Correspondence 0001140361-24-018363 from Stronghold Digital Mining, Inc. (SDIG) (CIK 0001856028)
Stronghold Digital Mining, Inc. (SDIG) (CIK 0001856028)
Date: April 5, 2024 · CIK: 0001856028 · Accession: 0001140361-24-018363
AI Filing Summary & Sentiment
File numbers found in text: 001-40931
Referenced dates: March 29, 2024
Letter
Re: Stronghold Digital Mining, Inc.
April 5, 2024
United States Securities and Exchange Commission
Division of Corporation Finance
Office of Crypto Assets
100 F Street, N.E.
Washington, D.C. 20549-3561
Attention: Rolf Sundwall and Bonnie Baynes
Form 10-K for the Fiscal Year Ended December 31, 2022
Form 10-Q for the Quarterly Period Ended September 30, 2023
Form 8-K, Furnished November 14, 2023
File No. 001-40931
Ladies and Gentlemen:
Set forth below are the responses of Stronghold Digital Mining, Inc. (the “Company,” “we,” “us” or “our”) to comments received from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated March 29, 2024, with respect to Form 10-K for the Fiscal Year Ended December 31, 2022 (“Form 10-K”), Form 10-Q for the Quarterly Period Ended September 30, 2023 (“Form 10-Q”) and Form 8-K Furnished November 14, 2023 (“Form 8-K”).
For your convenience, each response is prefaced by the exact text of the Staff’s corresponding comment in bold, italicized text. Capitalized terms used in this response letter, but not defined herein, have the meanings given to them in the Form 10-K, Form 10-Q or Form 8-K.
Form 10-K for the Fiscal Year Ended December 31, 2023
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation and Significant Accounting Policies
Digital Currencies, page 90
1.
We acknowledge your response to prior comment 3 and your current impairment disclosures on pages 52, 65 and 90 that for digital assets you will proceed to performing a quantitative impairment test in any period when the market price is below the carrying value. Please address the following:
•
Tell us your consideration of whether a decline in the quoted market price below the carrying value at any time during the assessed period is an impairment indicator because the digital assets are traded in active markets where there are observable prices.
RESPONSE: The Company considers a decline in the quoted market price of a digital asset below its carrying value at any time during the assessed period to be an impairment indicator.
•
Tell us your consideration of modifying your impairment policy to record an impairment charge whenever the fair value of the digital asset decreases below the carrying value at any time during the assessed period.
RESPONSE: We note the Staff’s comment, and although we do not explicitly state “at any time” in our accounting policy, we believe it is reasonable for a reader of our financial statements to understand this in the context of our entire accounting policy, which reads as follows:
“Impairment exists when the carrying amount exceeds its fair value, which is measured using the lowest quoted price of the cryptocurrency at the time its fair value is being measured (i.e., daily). In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. However, given the existence of a quoted price for Bitcoin on active markets, the Company exercises its unconditional option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period when the market price is below the carrying value and proceed directly to performing the quantitative impairment test.”
As previously stated, effective January 1, 2024, the Company has adopted ASU 2023-08, Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60), which requires all entities holding crypto assets that meet certain requirements to subsequently measure those in-scope crypto assets at fair value, with the remeasurement recorded in net income. Before this new guidance, crypto assets were generally accounted for as indefinite-lived intangible assets, which follow a cost-less-impairment accounting model that only reflects decreases, but not increases, in the fair value of crypto assets holdings until sold. As such, because we have adopted this new guidance in 2024, we believe this comment will not be applicable to the Company in current or future periods.
Cryptocurrency Mining Revenues, page 93
2.
We acknowledge your response to prior comment 2 and your revised disclosure in your Form 10-K for the fiscal year ended December 31, 2023. Please respond to the following, and revise your disclosure in future periodic filings accordingly:
•
In your response to bullet 3 and your revised disclosure you state that the contract cancellation terms, and your customary business practices, effectively provide the option to renew for successive contract terms continuously throughout each day. Please confirm for us and revise your disclosure in future filings to state, whether the cancellation terms refer to the customer's ability to terminate the contract at any time without penalty, and whether you have determined that the contract term is for less than 24 hours;
RESPONSE: In response to the Staff’s comment, we will revise our disclosure in future filings to clarify that the cancellation terms refer to us and the customer. Both parties can terminate the contract at any time without penalty. Additionally, we will revise our disclosure in future filings to make it clear that, because of the option to renew for successive contract terms continuously throughout each day, our contract terms with mining pool operators are for less than 24 hours. Below is an excerpt of what we intend to disclose in future filings:
“The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with mining pool operators to provide computing power and perform hash computations for the mining pool operators. The Company has determined that the mining pool operators are its customers and providing computing power to perform hash computations is the only performance obligation in the Company’s contracts with the mining pool operators. The contracts are terminable at any time by either party – the Company or the mining pool operator – without penalty, and therefore, the duration of the contracts does not extend beyond the services already transferred. The Company’s enforceable right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator. It is the Company’s decision when to perform these hash computations. Because such contracts effectively provide the option to renew for successive contract terms continuously throughout each day, the contract term of such mining pool agreements is less than 24 hours.”
•
You disclose that your enforceable right to compensation begins when, and lasts as long as, you perform hash computations for the mining pool operator. Please confirm and revise your disclosure in future filings to state, that it is your decision when to provide these hash computations;
RESPONSE: In response to the Staff’s comment, we will revise our disclosure in future filings to make it clear that it is our decision when we perform hash computations for the mining pool operators. Below is an excerpt of what we intend to disclose in future filings:
“The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with mining pool operators to provide computing power and perform hash computations for the mining pool operators. The Company has determined that the mining pool operators are its customers and providing computing power to perform hash computations is the only performance obligation in the Company’s contracts with the mining pool operators. The contracts are terminable at any time by either party – the Company or the mining pool operator – without penalty, and therefore, the duration of the contracts does not extend beyond the services already transferred. The Company’s enforceable right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator. It is the Company’s decision when to perform these hash computations. Because such contracts effectively provide the option to renew for successive contract terms continuously throughout each day, the contract term of such mining pool agreements is less than 24 hours.”
•
You disclose that you provide computing power and perform hash computations for the mining pool operators. Please confirm to us that you have determined the mining pool operators are your customers, and that performing hash computations is your only performance obligation. If so, please revise your disclosure in future filings to state those facts; and
RESPONSE: In response to the Staff’s comment, we will revise our disclosure in future filings to explicitly state that the mining pool operators are our customers and that performing hash computations is our only performance obligation. Below is an excerpt of what we intend to disclose in future filings:
“The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with mining pool operators to provide computing power and perform hash computations for the mining pool operators. The Company has determined that the mining pool operators are its customers and providing computing power to perform hash computations is the only performance obligation in the Company’s contracts with the mining pool operators. The contracts are terminable at any time by either party – the Company or the mining pool operator – without penalty, and therefore, the duration of the contracts does not extend beyond the services already transferred. The Company’s enforceable right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator. It is the Company’s decision when to perform these hash computations. Because such contracts effectively provide the option to renew for successive contract terms continuously throughout each day, the contract term of such mining pool agreements is less than 24 hours…”
•
In your response to bullet 7, and your revised disclosure, you indicate that you measure the fair value at the end of the day on the date of contract inception, which is the same day that control of the contracted services transfers to the mining pool. In your response to bullet 10, you state that the bitcoin rewards are measured on the day of receipt, which occurs one day after the day of contract inception. Please confirm to us when you currently measure the fair value of the mining rewards.
RESPONSE: The Company’s accounting policy regarding the fair value recognition of noncash consideration aligns with ASC 606, Revenue from Contracts with Customers, which states that the measurement date for determining the fair value of noncash consideration to be received from a customer is the date of contract inception, rather than the date when the noncash consideration is received or earned. However, for the year ended December 31, 2023, and all previous periods, we applied an accounting convention to measure the fair value of noncash (Bitcoin) revenue on the day of receipt. As disclosed in our previous response to bullet 10 of prior comment 2, we evaluated this difference for each period and determined that applying this accounting convention did not have a material impact on our reported results for any period.
Effective January 1, 2024, and going forward, we will measure the fair value of noncash (Bitcoin) revenue at the end of the day on the date of contract inception.
3.
We acknowledge your response to our comment 4. Please address the following:
•
Please provide us with copies of your hosting agreements with Canaan and Foundry.
RESPONSE: Attached as exhibits are copies of our hosting agreements (including all amendments and addendums) with Canaan and Foundry, in that order.
•
In your response, and revised disclosure, you state that your compensation for hosting services (your sole performance obligation) is comprised of a variable cost-of-power fee and a 50% share of bitcoin mined. However, you also state that the mining portion of the cryptocurrency hosting revenues represents a separate contract between the Company and its mining pool operators. Please explain to us why you believe the mining portion of your hosting agreements should be accounted for as a separate agreement and explain how the mining pool operators are a party to that agreement. Cite any relevant accounting literature in your response.
RESPONSE: As part of our hosting contracts, we agree to provide hosting services to our customers in exchange for a variable cost-of-power fee and 50% of the Bitcoin mined by the Bitcoin mining machines owned by the Company’s hosting customers. The 50% compensation split is mandated by the hosting contracts. However, the cryptocurrency mining revenues associated with the hosted miners are separately governed by the Company’s contracts with the mining pool operators as the integration of hosting services performed by the Company is integral to operating the hosted miners and generating Bitcoin mining revenues. As is the case with all cryptocurrency mining revenues, the Company’s enforceable right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator.
The Company believes the mining portion of our hosting agreements should be accounted for as a separate contract because participation in the Bitcoin mining pools is separately governed by the Company’s contracts with the mining pool operators and does not depend on ownership of the underlying mining machines. Furthermore, the contract term of any mining pool agreement is less than 24 hours because of the option to renew for successive contract terms continuously throughout each day. Bitcoin mined via hosted miners is only possible if the underlying miners perform hash computations for the mining pool operator. The hosting contracts state in Item 4.3. Intermittent Outages that Stronghold may curtail the hosted Bitcoin miners for outages for force majeure, hazardous conditions, or maintenance purposes, or if Stronghold, in its sole and reasonable discretion, determines that it is in its best interest and more economical to sell power to the grid. In other words, the hosting contracts specifically state that we have the ability to turn the hosted Bitcoin miners on or off within reason.
By accounting for the mining portion of the hosting agreement as a separate contract, we are va
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filename1.htm
April 5, 2024
United States Securities and Exchange Commission
Division of Corporation Finance
Office of Crypto Assets
100 F Street, N.E.
Washington, D.C. 20549-3561
Attention: Rolf Sundwall and Bonnie Baynes
Re: Stronghold Digital Mining, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2022
Form 10-Q for the Quarterly Period Ended September 30, 2023
Form 8-K, Furnished November 14, 2023
File No. 001-40931
Ladies and Gentlemen:
Set forth below are the responses of Stronghold Digital Mining, Inc. (the “Company,” “we,” “us” or “our”) to comments received from the staff of the Division of Corporation
Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) by letter dated March 29, 2024, with
respect to Form 10-K for the Fiscal Year Ended December 31, 2022 (“Form 10-K”), Form 10-Q for the Quarterly Period Ended September 30, 2023 (“Form 10-Q”) and Form 8-K Furnished November 14, 2023 (“Form 8-K”).
For your convenience, each response is prefaced by the exact text of the Staff’s corresponding comment in bold, italicized text. Capitalized terms used in this response
letter, but not defined herein, have the meanings given to them in the Form 10-K, Form 10-Q or Form 8-K.
Form 10-K for the Fiscal Year Ended December 31, 2023
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation and Significant Accounting Policies
Digital Currencies, page 90
1.
We acknowledge your response to prior comment 3 and your current impairment disclosures on pages 52, 65 and 90 that for digital assets you will proceed to performing a quantitative
impairment test in any period when the market price is below the carrying value. Please address the following:
•
Tell us your consideration of whether a decline in the quoted market price below the carrying value at any time during the assessed period is an impairment indicator because
the digital assets are traded in active markets where there are observable prices.
RESPONSE: The Company considers a decline in the quoted market price of a digital asset below its carrying value at any time during the assessed period to be an
impairment indicator.
1
•
Tell us your consideration of modifying your impairment policy to record an impairment charge whenever the fair value of the digital asset decreases below the carrying value at any time
during the assessed period.
RESPONSE: We note the Staff’s comment, and although we do not explicitly state “at any time” in our accounting policy, we believe it is reasonable for a reader of our financial statements to understand this
in the context of our entire accounting policy, which reads as follows:
“Impairment exists when the carrying amount exceeds its fair value, which is measured using the lowest quoted price of the
cryptocurrency at the time its fair value is being measured (i.e., daily). In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is
more likely than not (that is, a likelihood of more than 50 percent) that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. However, given the existence of a quoted price for Bitcoin on active markets, the Company exercises its unconditional option to bypass the qualitative assessment for any
indefinite-lived intangible asset in any period when the market price is below the carrying value and proceed directly to performing the quantitative impairment test.”
As previously stated, effective January 1, 2024, the Company has adopted ASU 2023-08, Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60),
which requires all entities holding crypto assets that meet certain requirements to subsequently measure those in-scope crypto assets at fair value, with the remeasurement recorded in net income. Before this new guidance, crypto assets were
generally accounted for as indefinite-lived intangible assets, which follow a cost-less-impairment accounting model that only reflects decreases, but not increases, in the fair value of crypto assets holdings until sold. As such, because we have
adopted this new guidance in 2024, we believe this comment will not be applicable to the Company in current or future periods.
Cryptocurrency Mining Revenues, page 93
2.
We acknowledge your response to prior comment 2 and your revised disclosure in your Form 10-K for the fiscal year ended December 31, 2023. Please respond to the following, and revise your
disclosure in future periodic filings accordingly:
•
In your response to bullet 3 and your revised disclosure you state that the contract cancellation terms, and your customary business practices, effectively provide the option to renew for
successive contract terms continuously throughout each day. Please confirm for us and revise your disclosure in future filings to state, whether the cancellation terms refer to the customer's ability to terminate the contract at any time
without penalty, and whether you have determined that the contract term is for less than 24 hours;
RESPONSE: In response to the Staff’s comment, we will revise our disclosure in future filings to clarify that the cancellation terms refer to us and the customer. Both parties can terminate the contract at
any time without penalty. Additionally, we will revise our disclosure in future filings to make it clear that, because of the option to renew for successive contract terms continuously throughout each day, our contract terms with mining pool
operators are for less than 24 hours. Below is an excerpt of what we intend to disclose in future filings:
2
“The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with mining pool operators to provide computing power and perform hash computations for the mining pool
operators. The Company has determined that the mining pool operators are its customers and providing computing power to perform hash computations is the only performance obligation in the Company’s contracts with the mining pool operators. The
contracts are terminable at any time by either party – the Company or the mining pool operator – without penalty, and therefore, the duration of the contracts does not extend beyond the services already transferred. The Company’s enforceable
right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator. It is the Company’s decision when to perform these hash computations. Because such contracts effectively provide the
option to renew for successive contract terms continuously throughout each day, the contract term of such mining pool agreements is less than 24 hours.”
•
You disclose that your enforceable right to compensation begins when, and lasts as long as, you perform hash computations for the mining pool operator. Please confirm and revise your
disclosure in future filings to state, that it is your decision when to provide these hash computations;
RESPONSE: In response to the Staff’s comment, we will revise our disclosure in future filings to make it clear that it is our decision when we perform hash computations for the mining pool operators. Below is
an excerpt of what we intend to disclose in future filings:
“The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with mining pool operators to provide computing power and perform hash computations for the mining pool
operators. The Company has determined that the mining pool operators are its customers and providing computing power to perform hash computations is the only performance obligation in the Company’s contracts with the mining pool operators. The
contracts are terminable at any time by either party – the Company or the mining pool operator – without penalty, and therefore, the duration of the contracts does not extend beyond the services already transferred. The Company’s enforceable
right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator. It is the Company’s decision when to perform these hash computations. Because such contracts effectively provide the
option to renew for successive contract terms continuously throughout each day, the contract term of such mining pool agreements is less than 24 hours.”
•
You disclose that you provide computing power and perform hash computations for the mining pool operators. Please confirm to us that you have determined the mining pool operators are your
customers, and that performing hash computations is your only performance obligation. If so, please revise your disclosure in future filings to state those facts; and
RESPONSE: In response to the Staff’s comment, we will revise our disclosure in future filings to explicitly state that the mining pool operators are our customers and that performing hash computations is our
only performance obligation. Below is an excerpt of what we intend to disclose in future filings:
“The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with mining pool operators to provide computing power and perform hash computations for the mining pool
operators. The Company has determined that the mining pool operators are its customers and providing computing power to perform hash computations is the only performance obligation in the Company’s contracts with the mining pool operators. The
contracts are terminable at any time by either party – the Company or the mining pool operator – without penalty, and therefore, the duration of the contracts does not extend beyond the services already transferred. The Company’s enforceable
right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator. It is the Company’s decision when to perform these hash computations. Because such contracts effectively provide the
option to renew for successive contract terms continuously throughout each day, the contract term of such mining pool agreements is less than 24 hours…”
3
•
In your response to bullet 7, and your revised disclosure, you indicate that you measure the fair value at the end of the day on the date of contract inception, which is the same day that
control of the contracted services transfers to the mining pool. In your response to bullet 10, you state that the bitcoin rewards are measured on the day of receipt, which occurs one day after the day of contract inception. Please
confirm to us when you currently measure the fair value of the mining rewards.
RESPONSE: The Company’s accounting policy regarding the fair value recognition of noncash consideration aligns with ASC 606, Revenue from Contracts with Customers,
which states that the measurement date for determining the fair value of noncash consideration to be received from a customer is the date of contract inception, rather than the date when the noncash consideration is received or earned. However, for the year ended December 31, 2023, and all previous periods, we applied an accounting convention to measure the fair value of noncash (Bitcoin) revenue on the day of receipt. As disclosed in our
previous response to bullet 10 of prior comment 2, we evaluated this difference for each period and determined that applying this accounting convention did not have a material impact on our reported results for any period.
Effective January 1, 2024, and going forward, we will measure the fair value of noncash (Bitcoin) revenue at the end of the day on the date of contract inception.
3.
We acknowledge your response to our comment 4. Please address the following:
•
Please provide us with copies of your hosting agreements with Canaan and Foundry.
RESPONSE: Attached as exhibits are copies of our hosting agreements (including all amendments and addendums) with Canaan
and Foundry, in that order.
•
In your response, and revised disclosure, you state that your compensation for hosting services (your sole performance obligation) is comprised of a variable cost-of-power fee and a 50%
share of bitcoin mined. However, you also state that the mining portion of the cryptocurrency hosting revenues represents a separate contract between the Company and its mining pool operators. Please explain to us why you believe the
mining portion of your hosting agreements should be accounted for as a separate agreement and explain how the mining pool operators are a party to that agreement. Cite any relevant accounting literature in your response.
RESPONSE: As part of our hosting contracts, we agree to provide hosting services to our customers in exchange for a variable cost-of-power fee and 50% of the Bitcoin mined by the Bitcoin mining machines owned
by the Company’s hosting customers. The 50% compensation split is mandated by the hosting contracts. However, the cryptocurrency mining revenues associated with the hosted miners are separately governed by the Company’s contracts with the mining
pool operators as the integration of hosting services performed by the Company is integral to operating the hosted miners and generating Bitcoin mining revenues. As is the case with all cryptocurrency mining revenues, the Company’s enforceable
right to compensation begins when, and lasts as long as, the Company performs hash computations for the mining pool operator.
4
The Company believes the mining portion of our hosting agreements should be accounted for as a separate contract because participation in the Bitcoin mining pools is separately governed by the Company’s contracts
with the mining pool operators and does not depend on ownership of the underlying mining machines. Furthermore, the contract term of any mining pool agreement is less than 24 hours because of the option to renew for successive contract terms
continuously throughout each day. Bitcoin mined via hosted miners is only possible if the underlying miners perform hash computations for the mining pool operator. The hosting contracts state in Item 4.3.
Intermittent Outages that Stronghold may curtail the hosted Bitcoin miners for outages for force majeure, hazardous conditions, or maintenance purposes, or if Stronghold, in its sole and reasonable discretion, determines that it is in
its best interest and more economical to sell power to the grid. In other words, the hosting contracts specifically state that we have the ability to turn the hosted Bitcoin miners on or off within reason.
By accounting for the mining portion of the hosting agreement as a separate contract, we are va