S-1/A 1 sdmi-s1a.htm S-1/A sdmi-s1a.htm

 

 

 

As filed with the U.S. Securities and Exchange Commission on October 19, 2021

Registration No. 333-258188 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Amendment No. 5 to

Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

Stronghold Digital Mining, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

7374

86-2759890

(State or other jurisdiction of
incorporation or organization)

(Primary Standard Industrial
Classification Code Number)

(IRS Employer
Identification No.)

 

 

 

 

595 Madison Avenue, 29th Floor

New York, New York 10022

(212) 967-5294

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Gregory A. Beard
Chief Executive Officer
595 Madison Avenue, 29th Floor

New York, New York 10022
(212) 967-5294

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

Daniel M. LeBey
Shelley A. Barber
Vinson & Elkins L.L.P.
1114 Avenue of the Americas, 32nd Floor
New York, New York 10036
(804) 327-6300

 

Jonathan H. Talcott

E. Peter Strand

Nelson Mullins Riley & Scarborough LLP

101 Constitution Avenue NW, Suite 900

Washington, D.C. 20001

(202) 689-2806

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☐

 

Accelerated filer

☐

Non-accelerated filer

☒

 

Smaller reporting company 

☒

 

 

 

Emerging growth company

☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered

Amount to be Registered(1)

Proposed Maximum Offering Price per Share(2)

Proposed Maximum
Aggregate Offering Price(1)(2)

Amount of
Registration
Fee(3)

Class A common stock, par value $0.0001 per
share

6,764,704

$18.00

$121,764,704

$13,173.59

(1)

Includes 882,352 additional shares of Class A common stock that the underwriters have the option to purchase.

(2)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended.

(3)

Includes $12,546.50 previously paid.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy, these securities in any state or jurisdiction where the offer or sale is not permitted.

 

 

 

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER 19, 2021

 

5,882,352 Shares

 

Stronghold Digital Mining, Inc.

Class A Common Stock

This is the initial public offering of Class A common stock of Stronghold Digital Mining, Inc., a Delaware corporation. We are offering 5,882,352 shares of Class A common stock. We are a holding company and the sole managing member of Stronghold Digital Mining Holdings, LLC (“Stronghold LLC”), and our principal asset consists of units of Stronghold LLC.  We intend to contribute the net proceeds of this offering to Stronghold LLC in exchange for Stronghold LLC Units. Stronghold LLC will use such proceeds for general corporate purposes, including acquisitions of miners and power generating assets and to pay the expenses of this offering. Please see “Use of Proceeds.”

Prior to this offering, there has been no public market for our Class A common stock. We have applied to list our Class A common stock on The Nasdaq Global Market under the symbol “SDIG.” We anticipate that the initial public offering price will be between $16.00 and $18.00 per share of Class A common stock.

The underwriters have the option solely to cover over-allotments, if any, for a period of 30 days from the date of this prospectus to purchase up to a maximum of 882,352 additional shares of Class A common stock from us at the public offering price, less the underwriting discount and commissions.

We are an “emerging growth company” and a “smaller reporting company” under applicable federal securities laws and will be subject to reduced reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company. We have two classes of common stock: Class A common stock and Class V common stock. Upon consummation of this offering, investors in this offering, including any of our affiliates that may purchase shares in this offering, will hold 32.3% of the Class A common stock, representing 13.0% of the total voting stock outstanding. Legacy Owners, including Q Power, will hold 87.0% of the total voting stock outstanding (with Q Power, which is controlled by Greg Beard, our Co-Chairman and Chief Executive Officer, and Bill Spence, our other Co-Chairman, holding 59.8% of the total voting stock outstanding), including 100% of the Class V common stock, which votes together with the Class A common stock as a single class. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of The Nasdaq Stock Market (“Nasdaq”). See “Management—Controlled Company Status.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 29 to read about factors you should consider before buying shares of our Class A common stock.

 

 

 

Per Share

 

 

Total

 

Initial public offering price

 

$

 

 

 

$

 

 

Underwriting discount and commissions(1)

 

$

 

 

 

$

 

 

Proceeds, before expenses, to Stronghold Digital Mining, Inc.

 

$

 

 

 

$

 

 

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

At our request, the underwriters have reserved up to 294,117 of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to certain individuals through a directed share program. See “Underwriting.”

The underwriters expect to deliver the shares of Class A common stock to purchasers on or about           , 2021, through the book-entry facilities of The Depository Trust Company.

Bookrunners

B. Riley Securities

 

Cowen

 

Lead Manager

 

 

Tudor, Pickering, Holt & Co.

 

 

Co-Managers

 

D.A. Davidson & Co.

Compass Point

Northland Capital Markets

The date of this prospectus is                 , 2021.

 

 

 

 

TABLE OF CONTENTS

 

 

 

Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus and any free writing prospectus we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Offers to sell, and solicitations of offers to buy, shares of our Class A common stock are being made only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since the date of this prospectus.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

Industry and Market Data

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, publicly available information, business organizations, government publications and other published independent sources. Some data is also based on our good faith estimates. Although we believe these third-party sources are reliable as of their respective dates, neither we nor the underwriters have independently verified the accuracy or completeness of this information. Market share data is subject to change and may be limited by the availability of raw data, the voluntary nature of the data gathering process and other limitations in any statistical survey of market share data. Accordingly, you are cautioned not to place undue reliance on such market share data or any other such estimates. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

i

 

Trademarks and Trade Names

We rely on various trade names that we use in connection with the operation of our business. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

Basis of Presentation

Organizational Structure

On April 1, 2021, we effected a reorganization, which we describe in “Prospectus Summary—Corporate Reorganization” and “Corporate Reorganization” and refer to herein as the “Reorganization.” Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the Reorganization, certain subsequent transactions, and this offering. See “Corporate Reorganization” and a simplified diagram depicting our organizational structure in “Prospectus Summary—Corporate Reorganization” for more information.

Except as otherwise indicated or required by the context, all references in this prospectus to the “Company,” “we,” “us” or “our” relate to Stronghold Digital Mining, Inc. (“Stronghold Inc.”) and its consolidated subsidiaries following the Reorganization. References in this prospectus to “Q Power” refer to Q Power LLC, which prior to the Reorganization (i) was the sole regarded owner of Stronghold Digital Mining LLC (f/k/a Stronghold Power LLC) (“SDM”) and (ii) indirectly held 70% of the limited partner interests and 100% of the general partner interests in Scrubgrass Reclamation Company, L.P. (f/k/a Scrubgrass Generating Company, L.P.) (“Scrubgrass LP”). References in this prospectus to the “Legacy Owners” refer to the existing owners of Stronghold Inc., including, but not limited to, Q Power and the holders of Series A Preferred Stock and Series B Preferred Stock (each as defined herein) that we expect will convert into shares of Class A common stock in connection with this offering.

We are a holding company and the sole managing member of Stronghold Digital Mining Holdings LLC (“Stronghold LLC”), and our principal asset consists of units of Stronghold LLC.

Presentation of Financial and Other Information

SDM and Scrubgrass LP collectively are, and are generally referred to herein as, the accounting predecessor of the issuer, Stronghold Inc. Stronghold Inc. is the audited financial reporting entity following the Reorganization.

The unaudited pro forma financial information of Stronghold Inc. presented in this prospectus for all periods prior to April 1, 2021 has been derived by the application of pro forma adjustments to the historical consolidated financial statements of our accounting predecessor and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Reorganization and the consummation of this offering as if they had occurred on January 1, 2020, in the case of the unaudited pro forma consolidated statement of operations data, and as of December 31, 2020, in the case of the unaudited pro forma consolidated balance sheet. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our combined financial statements included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.


 

ii

 

PROSPECTUS SUMMARY

This summary contains basic information about us and the offering. Because it is a summary, it does not contain all the information that you should consider before investing in our Class A common stock. You should read and carefully consider this entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and the accompanying notes included elsewhere in this prospectus.

Except as otherwise indicated, all information contained in this prospectus assumes (i) an initial public offering price of $17.00 per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus), (ii) that the underwriters do not exercise their over-allotment option, and excludes 4,752,000 shares of Class A common stock reserved for issuance under the New LTIP, our equity incentive plan, and (iii) other than in the consolidated historical financial statements and related notes included elsewhere in this prospectus, the consummation of a  2.88-for-1 stock split immediately prior to and contingent upon the completion of this offering pursuant to which each share of common stock held of record by the holder thereof will be reclassified into approximately 2.88 shares of common stock. Please see “Principal Stockholders” and “Stock Split” for more information.  

Overview

We are a vertically integrated crypto asset mining company currently focused on mining Bitcoin. We wholly-own and operate a low-cost, environmentally-beneficial coal refuse power generation facility that we have upgraded in Scrubgrass Township, Pennsylvania (the “Scrubgrass Plant”), and it is recognized as an Alternative Energy System because coal refuse is classified under Pennsylvania law as a Tier II Alternative Energy Source (large-scale hydropower is also classified in this tier). 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. Simply put, we employ 21st century crypto mining techniques to remediate the impacts of 19th and 20th century coal mining in some of the most environmentally neglected regions of the United States. We believe our power generation facility is environmentally beneficial because we remove legacy coal refuse and facilitate the remediation of land and water, with power generation being the byproduct of this activity, and this is described in more detail under “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. For example, we have been able to enter into partnerships with crypto asset industry participants, including miner sharing arrangements, because we offered competitive power rates in a mutually beneficial arrangement. We believe other miner manufacturers or suppliers may be more willing to work with us because our vertical integration, strong financial position, and industrial scale make us a dependable partner. We have entered into a definitive agreement to purchase a second coal refuse power generation facility and a non-binding letter of intent to purchase a third coal refuse power generation facility. We intend to leverage these competitive advantages to continue to grow our business through the opportunistic acquisition of additional power generating assets and miners.

We currently operate approximately 3,000 crypto asset mining computers (known as “miners”) with hash rate capacity of approximately 185 petahash per second (“PH/s”). We have entered into definitive agreements with three suppliers to purchase approximately 26,150 additional miners with a total hash rate capacity equal to over 2,500 PH/s. Of these miners, 72% are scheduled to be delivered in 2021, with the next batch scheduled for delivery in October 2021, 21% are scheduled to be delivered in the first quarter of 2022, and the remaining 6% are scheduled to be delivered during the remainder of 2022. With part of the proceeds of this offering, we intend to procure approximately 55,800 additional miners, which we anticipate will bring our total hash rate capacity to over 2,100 PH/s by December 2021 and to over 8,000 PH/s by December 2022. We intend to house our miners at the Scrubgrass Plant, the Panther Creek Energy Facility (the “Panther Creek Plant”), a coal refuse power generation facility that we have under contract to purchase (subject to customary closing conditions and regulatory approvals), and additional power assets, one of which is a coal refuse power generation facility (the “Third Plant”) that we have under a non-binding letter of intent to purchase. The acquisition of the Third Plant is subject to due diligence and the negotiation of a definitive agreement, and there is no assurance that the acquisition will be completed. We are also strategically pursuing acquisitions of additional power assets.

1

 

As we produce Bitcoins through our mining operations, we will from time to time exchange Bitcoins for fiat currency based on our internal cash management policy. We intend to hold enough fiat currency or hedge enough of our Bitcoin exposure to cover our projected near-term fiat currency needs, including liabilities and anticipated expenses and capital expenditures. In identifying our fiat currency needs, we will assess market conditions and review our financial forecast. We safeguard and keep private our digital assets by utilizing storage solutions provided by Coinbase Global Inc., which require multi-factor authentication and utilize cold and hot storage. While we are confident in the security of our digital assets, we are evaluating additional measures to provide additional protection.

Our founders have long experience in finance and in operating energy assets. Greg Beard, our Co-Chairman and Chief Executive Officer, previously served as Senior Partner and Head of Natural Resources at Apollo Global Management Inc. Bill Spence, our Co-Chairman, has 40 years of energy-related experience and was a pioneer in the operation of and fuel sourcing for coal refuse plants.

Our Competitive Strengths

 

•

Environmentally beneficial, coal refuse-powered electricity generation classified by the Commonwealth of Pennsylvania as a Tier II alternative energy source.  Our Scrubgrass Plant and the two additional plants currently under purchase agreement and non-binding letter of intent, the Panther Creek Plant and the Third Plant, respectively, are powered by coal refuse.  Coal refuse is a waste product historically generated by coal mining in Pennsylvania and neighboring states, and coal refuse is a significant contributor to air and water pollution in these geographies.  Because generating power from this waste facilitates its removal and reclamation of the land, coal refuse is classified by the Commonwealth of Pennsylvania as a Tier II Alternative Energy Source, a classification that also applies to other energy sources such as large-scale hydropower, and the Scrubgrass Plant is recognized as an Alternative Energy System.  In contrast, most of our competitors with integrated power assets rely on traditional fuels, such as coal or natural gas.  Given the power-intensive nature of crypto asset mining and the implications for the environment with regards to the current widespread availability of coal refuse piles in Pennsylvania that may be used in the waste-to-power process, we believe that our access to inexpensive, environmentally-beneficial power represents a meaningful and durable competitive advantage. In addition, we believe that buyers of the Bitcoin we mine could ascribe value due to the environmentally-beneficial manner in which they were mined as it results in the removal of legacy coal refuse and facilitates the remediation of land and water, with power generation being the byproduct of this activity.  

 

•

Vertically integrated crypto asset mining and power generation operations, driving among the lowest costs of crypto asset production in our industry.  We operate vertically integrated power generation and crypto asset mining operations.  Our miners are located on the same premises as our Scrubgrass Plant to maximize efficiency and to minimize cost.  The Scrubgrass Plant’s recognition as an Alternative Energy System also allows us to earn renewable energy credits (“RECs”) under Pennsylvania law, and coal refuse is inexpensive and in abundant supply near our operations.  As a result, we believe that our net cost of power at our Scrubgrass Plant of approximately $18 per megawatt-hour (“MWh”), after accounting for RECs and waste coal tax credits, is among the lowest compared to our publicly traded peer companies. This $18 per MWh corresponds to less than $3,000 per Bitcoin equivalent with the latest-generation miners and assuming a network hash rate of 150 exahash per second (“EH/s”). As we acquire additional power generation facilities, including the potential acquisitions of the Panther Creek Plant and the Third Plant, we will focus on environmentally-beneficial power generation assets that offer similarly attractive crypto asset mining economics.

 

•

Strong track record of acquiring and operating power assets.  Our management team has a distinguished track record of sourcing, financing, and operating power assets. Greg Beard, our Co-Chairman and Chief Executive Officer, previously served as Senior Partner and Head of Natural Resources at Apollo Global Management Inc. and as a Founding Member and Managing Director at Riverstone Holdings LLC, two leading private equity firms.  During his private equity tenure, Mr. Beard sourced and led 23 energy investments, representing $8.8 billion in proceeds.  Bill Spence, our Co-Chairman, has 40 years of energy-related experience.  Mr. Spence is the former owner and operator of Coal Valley/Dark Diamond, a coal refuse power generation facility, from 1993 to 2007.  Mr. Spence was also the former independent operator of our Scrubgrass Plant prior to our formation.  

2

 

 

•

Superior access to Bitcoin miners with multiple miner procurement channels, including direct relationships with equipment manufacturers and partnerships with datacenter operators and other intermediaries.  We benefit from strong relationships with multiple providers of Bitcoin miners.  We have entered into an agreement with a leading manufacturer of Bitcoin miners to purchase 15,000 miners with aggregate hash rate of approximately 1,500 PH/s for delivery between October 2021 and January 2022.  In addition, through our partnership with a leading global manager of Bitcoin mining operations, we have executed a purchase agreement to acquire 9,900 MicroBT miners with phased delivery that began in September 2021 and have agreed to purchase terms for the acquisition of approximately 4,950 additional MicroBT miners.  Finally, we have been highly opportunistic in entering into hardware purchase agreements with miner brokers.  We believe that our access to capital, including prior private financings, as well as the proceeds from this initial public offering, in conjunction with our vertically-integrated power generation, makes us an attractive partner for Bitcoin equipment manufacturers and other market leaders alike.

Our Growth Strategies

 

•

Acquire additional environmentally-beneficial power generation assets, including closing on two coal refuse power generation facilities, one of which is currently under definitive purchase agreement and the other of which is currently under letter of intent.  We have entered into a definitive agreement to purchase the Panther Creek Plant (the “Panther Creek Acquisition”) and a non-binding letter of intent to purchase the Third Plant, both of which are coal refuse plants.  We believe that we will be able to close the Panther Creek Acquisition within the next three months.  We also anticipate a favorable outcome of our ongoing due diligence of the Third Plant; however, there is no assurance that the acquisition of the Third Plant will be completed as such acquisition is subject to due diligence and the negotiation of a definitive agreement. Additionally, we are strategically considering acquisition opportunities for a fourth power asset. Powered by the Scrubgrass Plant and these subsequent power asset acquisitions, we have developed a plan to build out aggregate mining capacity to approximately 300 megawatts (“MW”) by the end of 2022.  We believe that our expected expansion of power generation capacity dedicated to Bitcoin mining is repeatable and scalable. With the extensive experience and relationships that our leadership team has in the industry, we have an acquisition pipeline of additional environmentally-friendly power assets, and we believe that the acquisition of additional power generation facilities will enable us to drive further growth in crypto asset mining.

 

•

Continue to opportunistically source new miners through our multiple procurement channels to accelerate our business plan and increase our mining capacity.  As previously outlined, we have recently executed purchase orders for the acquisition of miners from a manufacturer, a Bitcoin mining and datacenter operator (for MicroBT miners), and multiple miner brokers (for Canaan and Bitmain miners).  While many of our competitors have struggled to obtain mining equipment due to historically strong demand and pre-sold supply, we believe that these recent confirmed purchase orders demonstrate our ability to leverage the breadth of our relationships to quickly expand our mining capacity. By operating the Scrubgrass Plant at capacity and through the ongoing buildout of Panther Creek and anticipated acquisition and buildout of the Third Plant, we would expect to grow our mining operations to over 55,000 miners. Additionally, with the proceeds from this offering, we are planning to acquire and build out one or more additional power generation asset(s) and to purchase additional miners. We are forecasting expansion of our crypto mining operations to approximately 85,000 total miners, representing over 8,000 PH/s, by the end of 2022. We expect to benefit from these strong relationships to purchase additional miners on favorable economic terms as we continue to expand our power generation capacity through the acquisition of additional plants.

3

 

 

•

Drive operational excellence and structure alignment with key industry partners, including equipment manufacturers, power generation facility owners and the broader crypto currency and investment ecosystem.  We are committed to building the leading vertically integrated crypto asset mining and environmentally-beneficial power generation platform.  To achieve this objective, we have developed a network of technology and service providers, and we are emphasizing long-term partnerships and equity alignment.  For example, we believe that we negotiated favorable economic and delivery terms for the purchase of miners by providing an equity incentive to the sellers of the miners, subject to meeting specified performance obligations.  Similarly, our anticipated partnership with our Bitcoin mining and datacenter operator provides for sharing of the economic rights to Bitcoin produced by the partnership, motivating our partner to manage mining operations to achieve maximum efficiency.  By aligning interests, we believe that we are driving operational excellence, thereby enabling further expansion and accelerating our growth.

Environmentally-Beneficial Operations

The Scrubgrass Plant, our first power generation facility, is located on a 650-acre site in Scrubgrass Township, Venango County, Pennsylvania, and is recognized as an Alternative Energy System because coal refuse is classified under Pennsylvania law as a Tier II Alternative Energy Source. The Scrubgrass Plant currently has the capacity to produce approximately 85 MW of electricity utilizing circulating fluidized bed (“CFB”) technology. Using this CFB technology, the Scrubgrass Plant converts highly polluting coal refuse, a legacy waste from decades of coal mining currently found in sites throughout Pennsylvania and neighboring states, into power and also yields beneficial use ash, a by-product of the combustion process that can be used as fertilizer and filler in other reclamation projects.

 

The operation of our power generation facility with coal refuse allows the reclamation of large geographic areas that have been ravaged by the presence of coal refuse, the environmentally harmful byproduct of Pennsylvania’s legacy coal-mining operations. Coal refuse is a non-renewable fossil fuel constituting a Tier II Alternative

Energy Source under Pennsylvania law, the combustion of which results in air emissions, including carbon dioxide,

nitrogen oxides, sulfur dioxide and particulate matter, which are subject to regulation as pollutants under the federal

Clean Air Act and analogous state law. Tier I Alternative Energy Sources under Pennsylvania law include “clean”

renewable sources such as solar photovoltaic energy, wind power, and low-impact hydropower, which sources do

not result in the emission of regulated pollutants and generally are not subject to the same level of regulatory

scrutiny. Nonetheless, the coal refuse targeted for combustion by us is from existing legacy coal refuse piles, and

the refuse’s conversion into a power source as well as the subsequent reclamation of the refuse pile areas constitute

environmentally-beneficial aspects of our power generation facility, as we discuss herein. As coal refuse is not a

renewable source, the sustainability of this waste-to-power process is dependent upon the continued availability of

coal refuse for economic transport from former coal mines to our power generation facility. Additionally, we

recognize that combustion of coal refuse results in offsetting adverse impacts to the environment, which impacts do not arise when using clean renewables such as Pennsylvania Tier I wind and solar photovoltaic energy sources.

Coal mining began in earnest in Pennsylvania in the later part of the 19th century to help meet the nation’s growing demand for steel, and continued through the 20th century as Pennsylvania and other coal producing states mined the fuel needed to power the industrial revolution in the United States and fight two World Wars. While the placement of coal refuse became more strictly regulated with the passage of the federal Surface Mining Control and Reclamation Act of 1977 (the “SMCRA”), the decades of operations prior to the SMCRA’s adoption produced large piles of refuse near now-abandoned coal mining operations. The Bureau of Abandoned Mine Reclamation (“BAMR”) of the Pennsylvania Department of Environmental Protection (“PADEP”) estimates that today there are 840 coal refuse sites, covering approximately 9,000 acres, filled by over 220 million tons of coal refuse in legacy piles located throughout the state. We estimate that, based on the number of coal refuse sites we are currently reclaiming in close proximity to the Scrubgrass Plant, there is at least 30 years’ worth of fuel available for that plant alone. We expect the additional plants that we intend to acquire will also have access to a multi-year supply of coal refuse.

4

 

In 2015, Pennsylvania estimated that the cost to remediate the abandoned mine lands (“AML”) and acid mine drainage (“AMD”) sites in Pennsylvania could be as high as $20 billion, of which reclamation of coal refuse piles represented a $2 billion burden.  Coal refuse piles produce significant, adverse local and regional environmental consequences, including the harmful leaching of acidity, iron and iron oxide, aluminum, manganese, and sulfate residues into waterways resulting in significant AMD.  This leachate creates both surface water and groundwater contamination and produces streams, ponds and lakes that can be devoid of aquatic life.  AMD is the largest non-point source water pollutant in these Pennsylvania communities and afflicts watersheds downstream from the coal refuse piles, while also reducing potable water supplies.

The coal refuse piles cover large areas of otherwise productive land and pose negative consequences for air quality in the surrounding communities.  Uncontrolled fugitive dust from these piles creates particulate matter pollution and can act as a wind-borne pathogen, posing significant risks to human health.  The piles themselves can also ignite.  Wildfires, lightning strikes and campfires on the surface can quickly turn into bigger issues such as underground mine fires.  Unattended piles can also spontaneously combust through an oxidation process that generates heat and consequently ignites the combustible components of piles. Burning piles, especially underground fires in the absence of oxygen, produce a variety of adverse uncontrolled ambient impacts, including smoke, particulate, and the release of poisonous and noxious gases – often at ground level. These gases, including carbon monoxide, carbon dioxide, hydrogen sulfide, sulfur dioxide, ammonia, sulfur trioxide, and oxides of nitrogen and a variety of volatile organic compounds – are all potentially harmful to human, animal and vegetative life. According to PADEP, as of December 14, 2020, there were 92 coal refuse piles burning in Pennsylvania, and over the past decades hundreds of others have burned. PADEP has estimated that 6.6 million tons of coal refuse burn each year in unintended, uncontrolled fires, releasing 9 million tons of carbon dioxide and numerous other air pollutants.  When fires occur, the budgets of these environmentally and often economically challenged communities are hardest hit, and it may take years to extinguish the fire.

The CFB technology employed by the Scrubgrass Plant and other coal refuse reclamation facilities was developed to burn coal refuse and similar low-BTU substances by combining the waste with limestone injection for acid gas control in specialized CFB boilers and injecting streams of hot air. These units are also equipped with fabric filter systems to control filterable particulate matter (“FPM”) emissions. The coal refuse-powered units control emissions of sulfur dioxide, nitrogen oxides, air toxins, FPM and total particulate matter. These units are some of the lowest emitters of mercury and FPM in the nation.  The solid materials are consumed in the combustion process and the by-products are steam, which powers electricity generators, and beneficial use ash, an inert non-acidic substance that can be used in remediation and reclamation activities. The removal, remediation and reclamation of the polluting piles contributes to a majority of the operating costs of one of these specialized power generation facilities.  This business model results in the most efficient method to comprehensively remove the hazardous materials from the environment and remediate the polluting impacts.  

Our ownership of the Scrubgrass Plant combined with the environmental benefits which accrue to the region allow us to mine Bitcoin at what we believe to be some of the lowest costs in the industry while making a transformational contribution to the environment.

Low-Cost Power Generation

Given that the price of electricity has a significant impact on the ultimate economics and profitability of crypto asset mining, we believe long-term value is enabled primarily by the reduction of power costs and securing environmentally-beneficial power generation assets. Our miners are powered by the electricity produced by our own assets. As detailed in the chart below, we expect to be able to generate power for approximately $18 per MWh at our Scrubgrass Plant at full capacity, which corresponds to less than $3,000 per Bitcoin equivalent with latest-generation miners and assuming a network hash rate of 150 EH/s. We consider latest-generation miners to be miners with efficiency of 37 joules per terahash. These estimated costs include the RECs and waste coal tax credits we currently receive. Should these credits be discontinued, our estimated cost to generate power would increase to approximately $37 per MWh, which corresponds to approximately $5,500 per Bitcoin equivalent. This contributes to our value creation strategy, which is based on four concepts: (i) securing and operating low-cost, environmentally-beneficial energy assets, (ii) protecting operational profitability and efficiently managing risk across different pricing environments, (iii) optimizing returns over invested capital through strategic and innovative sourcing of power and mining equipment (including through partnerships with suppliers) and (iv) potentially extending the economic life of our equipment through the use of low cost of power.  

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The chart below shows an estimate of the components of our net cost of power for the second half of 2021 and a comparison to our peers’ cost of power. 1  

 

 

 

Due to the specialized nature of coal refuse power generation facilities that utilize CFB technology, we estimate the replacement cost for an electricity generation facility utilizing this technology that operates on the scale of our Scrubgrass Plant would be approximately $500 million.  

 

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Our estimated net cost of power for the period presented represents all of our expected costs associated with generating power (including the cost of procuring fuel, operations and maintenance expenses, and plant general and administrative expenses), after taking into account estimated capacity revenue and income from RECs and renewable energy and waste coal tax credits (which are the only sources of income we expect to receive from power-generating activities, excluding the sale of electricity). Estimated costs of power for comparable companies are based upon publicly available information and may not be for the period presented for our expected cost of power, and we are limited in the amount of information available to us. One of the presented comparable companies generates its own power and the costs shown for that company represent the average mining power cost from June 2020 to February 2021, net of energy margin and ancillary service revenue. The remaining presented comparable companies do not own power generating assets but instead purchase electricity. The cost of power for those companies represents the cost to purchase electricity disclosed by those companies in reports filed with the SEC, without additional operating or other costs, or rebates or credits, factored in. Therefore, our net cost of power may not be equivalent to, and may not include the same inputs as, the cost of power identified for such comparable companies.

 

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In May 2021, we engaged PA Consulting Group, Inc. (“PA Consulting”) to benchmark our electric supply costs against a broader set of power supply alternatives for crypto asset mining. To facilitate this comparison, PA Consulting prepared a net Levelized Cost of Energy (“LCOE”) analysis as a means of determining the normalized cost of generating electricity over the lifetime of a power generation facility, including the initial capital investment, fixed and variable operations and maintenance expenses, labor costs, fuel costs, and expected capital expenditures, as well as offsetting income streams, including RECs, waste coal tax credits, and capacity payments. In the context of crypto asset mining, net LCOE represents the all-in cost of procuring electricity. The primary differences between net cost of power and net LCOE are that (i) net cost of power represents a cost for a specific period, while net LCOE represents the normalized cost over the life of the asset, and (ii) net LCOE includes the initial capital investment, while net cost of power only captures the costs incurred during the period for which the metric is calculated. In other words, net LCOE includes both the net cost of power and the investment required to achieve that net cost of power.

PA Consulting calculated the net LCOE for the Scrubgrass Plant and benchmarked this cost structure against (i) historical retail commercial and industrial electric rates across the United States, (ii) the LCOE of new-build sources of firm power generation, which could serve as alternative power sources for data mining operations, and (iii) published electric supply costs by our crypto asset mining peers. Based on PA Consulting’s analysis, our net LCOE of 2.1 cents per kilowatt-hour (“kWh”) is lower than those for all contemplated alternatives in the United States. The chart below shows the summary data from PA Consulting’s report. 2

 

 

As part of our strategy of securing environmentally-beneficial power generation assets for crypto asset mining, we have entered into (i) a definitive agreement to purchase the Panther Creek Plant, a coal refuse reclamation-to-energy facility that utilizes CFB technology (similar to the Scrubgrass Plant) with 80 MW of net electricity generation capacity located near Nesquehoning, Pennsylvania, and (ii) a non-binding letter of intent to purchase the Third Plant, another coal refuse reclamation-to-energy facility that utilizes CFP technology with 112 MW of net electricity generation capacity located in Pennsylvania. These facilities are each waste removal and environmental remediation businesses that generate and sell electricity to pay for the environmental reclamation work that they perform. We intend to opportunistically acquire such electricity generation assets to power our increasing crypto asset mining operations in an environmentally-conscious manner.

Pennsylvania has deemed the reclamation of coal refuse sites as an environmental priority, and since the early 1990s an unofficial public-private-partnership has developed between the coal refuse reclamation to energy industry

 

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The comparable crypto asset mining companies represent the same data presented in the chart titled “Scrubgrass Plant Estimated Net Cost of Power vs. Comparable Companies ($/MWh),” with the exception of one company that generates its own power, which is excluded here because there is not enough information publicly available to estimate the net LCOE associated with its power generation facility.

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and the Commonwealth of Pennsylvania. In 2016, Pennsylvania adopted a performance-based tax credit targeting coal refuse removal by alternative electricity generation facilities utilizing CFB technology, such as the Scrubgrass Plant, the Panther Creek Plant and the Third Plant. To qualify for the tax credit, 75% of the fuel used by these facilities must be qualified coal refuse, plant design must include circulating fluidized bed technology, utilizing limestone injection and a fabric filter for particulate emissions control, ash produced by the facilities must be put to beneficial use as defined by PADEP, and, finally, at least 50% of that beneficial use ash must be used to reclaim coal mining affected sites.

Due to the environmental benefit produced by our facilities, we also qualify for Tier II RECs in Pennsylvania. These RECs are currently valued at approximately $15.00 per MWh, based on the bid-level price as of July 21, 2021.  Particularly challenging and often remote piles also require partnerships with federal, state, and local environmental groups in order to accomplish the remediation and reclamation goals of a project.  These projects include the use of federal grants combined with millions of private dollars invested by the coal refuse reclamation to energy project companies.  Our coal refuse reclamation to energy facility has frequently partnered with the U.S. Department of the Interior’s Office of Surface Mining Reclamation and Enforcement, BAMR and local environmental groups to remediate these piles. The Scrubgrass Plant has partnered with state agencies since the mid-1990s to identify and reclaim waste sites and have removed over 16 million tons from the environment since start of operations.

While crypto asset mining continues to consume a massive amount of energy worldwide, often generated from traditional and more environmentally-harmful sources, we are able to conduct our activities in a manner that benefits both the environment and our profitability.

Mining Operations

We currently operate approximately 3,000 miners with hash rate capacity of approximately 185 PH/s. Our current fleet comprises approximately 860 Bitmain Antminer S9 (“S9”) miners, approximately 190 Bitmain Antminer S17 Pro (“S17 Pro”) miners, approximately 10 Bitmain Antminer T17 (“T17”) miners, approximately 655 Canaan AvalonMiner 1166 Pro (“1166 Pro”) miners, approximately 125 Canaan AvalonMiner 1246 (“Canaan 1246”) miners, approximately 106 MicroBT WhatsMiner M30S+ (“M30S+”) miners, and approximately 1,040 MicroBT WhatsMiner M30S (“M30S”) miners. The S9 miners have hash rate capacity of approximately 13 terahash per second (“TH/s”) per miner and power consumption of approximately 1,300 watts per miner. The S17 Pro miners have hash rate capacity of approximately 50 TH/s per miner and power consumption of approximately 1,975 watts per miner. The T17 miners have hash rate capacity of approximately 40 TH/s per miner and power consumption of approximately 2,200 watts per miner. The 1166 Pro miners have hash rate capacity of approximately 80 TH/s and power consumption of approximately 3,400 watts per miner. The Canaan 1246 miners have hash rate capacity of approximately 85 TH/s and power consumption of approximately 3,420 watts per miner. The M30S+ miners have hash rate capacity of approximately 100 TH/s and power consumption of approximately 3,500 watts per miner. The M30S miners have hash rate capacity of approximately 88 TH/s and power consumption of approximately 3,344 watts per miner. We manage our fleet of miners through a combination of internal employees and outside contractors.

We believe that through our innovative strategic initiatives and existing commercial relationships, we will continue to efficiently secure high-quality equipment necessary to maximize our operational advantages. Using our access to and control of environmentally beneficial and low-cost power as leverage, our focus is on sourcing the latest crypto asset mining technology and engaging in transactions to align our interests with those of other key industry stakeholders, including equipment manufacturers and high-performance computing infrastructure managers. We are actively adding to our existing fleet of approximately 3,000 miners currently deployed at the Scrubgrass Plant, with a hash rate capacity of approximately 185 PH/s, through the execution of definitive agreements since April 1, 2021 with three suppliers to purchase approximately 26,150 additional miners with a total hash capacity equal to over 2,500 PH/s. Approximately 72% of these miners are scheduled to be delivered in 2021, with the next batch scheduled for delivery in October 2021, 21% are scheduled to be delivered in the first quarter of 2022, and the remaining 6% are scheduled to be delivered during the remainder of 2022. We expect to house approximately 17,000 miners in our datacenters at the Scrubgrass Plant. We have initiated construction of a datacenter for the Panther Creek Plant, and we plan to begin deploying miners there later this year, ultimately deploying 20,000. The Panther Creek Acquisition is subject to customary closing conditions and regulatory approvals. We plan to house our remaining anticipated miners at the Third Plant and one or more additional power

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generation asset(s). The acquisition of the Third Plant is subject to due diligence and the negotiation of a definitive agreement, and there is no assurance that the acquisition will be completed.

Pursuant to the three agreements that we have entered into to procure additional miners, we pre-paid significant portions of the purchase price for the new miners under each of the three agreements, with the remainder of the payments due upon confirmation of shipment or delivery of the miners. Delivery of the miners under one of these agreements is subject to us entering into a hosting agreement on reasonable commercial terms with the supplier that is currently under letter of intent. To date, we have not been advised by our suppliers of any supply constraints in fulfilling these agreements.

Our location in the cooler Northeastern United States and access to cheap power allow us to cool our miners at lower cost than if we were located in warmer regions and also affords us the flexibility to buy power off the grid when the cost of such power is cheaper than our cost of production, resulting in our ability to maximize crypto asset mining operations through low variable costs and cost per MW. Our current focus is on mining Bitcoin, which we may convert to USD to the extent necessary to fund our development.

We believe that buyers of the Bitcoin we mine may ascribe value to the environmentally-beneficial manner in which it was mined in the United States because it results in the removal of legacy coal refuse piles through their conversion into a power source, and reclamation of these former waste areas. Furthermore, while our focus is currently on Bitcoin, we may utilize our miners for other crypto assets depending on market conditions, including the relative values of such other crypto assets, and other factors. We intend to operate with flexibility and a goal of maximizing value from our operations. To this end, our business strategy continues to be acquiring power generating assets that allow us to generate electricity at competitive rates in an environmentally-beneficial fashion, securing miners with the latest technology to utilize such power generation capabilities, and re-investing proceeds from our crypto asset mining operations in acquiring additional power generating assets and miners.

Bitcoin and Bitcoin Mining

Bitcoin, a form of cryptocurrency, is a crypto asset that is designed to work as a secure and decentralized medium of exchange. Digital assets exist on a blockchain which is a network of computers that together store the history of transactions and validate new transactions without the need for a trusted, central intermediary. Using a blockchain, value can be sent from one account to another in a matter of minutes and with full certainty without requiring the involvement of a bank or financial institution.  Each computer on the network stores a copy of all the past transactions and the balance of every account.

Each account is identified by a “public key,” the address to which funds are sent to and from. To access the account, however, a “private key” is needed.  This private key is closely guarded by the holders of crypto assets, as anyone who possesses the private key for an account can access that account and transfer value.  As a result of the relationship between public keys and private keys, every transaction ever done on the blockchain is available for public viewing in perpetuity, but the owners of the accounts may be anonymous.

The Bitcoin network infrastructure is collectively maintained by a decentralized, public user base who are either volunteers or are rewarded with Bitcoin. As the network is decentralized, it does not rely on either governmental authorities or financial institutions to create, transmit or determine the value of the coins and instead value is determined by supply and demand.

Most blockchains, including Bitcoin blockchains, validate transactions via a process called “proof of work,” which requires that computers compete to solve a complex cryptographic puzzle. Solving this puzzle essentially requires random guesswork and computers generate millions of guesses to arrive at the correct answer, which is referred to as “mining.”  The computer that solves the puzzle is rewarded with the crypto asset.  Recognizing that over time the computing power devoted to mining can increase or decrease, every 10 minutes the Bitcoin network re-calibrates the difficulty of the puzzle to keep a 10 minute delay between each time the puzzle is solved. This delay is known as the “block time.”

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We plan to mine Bitcoin by using our miners to solve this complex cryptographic puzzle. In return for solving a block, we receive a Bitcoin or other crypto asset reward, depending on the blockchain, which we hold for our account and attempt to sell opportunistically on the market or directly to purchasers to generate a profit. Miners measure their capability in terms of processing power, which is known in the industry as “hashing” power. Hashing power is measured in terms of the number of hashing algorithms solved (or “hashes”) per second, which is the miner’s “hash rate.” Generally speaking, miners with greater hashing power relative to other miners attempting to solve a block have a higher chance of solving the block and receiving a crypto asset award. See below for an illustration of how Bitcoin mining works.

 

 

 

Since the inception of the Bitcoin network, more and more miners have entered the market competing for the limited number of blocks that are regularly added to the Bitcoin blockchain. The resulting tremendous increase in network hash rate has resulted in increasing levels of “difficulty” being implemented by the Bitcoin network over time. As a result, an individual miner’s chances of adding a new block to the blockchain in a given period of time has decreased, creating volatility in a miner’s revenue stream. To address this challenge, Bitcoin mining operators began to combine their mining resources into “mining pools” to better compete and reduce volatility in Bitcoin mining revenue. Combining mining devices in a mining pool allows for faster output and better odds of finding a block at the group level, rather than the individual level. As part of our mining operations, we contribute our hash rate to certain pools, subject to their terms of service. Participation in such pools is generally terminable at any time by either party and our risk is limited, as we are able to switch pools at any time or simply not participate in any pools and mine independently. As a participant in such pools, in exchange for providing computing power, we receive a share of the theoretical global mining rewards based on our percent contribution to the Bitcoin mining network, less fees payable to the pool. We are able to verify our proportion of the contributed computing power because we track the computing power of the miners that we operate, and the total computing power contributed to the pool is publicly available.

While we currently only mine Bitcoin, we continue to monitor and evaluate the crypto asset market and may in the future mine other crypto assets. We will consider factors such as market acceptance, value of the underlying crypto asset, cost to mine, mining equipment and resources required, and impact on our results of operation in making any future determination on the type of crypto assets to mine. Further, while we currently intend to acquire Bitcoins only through our mining efforts, it is possible that we may in the future acquire Bitcoins or other crypto assets through other means, such as exchanging crypto assets for other crypto assets instead of fiat currency.

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Private Placements

On April 1, 2021, we entered into the Series A Stock Purchase Agreement (the “Series A Stock Purchase Agreement”), pursuant to which we issued and sold 3,400,000 shares of Series A Convertible Redeemable Preferred Stock of Stronghold Inc. (the “Series A Preferred Stock”) in a private offering at a price of $25.00 per share to various accredited investors in reliance upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Regulation D thereunder for aggregate consideration of approximately $85.0 million (the “Series A Private Placement”).

Pursuant to the Series A Stock Purchase Agreement, Stronghold Inc. entered into a registration rights agreement (the “Series A Registration Rights Agreement”) with the investors in the Series A Private Placement, pursuant to which, among other things, we agreed to prepare and file or confidentially submit to the SEC a registration statement covering the resale of all Registrable Securities (as defined in the Series A Registration Rights Agreement) not already covered by an existing and effective registration statement on or prior to the 120th day following the closing of the Series A Private Placement. See “Certain Relationships and Related Party Transactions— Registration Rights Agreements” and “Description of Capital Stock—Registration Rights Agreements” for additional information.

Further, pursuant to the Series A Stock Purchase Agreement, Stronghold Inc., the investors in the Series A Private Placement and certain beneficial owners of common stock of Stronghold Inc. (the “Key Holders”) entered into a Right of First Refusal and Co-Sale Agreement (the “Series A ROFR Agreement”). Under the Series A ROFR Agreement, the Key Holders agreed to grant a right of first refusal to Stronghold Inc. to purchase all or any portion of capital stock of Stronghold Inc, held by a Key Holder or issued to a Key Holder after the date of the Series A ROFR Agreement, not including any shares of Series A Preferred Stock or common stock issued or issuable upon conversion of the Series A Preferred Stock. The Key Holders also granted a secondary refusal right to the investors in the Series A Private Placement to purchase all or any eligible capital stock not purchased by Stronghold Inc. pursuant to their right of first refusal. The Series A ROFR Agreement also provides certain co-sale rights to investors in the Series A Private Placement to participate in any sale or similar transfer of any shares of common stock owned by a Key Holder or issued to a Key Holder after the Series A Private Placement, on the terms and conditions specified in a written notice from a Key Holder. The investors, however, are not obligated to participate in such sales or similar transfers. The co-sale and rights of first refusal under the Series A ROFR Agreement will terminate upon the consummation of this offering.

On May 14, 2021, we entered into the Series B Stock Purchase Agreement (the “Series B Stock Purchase Agreement”), pursuant to which we issued and sold 630,915 shares of Series B Convertible Redeemable Preferred Stock of Stronghold Inc. (the “Series B Preferred Stock”) in a private offering at a price of $31.70 per share to various accredited investors in reliance upon exemptions from registration pursuant to Section 4(a)(2) of the Securities Act and Regulation D thereunder, for aggregate consideration of $20.0 million (the “Series B Private Placement” and, together with the Series A Private Placement, the “Private Placements”). The terms of the Series B Preferred Stock are substantially similar to the Series A Preferred Stock, except for differences in the stated value of such shares in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or certain deemed liquidation events.  

Simultaneous with the closing of the Series B Private Placement, we entered into a registration rights agreement (the “Series B Registration Rights Agreement” and, together with the Series A Registration Rights Agreement, the “Registration Rights Agreements”) with the investors in the Series B Private Placement, pursuant to which, among other things, we agreed to prepare and file or confidentially submit to the SEC a registration statement covering the resale of all Registrable Securities (as defined in the Series B Registration Rights Agreement) not already covered by an existing and effective registration statement on or prior to the 120th day following the closing of the Series A Private Placement. We have filed a registration statement on Form S-1 (the “Resale Registration Statement”) covering the resale of all Registrable Securities under the Series A Registration Rights Agreement and Series B Registration Rights Agreement and expect that such Resale Registration Statement will become effective concurrently with or shortly after the effectiveness of the registration statement of which this prospectus forms a part. See “Description of Capital Stock—Registration Rights Agreements” for additional information.

Further, pursuant to the Series B Stock Purchase Agreement, Stronghold Inc., the investors in the Series B Private Placement and certain beneficial owners of common stock of Stronghold Inc. entered into a Right of First Refusal and Co-Sale Agreement (the “Series B ROFR Agreement” and, together with the Series A ROFR Agreement, the “ROFR Agreements”), on substantially the same terms as the Series A ROFR Agreement.

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Upon consummation on April 1, 2021 of the Series A Private Placement and on May 14, 2021 of the Series B Private Placement, we issued warrants to purchase up to 34,000 and 6,309 shares of Series A Preferred Stock and Series B Preferred Stock (or any capital stock into which the Series A Preferred Stock or Series B Preferred Stock have been converted, exchanged or reclassified), respectively, to the placement agent in the Private Placements. The warrants have an expiration date of five years after the issuance date.

Share figures presented in this section do not reflect the Preferred Stock Conversion or the Stock Split. Following the Preferred Stock Conversion and the Stock Split, the 3,400,000 shares of Series A Preferred Stock and 630,915 shares of Series B Preferred Stock sold in the Private Placements will be converted and split into an aggregate of 11,608,994 shares of Class A common stock.

Recent Developments

Acquisitions

On March 3, 2021, SDM entered into a non-binding letter of intent (the “Olympus LOI”) with Olympus Power, LLC (“Olympus”) for the purchase of (i) a 30% limited partnership interest in Scrubgrass LP from Aspen Scrubgrass LP, a subsidiary of Olympus (“Aspen”), which represented all of Aspen’s ownership interest in Scrubgrass LP (the “Aspen Interest”), (ii) the Panther Creek Plant, and (iii) the Third Plant.

On July 9, 2021, we entered into a purchase agreement for the Panther Creek Acquisition, as contemplated by the Olympus LOI, from Panther Creek Reclamation Holdings, LLC, a subsidiary of Olympus Power, LLC. The Panther Creek Acquisition includes all of the assets of Panther Creek Power Operating LLC (“Panther Creek”), comprised primarily of the Panther Creek Plant. The Panther Creek Plant is a coal refuse reclamation facility with 80 MW of net electricity generation capacity located near Nesquehoning, Pennsylvania. The consideration for the Panther Creek Plant is approximately $3.0 million in cash and 400,000 Series A Preferred Units of Stronghold LLC (on a pre-Stock Split basis), or in the event that all Series A Preferred Units of Stronghold LLC have been converted into Class A common units of Stronghold LLC (“Stronghold LLC Units”), an equivalent amount of Stronghold LLC Units, together with a corresponding number of shares of Class V common stock. The Panther Creek Acquisition is subject to customary closing conditions and regulatory approvals.

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 due diligence and the negotiation of a definitive agreement, and there is no assurance that the acquisition will be completed. The consideration for the Third Plant is expected to be approximately $3.0 million in cash and $6,250,000 of Stronghold LLC Units, together with a corresponding number of shares of Class V common stock. If acquired, we plan to store newly acquired miners at or near the Third Plant and use power generated by the Third Plant to power crypto asset mining operations in an environmentally conscious manner.

Northern Data

On August 17, 2021, Stronghold LLC entered into a Hosting Services Agreement with Northern Data PA, LLC (“Northern Data”) whereby Northern Data will construct and operate a colocation datacenter facility located on the Scrubgrass Plant, 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.

Corporate Reorganization

Stronghold Digital Mining Inc. was incorporated as a Delaware corporation on March 19, 2021. On April 1, 2021, contemporaneously with the Series A Private Placement (as defined herein), we underwent a corporate reorganization pursuant to that certain Master Transaction Agreement dated as of April 1, 2021, by and among the Company, Q Power, SDM, EIF Scrubgrass, LLC (“EIF Scrubgrass”), Falcon Power LLC (“Falcon”), Scrubgrass Power LLC (“Scrubgrass Power”), Scrubgrass LP, Gregory A. Beard and William Spence (the “Master Transaction Agreement”), which we refer to herein as the “Reorganization.” All share numbers presented in this section are historical and do not take into effect the Stock Split.

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Our organizational structure following the Reorganization is commonly referred to as an umbrella partnership-C corporation (or “Up-C”) structure.  Pursuant to this structure, following this offering Stronghold Inc. will hold a number of Stronghold LLC Units equal to the number of shares of Class A common stock issued and outstanding, and holders of Stronghold LLC Units (each, a “Stronghold Unit Holder”) (other than Stronghold Inc.) will hold a number of Stronghold LLC Units equal to the number of shares of Class V common stock issued and outstanding.  The Up-C structure was selected in order to (i) allow Q Power the option to continue to hold its economic ownership in Stronghold LLC in “pass-through” form for U.S. federal income tax purposes through its ownership of the Stronghold LLC Units, and (ii) potentially allow Q Power and Stronghold Inc. to benefit from net cash tax savings that Stronghold Inc. might realize as more fully described in “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”  

Immediately prior to the Reorganization, Q Power directly held all of the equity interests in SDM, and indirectly held 70% of the limited partner interests, and all of the general partner interests, in Scrubgrass LP, through wholly-owned subsidiaries EIF Scrubgrass, Falcon and Falcon’s wholly-owned subsidiary Scrubgrass Power. Aspen held the remaining 30% of the limited partner interests in Scrubgrass LP.  Scrubgrass LP is a Delaware limited partnership originally formed on December 1, 1990 under the name of Scrubgrass Generating Company, L.P. SDM is a Delaware limited liability company originally formed on February 12, 2020 under the name Stronghold Power LLC.

Contemporaneously with the Reorganization, Stronghold Inc. acquired the Aspen Interest in exchange for 200,000 newly issued shares of Series A Preferred Stock of Stronghold Inc. and a portion of the proceeds from the Series A Private Placement.  Pursuant to the Reorganization, Q Power contributed all of its ownership interests in EIF Scrubgrass, Falcon and SDM to Stronghold LLC in exchange for 9,400,000 Stronghold LLC Units, Stronghold Inc. contributed cash (using the remaining proceeds from the Series A Private Placement, net of fees, expenses and amounts paid to Aspen), 9,400,000 shares of Class V common stock of Stronghold Inc. and the Aspen Interest to Stronghold LLC in exchange for 3,600,000 preferred units of Stronghold LLC, and Stronghold LLC immediately thereafter distributed the 9,400,000 shares of Class V common stock to Q Power.  In addition, effective as of April 1, 2021, Stronghold Inc. acquired 5,000 Stronghold LLC Units held by Q Power (along with an equal number of shares of Class V common stock) in exchange for 5,000 newly issued shares of Class A common stock.  

As a result of the Reorganization, the acquisition of the Aspen Interest and the acquisition of Stronghold LLC Units by Stronghold Inc. discussed above, (i) Q Power acquired and retained 9,395,000 Stronghold LLC Units, 5,000 shares of Class A common stock of Stronghold Inc., and 9,395,000 shares of Class V common stock of Stronghold Inc., effectively giving Q Power, which is controlled by Greg Beard, our Co-Chairman and Chief Executive Officer, and Bill Spence, our other Co-Chairman, approximately 72% of the voting power of Stronghold Inc. and approximately 72% of the economic interest in Stronghold LLC, (ii) Stronghold Inc. acquired 3,600,000 preferred units of Stronghold LLC and 5,000 Stronghold LLC Units, effectively giving Stronghold Inc. approximately 28% of the economic interest in Stronghold LLC, (iii) Stronghold Inc. became the sole managing member of Stronghold LLC and is responsible for all operational, management and administrative decisions relating to Stronghold LLC’s business and will consolidate financial results of Stronghold LLC and its subsidiaries, (iv) Stronghold Inc. became a holding company whose only material asset consists of membership interests in Stronghold LLC, and (v) Stronghold LLC directly or indirectly owns all of the outstanding equity interests in the subsidiaries through which we operate our assets, including Scrubgrass LP and SDM.

See the sections entitled “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” and “Corporate Reorganization” for additional information on our organizational structure, including the Tax Receivable Agreement.

Pursuant to the terms of the Preferred Stock (as defined herein), on (i) the date that a registration statement registering the shares of Class A common stock issuable upon the conversion of the Preferred Stock is declared effective by the SEC or (ii) the date on which a “Significant Transaction Event” occurs, as defined in our amended and restated certificate of incorporation, such shares of Preferred Stock will automatically convert into shares of Class A common stock of Stronghold Inc. on a one-to-one basis, subject to certain adjustments as set forth in our amended and restated certificate of incorporation. Correspondingly, pursuant to the Stronghold LLC Agreement, preferred units in Stronghold LLC automatically convert into Stronghold LLC Units on a one-to-one basis under like circumstances (subject to corresponding adjustments).  All of the outstanding shares of Preferred Stock will automatically convert into shares of Class A common stock upon effectiveness of the Resale Registration Statement, which we expect to occur concurrently with or shortly after the effectiveness of the registration statement of which

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this prospectus forms a part (the “Preferred Stock Conversion”) and, correspondingly, all of the preferred units in Stronghold LLC will automatically convert into Stronghold LLC Units.

After giving effect to the offering contemplated by this prospectus, the Preferred Stock Conversion and the Stock Split, Stronghold Inc. will own an approximate 40.5% interest in Stronghold LLC (or 41.6% if the underwriters’ over-allotment option is exercised in full), and Q Power, which is controlled by Greg Beard, our Co-Chairman and Chief Executive Officer, and Bill Spence, our other Co-Chairman, will own an approximate 59.5% interest in Stronghold LLC (or 58.4% if the underwriters’ over-allotment option is exercised in full) and all of the Class V common stock. Please see “Principal Stockholders.”

Each share of Class V common stock has no economic rights but entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of Class A common stock and Class V common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our amended and restated certificate of incorporation. Stronghold Inc. does not intend to list Class V common stock on any exchange.

Under the Second Amended and Restated Limited Liability Company Agreement of Stronghold LLC, as amended from time to time (the “Stronghold LLC Agreement”), each Stronghold Unit Holder, other than Stronghold Inc., subject to certain limitations, has the right (the “Redemption Right”) to cause Stronghold LLC to acquire all or a portion of its Stronghold LLC Units for, at Stronghold LLC’s election, (i) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each Stronghold LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions or (ii) an approximately equivalent amount of cash as determined pursuant to the Stronghold LLC Agreement. Alternatively, upon the exercise of the Redemption Right, Stronghold Inc. (instead of Stronghold LLC) has the right (the “Call Right”), for administrative convenience, to acquire each tendered Stronghold LLC Unit directly from the redeeming Stronghold Unit Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an approximately equivalent amount of cash as determined pursuant to the terms of the Stronghold LLC Agreement. In addition, Stronghold Inc. has the right to require (i) upon the acquisition by Stronghold Inc. of substantially all of the Stronghold LLC Units, certain minority unitholders or (ii) upon a change of control of Stronghold Inc., each Stronghold Unit Holder (other than Stronghold Inc.), in each case, to exercise its Redemption Right with respect to some or all of such unitholder’s Stronghold LLC Units. In connection with any redemption of Stronghold LLC Units pursuant to the Redemption Right or the Call Right, the corresponding number of shares of Class V common stock will be cancelled. The Third Amended and Restated Limited Liability Company Agreement of Stronghold LLC, which will reflect the automatic conversion of the outstanding preferred units of Stronghold LLC into Stronghold LLC Units, will become effective upon the Preferred Stock Conversion. See “Certain Relationships and Related Party Transactions—Stronghold LLC Agreement.”

Stronghold Inc.’s acquisition (or deemed acquisition for U.S. federal income tax purposes) of Stronghold LLC Units pursuant to an exercise of the Redemption Right or the Call Right is expected to result in adjustments to the tax basis of the tangible and intangible assets of Stronghold LLC, and such adjustments will be allocated to Stronghold Inc. These adjustments would not have been available to Stronghold Inc. absent its acquisition or deemed acquisition of Stronghold LLC Units and are expected to reduce the amount of cash tax that Stronghold Inc. would otherwise be required to pay in the future.

In connection with the Reorganization, Stronghold Inc. entered into a Tax Receivable Agreement with Q Power and an agent named by Q Power (the “Tax Receivable Agreement”). The Tax Receivable Agreement generally provides for the payment by Stronghold Inc. to Q Power (or its permitted assignees) of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax (computed using the estimated impact of state and local taxes) that Stronghold 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 of its acquisition (or deemed acquisition for U.S. federal income tax purposes) of all or a portion of Stronghold Unit Holders’ Stronghold LLC Units pursuant to an exercise of the Redemption Right or the Call Right and (ii) imputed interest deemed to be paid by Stronghold Inc. as a result of, and additional tax basis arising from, any payments Stronghold Inc. makes under the Tax Receivable Agreement.

Payments will generally be made under the Tax Receivable Agreement as Stronghold Inc. realizes actual cash tax savings from the tax benefits covered by the Tax Receivable Agreement. However, if Stronghold Inc.

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experiences a change of control (as defined under the Tax Receivable Agreement, which includes certain mergers, asset sales and other forms of business combinations) or the Tax Receivable Agreement terminates early (at Stronghold Inc.’s election or as a result of Stronghold Inc.’s breach), Stronghold Inc. would be 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 Tax Receivable Agreement (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 by Stronghold Inc. Stronghold Inc. will be dependent on Stronghold LLC to make distributions to Stronghold Inc. in an amount sufficient to cover Stronghold Inc.’s obligations under the Tax Receivable Agreement.

Estimating the amount and timing of Stronghold Inc.’s realization of tax benefits subject to the Tax Receivable Agreement is by its nature imprecise and unknown at this time and will vary based on a number of factors, many of which are outside of our control. Solely for purposes of illustration, we expect that if there were a redemption of all of the Stronghold LLC Units held by Q Power immediately after this offering (which is not likely or anticipated), the estimated tax benefits to Stronghold Inc. subject to the Tax Receivable Agreement could be up to $191.8 million (to the extent Stronghold Inc. has actual tax liability equal to or in excess of this amount) to be utilized over at least 15 years from the date of this offering as and when such benefits are realized (or in some cases, deemed realized). This illustration is almost certainly not accurate as it is based on stylized assumptions that are not realistic, and the actual or deemed benefits (and corresponding payments under the Tax Receivable Agreement) are likely to be significantly different. Moreover, any estimate we provide would necessarily be based on numerous uncertain assumptions, including but not limited to a $17.00 per share trading price of Class A common stock, a 21% U.S. federal corporate income tax rate and estimated applicable state and local income tax rates, no material change in U.S. federal, state or local income tax law, and that Stronghold Inc. will have sufficient taxable income on a current basis to utilize such estimated tax benefits. Utilizing this estimate as an illustration, Q Power would be entitled to payments under the Tax Receivable Agreement equal to 85% of the $191.8 million of tax benefits, or approximately $163.0 million, as and when such benefits are realized (or in some cases, deemed realized).

As noted above, the foregoing numbers are merely estimates for purposes of this illustration and the actual tax benefits and the amount and timing of the payments under the Tax Receivable Agreement to Q Power could differ materially as a result of a number of factors, including changes to Stronghold LLC’s balance sheet, the timing of the redemption of Stronghold LLC Units, the price of Class A common stock at the time of each exchange, the extent to which such exchanges are taxable, the amount and timing of the taxable income Stronghold Inc. generates in the future and the tax rate then applicable, and the portion of the payments under the Tax Receivable Agreement constituting imputed interest or depreciable or amortizable tax basis, as more fully described in “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Moreover, if tax benefits are deemed realized in certain circumstances (such as a change of control or other early termination of the Tax Receivable Agreement), the actual amount and timing of tax benefits may substantially differ from the deemed timing and amount, and the payments made by Stronghold Inc. under the Tax Receivable Agreement could exceed the actual net cash tax savings resulting from the “Up-C” structure. Payments under the Tax Receivable Agreement will not be conditioned upon Q Power having an ownership interest in Stronghold Inc. or Stronghold LLC. In addition, certain rights of Q Power (including the right to receive payments) under the Tax Receivable Agreement will be transferable in connection with transfers permitted under the Stronghold LLC Agreement of the corresponding Stronghold LLC Units or after the corresponding Stronghold LLC Units have been acquired pursuant to the Redemption Right or Call Right. For a more detailed discussion of the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”  

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The following diagram indicates our simplified ownership structure immediately following this offering and the transactions related thereto, taking into account the Preferred Stock Conversion and the Stock Split (assuming that the underwriters’ over-allotment option is not exercised):  

 

 

 

1 Includes 181,702 “Warrant Units” of Stronghold LLC issued to Stronghold Inc. in connection with the WhiteHawk Financing Agreement, as described below. Such Warrant Units were issued to Stronghold Inc. to mirror the shares of Class A common stock that may be issued upon exercise of the WhiteHawk Warrant (as described below) in order to preserve the economic equivalency between the shares of Class A common stock of Stronghold Inc. and the Stronghold LLC Units. Under the terms of the Stronghold LLC Agreement, the Warrant Units are identical to Stronghold LLC Units except that the Warrant Units lack voting rights.

 

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Stock Split

We will effect a 2.88-for-1 stock split immediately prior to and contingent upon the completion of this offering, pursuant to which each share of common stock held of record by the holder thereof will be reclassified into approximately 2.88 shares of common stock. No fractional shares will be issued. Pursuant to the Stronghold LLC Agreement, each Stronghold LLC Unit will also be split on a corresponding 2.88-for-1 basis, such that there will be 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.”

Unless otherwise indicated, and other than the consolidated financial statements and the related notes included elsewhere in this prospectus, the number of shares of our company presented in this prospectus is adjusted to reflect the Stock Split.

 

Our Legacy Owners

Upon completion of this offering (and taking into account the Preferred Stock Conversion and Stock Split), the existing owners of Stronghold Inc. (the “Legacy Owners”), including, but not limited to, Q Power and the holders of Series A Preferred Stock and Series B Preferred Stock, will own 12,325,667 shares of Class A common stock, representing approximately 27.2% of the voting power of the Company (or 26.7% if the underwriters exercise their over-allotment option in full), and Q Power, which is controlled by Greg Beard, our Co-Chairman and Chief Executive Officer, and Bill Spence, our other Co-Chairman, will own 27,057,600 shares of Class V common stock, representing approximately 59.8% of the voting power of the Company (or 58.6% if the underwriters exercise their over-allotment option in full). For more information on our Reorganization and the ownership of our common stock by our principal stockholders, see “– Corporate Reorganization” and “Corporate Reorganization.”

Controlled Company Status

After the completion of this offering, Q Power, which is controlled by Greg Beard, our Co-Chairman and Chief Executive Officer, and Bill Spence, our other Co-Chairman, will continue to collectively hold more than 50% of the voting power for the election of directors of the Company. As a result, we expect to be a controlled company within the meaning of Nasdaq corporate governance standards. Under Nasdaq rules, a company of which more than 50% of the voting power is held by an individual, company or group of persons acting together is a controlled company and may elect not to comply with certain Nasdaq corporate governance requirements, including the requirements that:

 

•

a majority of the Board consist of independent directors under Nasdaq rules;

 

•

the nominating and governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

•

the compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

These requirements will not apply to us as long as we remain a controlled company. Following this offering, we may utilize some or all of these exemptions. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.  See “Management—Controlled Company Status.”

Summary Risk Factors

Investing in our Class A common stock involves risks. You should carefully read the section of this prospectus entitled “Risk Factors” beginning on page 29 for an explanation of these risks before investing in our Class A common stock. In particular, the following considerations may offset our competitive strengths or have a negative effect on our strategy or operating activities, which could cause a decrease in the price of our Class A common stock and a loss of all or part of your investment.

 

•

We have a hybrid business model which is highly dependent on the price of Bitcoin. A decline in the price of Bitcoin could result in significant losses.

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•

If we fail to effectively manage our growth or to raise additional capital needed to grow our business, our business, financial condition and results of operations may be harmed.

 

•

We have an evolving business model which is subject to various uncertainties.

 

•

The loss of any of our management team could adversely affect our business.

 

•

We may be unable to successfully enter into definitive purchase agreements for or close on the additional plants or miners described herein, or any other potential acquisitions.

 

•

We are dependent on third-party brokers and direct suppliers to source some of our miners.

 

•

If crypto assets are determined to be investment securities, we may inadvertently violate the Investment Company Act of 1940, as amended (the “Investment Company Act”), and incur large losses and potentially be required to register as an investment company.

 

•

Regulatory changes or actions may alter the nature of an investment in us or restrict the use of Bitcoin in a manner that adversely affects our business, prospects or operations.

 

•

The open-source structure of the certain crypto asset network protocol, including Bitcoin, means that the contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage that network and an investment in us.

 

•

The further development and acceptance of crypto asset networks and other crypto assets are subject to a variety of factors that are difficult to evaluate.

 

•

We may not be able to compete with other companies, some of whom have greater resources and experience.

 

•

The development and acceptance of competing blockchain platforms or technologies may cause consumers to use alternative distributed ledgers or other alternatives.

 

•

The loss or destruction of private keys required to access any crypto assets held in custody for our own account may be irreversible.

 

•

The nature of our business requires the application of complex financial accounting rules, and there is limited guidance from accounting standard setting bodies. If financial accounting standards undergo significant changes, our operating results could be adversely affected.

 

•

The Bitcoin reward for successfully uncovering a block will halve several times in the future and Bitcoin value may not adjust to compensate us for the reduction in the rewards we receive from our mining efforts.

 

•

Our future success will depend upon the value of Bitcoin; the value of Bitcoin may be subject to pricing risk and has historically been subject to wide swings.

 

•

Cryptocurrencies, including those maintained by or for us, may be exposed to cybersecurity threats and hacks.

 

•

If the Bitcoin reward for solving blocks and transaction fees is not sufficiently high, we may not have an adequate incentive to continue mining and may cease mining operations.

 

•

The limited rights of legal recourse against us, and our lack of insurance protection expose us and our stockholders to the risk of loss of our crypto assets for which no person is liable.

 

•

Natural or manmade events may cause our power production to fall below our expectations.

 

•

We may not be able to operate the power generation facility as planned.

 

•

Land reclamation requirements may be burdensome and expensive.

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•

Changes in tax credits related to coal refuse power generation could have a material adverse effect on our business, financial condition, results of operations and future development efforts.

 

•

Competition in power markets may have a material adverse effect on our results of operations, cash flows and the market value of our assets.

 

•

Because our power-generating reclamation facility is a member of PJM Interconnection (“PJM”), a regional transmission organization, we may be required to supply power to the grid at a time that is not optimal to our operations.

 

•

Our business is subject to substantial energy regulation, and we are required to obtain, and to comply with, government permits and approvals.

 

•

Our operations involving the combustion of coal refuse are subject to a number of risks arising out of the threat of climate change, which could result in increased operating and capital costs for us and reduce the extent of our business activities.

 

•

Operation of power generation facilities involves significant risks and hazards.

 

•

We are a holding company whose sole material asset is our equity interests in Stronghold LLC.

 

•

We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls.

 

•

If we fail to remediate the material weakness in our internal control over financial reporting, or experience any additional material weaknesses in the future or otherwise fail to develop or maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations.

 

•

The Legacy Owners will own a significant amount of our voting stock, and their interests may conflict with those of our other stockholders.

 

•

In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits, if any, Stronghold Inc. realizes.

 

•

Investors in this offering will experience immediate and substantial dilution of $13.10 per share.

 

•

We do not intend to pay cash dividends on our Class A common stock.

 

•

Future sales of our Class A common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

 

•

We may issue preferred stock whose terms could adversely affect the voting power or value of our Class A common stock.

See “Risk Factors” immediately following this prospectus summary for a more thorough discussion of these and other risks and uncertainties we face.

Emerging Growth Company and Smaller Reporting Company Status

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

•

We are not required to engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

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•

We are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

•

We are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes”; and

 

•

We are not required to disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iii) the date on which we are deemed to be a “large accelerated filer,” which will occur as of the end of any fiscal year in which we (x) have an aggregate market value of our common stock held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (y) have been required to file annual and quarterly reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for a period of at least 12 months and (z) have filed at least one annual report pursuant to the Exchange Act.

We have elected to take advantage of the reduced disclosure obligations listed above in this prospectus, and may elect to take advantage of other reduced reporting requirements in future filings. In particular, we have elected to adopt the reduced disclosure with respect to our executive compensation disclosure. As a result of this election, the information that we provide stockholders may be different than you might get from other public companies.

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies. Our election to use the transition periods permitted by this election may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the extended transition periods permitted under the JOBS Act and that will comply with new or revised financial accounting standards. If we were to subsequently elect instead to comply with public company effective dates, such election would be irrevocable pursuant to the JOBS Act.

For additional descriptions of the qualifications and other requirements applicable to emerging growth companies and certain elections that we have made due to our status as an emerging growth company, see “Risk Factors—Risks Related to this Offering and Our Class A Common Stock—For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.”

Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (1) the market value of our common stock held by non-affiliates exceeds $250 million as of the end of that fiscal year’s second fiscal quarter and (2) our annual revenues exceeded $100 million during such completed fiscal year and the market value of our common stock held by non-affiliates exceeds $700 million as of the end of that fiscal year’s second fiscal quarter.

Our Offices

Our principal executive offices are located at 595 Madison Avenue, 29th Floor, New York, New York 10022, and our telephone number at that address is (212) 967-5294. Our website address is www.strongholddigitalmining.com. Information contained on our website does not constitute part of this prospectus.

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The Offering

 

Issuer

 

Stronghold Digital Mining Inc.

 

 

 

Class A common stock offered by us

 

5,882,352 shares.

 

 

 

Over-allotment option to purchase additional shares of Class A common stock

 

The underwriters have the option to purchase up to an aggregate of 882,352 additional shares of Class A common stock from us solely to cover over-allotments, if any, at the initial public offering price, less the underwriting discount and commissions. The underwriters can exercise this over-allotment option at any time within 30 days from the date of this prospectus.

 

 

 

Class A common stock to be outstanding immediately after completion of this offering

 

18,208,019 shares (or 19,090,371 shares if the underwriters’ over-allotment option is exercised in full), after giving effect to the Preferred Stock Conversion and Stock Split.

 

 

 

Class V common stock to be outstanding immediately after completion of this offering

 

27,057,600 shares (after giving effect to the Stock Split), all of which will be owned by Q Power. Class V shares do not have economic rights. In connection with any redemption of Stronghold LLC Units pursuant to the Redemption Right or our Call Right, the corresponding number of shares of Class V common stock will be cancelled.

 

 

 

Voting power of Class A common stock after giving effect to this offering

 

40.2% (or 41.4% if the underwriters’ over-allotment option is exercised in full), after giving effect to the Preferred Stock Conversion and the Stock Split.

 

 

 

Voting power of Class V common stock after giving effect to this offering

 

59.8% (or 58.6% if the underwriters’ over-allotment option is exercised in full), after giving effect to the Preferred Stock Conversion and the Stock Split.

 

 

 

Voting rights

 

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Each share of our Class V common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. Holders of our Class A common stock and Class V common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or by our amended and restated certificate of incorporation. See “Description of Capital Stock.”

 

 

 

Use of proceeds

 

We expect to receive approximately $89.6 million of net proceeds from the sale of Class A common stock offered by us in this offering after deducting underwriting discounts and estimated offering expenses payable by us (or approximately $103.6 million of net proceeds if the underwriters’ over-allotment option is exercised in full).

 

We intend to contribute the net proceeds of this offering to Stronghold LLC in exchange for Stronghold LLC Units. Stronghold LLC will use the net proceeds for general corporate purposes, including for acquisitions of miners and power generating assets. Please see “Use of Proceeds.”

 

 

 

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Dividend policy

 

We currently anticipate that we will retain all future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends in the foreseeable future.

 

 

 

Redemption rights of Stronghold Unit Holders

 

Under the Stronghold LLC Agreement, each Stronghold Unit Holder (other than Stronghold Inc.), subject to certain limitations, has the right, pursuant to the Redemption Right, to cause Stronghold LLC to acquire all or a portion of its Stronghold LLC Units for, at Stronghold LLC’s election, (i) shares of our Class A common stock at a redemption ratio of one share of Class A common stock for each Stronghold LLC Unit redeemed, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions or (ii) an approximately equivalent amount of cash as determined pursuant to the terms of the Stronghold LLC Agreement. Alternatively, upon the exercise of the Redemption Right, Stronghold Inc. (instead of Stronghold LLC) has the right, pursuant to the Call Right, to acquire each tendered Stronghold LLC Unit directly from the redeeming Stronghold Unit Holder for, at its election, (x) one share of Class A common stock, subject to conversion rate adjustments for stock splits, stock dividends and reclassification and other similar transactions, or (y) an approximately equivalent amount of cash as determined pursuant to the terms of the Stronghold LLC Agreement. In addition, Stronghold Inc. has the right to require (i) upon the acquisition by Stronghold Inc. of substantially all of the Stronghold LLC Units, certain minority unitholders or (ii) upon a change of control of Stronghold Inc., each Stronghold Unit Holder (other than Stronghold Inc.), in each case, to exercise its Redemption Right with respect to some or all of such unitholder’s Stronghold LLC Units. In connection with any redemption of Stronghold LLC Units pursuant to the Redemption Right or the Call Right, the corresponding number of shares of Class V common stock will be cancelled. See “Certain Relationships and Related Party Transactions—Stronghold LLC Agreement.”

 

 

 

Tax Receivable Agreement

 

Stronghold Inc. has entered into the Tax Receivable Agreement, which provides for the payment by Stronghold Inc. to Q Power (or its permitted assignees) of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax (computed using the estimated impact of state and local taxes) that Stronghold Inc. actually realizes (or is deemed to realize in certain circumstances) as a result of certain tax basis increases and certain tax benefits attributable to imputed interest. Stronghold Inc. will retain the remaining net cash savings, if any. See “Risk Factors—Risks Related to this Offering and Our Class A Common Stock” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

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Proposed listing symbol

 

We have applied to list our Class A common stock on The Nasdaq Global Market under the symbol “SDIG.”

 

 

 

Risk factors

 

You should carefully read and consider the information beginning on page 29 of this prospectus set forth under the heading “Risk Factors” and all other information set forth in this prospectus before deciding to invest in our Class A common stock.

 

 

 

Directed share program

 

The underwriters have reserved for sale at the initial public offering price up to 5% of the shares of Class A common stock being offered by this prospectus, excluding any shares issued pursuant to the underwriters’ over-allotment option, for sale to our employees, executive officers, directors and related persons who have expressed an interest in purchasing common stock in this offering. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they make will reduce the number of shares available to the general public. Please see “Underwriting.”

 

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Summary Historical and Pro Forma Consolidated Financial and Operating Data

Stronghold Inc. was incorporated on March 19, 2021. The following table presents the summary historical and certain pro forma financial data and other data for Stronghold Inc. and its subsidiaries and its accounting predecessor. The historical results presented below are not necessarily indicative of the results to be expected for any future period, and should be read together with “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Corporate Reorganization” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The summary historical financial data as of December 31, 2020 and 2019 and for the fiscal years ended December 31, 2020 and 2019 was derived from the audited historical financial statements of Stronghold Inc.’s accounting predecessor included elsewhere in this prospectus. The summary historical financial data as of June 30, 2021 and 2020 and for the six months ended June 30, 2021 and 2020 was derived from the unaudited historical financial statements of Stronghold Inc. and its subsidiaries included elsewhere in this prospectus.

The summary unaudited pro forma consolidated statements of operations data for the year ended December 31, 2020 and the six months ended June 30, 2021 present our consolidated results of operations after giving effect to the following adjustments, which we collectively refer to as the “pro forma adjustments”: (i) the Panther Creek Acquisition, (ii) a preliminary purchase price allocation of the Panther Creek Acquisition, (iii) funding pursuant to the master equipment financing agreement (the “Arctos/NYDIG Financing Agreement”) with Arctos Credit, LLC (now “NYDIG”) on July 2, 2021, (iv) the issuance of 154,114 shares of Class A common stock to Minerva Semiconductor Corp. upon final delivery of equipment (miners), (v) payments of the remaining commitments under the equipment financing agreements, (vi) additional transaction related costs (collectively, (iii), (iv), (v) and (vi) are referred to as the “Equipment Financing and Transaction Costs”), (vii) major repairs and upgrade maintenance to achieve maximum capacities at the Panther Creek Plant, (viii) this offering and our receipt of the estimated net proceeds from this offering and the subsequent contribution of such net proceeds to Stronghold LLC in exchange for Stronghold LLC Units, (ix) the Preferred Stock Conversion and the Stock Split, and (x) the establishment of a valuation allowance against the Company’s net deferred tax assets, and a provision for corporate income taxes on the income attributable to Stronghold Inc. at an effective rate of 0% for each of the fiscal year ended December 31, 2020 and the six months ended June 30, 2021, inclusive of all U.S. federal, state and local income taxes, net. Management continues to evaluate the likelihood of Stronghold Inc. utilizing its deferred tax assets, and while the valuation allowance remains in place, we expect to record no income tax expense. Should the valuation allowance no longer be required, the 21% statutory federal income tax rate will apply to income allocated to Stronghold Inc. as well as state and local income taxes, resulting in an estimated blended statutory rate of 28.89%. As disclosed in “Unaudited Pro Forma Consolidated Financial Information,” a provision for corporate income taxes on income attributable to Stronghold Inc. will have a full valuation allowance due to the fact that some or all of the deferred income tax assets will not be utilized. The unaudited pro forma consolidated balance sheet as of June 30, 2021 gives effect to the pro forma adjustments, including this offering, as if the same had occurred on June 30, 2021. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect their impact, on a pro forma basis, on the historical financial information of our accounting predecessor and Stronghold Inc. The summary unaudited pro forma consolidated financial information is derived from, and should be read in conjunction with, the condensed consolidated financial statements and related notes of Stronghold Inc. and its accounting predecessor and the consolidated financial statements and related notes of Panther Creek included elsewhere in this prospectus, together with the more detailed information as set forth under “Unaudited Pro Forma Consolidated Financial Information.” The summary unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of Stronghold Inc. that would have occurred had Stronghold Inc. been in existence or operated as a public company or otherwise during the periods presented. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial position had the described transactions occurred on the dates assumed. The unaudited pro forma consolidated financial information also does not project our results of operations or financial position for any future period or date.

24

 

 

 

 

Stronghold Inc.

 

 

Accounting Predecessor

 

 

Pro

Forma

Stronghold

Inc.(1)

 

 

Pro

Forma

Stronghold

Inc.(1)

 

 

 

Six Months Ended

June 30,

 

 

Years Ended

December 31,

 

 

Six

Months

Ended

June 30,

2021

 

 

Year

Ended

December 31,

2020

 

 

 

2021

 

 

2020

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

(unaudited)

 

Combined Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy

 

$

3,486,822

 

 

$

584,659

 

 

$

518,397

 

 

$

7,047,237

 

 

$

6,357,394

 

 

$

4,460,339

 

Capacity

 

 

1,283,236

 

 

 

1,469,661

 

 

 

2,816,457

 

 

 

3,832,457

 

 

 

1,283,236

 

 

 

2,816,457

 

Crypto asset hosting

 

 

1,242,518

 

 

 

—

 

 

 

252,413

 

 

 

—

 

 

 

1,242,518

 

 

 

252,413

 

Crypto asset mining

 

 

1,840,903

 

 

 

80,229

 

 

 

339,456

 

 

 

33,337

 

 

 

1,840,903

 

 

 

339,456

 

Other

 

 

33,123

 

 

 

33,743

 

 

 

191,661

 

 

 

136,299

 

 

 

326,690

 

 

 

616,135

 

Total operating revenues

 

 

7,886,602

 

 

 

2,168,292

 

 

 

4,118,384

 

 

 

11,049,330

 

 

 

11,050,741

 

 

 

8,484,800

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

 

4,100,521

 

 

 

302,937

 

 

 

425,126

 

 

 

8,435,990

 

 

 

5,042,577

 

 

 

2,341,287

 

Operations and maintenance

 

 

3,204,858

 

 

 

1,663,367

 

 

 

3,305,833

 

 

 

5,637,118

 

 

 

8,594,943

 

 

 

10,818,110

 

General and administrative

 

 

2,907,847

 

 

 

728,590

 

 

 

2,269,525

 

 

 

3,072,285

 

 

 

2,907,847

 

 

 

2,269,525

 

Impairments on digital currencies

 

 

375,246

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

375,246

 

 

 

—

 

Depreciation and amortization

 

 

1,305,174

 

 

 

283,453

 

 

 

558,630

 

 

 

483,658

 

 

 

1,509,348

 

 

 

976,211

 

Total operating expenses

 

 

11,893,646

 

 

 

2,978,347

 

 

 

6,559,114

 

 

 

17,629,051

 

 

 

18,429,962

 

 

 

16,405,133

 

Operating loss

 

 

(4,007,044

)

 

 

(810,055

)

 

 

(2,440,730

)

 

 

(6,579,921

)

 

 

(7,379,221

)

 

 

(7,920,333

)

Other Income (Expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

—

 

 

 

—

 

 

 

2,982

 

 

 

4,177

 

 

 

8,884

 

 

 

2,982

 

Interest expense

 

 

(134,083

)

 

 

(74,500

)

 

 

(205,480

)

 

 

(192,961

)

 

 

(139,335

)

 

 

(232,109

)

Gain on extinguishment of EIDL advance

 

 

—

 

 

 

—

 

 

 

10,000

 

 

 

—

 

 

 

—

 

 

 

10,000

 

Gain on extinguishment of PPP loan

 

 

638,000

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

638,800

 

 

 

—

 

Realized gain (loss) on sale of digital currencies

 

 

149,858

 

 

 

1,280

 

 

 

31,810

 

 

 

(1,516

)

 

 

149,858

 

 

 

—

 

Changes in fair value of warrant liabilities

 

 

(191,477

)

 

 

—

 

 

 

—

 

 

 

590,832

 

 

 

(669,063

)

 

 

—

 

Derivative contracts, net

 

 

—

 

 

 

1,207,131

 

 

 

1,207,131

 

 

 

2,244,810

 

 

 

—

 

 

 

1,207,131

 

Waste coal credit

 

 

23,796

 

 

 

7,500

 

 

 

1,188,210

 

 

 

2,011,044

 

 

 

281,112

 

 

 

1,533,215

 

Other

 

 

38,185

 

 

 

27,258

 

 

 

61,083

 

 

 

71,892

 

 

 

(2,461,815

)

 

 

(2,838,917

)

Total other income/ (expense)

 

 

525,079

 

 

 

1,168,669

 

 

 

2,295,736

 

 

 

4,728,278

 

 

 

(2,191,559

)

 

 

(285,888

)

Pro forma income taxes

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

Pretax income (loss)

 

$

(3,481,965

)

 

$

358,614

 

 

$

(144,994

)

 

$

(1,851,443

)

 

$

(9,570,781

)

 

$

(8,206,221

)

Pro forma income taxes

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Net income (loss)

 

 

(3,481,965

)

 

 

358,614

 

 

 

(144,994

)

 

 

(1,851,443

)

 

 

(9,570,781

)

 

 

(8,206,221

)

Less: Net income attributable to non-controlling

   interest

 

 

(2,402,488

)

 

 

—

 

 

 

(147,546

)

 

 

(564,980

)

 

 

—

 

 

 

—

 

Net income (loss) attributable to Stronghold

   LLC and Stronghold

 

$

(1,079,478

)

 

$

358,614

 

 

$

2,552

 

 

$

(1,286,463

)

 

$

(9,570,781

)

 

$

(8,206,221

)

Pro Forma Per Share Data(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(123.86

)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(408.40

)

 

 

 

 

Diluted

 

$

(123.86

)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(408.40

)

 

 

 

 

Pro forma weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,435

 

 

 

 

 

Diluted

 

 

8,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,435

 

 

 

 

 

Combined Statement of Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by operating activities

 

$

1,640,811

 

 

$

(893,940

)

 

$

587,223

 

 

$

755,182

 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by investing activities

 

 

(90,872,789

)

 

 

1,337,213

 

 

 

(1,827,786

)

 

 

17,982

 

 

 

 

 

 

 

 

 

Cash flows (used in) provided by financing activities

 

 

132,643,570

 

 

 

248,212

 

 

 

1,409,607

 

 

 

(826,242

)

 

 

 

 

 

 

 

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(3)

 

 

(2,018,558

)

 

 

(497,964

)

 

 

(1,811,041

)

 

 

(6,023,984

)

 

 

 

 

 

 

 

 

Combined Balance Sheet Data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

144,435,015

 

 

$

8,346,095

 

 

$

9,362,316

 

 

$

7,950,960

 

 

$

266,884,231

 

 

 

 

 

Long-term debt

 

 

18,871,881

 

 

 

755,826

 

 

 

1,757,371

 

 

 

1,356,197

 

 

 

30,398,229

 

 

 

 

 

Total liabilities

 

55,410,900

 

 

 

11,156,541

 

 

 

13,409,417

 

 

 

10,731,916

 

 

 

82,847,830

 

 

 

 

 

Total members’ equity/stockholders’ equity (deficit)

 

 

(174,920,980

)

 

 

(2,810,446

)

 

 

(4,047,101

)

 

 

(2,780,956

)

 

 

(270,829,998

)

 

 

 

 

 

(1)

Pro forma figures give effect to the transactions, including this offering, described under “Unaudited Pro Forma Consolidated Financial Information.” Please see “Unaudited Pro Forma Consolidated Financial Information” for a detailed

25

 

presentation of the unaudited pro forma information, including a description of the transactions and assumptions underlying the pro forma adjustments.

 

(2)

Pro forma per share data reflect the estimated number of shares of Class A common stock we expect to have outstanding upon the completion of this offering, taking into account the Reorganization, the Preferred Stock Conversion and the Stock Split. The pro forma data does not assume the exchange of any Stronghold LLC Units (and the corresponding cancellation of the outstanding shares of Class V common stock) for Class A common stock and any related adjustments to pro forma net income (loss) or pro forma net income (loss) per share. The pro forma data includes additional pro forma income tax expense of $0 for each of the fiscal year ended December 31, 2020 and the six months ended June 30, 2021 associated with the income tax effects of the Reorganization described under “—Corporate Reorganization.” Stronghold Inc. is a corporation and is subject to U.S. federal income tax starting on April 1, 2021 (the date of the Reorganization). Our accounting predecessor was not subject to U.S. federal income tax at an entity level prior to the Reorganization date of April 1, 2021.  Stronghold Inc. is subject to U.S. federal income tax as an entity for the period of April 1 to June 30, 2021. Stronghold Inc. has determined that the utilization of historic and pro forma net deferred tax assets, during this period, is not more likely than not, and therefore has recorded a valuation allowance against the net deferred tax assets in the unaudited condensed consolidated historical financial information and assumes the same for the pro forma consolidated financial information presented herein.  Therefore, the provision for income taxes during these periods after the Reorganization are $0.  The consolidated net income in our historical financial statements, including the period of January 1 to March 31, 2021 (pre-Reorganization), does not reflect the tax expense we would have incurred if we were subject to U.S. federal income tax at an entity level during such periods.

(3)

Adjusted EBITDA is a non-GAAP financial measure. For the definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measure.”

Non-GAAP Financial Measure

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation and amortization, further adjusted by the removal of one-time transaction costs, impairment of digital currencies, realized gains and losses on the sale of long-term assets, expenses related to stock-based compensation, gains or losses on derivative contracts, gain on extinguishment of debt, realized gain or loss on sale of digital currencies, waste coal credits, commission on sale of ash, or changes in fair value of warrant liabilities in the period presented. Our board of directors and management team use Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing the effects of our capital structure (such as varying levels of interest expense and income), asset base (such as depreciation, amortization, impairment, and realized gains and losses on sale of long-term assets) and other items (such as one-time transaction costs, expenses related to stock-based compensation, and unrealized gains and losses on derivative contracts) that impact the comparability of financial results from period to period. We present Adjusted EBITDA because we believe it provides useful information regarding the factors and trends affecting our business in addition to measures calculated under GAAP. Adjusted EBITDA is not a financial measure presented in accordance with GAAP. We believe that the presentation of this non-GAAP financial measure will provide useful information to investors and analysts in assessing our financial performance and results of operations across reporting periods by excluding items we do not believe are indicative of our core operating performance. Net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Our non-GAAP financial measure should not be considered as an alternative to the most directly comparable GAAP financial measure. You are encouraged to evaluate each of these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in the future, and any such modification may be material. Adjusted EBITDA has important limitations as an analytical tool and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.

26

 

The following table presents a reconciliation of Adjusted EBITDA to the GAAP financial measure of net income (loss) for the six months ended June 30, 2021 and 2020 and for the years ended December 31, 2020 and 2019.

 

 

 

Six Months Ended June 30,

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2020

 

 

2019

 

 

 

(in thousands)

(unaudited)

 

Net income (loss)

 

$

(3,482.0

)

 

$

358.6

 

 

$

(145.0

)

 

$

(1,851.4

)

Interest

 

 

134.1

 

 

 

74.5

 

 

 

202.5

 

 

 

188.8

 

Income taxes

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Depreciation and amortization

 

 

1,305.2

 

 

 

283.5

 

 

 

558.6

 

 

 

483.7

 

One-time transaction costs

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Impairment of digital currencies

 

 

375.2

 

 

 

—

 

 

 

—

 

 

 

—

 

Realized gains and losses on the sale of long-term

   assets

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Expenses related to stock-based compensation

 

 

269.9

 

 

 

—

 

 

 

—

 

 

 

—

 

(Gains)/Losses on derivative contracts

 

 

—

 

 

 

(1,207.1

)

 

 

(1,207.1

)

 

 

(2,244.8

)

Waste coal credit

 

 

(23.8

)

 

 

(7.5

)

 

 

(1,188.2

)

 

 

(2,011.0

)

Commission on sale of ash

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(590.8

)

Gain on extinguishment of PPP loan

 

 

(638.8

)

 

 

—

 

 

 

—

 

 

 

—

 

Realized (gain)/loss on sale of digital currencies

 

 

(149.9

)

 

 

—

 

 

 

(31.8

)

 

 

1.5

 

Changes in fair value of warrant liabilities

 

 

191.5

 

 

 

—

 

 

 

—

 

 

 

—

 

Adjusted EBITDA

 

$

(2,018.6

)

 

$

(498.0

)

 

$

(1,811.0

)

 

$

(6,024.0

)

 

27

 

 

Summary Historical Financial Data of Panther Creek

The summary historical financial data as of December 31, 2020 and 2019 and for the fiscal years ended December 31, 2020 and 2019 was derived from the audited historical financial statements of Panther Creek included elsewhere in this prospectus. The summary historical financial data as of June 30, 2021 and 2020 and for the six months ended June 30, 2021 and 2020 was derived from the unaudited historical financial statements of Panther Creek included elsewhere in this prospectus.

The unaudited condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of Panther Creek’s management, include all adjustments necessary for a fair presentation of the information set forth therein. The results of interim periods are not necessarily indicative of results that may be expected for the full year or any future periods.

 

 

 

Six Months Ended June 30,

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electricity

 

$

2,870,572

 

 

$

2,624,153

 

 

$

3,941,942

 

 

$

8,969,769

 

Other Revenue

 

 

293,567

 

 

 

349,734

 

 

 

424,474

 

 

 

75,952

 

Total operating revenues

 

 

3,164,139

 

 

 

2,973,887

 

 

 

4,366,416

 

 

 

9,045,721

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

 

942,057

 

 

 

1,865,600

 

 

 

1,916,161

 

 

 

3,418,740

 

Operations and maintenance

 

 

2,390,085