STRONGHOLD DIGITAL MINING, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

STRONGHOLD DIGITAL MINING, INC.  Management's Discussion and Analysis of Financial Condition and Results
of Operations (form 10-Q)

STRONGHOLD DIGITAL MINING, INC. Management’s Discussion and Analysis of Financial Condition and Results
of Operations (form 10-Q)

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.

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes and other financial information appearing in this
Form 10-Q. Some of the information contained in this discussion and analysis or
set forth elsewhere in this Form 10-Q, including information with respect to our
plans, expectations and strategy for our business, and operations, includes
forward-looking statements within the meaning of the federal securities laws.
For a complete discussion of forward-looking statements, see section above
entitled “Cautionary Statement Regarding Forward-Looking Statements.” Certain
risks may cause actual results, performance or achievements to differ materially
from those expressed or implied by the following discussion and analysis.
Factors that may cause actual results to differ materially from current
expectations include, among other things, those described under the heading
“Item 1A.Risk Factors” as filed in our Annual Report on Form 10-K for the year
ended December 31, 2021, and our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2022, each as filed with the U.S. Securities and Exchange
Commission (the “SEC”), and this Form 10-Q. Except as set forth in Item 1A.
“Risk Factors” below, there have been no material changes to the risk factors
previously disclosed in the 2021 Form 10-K, or first quarter 2022 Form 10-Q.

Overview

We are a vertically integrated crypto asset mining company currently focused on
mining Bitcoin. We wholly own and operate two low-cost,
environmentally-beneficial coal refuse power generation facilities that we have
upgraded: (i) our first reclamation facility located on a 650-acre site in
Scrubgrass Township, Venango County, Pennsylvania, which we acquired the
remaining interest of in April 2021 and currently has the capacity to generate
approximately 83.5 megawatts (“MW”) of electricity (the “Scrubgrass Plant”) and
(ii) a facility located near Nesquehoning, Pennsylvania, which we acquired in
November of 2021 and which has the capacity to generate approximately 80
megawatts (“MW”) of electricity (the “Panther Creek Plant”), each of which is as
an Alternative Energy System because coal refuse is classified 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. Owning our own source of power helps us
to produce Bitcoin at one of the lowest prices among our publicly traded peers.
We also believe that owning our own power source makes us a more attractive
partner to crypto asset mining equipment purveyors. We intend to leverage these
competitive advantages to continue to grow our business through the
opportunistic acquisition of additional power generating assets and miners.

Bitcoin Mining Growth
During 2018 and 2019, we began providing Bitcoin mining services to third
parties and also began operating our own Bitcoin mining equipment to generate
Bitcoin, which we then exchange for U.S. Dollars. We have been expanding our
mining operations since such date. As of June 30, 2022, we operated
approximately 32 thousand cryptocurrency mining computers (known as “miners”)
with hash rate capacity of approximately 3.0 EH/s. As of June 30, 2022, we had
entered into definitive agreements with multiple suppliers to deliver
approximately 10 thousand additional miners with capacity of approximately 1.0
EH/s through the end of 2022. We intend to house our miners at the Scrubgrass
Plant and the Panther Creek Plant data centers. On August 16, 2022, the Company
agreed to sell approximately 26 thousand NYDIG-secured Bitcoin miners to NYDIG,
fewer than 19 thousand of which were installed as of August 16, 2022, to NYDIG
in exchange for the NYDIG Debt (as defined below). Refer to Note 33 – Subsequent
Events.

Acquisitions

On March 3, 2021, Stronghold Digital Mining LLC (“SDM”) entered into a
non-binding letter of intent (the “Olympus LOI”) with Olympus Power, LLC
(together with its affiliates, “Olympus”)for the purchase of (i) the ownership
interest in Scrubgrass Reclamation Company, L.P. (f/k/a Scrubgrass Generating
Company, L.P.) (“Scrubgrass LP”) held by Aspen Scrubgrass Participant, LLC (the
“Aspen Interest”), (ii) the Panther Creek Plant, and (iii) a third coal refuse
power generation facility (the “Third Plant”).

On July 9, 2021, Stronghold Digital Mining Holdings LLC (“Stronghold LLC”)
entered into a purchase agreement for the Panther Creek Plant (the “Panther
Creek Acquisition”), as contemplated by the Olympus LOI, from Olympus. The
Panther Creek Acquisition includes all of the assets of Panther Creek Power
Operating LLC, comprised primarily of the

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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. We completed the Panther Creek Acquisition on
November 2, 2021. The consideration for the Panther Creek Plant was
approximately $2.2 million ($3 million less $800 thousand in shared land closing
costs) in cash and 1,152,000 Class A common units of Stronghold LLC (“Stronghold
LLC Units”), together with a corresponding number of shares of Class V common
stock. Effective November 2, 2021, we closed on this acquisition.

We continue to evaluate the acquisition of the Third Plant as contemplated by
the Olympus LOI, although we do not consider this acquisition to be probable at
this time. The acquisition of the Third Plant is subject to further due
diligence and the negotiation of a definitive agreement, and there is no
assurance that the acquisition will be completed.

Initial Public Offering

We completed the issuance and sale of our Class A common stock, par value $.0001
per share, in an initial public offering (the “IPO”) on October 22, 2021, and
our Class A common stock is listed on Nasdaq under the symbol “SDIG.”

Stock Split

We effected 2.88-for-1 stock split on October 22, 2021, pursuant to which each
share of common stock held of record by the holder thereof was reclassified into
approximately 2.88 shares of common stock. No fractional shares were issued.
Pursuant to the Second Amended and Restated Limited Liability Company Agreement
of Stronghold LLC, as amended from time to time, each “Stronghold LLC Unit” was
also split on a corresponding 2.88-for-1 basis, such that there are an
equivalent number of Stronghold LLC Units outstanding as the aggregate number of
shares of Class V common stock and Class A common stock outstanding following
the stock split. We refer to this collectively as the “Stock Split.”

Bitmain

On October 28, 2021, we entered into an agreement with Bitmain Technologies
Limited (“Bitmain”) to purchase 12,000 miners, which will be delivered in six
equal batches on a monthly basis beginning in April 2022 (the “First Bitmain
Purchase Agreement”). Per the First Bitmain Purchase Agreement, on October 29,
2021, we made an initial payment of $23,300,000 to Bitmain for the miners, On
November 18, 2021, we made an additional payment of $4,550,000. Subsequent
payments will be made in the future in connection with additional deliveries of
miners under the First Bitmain Purchase Agreement.

On November 16, 2021, we entered into a second agreement with Bitmain to
purchase 1,800 miners, which will be delivered in six equal batches on a monthly
basis beginning in July 2022 (the “Second Bitmain Purchase Agreement”). Per the
Second Bitmain Purchase Agreement, on November 18, 2021, we made an initial
payment of $6,835,000 to Bitmain for the miners. Subsequent payments will be
made in the future in connection with additional deliveries of miners under the
Second Bitmain Purchase Agreement.

The miners purchased pursuant to the two agreements with Bitmain will have an
aggregate hash rate capacity of approximately 1,450 PH/s.

On May 13, 2022, we entered into a purchase order to transfer the Second Bitmain
Purchase Agreement for 1,800 Bitmain Antminer S19 XP miners (the “Bitmain Sale”)
to Cryptech Solutions, Inc. (“Cryptech”) for a total value of $12,600,000,
including a $5,638,500 payment to the Company.

Nowlit Solutions Corp.

We paid for two separate purchases of miners from Nowlit Solutions Corp. The
first purchase payment was made on November 23, 2021, in the amount of
$1,605,360 for 190 miners. The second purchase payment was made on November 26,
2021, in the amount of $2,486,730 for an additional 295 miners.

Luxor Technology Corporation

We paid for three separate purchases of miners from Luxor Technology Corporation
(“Luxor”). The first purchase payment was made on November 26, 2021, in the
amount of $4,312,650 for 770 miners. The second and third purchase payments were
made on November 29, 2021, in the amount of $5,357,300 and $3,633,500
respectively; for an additional 750 and 500 miners.

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On November 30, 2021, we entered into a fourth purchase agreement with Luxor to
acquire 400 Antminer T19 miners with a hash rate of 84 TH/s and 400 Antminer T19
miners with a hash rate of 88 TH/s for a total purchase price of $6,260,800.

Cryptech Purchase Agreement

On December 7, 2021, we entered into a Hardware Purchase and Sales Agreement
(the “Cryptech Purchase Agreement”) with Cryptech to acquire 1,000 Bitmain S19a
miners with a hash rate of 96 TH/s for a total purchase price of $8,592,000.
Pursuant to the Cryptech Purchase Agreement, all hardware will be paid for in
advance of being shipped to the Company.

Supplier Purchase Agreements

On December 10, 2021, we entered into a Hardware Purchase and Sale Agreement
(the “First Supplier Purchase Agreement”) to acquire 3,000 MicroBT WhatsMiner
M30S miners (the “M30S Miners”) with a hash rate per unit of 87 TH/s. Pursuant
to the First Supplier Purchase Agreement, the unit price per M30S Miner is
$6,960 for a cumulative purchase price of $20,880,000 that was paid in full
within five business days of the execution of the First Supplier Purchase
Agreement.

On December 16, 2021, we entered into a Second Hardware Purchase and Sale
Agreement (the “Second Supplier Purchase Agreement”) to acquire a cumulative
amount of approximately 4,280 M30S Miners and MicroBT WhatsMiner M30S+ miners
with a hash rate per unit of 100 TH/s (the “M30S+ Miners”). Pursuant to the
Second Supplier Purchase Agreement, the unit price per M30S Miner is $2,714 and
the unit price per M30S+ Miner is $3,520 for a cumulative purchase price of
$11,340,373.

NYDIG ABL LLC

On December 15, 2021, we entered into a Master Equipment Finance Agreement (the
“Second NYDIG Financing Agreement”) with NYDIG ABL LLC (“NYDIG”) whereby NYDIG
agreed to lend Stronghold Digital Mining BT, LLC (“Digital Mining BT”) up to
$53,952,000 to finance the purchase of certain Bitcoin miners and related
equipment (the “Second NYDIG-Financed Equipment”). Outstanding borrowings under
the Second NYDIG Financing Agreement are secured by the Second NYDIG-Financed
Equipment, contracts to acquire Second NYDIG-Financed Equipment, and the Bitcoin
mined by the Second NYDIG-Financed Equipment. The Second NYDIG Financing
Agreement includes customary restrictions on additional liens on the Second
NYDIG-Financed Equipment. The NYDIG Second Financing Agreement may not be
terminated by Digital Mining BT or prepaid in whole or in part.

O&M Agreement

On November 2, 2021, we entered into the Operations, Maintenance and Ancillary
Services Agreement (the “Omnibus Services Agreement”) with Olympus Stronghold
Services, LLC (“Olympus Stronghold Services”), whereby Olympus Stronghold
Services will provide certain operations and maintenance services to Stronghold
LLC, as well as employ certain personnel to operate the Panther Creek Plant and
the Scrubgrass Plant. Stronghold LLC will reimburse Olympus Stronghold Services
for those costs incurred by Olympus Stronghold Services and approved by
Stronghold LLC in the course of providing services under the Omnibus Services
Agreement, including payroll and benefits costs and insurance costs. The
material costs incurred by Olympus Stronghold Services shall be approved by
Stronghold LLC. Stronghold LLC will also pay Olympus Stronghold Services a
management fee at the rate of $1,000,000 per year, payable monthly, and an
additional one-time mobilization fee of $150,000 upon the effective date of the
Omnibus Services Agreement.

Miner Sales Agreement

During the second quarter of 2022, the Company entered into multiple miner sales
agreements with multiple buyers. The Company previously disclosed its effort to
optimize its Bitcoin miner fleet through its sale of 3,425 miners (approximately
411 PH/s) with a historical carrying value of $21.9 million, or $50.70 per TH/s.
The Company recognized a loss of approximately $8.0 million on these miners
during the second quarter of 2022. The Company undertook these sales due to its
priorities of improving its liquidity position and improved returns over growth.
The loss was recorded in Realized gain (loss) on sale of miner assets on the
consolidated statements of operations. The various buyers paid the Company an
aggregate of $13.8 million up front and took over the remaining installment
payment obligations upon transfer of the contract, relieving the Company of the
outstanding purchase obligation.
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Reorganization

On April 1, 2021, we effected the corporate reorganization described in Note 1 –
Business Combinations in the notes to our financial statements.

Trends and Other Factors Impacting Our Performance

COVID-19 and Supply Chain Constraints

The coronavirus (“COVID-19”) global pandemic has resulted and is likely to
continue to result in significant national and global economic disruption, which
may adversely affect our business. Among other things, the COVID-19 pandemic has
caused supply chain disruptions that may have lasting impacts. Additionally, the
global supply chain for Bitcoin miners is presently further constrained due to
unprecedented demand coupled with a global shortage of mining equipment and
mining equipment parts. Based on our current assessments, however, we do not
expect any material impact on long-term development, operations, or liquidity
due to the spread of COVID-19. However, we are actively monitoring this
situation and the possible effects on its financial condition, liquidity,
operations, suppliers, and industry.

China’s Crackdown on Bitcoin Mining

In May 2021, the Chinese government called for a crackdown on Bitcoin mining and
trading. Following this, the majority of Bitcoin miners in China were taken
offline. This resulted in (i) a significant reduction in the Bitcoin global
network hash rate, (ii) an increase in the availability of Bitcoin miners for
purchase and (iii) an increase in the demand for power outside of China.
Further, in September 2021, Chinese regulators instituted a blanket ban on all
crypto mining and transactions, including overseas crypto exchange services
taking place in China, effectively making all crypto-related activities illegal
in China. The reduction in network hash rate has improved Bitcoin mining
profitability (not factoring in underlying Bitcoin prices), with plugged-in
Bitcoin miners representing a larger percentage of the global hash rate. We do
not believe that higher demand for power will have a negative impact on our
business because we own and operate our power sources.

Scrubgrass Plant

During the fourth quarter of 2021 and continuing into the second quarter of
2022, the Scrubgrass Plant had downtime that was greater than anticipated,
driven largely by mechanical failures. The upgrades and maintenance that are
necessary have taken longer and are more extensive than originally anticipated.
We expect these investments to be completed in the second half of 2022. Once
finished, the Scrubgrass Plant is expected to be operational at nameplate
capacity with high uptime and low operating costs.

During the first half of 2022, higher than anticipated requirements from PJM
Interconnection LLC (“PJM”) resulted in unplanned and extended outages of our
mining operations at the Scrubgrass Plant, diverting capacity away from our
mining operations at a time that was not economical for our business strategy.
These diversions of power away from our mining operations during the first and
second quarters had a material adverse effect on our business, financial
condition and results of operations. The Scrubgrass Plant also experienced
higher than expected cost capping, as the result of its role as a capacity
resource, from PJM which obligated the Scrubgrass Plant to supply power to the
PJM grid at pre-set prices in an effort to stabilize PJM grid pricing. Starting
in June, Scrubgrass Plant was no longer classified as a capacity resource, and
is now an energy resource, which will allow the plant to sell power to the grid
at market prices.

In the third quarter of 2022, the Scrubgrass Plant will undergo planned
maintenance for approximately seven to ten days, during which time it will not
be generating power.

Panther Creek Plant and Data Center

During the second quarter of 2022, the Panther Creek Plant’s mining operations
were offline for ten days due to the failure of a switchgear and the need to
source, deliver and install a new piece of equipment, causing ten days of no
mining revenue generation at the facility and resulting in an estimated loss of
approximately $1.4 million. The operation of our power generation facilities,
information technology systems and other assets and conduct of other activities
subjects us to a variety of risks, including the breakdown or failure of
equipment, accidents, security breaches, viruses or outages affecting
information technology systems, labor disputes, obsolescence,
delivery/transportation problems and disruptions of fuel supply, failure to
receive spare parts in a timely manner, and performance below expected levels.

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As previously disclosed on the Company’s Form 8-K dated July 25, 2022, the
Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in
the month of June from damaged transmission lines caused by a storm, and other
plant maintenance issues. The Company estimates the financial impact of the June
outages to be lost revenue of $1.8 million and a net income impact of
$1.4 million.

In the third quarter of 2022, the Panther Creek Plant will undergo planned
maintenance for approximately one week, during which time it will not be
generating power.

Bitcoin Price Volatility

The market price of Bitcoin has historically and recently been volatile. For
example, the price of Bitcoin ranged from a low of approximately $29,000 to a
high of approximately $69,000 during 2021 and has ranged from approximately
$18,000 to approximately $48,000 year-to-date as of August 12, 2022. Since the
IPO, the price of Bitcoin has dropped over 70%, resulting in an adverse effect
on our results of operations, liquidity and strategy, and resulting in increased
credit pressures on the cryptocurrency industry. Our operating results depend on
the value of Bitcoin because it is the only crypto asset we currently mine.

We cannot accurately predict the future market price of Bitcoin and, as such, we
cannot accurately predict potential adverse effects, including whether we will
record impairment of the value of our Bitcoin assets. The future value of
Bitcoin will affect the revenue from our operations, and any future impairment
of the value of the Bitcoin we mine and hold for our account would be reported
in our financial statements and results of operations as charges against net
income, which could have a material adverse effect on the market price for our
securities.

Recent Developments

Northern Data

On August 17, 2021, Stronghold LLC entered into an agreement with Northern Data
PA, LLC (“Northern Data”) whereby Northern Data will construct and operate a
colocation data center facility located on the Scrubgrass Plant (the “Hosting
Agreement”), the primary business purpose of which will be to provide hosting
services and support the cryptocurrency miners that we have purchased but not
yet received entirely from Northern Data. On March 28, 2022, we restructured the
Hosting Agreement to obtain an additional 2,675 miners at cost of $37.5 per
terahash (to be paid five months after delivery) and temporarily reduced the
profit share for Northern Data while incorporating performance thresholds until
the data center build-out is complete. On August 10, 2022 the Company and
Northern Data terminated the provision of the restructured Hosting Agreement
related to the additional 2,675 miners and the Company shall neither make
payment for such additional miners nor obtain title to such additional miners.

MinerVa

On April 2, 2021, we entered into a purchase agreement with MinerVa (the
“MinerVa Purchase Agreement”) for the acquisition of 15,000 of their MV7 ASIC
SHA256 model cryptocurrency miner equipment (miners) with a total terahash to be
delivered equal to 1.5 million terahash. In December 2021, we extended the
deadline for delivery of the MinerVa miners to April 2022. As of June 30, 2022,
MinerVa has delivered, refunded cash, or swapped into deliveries of industry
leading miners of equivalent value to approximately 7,200 of the 15,000 miners.
As of August 12, 2022, the Company has received approximately 8,500 of the
miners or equivalent value from MinerVa. We do not know when the remaining
MinerVa miners will be received, if at all. As a result, an impairment totaling
$12,228,742 was recognized on March 31, 2022. On July 18, 2022, the Company
provided written notice of dispute to MinerVa pursuant to the MinerVa Purchase
Agreement obligating the Company and MinerVa to work together in good faith
towards a resolution for a period of sixty (60) days. In accordance with the
MinerVa Purchase Agreement, if no settlement has been reached after sixty (60)
days, Stronghold may end discussions and declare an impasse and adhere to the
dispute resolution provisions of the MinerVa Purchase Agreement.

Second WhiteHawk Amendment

On March 28, 2022, Equipment LLC and WhiteHawk Finance LLC (“WhiteHawk”) amended
the WhiteHawk Financing Agreement (as defined below) for a second time (the
“Second WhiteHawk Amendment”) to exchange the collateral under the WhiteHawk
Financing Agreement. Pursuant to the Second WhiteHawk Amendment, (i) the
approximately 11,700 remaining miners under the MinerVa Purchase Agreement were
exchanged as collateral for additional miners received by us from other
suppliers and (ii) WhiteHawk agreed to lend to us an additional amount not to
exceed $25.0 million to finance certain previously purchased Bitcoin miners and
related equipment (the “Second Total
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Advance”). Pursuant to the Second WhiteHawk Amendment, Equipment, LLC paid an
amendment fee in the amount of $275,414.40 and a closing fee with respect to the
Second Total Advance of $500,000. In addition to the purchased Bitcoin miners
and related equipment, Panther Creek and Scrubgrass each agreed to a negative
pledge of the Panther Creek Plant and Scrubgrass Plant, respectively, and
guaranteed the WhiteHawk Financing Agreement. Each of the negative pledge and
the guaranty by Panther Creek and Scrubgrass will be released upon payment in
full of the Second Total Advance, regardless of whether the Total Advance
remains outstanding. In conjunction with the Second WhiteHawk Amendment, we
issued a warrant to WhiteHawk to purchase 125,000 shares of Class A common
stock, subject to certain antidilution and other adjustment provisions as
described in the warrant agreement, at an exercise price of $0.01 per share (the
“Second WhiteHawk Warrant”). The Second WhiteHawk Warrant expires on March 28,
2032.

2022 Private Placement

On May 15, 2022, we entered into a note and warrant purchase agreement (the
“Purchase Agreement”), by and among the Company and the purchasers thereto
(collectively, the “Purchasers”), whereby we agreed to issue and sell to
Purchasers, and Purchasers agreed to purchase from the Company, (i) $33,750,000
aggregate principal amount of 10.00% unsecured convertible promissory notes (the
“May 2022 Notes”) and (ii) warrants (the “May 2022 Warrants”) representing the
right to purchase up to 6,318,000 shares of Class A Common Stock, of the Company
with an exercise price per share equal to $2.50, on the terms and subject to the
conditions set forth in the Purchase Agreement (collectively, the “2022 Private
Placement”). The Purchase Agreement contained representations and warranties by
the Company and the Purchasers that are customary for transactions of this type.
The May 2022 Notes and the May 2022 Warrants were offered and sold in reliance
on the exemption afforded by Section 4(a)(2) of the Securities Act, and Rule
506(b) of Regulation D promulgated thereunder for aggregate consideration of
$27.0 million.

In connection with the 2022 Private Placement, the Company undertook to
negotiate with the Purchasers, and to file a certificate of designation (“Series
C Preferred Certificate of Designation”) with the State of Delaware, following
the closing of the 2022 Private Placement, the terms of a new series of
preferred stock (the “Series C Preferred Stock”).

In connection with the 2022 Private Placement, the May 2022 Warrants were issued
pursuant to a Warrant Agreement, dated as of May 15, 2022 (the “Warrant
Agreement”). The May 2022 Warrants are subject to mandatory cashless exercise
provisions and have certain anti-dilution provisions. The May 2022 Warrants will
be exercisable for a five-year period from the closing.

McClymonds Supply & Transit Company, Inc. and DTA, L.P. vs Scrubgrass Generating
Company, L.P.

On May 9, 2022, an award in the amount of $5.0 million plus interest computed as
of May 15, 2022 in the amount of $0.8 million was issued in favor of the
McClymonds Supply & Transit Company, Inc. in the previously disclosed dispute
over a trucking contract between the claimant and our subsidiary. The two
managing members of Q Power, LLC, our primary Class V shareholder, have agreed
to and begun to pay the full amount of the award such that there will be no
effect on the financial condition of the Company.

WhiteHawk Refinancing Agreement

On August 16, 2022, we entered into a commitment letter (the “Commitment
Letter”) with WhiteHawk to provide for committed financing to refinance the
WhiteHawk Financing Agreement and provide up to $20 million in additional
commitments (such additional commitments, the “Delayed Draw Facility”) for an
aggregate loan not to exceed $60.0 million. Such loans under the Delayed Draw
Facility will be available to be drawn for 180 days from the closing date of the
WhiteHawk Refinancing Agreement (as defined below). The financing contemplated
by the Commitment Letter (such financing, the “WhiteHawk Refinancing Agreement”)
will be entered into by Stronghold LLC as Borrower (the “Borrower”) and secured
by substantially all of the assets of the Company and its subsidiaries and will
be guaranteed by the Company and each of its subsidiaries. The WhiteHawk
Refinancing Agreement will require equal monthly amortization payments resulting
in full amortization at maturity. The WhiteHawk Refinancing Agreement will have
customary representations, warranties and covenants including restrictions on
indebtedness, liens, restricted payments and dividends, investments, asset sales
and similar covenants and will contain customary events of default. The
WhiteHawk Refinancing Agreement will contain a covenant requiring the Borrower
and its subsidiaries to maintain a minimum of (x) $7.5 million of liquidity at
all times (y) a minimum liquidity of $10 million of average daily liquidity for
each calendar month (rising to $20 million beginning July 1, 2023) and (z) a
maximum total leverage ratio covenant of (i) 7.5:1.0 for the quarter ending
December 31, 2022, (ii) 5.0:1.0 for the quarter ending March 31, 2023, (iii)
4.0:1.0 for the quarter ending June 30, 2023 and (iv) 4.0:1.0 for each quarter
ending thereafter. The initial closing of the WhiteHawk Refinancing Agreement
will be subject to customary closing conditions. In addition, the initial
closing of the WhiteHawk Refinancing Agreement will
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subject to the full extinguishment and termination of all of the NYDIG Debt (as
defined below) and other obligations of the Company and its affiliates under the
NYDIG Agreements (as defined below), whether pursuant to the Asset Purchase
Agreement (as defined below) or otherwise.

The borrowings under the WhiteHawk Refinancing Agreement will mature 36 months
after the closing date of the WhiteHawk Refinancing Agreement and will bear
interest at a rate of Secured Overnight Financing Rate plus 10%. The loans under
the Delayed Draw Facility will be issued with 3% “original issue discount” on
all drawn amounts, payable when such amounts are drawn, and undrawn commitments
thereunder will incur a commitment fee, paid monthly, equal to 1% per annum.
Amounts drawn on the WhiteHawk Refinancing Agreement will be subject to a
prepayment premium such that the lenders thereunder achieve a 20% return on
invested capital. We agreed to issue a stock purchase warrant to WhiteHawk in
conjunction with the closing of the WhiteHawk Refinancing Agreement, which
provides for the purchase of an additional 2,000,000 shares of Class A common
stock at $0.01 per share.

NYDIG Asset Purchase Agreement

On August 16, 2022, the Company, Stronghold LLC, Stronghold Digital Mining LLC,
a Delaware limited liability company (“SD Mining”) and Stronghold Digital Mining
BT, LLC, a Delaware limited liability company (“SD Mining BT”, and together with
SD Mining, the “APA Sellers” and, together with the Company and Stronghold LLC,
the “APA Seller Parties”), entered into an Asset Purchase Agreement (the “Asset
Purchase Agreement”) with NYDIG ABL LLC, a Delaware limited liability company
formerly known as Arctos Credit, LLC (“NYDIG”), and The Provident Bank, a
Massachusetts savings bank (“BankProv” and together with NYDIG, “Purchasers” and
each, a “Purchaser”).

Pursuant to the Arctos/NYDIG Financing Agreement and the Second NYDIG Financing
Agreement (collectively, the “NYDIG Agreements”), certain miners are pledged as
collateral under such agreements (and together with certain related agreements
to purchase miners, the “APA Collateral”). Under the Asset Purchase Agreement,
the APA Seller Parties have agreed to sell, and the Purchasers (or their
respective designee) have agreed to purchase, the APA Collateral in a private
disposition in exchange for the forgiveness, reduction and release of all
principal, interest, and fees owing under each of the NYDIG Agreements
(collectively, the “NYDIG Debt”). The Sellers have agreed to clean, service,
package, ship and deliver the APA Collateral and to bear the costs associated
with such activities. Following (i) delivery of the APA Collateral pursuant to
the Purchasers or their designees to a master bill of sale and (ii) a subsequent
inspection period of up to 14 days (which may be extended up to seven additional
days), upon acceptance of the APA Collateral, the related portion of the NYDIG
Debt will be assigned to the Sellers and cancelled pursuant to the terms of the
Asset Purchase Agreement (each, a “Settlement”). A Settlement is subject to
certain conditions, including the delivery of certain milestone schedules to a
master bill of sale and the completion of an inspection of the APA Collateral by
the Purchasers, and, in the event of certain failures to satisfy the inspection
conditions, the obligation of the Company to replace such APA Collateral with
comparable assets, provided that such obligation only applies once the aggregate
value of such APA Collateral exceeds $173,650.68, with respect to BankProv, and
$252,532.33, with respect to NYDIG.

Prior to the date on which (i) APA Seller Parties first breaches a material
obligation under the Asset Purchase Agreement, (ii) the date on which the Asset
Purchase Agreement is terminated or if a Seller elects not to sell any or all of
its APA Collateral, or (iii) an insolvency or liquidation proceeding is
commenced by or against the APA Sellers (the “Non-Interference Period”), the
Purchasers have agreed not to foreclose on any of the APA Collateral under such
NYDIG Agreements. The APA Seller Parties also granted certain indemnification
rights to the Purchasers. The Asset Purchase Agreement also provides for certain
termination rights.

Pursuant to the Asset Purchase Agreement, the Seller Parties have granted a
release from certain claims arising out of or in connection with the Asset
Purchase Agreement and the transactions contemplated thereunder. Further, except
for the payment of accrued but unpaid interest through the date of signing of
the Asset Purchase Agreement, prior to the earlier of (i) the termination of the
Asset Purchase Agreement, (ii) the end of the Non-Interference Period, or (iii)
a Seller electing not to sell any of its APA Collateral required to be sold at a
settlement, the Sellers will not be required to make payments pursuant to the
NYDIG Agreements (although interest shall accrue but not be due and payable) and
each Purchaser, in its capacity as the respective lender under the NYDIG
Agreements, will not exercise any remedies available as a lender or declare any
event of default as a result of the Sellers taking any actions required or
directly contemplated by the Asset Purchase Agreement.
Private Placement Amendment

On August 16, 2022, the Company entered into an amendment to the note and
warrant purchase agreement (the “Purchase Agreement”), by and among the Company
and the purchasers thereto (collectively, the “Purchasers”), whereby the Company
agreed to amend the Purchase Agreement such that $11.25 million of the
outstanding principal has been exchanged for the Purchaser’s execution of an
amended and restated warrant agreement pursuant to which the strike price
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of the 6,318,000 May 2022 Warrants was reduced from $2.50 to $0.01. After giving
effect to the principal reduction and amended and restated warrants, the Company
will continue to make subsequent monthly, payments to the Purchasers on the
fifteenth (15th) day of each of November 2022, December 2022, January 2023 and
February 2023. The Company may elect to pay each such payment (A) in cash or (B)
in shares of Common Stock, in each case, at a twenty percent (20%) discount to
the average of the daily VWAPs for each of the twenty (20) consecutive trading
days preceding the payment date.

Critical Accounting Policies and Significant Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be
determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the financial
statements. The most significant accounting estimates inherent in the
preparation of our financial statements include estimates associated with
revenue recognition, investments, intangible assets, stock-based compensation
and business combinations. Our financial position, results of operations and
cash flows are impacted by the accounting policies we have adopted. In order to
get a full understanding of our financial statements, one must have a clear
understanding of the accounting policies employed.

A summary of our critical accounting policies follows:

Fair Value Measurements

We measure at fair value certain of our financial and non-financial assets and
liabilities by using a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date, essentially an
exit price, based on the highest and best use of the asset or liability. The
levels of the fair value hierarchy are:

Level 1: Observable inputs such as quoted market prices in active markets for
identical assets or liabilities;

Level 2: Observable market-based inputs or unobservable inputs that are
corroborated by market data; and

Level 3: Unobservable inputs for which there is little or no market data, which
require the use of the reporting entity’s own assumptions.

A financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement.

Cryptocurrency Machines

Management has assessed the basis of depreciation of our cryptocurrency machines
used to verify digital currency transactions and generate digital currencies and
believes they should be depreciated over a three-year period. The rate at which
we generate digital assets and, therefore, consume the economic benefits of our
Bitcoin miners, is influenced by a number of factors including the following:

1.The complexity of the Bitcoin mining process which is driven by the algorithms
contained within the Bitcoin open-source software;

2.The general availability of appropriate computer processing capacity on a
global basis (commonly referred to in the industry as hashing capacity which is
measured in petahash units); and

3.Technological obsolescence reflecting rapid development in the Bitcoin miner
industry such that more recently developed hardware is more economically
efficient to run in terms of digital assets generated as a function of operating
costs, primarily power costs, (i.e., the speed of hardware evolution in the
industry is such that later
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hardware models generally have faster processing capacity combined with lower
operating costs and a lower cost of purchase).

We operate in an emerging industry for which limited data is available to make
estimates of the useful economic lives of specialized equipment. Management has
determined that three years best reflects the current expected useful life of
Bitcoin miners. This assessment takes into consideration the availability of
historical data and management’s expectations regarding the direction of the
industry including potential changes in technology. Management will review this
estimate annually and will revise such estimate as and when data becomes
available.

To the extent that any of the assumptions underlying management’s estimate of
useful life of its Bitcoin miners are subject to revision in a future reporting
period either as a result of changes in circumstances or through the
availability of greater quantities of data then the estimated useful life could
change and have a prospective impact on depreciation expense and the carrying
amounts of these assets.

Revenue Recognition

We recognize revenue under ASC 606, Revenue from Contracts with Customers. The
core principle of this revenue standard is that a company should recognize
revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. The following five steps are
applied to achieve that core principle:

1.Step 1: Identify the contract with the customer

2.Step 2: Identify the performance obligations in the contract

3.Step 3: Determine the transaction price

4.Step 4: Allocate the transaction price to the performance obligations in the
contract

5.Step 5: Recognize revenue when we satisfy a performance obligation

In order to identify the performance obligations in a contract with a customer,
a company must assess the promised goods or services in the contract and
identify each promised good or service that is distinct. A performance
obligation meets ASC 606’s definition of a “distinct” good or service (or bundle
of goods or services) if both of the following criteria are met: the customer
can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e., the good or service
is capable of being distinct), and the entity’s promise to transfer the good or
service to the customer is separately identifiable from other promises in the
contract (i.e., the promise to transfer the good or service is distinct within
the context of the contract).

If a good or service is not distinct, the good or service is combined with other
promised goods or services until a bundle of goods or services is identified
that is distinct.

The transaction price is the amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services to a
customer. The consideration promised in a contract with a customer may include
fixed amounts, variable amounts, or both.

When determining the transaction price, an entity must consider the effects of
all of the following:

•Variable consideration

•Constraining estimates of variable consideration

•The existence of a significant financing component in the contract

•Noncash consideration

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•Consideration payable to a customer

Variable consideration is included in the transaction price only to the extent
that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the
variable consideration is subsequently resolved. The transaction price is
allocated to each performance obligation on a relative standalone selling price
basis. The transaction price allocated to each performance obligation is
recognized when that performance obligation is satisfied, at a point in time or
over time as appropriate. There were no revenue streams with variable
consideration during the six months ended June 30, 2022, and 2021.

There is currently no specific definitive guidance under GAAP or alternative
accounting framework for the accounting for cryptocurrencies recognized as
revenue or held, and management has exercised significant judgment in
determining the appropriate accounting treatment. In the event authoritative
guidance is enacted by the Financial Accounting Standards Board (the “FASB”), we
may be required to change our policies, which could have an effect on our
condensed consolidated financial position and results from operations.

The Company has determined that the Bitcoin that are awarded through its Bitcoin
mining operations are a current asset and should be accounted for in Cash Flow
from Operations due to the fact that it has been selling coins on a regular
basis in order to fund Operations. As such, any changes in the balance of the
current asset account, including those resulting from mining revenue, sales of
Bitcoin and any associated gains and losses, and impairments, should be
accounted for in Operations as opposed to Investing, where sales of Bitcoin had
appeared previously.

Fair value of the digital asset award received is determined using the quoted
price of the related cryptocurrency at the time of receipt.

Our policies with respect to our revenue streams are detailed below.

Energy Revenue

We operate as a market participant through PJM Interconnection, a Regional
Transmission Organization (“RTO”) that coordinates the movement of wholesale
electricity. We sell energy in the wholesale generation market in the PJM RTO.
Energy revenues are delivered as a series of distinct units that are
substantially the same and that have the same pattern of transfer to the
customer over time and are therefore accounted for as a distinct performance
obligation. The transaction price is based on pricing published in the day ahead
market which constitute the stand-alone selling price.

Energy revenue is recognized over time as energy volumes are generated and
delivered to the RTO (which is contemporaneous with generation), using the
output method for measuring progress of satisfaction of the performance
obligation. We apply the invoice practical expedient in recognizing energy
revenue. Under the invoice practical expedient, energy revenue is recognized
based on the invoiced amount which is considered equal to the value provided to
the customer for our performance obligation completed to date.

Reactive energy power is provided to maintain a continuous voltage level.
Revenue from reactive power is recognized ratably over time as we stand ready to
provide it if called upon by the PJM RTO.

Capacity Revenue

We provide capacity to a customer through participation in capacity auctions
held by the PJM RTO. Capacity revenues are a series of distinct performance
obligations that are substantially the same and that have the same pattern of
transfer to the customer over time and are therefore accounted for as a distinct
performance obligation. The transaction price for capacity is market-based and
constitutes the stand-alone selling price. As capacity represents our
stand-ready obligation, capacity revenue is recognized as the performance
obligation is satisfied ratably over time, on a monthly basis, since we stand
ready equally throughout the period to deliver power to the PJM RTO if called
upon. We apply the invoice practical expedient in recognizing capacity revenue.
Under the invoice practical expedient, capacity revenue is recognized based on
the invoiced amount which is considered equal to the value provided to the
customer for our performance obligation completed to date. Penalties may be
assessed by the PJM RTO against generation facilities if the facility is not
available during the capacity period. The penalties assessed by the PJM RTO, if
any, are recorded as a reduction to capacity revenue when incurred.
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Cryptocurrency Hosting

We have entered into customer hosting contracts whereby we provide electrical
power to cryptocurrency mining customers, and the customers pay a stated amount
per MWh (“Contract Capacity”). This amount is paid monthly in advance. Amounts
used in excess of the Contract Capacity are billed based upon calculated
formulas as contained in the contracts. If any shortfalls occur due to outages,
make-whole payment provisions contained in the contracts are used to offset the
billings to the customer which prevented them from cryptocurrency mining.
Advanced payments and customer deposits are reflected as contract liabilities.

Cryptocurrency Mining

We have entered into digital asset mining pools by executing contracts, as
amended from time to time, with the mining pool operators to provide computing
power to the mining pool. The contracts are terminable at any time by either
party and our enforceable right to compensation only begins when we provide
computing power to the mining pool operator. In exchange for providing computing
power, we are entitled to a fractional share of the fixed cryptocurrency award
the mining pool operator receives (less digital asset transaction fees to the
mining pool operator which are recorded as a component of cost of revenues), for
successfully adding a block to the blockchain. The terms of the agreement
provide that neither party can dispute settlement terms after thirty-five days
following settlement. Our fractional share is based on the proportion of
computing power we contributed to the mining pool operator to the total
computing power contributed by all mining pool participants in solving the
current algorithm.

Providing computing power in Bitcoin miners is an output of our ordinary
activities. The provision of providing such computing power is the only
performance obligation in our contracts with mining pool operators. The
transaction consideration we receive, if any, is noncash consideration, which we
measure at fair value on the date received, which is not materially different
than the fair value at contract inception or the time we have earned the award
from the pools. The consideration is not variable. Because it is not probable
that a significant reversal of cumulative revenue will not occur, the
consideration is constrained until the mining pool operator successfully places
a block (by being the first to solve an algorithm) and we receive confirmation
of the consideration we will receive, at which time revenue is recognized. There
is no significant financing component in these transactions.

Fair value of the cryptocurrency award received is determined using the quoted
price of the related cryptocurrency at the time of receipt. There is currently
no specific definitive guidance under GAAP or alternative accounting framework
for the accounting for cryptocurrencies recognized as revenue or held, and
management has exercised significant judgment in determining the appropriate
accounting treatment. In the event authoritative guidance is enacted by the
FASB, we may be required to change our policies, which could have an effect on
our consolidated financial position and results from operations.

Asset Retirement Obligations

Asset retirement obligations, including those conditioned on future events, are
recorded at fair value in the period in which they are incurred, if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the related long-lived asset in
the same period. In each subsequent period, the liability is accreted to its
present value and the capitalized cost is depreciated over the EUL of the
long-lived asset. If the asset retirement obligation is settled for other than
the carrying amount of the liability, we recognize a gain or loss on settlement.
Our asset retirement obligation represents the cost we would incur to perform
environmental clean-up or dismantle certain portions of the Facility.

Impairment of long-lived assets

We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. A long-lived asset (group) that is held and used must be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the long-lived asset (group) might not be recoverable (i.e.,
information indicates that an impairment might exist). We are responsible for
routinely assessing whether impairment indicators are present and should have
systems or processes to assist in the identification of potential impairment
indicators.

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We are not required to perform an impairment analysis (i.e., test the asset
(group) for recoverability and potentially measure an impairment loss) if
indicators of impairment are not present. We have assessed the need for an
impairment write-down only if an indicator of impairment (e.g., a significant
decrease in the market value of a long-lived asset (group)) is present. The
Company performed an impairment test on its long-lived assets and $4,990,000 was
recognized as expenses for both the three and six months ended June 30, 2022. No
impairment indicators existed as of the three and six months ended June 30, 2021
that would require impairment testing of our long-lived assets.

Derivative Contracts

In accordance with guidance on accounting for derivative instruments and hedging
activities all derivatives should be recognized at fair value. Derivatives or
any portion thereof, that are not designated as, and effective as, hedges must
be adjusted to fair value through earnings. Derivative contracts are classified
as either assets or liabilities on the accompanying combined balance sheets.
Certain contracts that require physical delivery may qualify for and be
designated as normal purchases/normal sales. Such contracts are accounted for on
an accrual basis.

We use derivative instruments to mitigate our exposure to various energy
commodity market risks. We do not enter into any derivative contracts or similar
arrangements for speculative or trading purposes. We will, at times, sell our
forward unhedged electricity capacity to stabilize its future operating margins.

We also use derivative instruments to mitigate the risks of Bitcoin market
pricing volatility. We entered into a variable prepaid forward sale contract
that mitigates Bitcoin market pricing volatility risks between a low and high
collar of Bitcoin market prices during the contract term. This contract settles
in September 2022. The contract meets the definition of a derivative transaction
pursuant to guidance under ASC 815 and is considered a compound derivative
instrument which is required to be presented at fair value subject to
remeasurement each reporting period. The change in fair value is recorded as
changes in fair value of forward sale derivative as part of earnings.

Stock Based Compensation

For equity-classified awards, compensation expense is recognized over the
requisite service period based on the computed fair value on the grant date of
the award. Equity classified awards include the issuance of stock options and
restricted stock units (“RSUs”).

Notes Payable

We record notes payable net of any discounts or premiums. Discounts and premiums
are amortized as interest expense or income over the life of the note in such a
way as to result in a constant rate of interest when applied to the amount
outstanding at the beginning of any given period.

Warrant Liabilities

We record warrant liabilities at their fair value as of the balance sheet date,
and recognizes changes in the balances, over the comparative periods of either
the issuance date or the last reporting date, as part of changes in fair value
of warrant liabilities expense. At the issuance date, each series of warrants
were convertible and redeemable to preferred stock.

Loss per share

Basic net (loss) income per share (“EPS”) of common stock is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding or shares subject to exercise for a nominal value during the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
Income Taxes

The amount of income taxes we record requires interpretations of complex rules
and regulations of federal, state, and local tax jurisdictions. We use the asset
and liability method of accounting for income taxes, under which deferred tax
assets and liabilities are recognized for the future tax consequences of
temporary differences between the financial statement carrying values and the
tax bases of existing assets and liabilities, and for operating loss and tax
credit carryforwards. Deferred income tax assets and liabilities are based on
enacted tax rates applicable to the future period when
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those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
income in the period the rate change is enacted. A valuation allowance is
provided for deferred tax assets when it is more likely than not the deferred
tax assets will not be realized after considering all positive and negative
evidence available concerning the realizability of our deferred tax assets.

As of June 30, 2022 and December 31, 2021, we maintained a valuation allowance
on our deferred tax assets. The valuation allowance remains in place based on
the uncertainty of future events, including the Company’s ability to generate
future taxable income in light of its recent losses, and management considered
this and other factors in evaluating the realizability of our deferred tax
assets. Any changes in the positive or negative evidence evaluated when
determining if our deferred tax assets will be realized could result in a
material change to our consolidated financial statements.

The accruals for deferred tax assets and liabilities are often based on
assumptions that are subject to a significant amount of judgment by management.
These assumptions and judgments are reviewed and adjusted as facts and
circumstances change. Material changes to our income tax accruals may occur in
the future based on the potential for income tax audits, changes in legislation
or resolution of pending matters.

Post IPO Taxation and Public Company Costs

Stronghold LLC is and has been organized as a pass-through entity for U.S.
federal income tax purposes and is therefore not subject to entity-level U.S.
federal income taxes. Stronghold Inc. was incorporated as a Delaware corporation
on March 19, 2021 and therefore is subject to U.S. federal income taxes and
state and local taxes at the prevailing corporate income tax rates, including
with respect to its allocable share of any taxable income of Stronghold LLC. In
addition to tax expenses, Stronghold Inc. also incurs expenses related to its
operations, plus payment obligations under the Tax Receivable Agreement entered
into between the Company, Q Power LLC (“Q Power”) and an agent named by Q Power,
dated April 1, 2021 (the “TRA”), which are expected to be significant. To the
extent Stronghold LLC has available cash and subject to the terms of any current
or future debt instruments, the Fourth Amended and Restated Limited Liability
Company Agreement of Stronghold LLC, as amended from time to time (the
“Stronghold LLC Agreement”) requires Stronghold LLC to make pro rata cash
distributions to holders of Stronghold LLC Units (“Stronghold Unit Holders”),
including Stronghold Inc., in an amount sufficient to allow Stronghold Inc. to
pay its taxes and to make payments under the TRA. In addition, the Stronghold
LLC Agreement requires Stronghold LLC to make non-pro rata payments to
Stronghold Inc. to reimburse it for its corporate and other overhead expenses,
which payments are not treated as distributions under the Stronghold LLC
Agreement. See “Tax Receivable Agreement” herein for additional information.

In addition, we have incurred, and expect to continue to incur incremental,
non-recurring costs related to our transition to a publicly traded corporation,
including the costs of the IPO and the costs associated with the initial
implementation of our internal control reviews and testing pursuant to Section
404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We have also
incurred, and expect to continue to incur additional significant and recurring
expenses as a publicly traded corporation, including costs associated with
compliance under the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”), annual and quarterly reports to common stockholders, registrar and
transfer agent fees, national stock exchange fees, audit fees, incremental
director and officer liability insurance costs and director and officer
compensation. Our financial statements following the IPO will continue to
reflect the impact of these expenses.

Factors Affecting Comparability of Our Future Results of Operations to Our
Historical Results of Operations

Our historical financial results discussed below may not be comparable to our
future financial results for the reasons described below.

Stronghold Inc. is subject to U.S. federal, state and local income taxes as a
corporation. Our accounting predecessor was treated as a partnership for U.S.
federal income tax purposes, and as such, was generally not subject to U.S.
federal income tax at the entity level. Rather, the tax liability with respect
to its taxable income was passed through to its members. Accordingly, the
financial data attributable to our predecessor contains no provision for U.S.
federal income taxes or income taxes in any state or locality. Due to cumulative
and current losses as well as an evaluation of other sources of income as
outlined in ASC 740, management has determined that the utilization of our
deferred tax assets is not more likely than not, and therefore we have recorded
a valuation allowance against our net deferred tax assets. Management continues
to evaluate the likelihood of the Company utilizing its deferred taxes, and
while the valuation allowance remains in place, we expect to record no deferred
income tax expense or benefit. Should the valuation allowance no longer be
required, the 21% statutory federal income tax rate as well as state and local
income taxes at their respective rates will apply to income allocated to
Stronghold Inc.
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As we further implement controls, processes and infrastructure applicable to
companies with publicly traded equity securities, it is likely that we will
incur additional selling, general and administrative (“G&A”) expenses relative
to historical periods. Our future results will depend on our ability to
efficiently manage our consolidated operations and execute our business
strategy.

As we continue to acquire miners and utilize our power generating assets to
power such miners, we anticipate that a great proportion of our revenue and
expenses will relate to crypto asset mining.

As previously discussed in the Critical Accounting Policies section, the
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates
associated with revenue recognition, investments, intangible assets, stock-based
compensation and business combinations. The Company’s financial position,
results of operations and cash flows are impacted by the accounting policies the
Company has adopted. In order to get a full understanding of the Company’s
financial statements, one must have a clear understanding of the accounting
policies employed.

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Results of Operations

Highlights of our consolidated results of operations for the three and six
months ended June 30, 2022 compared to the three and six months ended June 30,
2021 include:

Operating Revenue

Revenue increased $25.0 million for the three-month period ended June 30, 2022,
as compared to the same period in 2021, primarily due to a $18.9 million
increase in cryptocurrency mining revenue from deploying additional miners, and
a $5.6 million increase in energy revenue driven by higher prevailing power
prices per MW and higher MW generation as a result of the November 2021 Panther
Creek Acquisition. Capacity revenue also increased $1.1 million due to the
Panther Creek Acquisition.

Revenue increased $50.0 million for the six-month period ended June 30, 2022, as
compared to the same period in 2021, primarily due to a $36.6 million increase
in cryptocurrency mining revenue from deploying additional miners, and a
$12.0 million increase in energy revenue driven by higher prevailing market
rates per MW and higher MW generation as a result of the November 2021 Panther
Creek Acquisition. Capacity revenue also increased $2.4 million due to the
Panther Creek Acquisition.

Operating Expenses

Total operating expenses increased $51.8 million for the three-month period
ended June 30, 2022, as compared to the same period in 2021, primarily driven by
(1) a $14.8 million increase in operations and maintenance expense as a result
of the November 2021 Panther Creek Acquisition, higher labor and maintenance
costs at the Scrubgrass Plant associated with increased plant uptime, and the
ramp up of cryptocurrency mining operations including higher lease expenses for
our hosting services agreement, (2) a $11.9 million increase in depreciation and
amortization primarily from deploying additional miners and transformers, (3) a
$8.9 million increase in general and administrative expenses due to legal and
professional fees, insurance costs, and compensation as we continue to organize
and scale operations, (4) a $6.5 million increase in fuel expenses driven by
higher MW generation, primarily due to the November 2021 Panther Creek
Acquisition, and increased fuel delivery costs from higher diesel prices, and
(5) a $5.0 million impairment on miner assets attributable to the decline in the
price of Bitcoin. Impairments on digital currencies of $5.2 million were
primarily attributable to the June decline in the price of Bitcoin.

Total operating expenses increased $105.5 million for the six-month period ended
June 30, 2022, as compared to the same period in 2021, primarily driven by (1) a
$24.7 million increase in operations and maintenance expense driven by major
maintenance costs and labor at the Scrubgrass Plant associated with increasing
plant uptime, higher costs as a result of the November 2021 Panther Creek
Acquisition, and the ramp up of cryptocurrency mining operations including
higher lease expenses for our hosting services agreement, (2) a $23.7 million
increase in depreciation and amortization primarily from deploying additional
miners and transformers, (3) a $18.6 million increase in general and
administrative expenses due to legal and professional fees, insurance costs, and
compensation as we continue to organize and scale operations, (4) a
$13.9 million increase in fuel expenses driven by higher MW generation and
increased fuel delivery costs from higher diesel prices, and (5) a $12.2 million
impairment on equipment deposits for MinerVa miners discussed in Note 4 –
Equipment Deposits and Miner Sales and Note 8 – Contingencies and Commitments.
Impairments on digital currencies of $7.7 million were primarily attributed to
the June decline in the price of Bitcoin. In March 2022, the Company evaluated
the MinerVa equipment deposits for impairment and determined an impairment
charge of $12.2 million based on lack of miner delivery per agreement. In June
2022, the Company evaluated miner assets and determined an impairment charge of
$5.0 million for certain miners attributable to the decline in the price of
Bitcoin.

Other Income (Expense)

Total other income (expense) decreased $10.2 million for the three-month period
ended June 30, 2022, as compared to the same period in 2021, primarily driven by
(1) a $8.0 million realized loss on the sale of miner assets discussed in Note 4
– Equipment Deposits and Miner Sales, (2) a $4.5 million increase in interest
expense on additional financing agreements used to fund the growth of
cryptocurrency operations, (3) a $1.7 million realized loss on the disposal of
fixed assets, and (4) a $0.8 million increase in other income from the one-time
gain on extinguishment of PPP loan, partially offset by (5) a $3.9 million
increase from a change in value of the forward sale derivative. See Note 4 –
Equipment Deposits and Miner Sales regarding the sale of miner assets. See Note
6 – Long-Term Debt and Note 14 – Stock Issued Under Master Financing Agreements
and Warrants in the notes to our financial statements for further information on
financing agreements.

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Total other income (expense) decreased $13.6 million for the six-month period
ended June 30, 2022, as compared to the same period in 2021, primarily driven by
(1) a $8.0 million realized loss on the sale of miner assets, (2) a $7.3 million
increase in interest expense on additional financing agreements used to fund the
growth of cryptocurrency operations, (3) a $3.4 million increase from a change
in value of the forward sale derivative, and (4) a $0.6 million increase in
realized losses on the sale of digital currencies. See Note 6 – Long-Term Debt
and Note 14 – Stock Issued Under Master Financing Agreements and Warrants in the
notes to our financial statements for further information on financing
agreements.

Segment Results

The below presents summarized results for our operations for the two reporting
segments: Energy Operations and Cryptocurrency Operations.

Three Months Ended, Six Months Ended,
June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
(unaudited) (unaudited) (unaudited) (unaudited)
Operating Revenues
Energy Operations $ 8,829,741 $

2,173,108 $ 19,257,731 $ 4,803,181
Cryptocurrency Operations

20,348,708 2,011,416 38,620,777 3,083,421
Total Operating Revenues $ 29,178,449 $

4,184,524 $ 57,878,508 $ 7,886,602
Net Operating Income/(Loss)
Energy Operations

$ (11,731,620) $

(2,570,168) $ (23,828,745) $ (3,785,805)
Cryptocurrency Operations

(18,123,022) (467,593) (35,663,263) (221,239)
Net Operating Income/(Loss) $ (29,854,642) $

(3,037,761) $ (59,492,008) $ (4,007,044)
Other Income, net (a)

$ (10,383,933) $

(205,248) $ (13,052,982) $ 525,079
Net Income/(Loss)

$ (40,238,575) $

(3,243,009) $ (72,544,990) $ (3,481,965)
Depreciation and Amortization
Energy Operations

$ (1,326,552) $

(137,904) $ (2,582,653) $ (281,538)
Cryptocurrency Operations

(11,340,748) (649,827) (22,404,228) (1,023,636)

Total Depreciation & Amortization $ (12,667,300) $ (787,731) $ (24,986,881) $ (1,305,174)
Interest Expense
Energy Operations

$ (24,547) $

(27,048) $ (56,069) $ (68,306)
Cryptocurrency Operations

(4,484,236) (28,395) (7,364,166) (65,777)
Total Interest Expense $ (4,508,783) $

(55,443) $ (7,420,235) $ (134,083)

(a)We do not allocate other income, net for segment reporting purposes. Amount
is shown as a reconciling item between net operating income/(losses) and
consolidated income before taxes. Refer to our consolidated statement of
operations for the six months ended June 30, 2022 and 2021 for further details.

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Energy Operations Segment

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change 2022 2021 $ Change
(unaudited) (unaudited) (unaudited) (unaudited)
OPERATING REVENUES
Energy $ 7,129,732 $ 1,570,966 $ 5,558,766 $ 15,492,533 $ 3,486,822 $ 12,005,711
Capacity 1,668,001 595,545 1,072,456 3,712,428 1,283,236 2,429,192
Other 32,008 6,597 25,411 52,770 33,123 19,647
Total operating revenues 8,829,741 2,173,108 6,656,633 19,257,731 4,803,181 14,454,550

OPERATING EXPENSES
Fuel – net of crypto segment
subsidy1 4,752,332 1,825,716 2,926,616 11,559,912 3,601,815 7,958,097
Operations and maintenance 11,122,830 1,796,119 9,326,711 21,469,517 3,093,697 18,375,820
General and administrative 316,563 – 316,563 757,690 – 757,690
Depreciation and amortization 1,326,552 137,904 1,188,648 2,582,653 281,538 2,301,115
Total operating expenses $ 17,518,277 $ 3,759,739 $ 13,758,538 $ 36,369,772 $ 6,977,050 $ 29,392,722
NET OPERATING LOSS EXCLUDING
CORPORATE OVERHEAD (8,688,536) $ (1,586,631) (7,101,905) (17,112,041) $ (2,173,869) (14,938,172)
Corporate overhead 3,043,084 983,537 2,059,547 6,716,704 1,611,936 5,104,768
NET OPERATING LOSS $ (11,731,620) $ (2,570,168) $ (9,161,452) $ (23,828,745) $ (3,785,805) $ (20,042,940)

INTEREST EXPENSE $ (24,547) $ (27,048) $ 2,501 $ (56,069) $ (68,306) $ 12,237

1 Cryptocurrency operations consumed $3.9 million and $6.5 million of
electricity generated by the Energy Operations segment for the three and six
months ended June 30, 2022 and $0.4 million and $0.5 million for the three and
six months ended June 30, 2021. For segment reporting, this intercompany
electric charge is recorded as a contra-expense to offset fuel costs within the
Energy Operations segment.

Operating Revenues

Total operating revenue increased $6.7 million for the three-month period ended
June 30, 2022, as compared to the same period in 2021, primarily due to a
$5.6 million increase in energy revenue driven by higher prevailing market rates
per MW and higher MW generation. Capacity revenue increased $1.1 million as a
result of the November 2021 Panther Creek Acquisition. Effective June 1, 2022
through May 31, 2024, both plants strategically reduced their exposure to the
capacity markets, and the resulting cost-capping and operational requirements in
the day ahead market by PJM. The Company chose to be an energy resource after
achieving its RegA certification, which will reduce monthly capacity revenue and
the frequency with which the plants will be mandated to sell power at non-market
rates, in exchange for the opportunity to sell power to the grid at prevailing
market rates, which management expects will more than make up for lost capacity
revenue. This also gives our plants the ability to provide fast response energy
to the grid in the real time market when needed without having to comply with
day ahead power commitments. Over the course of 2022, the PJM grid has seen
stronger around the clock prices, and stronger daily “peak” prices suggesting
tight supply and demand grid conditions. When high power prices call for more
electricity to be supplied by our plants, and those prices are in excess of
Bitcoin-equivalent power prices, the Company may shut off its data center
Bitcoin mining load in order to sell power to the grid. The Company believes
that this integration should allow it to optimize for both Revenue as well as
grid support over time.

Total operating revenue increased $14.5 million for the six-month period ended
June 30, 2022, as compared to the same period in 2021, primarily due to a
$12.0 million increase in energy revenue driven by higher prevailing market
rates per MW and higher MW generation. Capacity revenue increased $2.4 million
resulting from the November 2021 Panther Creek Acquisition.

Full plant power utilization is optimal for our revenue growth as it also drives
a higher volume of Tier II Renewable Energy Credits (“RECs”), waste coal tax
credits, and beneficial use ash sales, as well as the increased electricity
supply for the crypto asset operations.

Operating Expenses

Total operating expenses increased $13.8 million for the three-month period
ended June 30, 2022, as compared to the same period in 2021, primarily due to
the incremental expenses associated with operating the Panther Creek Plant after
its
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November 2021 acquisition. Operations and maintenance expense increased
$9.3 million primarily driven by higher labor, plant maintenance and one-time
upgrades. Fuel expenses increased $2.9 million primarily due to higher MW
generation resulting from the November 2021 Panther Creek Acquisition and
increased fuel delivery costs from higher diesel prices, partially offset by
higher costs being allocated to the Cryptocurrency Segment due to higher
electric consumption for bitcoin mining operations, and greater REC sales. REC
sales of $2.1 million and $0.6 million were recognized as contra-expense to
offset fuel expenses for the three months ended June 30, 2022, and 2021,
respectively. Depreciation and amortization expense increased $1.2 million
primarily due to the Panther Creek Acquisition.

Corporate overhead increased $2.1 million primarily due to higher legal and
professional fees, directors’ and officers’ liability insurance, and payroll
expenses, which have been allocated to the two segments using a “fair-share” of
revenues approach, where the revenue for the segment is divided by the total
combined revenues of the segments and is then multiplied by the shared general
and administrative costs for the combined segments.

Total operating expenses increased $29.4 million for the six-month period ended
June 30, 2022, as compared to the same period in 2021, primarily due to the
incremental operations and maintenance and fuel expenses associated with
operating the Panther Creek Plant after its November 2021 acquisition.
Operations and maintenance increased $18.4 million primarily driven by payroll,
major maintenance and upgrade expenditures. Fuel expenses increased $8.0 million
primarily due to higher MW generation resulting from the November 2021 Panther
Creek Acquisition and increased fuel delivery costs from higher diesel prices,
partially offset by higher costs being allocated to the Cryptocurrency Segment
due to higher electric consumption for bitcoin mining operations, and greater
REC sales. REC sales of $2.6 million and $0.8 million were recognized as
contra-expense to offset fuel expenses for the six months ended June 30, 2022,
and 2021, respectively. Depreciation and amortization expense increased
$2.3 million primarily due to the Panther Creek Acquisition.

Corporate overhead increased $5.1 million primarily due to higher legal and
professional fees, directors’ and officers’ liability insurance, and payroll
expenses, which have been allocated to the two segments using a “fair-share” of
revenues approach, where the revenue for the segment is divided by the total
combined revenues of the segments and is then multiplied by the shared general
and administrative costs for the combined segments.

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Cryptocurrency Operations Segment

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change 2022 2021 $ Change
(unaudited) (unaudited) (unaudited) (unaudited)
OPERATING REVENUES
Cryptocurrency mining $ 20,227,536 $ 1,324,645 $ 18,902,891 $ 38,431,729 $ 1,840,903 $ 36,590,826
Cryptocurrency hosting 121,172 686,771 (565,599) 189,048 1,242,518 (1,053,470)
Total operating revenues 20,348,708 2,011,416 18,337,292 38,620,777 3,083,421

35,537,356

OPERATING EXPENSES
Electricity – purchased from energy
segment 3,927,782 402,451 3,525,331 6,458,596 498,706 5,959,890
Operations and maintenance 5,463,926 38,051 5,425,875 6,451,572 111,161 6,340,411
General and administrative 511,058 34,731 476,327 569,545 70,118 499,427
Impairments on digital currencies 5,205,045 375,246 4,829,799 7,711,217 375,246

7,335,971

Impairments on equipment deposits – – – 12,228,742 – 12,228,742
Impairments on miner assets 4,990,000 – 4,990,000 4,990,000 – 4,990,000
Depreciation and amortization 11,340,748 649,827 10,690,921 22,404,228 1,023,636 21,380,592
Total operating expenses $ 31,438,559 $ 1,500,306 $ 29,938,253 $ 60,813,900 $ 2,078,867 $ 58,735,033
NET OPERATING LOSS EXCLUDING
CORPORATE OVERHEAD (11,089,851) 511,110 (11,600,961) (22,193,123) 1,004,554 (23,197,677)
Corporate overhead 7,033,171 978,703 6,054,468 13,470,140 1,225,793 12,244,347
NET OPERATING LOSS $ (18,123,022) $ (467,593) $ (17,655,429) $ (35,663,263) $ (221,239) $ (23,197,677)

INTEREST EXPENSE $ (4,484,236) $ (28,395) $ (4,455,841) $ (7,364,166) $ (65,777) $ (7,298,389)

Operating Revenues

Total operating revenues increased by $18.3 million for the three-month period
ended June 30, 2022, as compared to the same period in 2021, primarily due to
increased cryptocurrency mining revenue as a result of purchasing and deploying
additional miners throughout 2021 and the six-month period ended June 30, 2022.
The increased quantity of miners increased total hash rates and Bitcoin awards.
The Company’s Bitcoin mining operations were awarded 637 coins during the second
quarter, a 45% increase versus the 438 Bitcoin it was awarded in the first
quarter of 2022. Cryptocurrency hosting revenue decreased by $0.6 million due to
the strategic termination of several agreements of generated power sales to
crypto asset mining customers for which we were providing hosting services.

Total operating revenues increased by $35.5 million for the six-month period
ended June 30, 2022, as compared to the same period in 2021, primarily due to
increased cryptocurrency mining revenue as a result of purchasing and deploying
additional miners throughout 2021 and the six-month period ended June 30, 2022.
The increased quantity of miners increased total hash rates and Bitcoin awards.
Cryptocurrency hosting revenue decreased by $1.1 million due to the strategic
termination of several agreements of generated power sales to crypto asset
mining customers for which we were providing hosting services.

Operating Expenses

Total operating expenses increased by $29.9 million for the three-month period
ended June 30, 2022, as compared to the same period in 2021, primarily due to
(1) a $10.7 million increase in depreciation and amortization resulting from the
deployment of miners and infrastructure assets, (2) a $5.0 million impairment on
miner assets attributable to the decline in the price of Bitcoin, (3) a
$5.4 million increase in operations and maintenance due to higher lease expenses
from the ramp up of the Northern Data Hosting Agreement, purchases of power
supplies and labor, (4) a $4.8 million increase in Impairments on digital
currencies related to the June 2022 decrease in Bitcoin pricing, and (5) a
$3.5 million increase of intercompany electric charges related to the ramp up of
cryptocurrency mining operations.

Corporate overhead increased by $6.1 million primarily due to higher legal and
professional fees, directors’ and officers’ liability insurance, and payroll
expenses, which have been allocated to the two segments using a “fair-share” of
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revenues approach, where the revenue for the segment is divided by the total
combined revenues of the segments and is then multiplied by the shared general
and administrative costs for the combined segments.

Total operating expenses increased by $58.7 million for the six-month period
ended June 30, 2022, as compared to the same period in 2021, primarily due to
(1) a $21.4 million increase in depreciation and amortization resulting from the
deployment of miners and infrastructure assets, (2) a $12.2 million impairment
on equipment deposits for MinerVa miners, (3) a $7.3 million increase in
Impairments on digital currencies primarily related to the June 2022 decrease in
Bitcoin pricing, (4) a $6.3 million increase in Operations and maintenance due
to higher lease expenses from the ramp up of the Northern Data Hosting
Agreement, purchases of power supplies and labor, (5) a $6.0 million increase of
intercompany electric charges related to the ramp up of cryptocurrency mining
operations, and (6) a $5.0 million impairment on miner assets attributable to
the decline in the price of Bitcoin.

Corporate overhead increased by $12.2 million primarily due to higher legal and
professional fees, directors’ and officers’ liability insurance, and payroll
expenses, which have been allocated to the two segments using a “fair-share” of
revenues approach, where the revenue for the segment is divided by the total
combined revenues of the segments and is then multiplied by the shared general
and administrative costs for the combined segments.

Impairment on Digital Currencies

Impairments on digital currencies of $5.2 million and $7.7 million were
recognized for the three and six-months ended June 30, 2022, respectively, as a
result of the negative impacts from the crypto coin spot market declines. As of
June 30, 2022, the Company held approximately 268 Bitcoin on its balance sheet
at carrying value, of which 250 were restricted. The spot market price of
Bitcoin was $19,986 as of June 30, 2022, per Coinbase Global Inc.

Interest Expense

Interest expense increased $4.5 million and $7.3 million for the three and six
months ended June 30, 2022, as compared to the same period in 2021, primarily
due to the borrowings from our WhiteHawk promissory notes and draws against the
Arctos/NYDIG Financing Agreement discussed in Note 14 – Stock Issued Under
Master Financing Agreements and Warrants in the notes to our financial
statements.

Liquidity and Capital Resources

Overview

Stronghold Inc. is a holding company with no operations and is the sole managing
member of Stronghold LLC. Our principal asset consists of units of Stronghold
LLC. Our earnings and cash flows and ability to meet any debt obligations will
depend on the cash flows resulting from the operations of our operating
subsidiaries, and the payment of distributions to us by such subsidiaries.

Our cash needs are primarily for growth through acquisitions, capital
expenditures and working capital to support equipment financing and the purchase
of additional miners. We have incurred and may continue to incur significant
expenses in servicing and maintaining our power generation facilities. If we
were to acquire additional facilities in the future, capital expenditures may
include improvements, maintenance, and build out costs associated with equipping
such facilities to house miners to mine Bitcoin.

We have historically relied on funds from equity issuances, equipment
financings, and revenue from sales of Bitcoin and power generated at our power
plants to provide for our liquidity needs. During 2021 and the first quarter of
2022, we received $63.2 million (net of loan fees and debt issuance costs) in
proceeds from the financing agreements with WhiteHawk and NYDIG, net proceeds of
$131.5 million from the IPO, net proceeds of $96.8 million from two private
placements of convertible preferred securities, and an additional $25.0 million
from WhiteHawk as a result of the Second WhiteHawk Amendment. Additionally, on
May 15, 2022, the Company received $33.75 million (net of loan fees and debt
issuance costs) pursuant to the 2022 Private Placement. Please see “-Debt
Agreements – Equipment Financing Transactions” for more information regarding
our financing arrangements. These cash sources provided additional short and
long-term liquidity to support our operations in fiscal year 2021 and through
the second quarter of 2022.

As of June 30, 2022, we held 268 Bitcoin on hand, of which 250 were pledged as
collateral. On July 27, 2022, we closed out the forward sale derivative
agreement with NYDIG for a gain of approximately $0.2 million and sold the above

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referenced 250 Bitcoin pledged as collateral and associated with the agreement.
As of June 30, 2022 and August 12, 2022, we had approximately $33.3 million and
$27.5 million of cash and cash equivalents on our balance sheet, which included
18 and 44 unrestricted Bitcoin, respectively. As of June 30, 2022 and August 12,
2022, we had outstanding indebtedness of $127.9 million and $141.0 million,
respectively, and availability under our financing agreements of $7.2 million
and $3.6 million, respectively.

If our cash flows from operations continue to fall short of uses of capital, we
may need to seek additional sources of capital to fund our short-term and
long-term capital needs. We may further sell assets or seek potential additional
debt or equity financing to fund our short-term and long-term needs. If we are
unable to raise additional capital, there is a risk that we could default on our
obligations and could be required to discontinue or significantly reduce the
scope of our operations, including through the sale of our assets, if no other
means of financing options are available.

Operations have not yet established a consistent record of covering our
operating expenses and we incurred a net loss of $40.2 million and $72.5 million
for the three and six months ended June 30, 2022, respectively, and an
accumulated deficit of $155.7 million as of June 30, 2022. We experienced a
number of previously disclosed setbacks and unexpected challenges, including a
longer-than-expected and continuing delay of the MinerVa miners and longer than
expected downtime at our Scrubgrass Plant for maintenance, the Panther Creek
Plant’s mining operations shutdown in April 2022 and the outages of our mining
operations due to higher than anticipated requirements from PJM. As a result of
the delay in delivery of the MinerVa miners, we were at risk of defaulting on
our obligations under the WhiteHawk debt facility because those miners were to
be provided as collateral to WhiteHawk by April 30, 2022. Pursuant to the Second
WhiteHawk Amendment, the MinerVa miners were exchanged for collateral for
additional miners received by the Company. Due to the delay, we determined an
impairment charge totaling $12.2 million that was recognized on March 31, 2022.
We spent approximately $5.1 million in fiscal year 2021 on maintenance and
repair costs at the Scrubgrass Plant, and we estimate that we will spend an
aggregate of approximately $5 million on major repairs and upgrades during
fiscal year 2022. In addition to incurred expenses, we were also unable to mine
Bitcoin at the Scrubgrass Plant during such downtime, which directly and
negatively affects our results of operations.

As previously disclosed, the Panther Creek Plant’s mining operations were
offline for ten days in April due to the failure of a switchgear and the need to
source, deliver and install a new piece of equipment, causing ten days of no
mining revenue generation at the facility and resulting in an estimated loss of
approximately $1.4 million.

As previously disclosed in the Company’s Form 8-K dated July 25, 2022, the
Panther Creek Plant experienced approximately 8.5 days of unplanned downtime in
the month of June from damaged transmission lines caused by a storm, and other
plant maintenance issues. The Company estimates the financial impact of the June
outages to be lost revenue of $1.8 million and a net income impact of
$1.4 million.

Taking into account the Second WhiteHawk Amendment, 2022 Private Placement, the
Bitmain Sale, other miner sales, and transactions subsequent to the June 30,
2022 quarter end which include the WhiteHawk Refinancing Agreement, NYDIG debt
extinguishment and equitization of the May 2024 Convertible Notes, we believe
our liquidity position, combined with expected improvements in operating cash
flows, and the proceeds of additional asset sales, will be sufficient to meet
our existing commitments and fund our operations for the next twelve months.

We have no material off balance sheet arrangements.

Cash Flows

Analysis of Cash Flow Changes Between the Six Months Ended June 30, 2022 and
2021

The following table summarizes our cash flows for the periods indicated:

Six Months Ended June 30,
2022 2021 Change
($ in thousands) (in thousands)
Net cash provided by (used in) operating activities $ (7,628.2) $ 2,225.2 $ (9,853.4)
Net cash provided by (used in) investing activities (55,303.8) (91,457.2) 36,153.4

Net cash provided by (used in) financing activities 64,129.1 132,643.6

(68,514.5)
Net change in cash $ 1,197.1 $

43,411.6 $ (42,214.5)

Operating Activities. Net cash used in operating activities was $7.6 million for
the six months ended June 30, 2022 compared to $2.2 million provided by
operating activities for the six months ended June 30, 2021. The $9.9 million
net
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decrease in cash from operating activities was primarily due to increases in
operations and maintenance expenses related to the November 2021 Panther Creek
Acquisition and increases in general and administrative expenses from higher
legal and professional fees, insurance costs, and compensation as we continue to
organize and scale operations. Interest expense increased for the same period
driven by incremental borrowings discussed in Note 6 – Long-Term Debt in the
notes to our financial statements. These increases in cash paid were partially
offset by higher proceeds from the sale of digital currencies and higher energy
revenue after the acquisition of the Panther Creek Plant.

Investing Activities. Net cash used in investing activities was $55.3 million
for the six months ended June 30, 2022 compared to $91.5 million used in
investing activities for the six months ended June 30, 2021. The $36.2 million
decrease in net cash used in investing activities was primarily attributable to
lower outflows for equipment deposits, partially offset by higher outflows for
the purchase of property, plant and equipment for the continued ramp up of
cryptocurrency mining operations. These investments require significant deposits
to be made with equipment vendors as commitments for future deliveries of miners
and cryptocurrency mining infrastructure. Cash outflows were partially offset by
the sale of some of our unproductive, excess or not-in-use assets. See Note 4 –
Equipment Deposits and Miner Sales.

Financing Activities. Net cash provided by financing activities was
$64.1 million for the six months ended June 30, 2022 compared to $132.6 million
provided by financing activities for the six months ended June 30, 2021. The
$68.5 million net decrease in cash provided by financing activities was due to
lower proceeds from private placements in 2022 payments on long-term debt and
financed insurance premiums, partially offset by higher proceeds from debt, net
of issuance costs paid in cash and payments on long-term debt. See the
promissory note, equipment financing agreements and convertible note discussed
in Note 6 – Long-Term Debt and Note 14 – Stock Issued Under Master Financing
Agreements and Warrants and Note 32 – Convertible Note.

Debt Agreements

We have entered into various debt agreements used to purchase equipment to
operate our business.

We entered into the WhiteHawk Financing Agreement on June 30, 2021 and amended
the agreement on December 31, 2021 and March 28, 2022. As of June 30, 2022, the
amount owed under the debt agreements totaled $65.0 million with repayment terms
extending through March 31, 2024. As of June 30, 2022, the repayment amounts,
including interest, totaled $46.4 million. For additional information, see Note
6 – Long-Term Debt in the notes to our financial statements.

Four draws against the Arctos/NYDIG Financing Agreement (as defined below)
totaled $37.3 million (net of debt issuance costs) secured by our equipment
contract commitments for future miner deliveries. As of June 30, 2022, the
amount owed under the debt agreements totaled $20.9 million with repayment terms
extending through October 25, 2023. Of the total amount outstanding of $20.9
million, $19.5 million was classified as current portion of long-term debt (less
discounts and debt issuance costs) and will be repaid as of June 30, 2023. The
remaining portion of long-term debt is $1.3 million (less discounts and debt
issuance costs). As of June 30, 2022, the repayment amounts, including interest,
totaled $23.5 million. For additional information, see Note 6 – Long-Term Debt
in the notes to our financial statements.

Three draws against the Second NYDIG Financing Agreement totaled $46.8 million
(net of debt issuance costs) secured by our equipment contract commitments for
future miner deliveries. As of June 30, 2022, the amount owed under the debt
agreements totaled $44.1 million with repayment terms extending through
January 25, 2024. Of the total amount outstanding of $44.1 million, $31.5
million was classified as current portion of long-term debt (less discounts and
debt issuance costs) and will be repaid as of June 30, 2023. The remaining
portion of long-term debt is $12.6 million (less discounts and debt issuance
costs). As of June 30, 2022, the repayment amounts, including interest, totaled
$49.5 million. For additional information, see Note 6 – Long-Term Debt in the
notes to our financial statements.

Total net obligations under all debt agreements as of June 30, 2022 were $127.5
million.

Effective October 21, 2021, we entered into a director and officer insurance
policy with annual premiums totaling $6.9 million. We have executed a Commercial
Premium Finance Agreement with AFCO Premium Credit LLC over a term of nine
months, with an annual interest rate of 3.454%, that finances the payment of the
total premiums owed. The agreement requires a $1.4 million down payment, with
the remaining $5.5 million plus interest paid over nine months. Monthly payments
of $621.3 thousand started November 21, 2021 and end July 21, 2022. As of June
30, 2022, the premiums were paid in full.

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Effective April 29, 2022, we entered into a commercial property insurance policy
with annual premiums totaling $523,076. The Company has executed a Commercial
Premium Finance Agreement with AFCO Premium Credit LLC, over a term of eleven
months, with an annual interest rate of 5.99%, that finances the payment of the
total premiums owed. The agreement requires a $44,793 down payment, with the
remaining $478,283 plus interest paid over eleven months. Monthly payments of
$44,793 started May 29, 2022 and end March 29, 2023. As of June 30, 2022, the
unpaid balance is $393,260.

May 2022 Notes

On May 15, 2022, we issued $33.75 million aggregate principal amount of May 2022
Notes to the Purchasers (the “May 2022 Notes”), bearing an interest rate of
10.00% per annum (in arrears) and a maturity date of May 15, 2024. The maturity
date for the May 2022 Notes may be accelerated upon certain instances, and the
May 2022 Notes may be prepaid at any time in whole or in part, at our election.
The holders of the May 2022 Notes (the “Holders”) have certain conversion
rights. In the event that we, by September 30th, 2022, (i) have achieved a total
equity market capitalization of at least $400 million, based on the 20-day VWAP
of our common stock and (ii) have at least 60 million shares of common stock
outstanding, the full amount outstanding and accrued but unpaid interest on the
May 2022 Notes shall automatically convert into a number of shares of Series C
Preferred Stock, provided that the Series C Preferred Certificate of Designation
has been filed. Upon such conversion, dividends will accrue at a rate of 8.0%
per annum on the Series C Preferred Stock. Beginning October 1, 2022, if the May
2022 Notes have not converted into shares of Series C Preferred Stock, we will
begin paying off the May 2022 Notes in quarterly installments in amounts equal
to the greater of (i) 8% of our consolidated revenue from each trailing quarter
or (ii) $5.4 million, payable at our option in either cash or up to 50% of the
shares of common stock at a 20% discount to the 20-day VWAP. Each of our
subsidiaries, subject to the exclusions therein, executed a guaranty agreement
with the Holders to guaranty our obligations under the May 2022 Notes.

Equipment Purchase and Financing Transactions

MinerVa Semiconductor Corp Purchase Agreement

On April 2, 2021, we entered into the MinerVa Purchase Agreement for the
acquisition of 15,000 of their MV7 ASIC SHA256 model cryptocurrency miner
equipment (miners) with a total terahash to be delivered equal to 1.5 million
terahash. The price per miner is $4,892.50 for an aggregate purchase price of
$73,387,500 to be paid in installments. The first installment of 60% of the
purchase price, or $44,032,500, was paid on April 2, 2021, and an additional
payment of 20% of the purchase price, or $14,677,500, was paid on June 2, 2021.
As of December 31, 2021, there are no remaining deposits owed. In December 2021,
we extended the deadline for delivery of the MinerVa miners to April 2022. In
March 2022, MinerVa was again unable to meet its delivery date and had only
delivered approximately 3,350 of the 15,000 miners. We do not know when the
remaining MinerVa miners will be received, if at all. As a result, we may write
off some or all of the approximately 7,800 undelivered MinerVa miners. Refer to
Note 30 – Covenants that describes covenants referencing the anticipated final
delivery timeframe of April 2022. On July 18, 2022, the Company provided written
notice of dispute to MinerVa pursuant to the MinerVa Purchase Agreement
obligating the Company and MinerVa to work together in good faith towards a
resolution for a period of sixty (60) days. In accordance with the MinerVa
Purchase Agreement, if no settlement has been reached after sixty (60) days,
Stronghold may end discussions and declare an impasse and adhere to the dispute
resolution provisions of the MinerVa Purchase Agreement. The aggregate purchase
price does not include shipping costs, which are our responsibility and shall be
determined at which time the miners are ready for shipment.

Nowlit Solutions Corp Purchase Agreement

We entered into a hardware purchase and sales agreement with Nowlit Solutions
Corp effective April 1, 2021. Hardware includes, but is not limited to, ASIC
miners, power supply units, power distribution units and replacement fans for
ASIC miners. All hardware must be paid for in advance before it is shipped to
us. We made payments totaling $5,657,432 in April 2021 and costs have been
capitalized and reported as property and equipment.

We also entered into two additional separate purchases of miners from Nowlit
Solutions Corp. The first purchase payment was made on November 23, 2021, in the
amount of $1,605,360 for 190 miners. The second purchase payment was made on
November 26, 2021, in the amount of $2,486,730 for an additional 295 miners.

Cryptech Solutions Purchase Agreement

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We entered into a hardware purchase and sales agreement with Cryptech effective
April 1, 2021. Hardware includes, but is not limited to, ASIC miners, power
supply units, power distribution units and replacement fans for ASIC miners.
Total purchase price is $12,660,000 for 2,400 BitmainS19j miners to be delivered
monthly in equal quantities (200 per month) from November 2021 through October
2022. All hardware must be paid for in advance before it is shipped to us. We
made a 30% down payment of $3,798,000 on April 1, 2021 with the remaining 70% or
$8,862,000, agreed to be paid in 17 installments.

On December 7, 2021, we entered into the Cryptech Purchase Agreement with
Cryptech to acquire the Cryptech miners with a hash rate of 96 TH/s for a total
purchase price of $8,592,000. Pursuant to the Cryptech Purchase Agreement, all
hardware will be paid for in advance of being shipped to the Company.

Supplier Purchase Agreements

On April 14, 2021, we entered into an agreement with a supplier to provide
approximately 9,900 miners for $21,011,287. We were required to make an initial
payment on the miners that are currently being delivered starting in October
2021 (refer to Note 33 – Subsequent Events in the notes to our financial
statements for further discussions). We made a 75% deposit of $15,758,432 in
April 2021, and the remaining 25%, or $5,252,755 plus sales taxes has been
invoiced in October 2021. Once operational, after deducting an amount equal to
$0.027 per kWh for the actual power used, 65% of all cryptocurrency revenue
generated by the miners in the supplier’s pods shall be payable to us and 35% of
all cryptocurrency revenue generated by the miners shall be payable to this
party or its designee. As of June 30, 2022, there are no miners operating that
will contractually obligate the Company to pay the 35% revenue share (refer to
Note 33 – Subsequent Events in the notes to our financial statements for further
discussions).

On December 10, 2021, we entered into a Hardware Purchase and Sale Agreement
(the “First Supplier Purchase Agreement”) to acquire 3,000 M30S Miners with a
hash rate per unit of 87 TH/s. Pursuant to the First Supplier Purchase
Agreement, the unit price per M30S Miner is $6,960 for a cumulative purchase
price of $20,880,000 that was paid in full within five business days of the
execution of the First Supplier Purchase Agreement.

On December 16, 2021, we entered into a Second Hardware Purchase and Sale
Agreement (the “Second Supplier Purchase Agreement”) to acquire a cumulative
amount of approximately 4,280 M30S+ Miners. Pursuant to the Second Supplier
Purchase Agreement, the unit price per M30S Miner is $2,714 and the unit price
per M30S+ Miner is $3,520 for a cumulative purchase price of $11,340,373.

Bitmain Technologies Limited Purchase Agreement

On October 28, 2021, we entered into the first of two Non-Fixed Price Sales and
Purchase Agreements with Bitmain. This first agreement covers six batches of
2,000 miners, or 12,000 in total, arriving on a monthly basis from April through
September 2022. Each batch has an assigned purchase price that totals to
$75,000,000, to be paid in three installments of 25%, 35% and 40% over the
six-month delivery period. Per the agreement, on October 29, 2021, the Company
made a $23,300,000 payment comprised of the 25% installment payment plus 35% of
the April 2022 batch of 2,000 miners that have an assigned purchase price of
$13,000,000. On November 18, 2021, the Company made an additional payment of 35%
or $4,550,000 towards the April 2022 batch of miners. During the three-month
period ending June 30, 2022, the Company paid installments totaling
$17.4 million.

On November 16, 2021, we entered into the second Non-Fixed Price Sales and
Purchase Agreement with Bitmain. This second agreement covers six batches of 300
miners, or 1,800 in total, arriving on a monthly basis from July 2022 through
December 2022. Each batch has an assigned purchase price that totals
$19,350,000, to be paid in three installments of 35%, 35%, and 30% of the total
purchase price over the six-month delivery period. Per the second Non-Fixed
Price Sales and Purchase Agreement, on November 18, 2021, the Company paid the
first installment payment of 35% or $6,835,000. During the three-month period
ending March 31, 2022, the Company paid three installments totaling $3,528,000.

The miners purchased pursuant to the two agreements with Bitmain will have an
aggregate hash rate capacity of approximately 1,450 PH/s.

Luxor Technology Corporation Purchase Agreement

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We paid for three separate purchases of miners from Luxor. The first purchase
payment was made on November 26, 2021, in the amount of $4,312,650 for 770
miners. The second and third purchase payments were made on November 29, 2021,
in the amount of $5,357,300 and $3,633,500 respectively; for an additional 750
and 500 miners.

On November 30, 2021, we entered into a fourth purchase agreement with Luxor to
acquire 400 Antminer T19 miners with a hash rate of 84 TH/s and 400 Antminer T19
miners with a hash rate of 88 TH/s for a total purchase price of $6,260,800.

Arctos/NYDIG Financing Agreement

On June 25, 2021, we entered into a $34,481,700 (“Maximum Advance Amount”)
master equipment financing agreement with an affiliate of Arctos Credit, LLC
(“Arctos,” now known as “NYDIG”) (the “Arctos/NYDIG Financing Agreement. The
aggregate principal outstanding bears interest of 10% and will be repaid in 24
monthly payments, with a 1.25% fee due if the Maximum Advance Amount is not
requested prior to August 15, 2021. Outstanding borrowings under the
Arctos/NYDIG Financing Agreement are secured by certain miners and the contracts
to acquire such miners. The Arctos/NYDIG Financing Agreement includes customary
restrictions on additional liens on the Arctos/NYDIG Financed Equipment. As of
June 30, 2022, $35.7 million (net of debt issuance costs) has been borrowed,
leaving zero funds available to be drawn under the Arctos/NYDIG Financing
Agreement. The Arctos/NYDIG Financing Agreement may not be terminated by us or
prepaid in whole or in part. In conjunction with the Arctos/NYDIG Financing
Agreement, we issued 126,273 shares of Class A common stock to Arctos (adjusted
for the Stock Split) and may issue additional shares of Class A common stock to
Arctos in consideration of future financings.

On January 31, 2022, we and NYDIG amended the Arctos/NYDIG Financing Agreement
(the “NYDIG Amendment”) to include (i) 2,140 M30S+ Miners and (ii) 2,140 M30S
Miners we purchased pursuant to a purchase agreement dated December 16, 2021,
totaling $12,622,816 of additional borrowing capacity. We will pay an aggregate
closing fee of $504,912 to NYDIG. The NYDIG Amendment requires that we maintain
a blocked wallet or other account for deposits of all mined currency.

NYDIG ABL LLC Financing Agreement

On December 15, 2021, we entered into the Second NYDIG Financing Agreement with
NYDIG whereby NYDIG agreed to lend us up to $53,952,000 to finance the purchase
of the Second NYDIG-Financed Equipment. Outstanding borrowings under the Second
NYDIG Financing Agreement are secured by the Second NYDIG-Financed Equipment,
contracts to acquire Second NYDIG-Financed Equipment, and the Bitcoin mined by
the Second NYDIG-Financed Equipment. The Second NYDIG Financing Agreement
includes customary restrictions on additional liens on the Second NYDIG-Financed
Equipment. The Second NYDIG Financing Agreement may not be terminated by us or
prepaid in whole or in part.

WhiteHawk Financing Agreement

On June 30, 2021, we entered into an equipment financing agreement (the
“WhiteHawk Financing Agreement”) with WhiteHawk whereby WhiteHawk agreed to lend
to us an aggregate amount not to exceed $40.0 million (the “Total Advance”) to
finance the purchase of certain Bitcoin miners and related equipment (the
“WhiteHawk-Financed Equipment”). At August 30, 2021, the entirety of the Total
Advance was drawn under the WhiteHawk Financing Agreement. The aggregate
principal outstanding bears interest of 10% and will be repaid in 24 monthly
payments. Outstanding borrowings under the WhiteHawk Financing Agreement are
secured by the WhiteHawk Financed Equipment and the contracts to acquire the
WhiteHawk-Financed Equipment. The WhiteHawk Financing Agreement includes
customary restrictions on additional liens on the WhiteHawk-Financed Equipment
and is guaranteed by the Company. The WhiteHawk Financing Agreement may be
terminated early if we, among other things, pay the Early Termination Fee (as
defined therein). In conjunction with the WhiteHawk Financing Agreement, we
issued a stock purchase warrant to WhiteHawk, which provides for the purchase of
a number of shares of Class A common stock at $0.01 per share, equal to
approximately $2.0 million, subject to adjustment as described in the warrant
agreement (the “WhiteHawk Warrant”). The WhiteHawk Warrant expires on June 30,
2031.

On December 31, 2021, we amended the WhiteHawk Financing Agreement (the
“WhiteHawk Amendment”) to extend the final MinerVa delivery date from December
31, 2021 to April 30, 2022. Pursuant to the WhiteHawk Amendment, Equipment, LLC
paid an amendment fee in the amount of $250,000 to WhiteHawk. On March 28, 2022,
Equipment LLC and WhiteHawk again amended the WhiteHawk Financing Agreement to
exchange the collateral under the WhiteHawk Financing Agreement. Pursuant to the
Second WhiteHawk Amendment, (i) the approximately 11,700 remaining miners
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under the MinerVa Purchase Agreement were exchanged as collateral for additional
miners received by us from other suppliers and (ii) WhiteHawk agreed to lend to
us the Second Total Advance. Pursuant to the Second WhiteHawk Amendment,
Equipment, LLC paid an amendment fee in the amount of $275,414.40 and a closing
fee with respect to the Second Total Advance of $500,000. In addition to the
purchased Bitcoin miners and related equipment, Panther Creek and Scrubgrass
each agreed to a negative pledge of the Panther Creek Plant and Scrubgrass
Plant, respectively, and guaranteed the WhiteHawk Financing Agreement. Each of
the negative pledge and the guaranty by Panther Creek and Scrubgrass will be
released upon payment in full of the Second Total Advance, regardless of whether
the Total Advance remains outstanding. In conjunction with the Second WhiteHawk
Amendment, we issued a warrant to WhiteHawk to purchase 125,000 shares of Class
A common stock, subject to certain antidilution and other adjustment provisions
as described in the Second WhiteHawk Warrant, at an exercise price of $0.01 per
share. The Second WhiteHawk Warrant expires on March 28, 2032. While we continue
to engage in discussions with MinerVa on the delivery of the remaining miners,
we do not know when the remaining miners will be delivered, if at all.

Tax Receivable Agreement

The TRA generally provides for the payment by Stronghold Inc. to certain of the
Stronghold Unit Holders 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 (i) certain increases
in tax basis that occur as a result of Stronghold Inc.’s acquisition (or deemed
acquisition for U.S. federal income tax purposes) of all or a portion of such
holder’s Stronghold LLC Units pursuant to an exercise of Redemption Right or the
Call Right and (ii) imputed interest deemed to be paid by Stronghold Inc. as a
result of, and additional tax basis arising from, any payments Stronghold Inc.
makes under the TRA. Stronghold Inc. will retain the remaining net cash savings,
if any. The TRA generally provides for payments to be made as Stronghold Inc.
realizes actual cash tax savings from the tax benefits covered by the TRA.
However, the TRA provides that if Stronghold Inc. elects to terminate the TRA
early (or it is terminated early due to Stronghold Inc.’s failure to honor a
material obligation thereunder or due to certain mergers, asset sales, other
forms of business combinations or other changes of control), Stronghold Inc. is
required to make an immediate payment equal to the present value of the future
payments it would be required to make if it realized deemed tax savings pursuant
to the TRA (determined by applying a discount rate equal to one-year LIBOR (or
an agreed successor rate, if applicable) plus 100 basis points, and using
numerous assumptions to determine deemed tax savings), and such early
termination payment is expected to be substantial and may exceed the future tax
benefits realized by Stronghold Inc.

The actual timing and amount of any payments that may be made under the TRA are
unknown at this time and will vary based on a number of factors. However,
Stronghold Inc. expects that the payments that it will be required to make to Q
Power (or its permitted assignees) in connection with the TRA will be
substantial. Any payments made by Stronghold Inc. to Q Power (or its permitted
assignees) under the TRA will generally reduce the amount of cash that might
have otherwise been available to Stronghold Inc. or Stronghold LLC. To the
extent Stronghold LLC has available cash and subject to the terms of any current
or future debt or other agreements, the Stronghold LLC Agreement will require
Stronghold LLC to make pro rata cash distributions to holders of Stronghold LLC
Units, including Stronghold Inc., in an amount sufficient to allow Stronghold
Inc. to pay its taxes and to make payments under the TRA. Stronghold Inc.
generally expects Stronghold LLC to fund such distributions out of available
cash. However, except in cases where Stronghold Inc. elects to terminate the TRA
early, the TRA is terminated early due to certain mergers or other changes of
control or Stronghold Inc. has available cash but fails to make payments when
due, generally Stronghold Inc. may defer payments due under the TRA if it does
not have available cash to satisfy its payment obligations under the TRA or if
its contractual obligations limit its ability to make these payments. Any such
deferred payments under the TRA generally will accrue interest at the rate
provided for in the TRA, and such interest may significantly exceed Stronghold
Inc.’s other costs of capital. If Stronghold Inc. experiences a change of
control (as defined under the TRA, which includes certain mergers, asset sales
and other forms of business combinations), and in certain other circumstances,
payments under the TRA may be accelerated and/or significantly exceed the actual
benefits, if any, Stronghold Inc. realizes in respect of the tax attributes
subject to the TRA. In the case of such an acceleration in connection with a
change of control, where applicable, Stronghold Inc. generally expects the
accelerated payments due under the TRA to be funded out of the proceeds of the
change of control transaction giving rise to such acceleration, which could have
a significant impact on our ability to consummate a change of control or reduce
the proceeds received by our stockholders in connection with a change of
control. However, Stronghold Inc. may be required to fund such payment from
other sources, and as a result, any early termination of the TRA could have a
substantial negative impact on our liquidity or financial condition.
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Recent Accounting Pronouncements

As an “emerging growth company”, the Jumpstart Our Business Startups Act (“JOBS
Act”) allows us to delay adoption of new or revised accounting pronouncements
applicable to public companies until such pronouncements are made applicable to
private companies. We have elected to use this extended transition period under
the JOBS Act. The adoption dates discussed below reflect this election.

In February 2016, FASB issued ASU 2016-02, Leases (“Topic 842”), which
supersedes ASC Topic 840, Leases. Topic 842 requires lessees to recognize a
lease liability and a lease asset for all leases, including operating leases,
with a term greater than 12 months on its balance sheet. The update also expands
the required quantitative and qualitative disclosures surrounding leases. Topic
842 will be applied using a modified retrospective transition approach for
leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. In November 2020, FASB
deferred the effective date for implementation of Topic 842 by one year and, in
June 2020, FASB deferred the effective date by an additional year. Beginning
after December 15, 2021 and the six months ended June 30, 2021, the guidance
under Topic 842 is effective. We are still in the process of developing our new
accounting policies and determining the potential aggregate impact this guidance
is likely to have on our unaudited consolidated financial statements as of its
adoption date.

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