023, the Company held $641,999 in unrestricted Bitcoin[36] Digital Currencies Changes (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Digital currencies at beginning of period | $1,429,653 | $5,131,987 | $109,827 | $10,417,865 | | Additions of digital currencies | $15,069,008 | $12,283,695 | $43,778,958 | $50,715,424 | | Impairment losses | $(357,411) | $(465,651) | $(683,241) | $(8,176,868) | | Proceeds from sale of digital currencies | $(15,630,957) | $(10,388,828) | $(43,288,684) | $(47,146,328) | | Digital currencies at end of period | $641,999 | $2,186,704 | $641,999 | $2,186,704 | - Impairment losses on digital currencies were $357,411 for the three months ended September 30, 2023 (down from $465,651 YoY), and $683,241 for the nine months ended September 30, 2023 (down significantly from $8,176,868 YoY)[36] Note 3 – Inventory Inventory Components (September 30, 2023 vs. December 31, 2022) | Component | Sep 30, 2023 | Dec 31, 2022 | | :---------- | :----------- | :----------- | | Waste coal | $2,977,652 | $4,147,369 | | Fuel oil | $85,049 | $143,592 | | Limestone | $80,583 | $180,696 | | Total Inventory | $3,143,284 | $4,471,657 | Note 4 – Equipment Deposits - The Company impaired the remaining MinerVa equipment deposits balance of $5,422,338 during Q3 2023 due to expected non-delivery and ongoing legal action[41][43] - Total equipment deposits were $0 as of September 30, 2023, reflecting transfers to PP&E, impairments, and sales[45] Note 5 – Property, Plant and Equipment Property, Plant and Equipment, Net (September 30, 2023 vs. December 31, 2022) | Category | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Electric plant | $66,836,615 | $66,295,809 | | Cryptocurrency machines and powering supplies | $101,687,166 | $81,945,396 | | Construction in progress | $10,781,505 | $19,553,826 | | Property, plant and equipment, net | $156,481,678 | $167,204,681 | - Depreciation and amortization expense decreased to $9,667,213 for the three months ended September 30, 2023 (from $12,247,245 YoY) and to $26,025,021 for the nine months ended September 30, 2023 (from $37,234,126 YoY)[47][48] Note 6 – Accrued Liabilities Accrued Liabilities (September 30, 2023 vs. December 31, 2022) | Category | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Accrued legal and professional fees | $528,757 | $1,439,544 | | Accrued sales and use tax | $5,659,897 | $5,150,659 | | Accrued plant utilities and fuel | $2,166,459 | $0 | | Total Accrued liabilities | $9,638,819 | $8,893,248 | Note 7 – Debt Total Outstanding Borrowings (September 30, 2023 vs. December 31, 2022) | Category | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | $58,149,411 Credit Agreement (WhiteHawk) | $54,239,946 | $56,114,249 | | $33,750,000 Convertible Note | $0 | $16,812,500 | | $3,500,000 Promissory Note (B&M) | $3,000,000 | $0 | | $1,184,935 Promissory Note (Canaan) | $1,066,442 | $0 | | Total outstanding borrowings | $59,308,457 | $74,449,664 | | Current portion of long-term debt | $1,654,634 | $17,422,546 | | Long-term debt, net | $57,653,823 | $57,027,118 | - The Company entered into a secured credit agreement with WhiteHawk Finance LLC in October 2022, which was amended in February 2023 to modify covenants and prepayment requirements, including a loan prepayment of $250,000 during Q3 2023[52][54][56] - Approximately $16.9 million of convertible note debt was extinguished in Q1 2023 in exchange for Series C Preferred Stock, resulting in a $29 million loss on debt extinguishment[58] - A settlement with Bruce & Merrilees Electric Co. in March 2023 eliminated an $11.4 million payable in exchange for a $3.5 million promissory note and a stock purchase warrant[60] - The Company purchased 2,000 A1346 Bitcoin miners from Canaan Inc. in July 2023 for $2,962,337, financed partly by a $1,184,935 interest-free promissory note[62][63] Note 8 – Related Party Transactions - The Company has a Waste Coal Agreement with Coal Valley Sales, LLC (CVS) and Coal Valley Properties, LLC, incurring a $6.07 per ton base handling fee for waste coal[64][65] - Expenses for coal purchases from CVS were $195,161 for Q3 2023 (down from $278,208 YoY) and $495,161 for the nine months ended September 30, 2023 (down from $581,708 YoY)[66] - The Company expensed $324,925 for Q3 2023 (down from $1,304,752 YoY) and $2,406,726 for the nine months ended September 30, 2023 (up from $2,225,864 YoY) under the Fuel Service and Beneficial Use Agreement with Northampton Fuel Supply Company, Inc[67] Amounts Due to Related Parties (September 30, 2023 vs. December 31, 2022) | Related Party | Sep 30, 2023 | Dec 31, 2022 | | :----------------------------------- | :----------- | :----------- | | Coal Valley Properties, LLC | $0 | $134,452 | | Q Power LLC | $20,119 | $500,000 | | Coal Valley Sales, LLC | $68,172 | $0 | | Northampton Generating Fuel Supply Company, Inc. | $363,076 | $594,039 | | Total Due to related parties | $451,367 | $1,375,049 | Note 9 – Concentrations - The Company's significant credit risk is primarily concentrated with Customized Energy Solutions (CES), which accounted for approximately 100% of energy operations segment revenues for the three and nine months ended September 30, 2023[83] - The Company recorded decreases in accounts receivable of $724,756 (Q3 2023) and $1,867,506 (YTD Q3 2023) related to expected reduced bonus payments from PJM[83] - The Company purchased 9% and 17% of coal from two related parties for the three and nine months ended September 30, 2023, respectively[84] Note 10 – Commitments and Contingencies - The Company is pursuing legal action against MinerVa Semiconductor Corp for breach of contract related to the MinerVa Purchase Agreement, having filed a Statement of Claim in Calgary, Alberta on October 31, 2023[88][101] - A $5.0 million arbitration award plus interest was issued against Scrubgrass Generating Company, L.P. in May 2022, but the full amount is being paid by Q Power, with no effect on the Company's financial condition[91] - The Company is involved in ongoing discussions with PJM and FERC regarding compliance and potential issues related to computational load banks, but does not believe these will have a material adverse effect[93][94] - The Company is a nominal defendant in consolidated shareholder derivative actions alleging breach of fiduciary duties, which it intends to vigorously defend[97] Note 11 – Redeemable Common Stock - Class V common stock represented 23.4% ownership of Stronghold LLC as of September 30, 2023, down from 45.1% as of December 31, 2022[102][108] - Redeemable common stock is recorded at the greater of book value or redemption amount, with a balance of $10,563,277 as of September 30, 2023[104][106] Note 12 – Noncontrolling Interests - The Company consolidates Stronghold LLC's financial results and reports a noncontrolling interest for common units held by Q Power, which decreased from 45.1% to 23.4% ownership of Stronghold LLC from December 31, 2022, to September 30, 2023[107][108] Note 13 – Stock-Based Compensation Stock-Based Compensation Expense (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Period | 2023 | 2022 | | :----------------------------------- | :----------- | :----------- | | Three Months Ended Sep 30 | $787,811 | $3,377,499 | | Nine Months Ended Sep 30 | $7,603,859 | $9,123,124 | - Executive officers were granted 272,500 restricted stock units in March 2023 in exchange for cancelled stock options and performance share units[110] Note 14 – Warrants Outstanding Warrants (September 30, 2023) | Status | Number of Warrants | | :----------------------------------- | :----------------- | | Outstanding as of December 31, 2022 | 1,587,511 | | Issued | 1,803,347 | | Exercised | (1,610,580) | | Outstanding as of September 30, 2023 | 1,780,278 | - The Company issued a stock purchase warrant to Bruce & Merrilees Electric Co. for 300,000 Class A common shares, of which 200,000 were exercised by September 30, 2023[114] - Warrants from the May 2022 Private Placement and September 2022 Private Placement saw significant exercises and strike price adjustments during the nine months ended September 30, 2023[117][119] - The April 2023 Private Placement included warrants for 1,000,000 shares of Class A common stock, with 433,340 pre-funded warrants exercised by September 30, 2023[120][121] Note 15 – Equity Issuances - The May 2022 Private Placement involved $33.75 million in convertible promissory notes and warrants for 631,800 Class A shares, with a subsequent amendment reducing the warrant strike price from $25.00 to $0.10[122][126] - The Series C Convertible Preferred Stock was issued in February 2023, exchanging $17,893,750 of principal and accrued interest from the May 2022 Notes for 23,102 shares of Series C Preferred Stock[127][128] - The September 2022 Private Placement raised approximately $9.0 million gross proceeds through the sale of Class A common stock and warrants, with warrant strike prices adjusted to $10.10 per share in April 2023[129][134] - The April 2023 Private Placement raised approximately $10.0 million gross proceeds from an institutional investor and CEO Greg Beard, involving Class A common stock and warrants[131][132] - Under the ATM Agreement, the Company sold 1,278,906 ATM Shares for approximately $8.9 million gross proceeds (net $8.6 million) during the nine months ended September 30, 2023[138] Note 16 – Segment Reporting Operating Revenues by Segment (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Energy Operations | $1,252,688 | $13,989,675 | $6,266,851 | $34,490,491 | | Cryptocurrency Operations | $16,474,269 | $12,376,974 | $46,960,062 | $50,997,751 | | Total operating revenues | $17,726,957 | $26,366,649 | $53,226,913 | $85,488,242 | Net Operating Loss by Segment (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Energy Operations | $(9,685,721) | $(16,086,915) | $(29,864,794) | $(39,862,217) | | Cryptocurrency Operations | $(10,019,215) | $(23,092,642) | $(20,035,786) | $(67,786,643) | | Total net operating loss | $(19,704,936) | $(39,179,557) | $(49,900,580) | $(107,648,860) | Note 17 – Earnings (Loss) Per Share Net Loss Per Share (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to Stronghold Digital Mining, Inc. | $(17,123,186) | $(31,220,215) | $(54,000,873) | $(61,330,013) | | Weighted average Class A common shares outstanding | 7,569,511 | 2,463,163 | 6,047,891 | 2,177,206 | | Basic net loss per share | $(2.26) | $(12.67) | $(8.93) | $(28.17) | | Diluted net loss per share | $(2.26) | $(12.67) | $(8.93) | $(28.17) | - Securities that could potentially dilute EPS were excluded from diluted loss per share computation as their inclusion would be anti-dilutive[144] Note 18 – Income Taxes - The provision for income taxes was zero for the three and nine months ended September 30, 2023 and 2022, due to pre-tax losses attributable to noncontrolling interest and a full valuation allowance against deferred income tax assets[149][150] - The Company has a Tax Receivable Agreement (TRA) with Q Power and an additional holder, obligating it to pay 85% of realized cash tax savings from tax basis step-ups, but no liability has been recorded due to estimated taxable losses and a valuation allowance[146][147][148] Note 19 – Supplemental Cash and Non-Cash Information Supplemental Cash Flow Information (Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :----------------------------------- | :----------- | :----------- | | Income tax payments | $0 | $0 | | Interest payments | $7,054,387 | $7,346,038 | - Significant non-cash investing and financing activities for the nine months ended September 30, 2023, included $1,184,935 in equipment financed with debt, $8,882,914 in warrants issued, and the extinguishment of a convertible note ($16,812,500) and accrued interest ($655,500) for Series C Preferred Stock[152] Note 20 – Fair Value - The fair values of cash, accounts receivable, prepaid expenses, accounts payable, contract liabilities, and accrued expenses approximate their carrying values due to their short-term nature[154] - As of September 30, 2023, the estimated fair value of the Company's Bitcoin holdings was approximately $654,314, based on a market price of $27,004 per Bitcoin[156] Note 21 – Subsequent Events - On October 13, 2023, Stronghold entered into a Managed Services Agreement with Frontier Outpost 8, LLC for monitoring, operating, and maintaining its data centers, with a monthly service fee of $410,000 for the first three months and potential Class A common stock shares based on 'Uptime' metrics[157][158] - On November 13, 2023, the Company consummated the Series D Exchange Transaction, issuing 15,582 shares of Series D Convertible Preferred Stock to Adage Capital Partners, LP in exchange for all of its Series C Preferred Stock, expected to result in approximately 6.5% accretion for stockholders[159] - The Panther Creek Plant experienced a planned 15-day outage starting October 28, 2023, which was shortened due to PJM grid import constraints, with hash rate fully restored by November 9, 2023[161] Cautionary Statement Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements, subject to numerous risks and uncertainties, and should not be relied upon as predictions of future events - Forward-looking statements are identified by terms like 'believes,' 'expects,' 'may,' 'will,' 'should,' 'seeks,' 'intends,' 'plans,' 'estimates,' or 'anticipates'[163] - Key risks include dependence on Bitcoin price, ability to raise capital, global economic/political conditions, crypto asset industry volatility, regulatory changes, and operational challenges of power generation facilities[164][165] - The Company disclaims any duty to update forward-looking statements beyond the report date, except as required by law[168] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the Company's financial condition and operations, including its business model, recent developments, market trends, and liquidity Overview of the Business - Stronghold Digital Mining, Inc. is a low-cost, environmentally beneficial, vertically integrated crypto asset mining company focused on Bitcoin mining and environmental remediation[172] - The Company owns and operates two coal refuse power generation facilities (Scrubgrass Plant and Panther Creek Plant) with a combined capacity of approximately 163.5 MW, which qualify as Tier II Alternative Energy Systems[172] - The integrated model allows for Bitcoin production at an attractive cost, leveraging Tier II renewable energy tax credits (RECs) valued at over $27 per MWh to reduce net power costs[173] Carbon Capture Initiative - The Company launched the first phase of its carbon capture project at the Scrubgrass Plant on November 10, 2023, utilizing beneficial use ash to bond with carbon dioxide[174] - Lab tests demonstrated potential to capture approximately 12% CO2 by weight of ash, implying a potential to capture 100,000 tons of CO2 per year from the plants' combined 800,000-900,000 tons of ash[175][176] - The scaled project is estimated to cost $50 to $125 per annual ton of CO2 capture capacity, with monetization of credits in private markets expected as early as 2024, and exploration of Section 45Q tax credits for 2025 or 2026[175][176] Bitcoin Mining - As of November 10, 2023, the Company owns or hosts over 42,000 Bitcoin miners with a hash rate capacity exceeding 4.1 EH/s, including approximately 32,000 wholly owned miners (3.1 EH/s) and over 10,000 hosted miners (1.0 EH/s)[177] - The Company's operating results depend on Bitcoin's value, and it does not plan regular Bitcoin trading or hedging, assessing fiat currency needs based on market conditions and financial forecasts[179] - Digital assets are safeguarded using Anchorage Digital Bank's storage solutions, requiring multi-factor authentication and utilizing cold and hot storage[179] Recent Developments - The Company entered into an At-The-Market (ATM) offering agreement in May 2023 to sell up to $15.0 million in Class A common stock, selling 1,278,906 shares for approximately $8.6 million net proceeds by September 30, 2023[181][184] - In April 2023, the Company entered a two-year hosting agreement with Canaan Inc. for 4,000 Bitcoin miners (400 PH/s) and subsequently purchased an additional 2,000 A1346 Bitcoin miners in July 2023, installed at the Panther Creek Plant[185][186] - The Company acquired 5,000 MicroBT WhatsMiner M50 miners in April 2023, and an additional 1,135 M50/M50S miners in July 2023, all received and installed as planned[187][188][189][190] - The Series D Exchange Transaction was consummated on November 13, 2023, exchanging Series C Preferred Stock for newly created Series D Convertible Preferred Stock, expected to result in approximately 6.5% accretion for stockholders[192] - The Company filed a Statement of Claim against MinerVa for breach of contract on October 31, 2023, after continued delays in miner deliveries[194] - A Managed Services Agreement was signed with Frontier Outpost 8, LLC on October 13, 2023, for data center operations, including a monthly service fee and potential Class A common stock awards based on uptime[195][196][197] Trends and Other Factors Impacting Our Performance - The crypto asset industry has experienced bankruptcies (e.g., Core Scientific, FTX), contributing to Bitcoin price volatility and loss of confidence, though Stronghold has not been directly materially impacted[198][199] - Bitcoin price volatility remains a key factor, with prices ranging from $17,000 to $37,000 year-to-date as of November 10, 2023, impacting revenue and potential impairment of Bitcoin assets[200][201] - Bitcoin network hash rate has increased to 447 EH/s as of October 30, 2023, leading to increased competition for block awards[202][203] - Hash price (revenue per terahash per day) was $0.07 on October 30, 2023, with transaction fees averaging 8.2% of block subsidy in Q2 2023, and increasing to 10.2% month-to-date in November[204][205] - The Scrubgrass Plant experienced an unplanned outage in September 2023, which was extended for maintenance, but the data center returned to full operations after seven days, achieving an all-time-high hash rate of approximately 3.5 EH/s[207] Critical Accounting Policies and Significant Estimates - The Company's critical accounting policies and significant estimates, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2022, remain unchanged[209] Post IPO Taxation and Public Company Costs - Stronghold Inc. is subject to U.S. federal, state, and local income taxes, while its subsidiary Stronghold LLC is a pass-through entity[210] - The Company incurs significant expenses related to its operations, payment obligations under the Tax Receivable Agreement (TRA), and incremental costs associated with being a publicly traded corporation[210][211] Factors Affecting Comparability of Our Future Results of Operations to Our Historical Results of Operations - Future financial results may not be comparable to historical results due to Stronghold Inc.'s corporate tax structure (unlike its partnership predecessor) and increased selling, general, and administrative expenses as a public company[213][215] - The Company has a valuation allowance against its net deferred income tax assets due to cumulative and current losses, expecting no deferred income tax expense or benefit while the allowance remains[214] - A greater proportion of revenue and expenses are anticipated to relate to crypto asset mining as the Company acquires more miners and utilizes its power generating assets[216] Consolidated Results of Operations Consolidated Operating Revenues (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Revenue Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cryptocurrency mining | $12,684,894 | $12,283,695 | $37,764,990 | $50,715,424 | | Energy | $1,210,811 | $13,071,894 | $4,682,590 | $29,807,512 | | Cryptocurrency hosting | $3,789,375 | $93,279 | $9,195,072 | $282,327 | | Total operating revenues | $17,726,957 | $26,366,649 | $53,226,913 | $85,488,242 | - Total operating revenues decreased by $8.6 million for Q3 2023 (YoY) due to an $11.9 million decrease in energy revenues, partially offset by a $3.7 million increase in cryptocurrency hosting revenues[220] - Total operating revenues decreased by $32.3 million for the nine months ended September 30, 2023 (YoY), primarily due to a $25.1 million decrease in energy revenues and a $13.0 million decrease in cryptocurrency mining revenue, partially offset by an $8.9 million increase in cryptocurrency hosting revenues[221] Consolidated Operating Expenses (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Expense Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Fuel | $8,556,626 | $10,084,466 | $22,262,141 | $29,292,616 | | Operations and maintenance | $6,961,060 | $19,528,088 | $24,206,080 | $47,449,177 | | General and administrative | $6,598,951 | $11,334,212 | $25,145,444 | $32,848,291 | | Depreciation and amortization | $9,667,213 | $12,247,245 | $26,025,021 | $37,234,126 | | Impairments on miner assets | $0 | $11,610,000 | $0 | $16,600,000 | | Impairments on equipment deposits | $5,422,338 | $0 | $5,422,338 | $12,228,742 | | Total operating expenses | $37,431,893 | $65,546,206 | $103,127,493 | $193,137,102 | - Total operating expenses decreased by $28.1 million for Q3 2023 (YoY), driven by lower operations and maintenance, general and administrative, and depreciation expenses, and the absence of miner asset impairments seen in 2022[223] - Total operating expenses decreased by $90.0 million for the nine months ended September 30, 2023 (YoY), primarily due to significant reductions in operations and maintenance, depreciation, miner asset impairments, and digital currency impairments[224] - Total other income (expense) increased by $33.4 million for Q3 2023 (YoY), primarily due to a $28.7 million loss on debt extinguishment and a $4.2 million impairment on assets held for sale in 2022[225] - Total other income (expense) increased by $9.4 million for the nine months ended September 30, 2023 (YoY), driven by a higher gain from changes in fair value of warrant liabilities and a decrease in interest expense[226] Segment Results Energy Operations Segment Energy Operations Segment Revenues (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Revenue Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Energy | $1,210,811 | $13,071,894 | $4,682,590 | $29,807,512 | | Capacity | $0 | $878,610 | $1,442,067 | $4,591,038 | | Total operating revenues | $1,252,688 | $13,989,675 | $6,266,851 | $34,490,491 | - Energy Operations total operating revenues decreased by $12.7 million for Q3 2023 (YoY) and $28.2 million for the nine months ended September 30, 2023 (YoY), primarily due to lower energy revenues from prevailing market prices and increased self-generated electricity consumption for crypto operations[231][232] - The segment strategically reduced exposure to capacity markets, opting to be an energy resource after RegA certification, aiming to optimize revenue through market rate power sales and grid support[233] - Total operating expenses decreased by $14.0 million for Q3 2023 (YoY) and $28.6 million for the nine months ended September 30, 2023 (YoY), mainly due to improved plant stability, one-time upgrades in 2022, and higher proceeds from REC sales[235][237] Cryptocurrency Operations Segment Cryptocurrency Operations Segment Revenues (Three & Nine Months Ended Sep 30, 2023 vs. 2022) | Revenue Type | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cryptocurrency mining | $12,684,894 | $12,283,695 | $37,764,990 | $50,715,424 | | Cryptocurrency hosting | $3,789,375 | $93,279 | $9,195,072 | $282,327 | | Total operating revenues | $16,474,269 | $12,376,974 | $46,960,062 | $50,997,751 | - Cryptocurrency Operations total operating revenues increased by $4.1 million for Q3 2023 (YoY) due to increased cryptocurrency hosting revenues from the Foundry Hosting Agreement and Canaan Bitcoin Mining Agreement[240] - Total operating revenues decreased by $4.0 million for the nine months ended September 30, 2023 (YoY), primarily due to lower cryptocurrency mining revenues from a higher global network hash rate and lower Bitcoin prices, partially offset by an $8.9 million increase in hosting revenues[241] - Total operating expenses decreased by $8.7 million for Q3 2023 (YoY) and $52.3 million for the nine months ended September 30, 2023 (YoY), driven by the absence of miner asset impairments, lower depreciation, and reduced operations and maintenance expenses[242][244] - Impairments on digital currencies decreased significantly to $0.7 million for the nine months ended September 30, 2023, compared to $8.2 million in the prior year, reflecting an upward trend in Bitcoin prices[247] - Interest expense decreased by $3.8 million for the nine months ended September 30, 2023 (YoY), primarily due to lower debt from extinguishments[248] Liquidity and Capital Resources - The Company's cash needs are primarily for growth through acquisitions, capital expenditures, working capital for equipment financing, miner purchases, and general operating expenses[250] - As of September 30, 2023, and November 10, 2023, the Company had approximately $5.6 million and $5.2 million, respectively, in cash and cash equivalents and Bitcoin[252] - The Company incurred net losses of $22.3 million (Q3 2023) and $80.7 million (YTD Q3 2023), with an accumulated deficit of $321.1 million as of September 30, 2023[255] - Liquidity, combined with expected improvements in operating cash flows, is believed to be sufficient to meet existing commitments and fund operations for the next twelve months[256] Changes in Cash Flows (Nine Months Ended Sep 30, 2023 vs. 2022) | Cash Flow Activity | Sep 30, 2023 | Sep 30, 2022 | Change | | :----------------------------------- | :----------- | :----------- | :----------- | | Net cash flows used in operating activities | $(7,064,082) | $(14,656,547) | $7,592,465 | | Net cash flows used in investing activities | $(14,743,269) | $(67,864,070) | $53,120,801 | | Net cash flows provided by financing activities | $13,489,947 | $67,454,013 | $(53,964,066) | | Net (decrease) increase in cash and cash equivalents | $(8,317,404) | $(15,066,604) | $6,749,200 | - Total net obligations under debt agreements were $59.3 million as of September 30, 2023[261] - The Tax Receivable Agreement (TRA) obligates Stronghold Inc. to pay TRA Holders 85% of realized cash tax savings, with payments expected to be substantial and potentially impacting liquidity[270][271] Recent Accounting Pronouncements - There have been no recently issued accounting pronouncements applicable to the Company[35][272] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the Company for the reported period - The Company has no quantitative and qualitative disclosures about market risk to report[273] Item 4. Controls and Procedures This section confirms that management evaluated the effectiveness of disclosure controls and procedures as of September 30, 2023, concluding they were effective with no material changes in internal control - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[275] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[276] Part II - Other Information Item 1. Legal Proceedings This section refers to Note 10 – Commitments and Contingencies in the financial statements for information regarding legal proceedings - Information on legal proceedings is detailed in Note 10 – Commitments and Contingencies[278] Item 1A. Risk Factors This section outlines new and updated risk factors, primarily focusing on the Company's carbon capture program, including monetization uncertainty and management experience - No material changes to risk factors previously disclosed in the 2022 Form 10-K, except for those detailed in this section[279] - Risks associated with the carbon capture program include uncertainty of monetization, potential for the program to be cash flow negative, inability to qualify for Section 45Q tax credits, and management's limited experience[280][283][284][288] - Dependence on third-party consultants, contractors, and suppliers for carbon capture development poses risks of business interruptions, unsatisfactory performance, and supply limitations[289] - The Company faces competition from larger, more resourced companies in the carbon capture and sequestration industry, which may hinder its ability to expand and remain competitive[290] Item 2. Unregistered Sales of Equity and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[292] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reported period - No defaults upon senior securities to report[293] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[294] Item 5. Other Information This section details the Series D Exchange Transaction, outlining the terms of the new Series D Preferred Stock, and confirms no Rule 10b5-1 trading plans were adopted - On November 13, 2023, the Company completed the Series D Exchange Transaction, issuing 15,582 shares of Series D Preferred Stock in exchange for Series C Preferred Stock, expected to result in approximately 6.5% accretion for stockholders[295] - The Series D Preferred Stock has a stated value of $1,000 per share, is convertible at $5.38145 per share into Class A common stock (subject to a 9.99% beneficial ownership limitation), and automatically converts on February 20, 2028[298] - Series D Preferred Stock ranks senior to Class A and Class V common stock, on parity with Series C Preferred Stock, and generally has no voting rights or dividend entitlements[299][300] - No Rule 10b5-1 trading plans were adopted, modified, or terminated by directors or officers during the quarter ended September 30, 2023[303] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate documents, agreements, and certifications - Exhibits include the Certificate of Designation for Series D Convertible Preferred Stock, the Exchange Agreement for Series D Preferred Stock, and the related Registration Rights Agreement[305] - Certifications from the Chief Executive Officer and Chief Financial Officer (Rule 13a-14(a)/15d-14(a) and Section 1350) are filed/furnished[305]