425: Stronghold Digital Mining Enters Hosting Agreement with Bitfarms, Amends Merger Agreement

Stronghold Digital Mining will host Bitfarms' miners at its Panther Creek facility under a new agreement, while also amending the existing merger agreement between the two companies.

Summary

• Stronghold Digital Mining Hosting, LLC entered into a hosting agreement with Bitfarms Ltd. on September 12, 2024.
• Bitfarms will deliver approximately 10,000 Bitmain T21 miners to Stronghold's Panther Creek facility.
• Stronghold will provide power, maintenance, hosting, and operation services for the Bitfarms miners.
• The hosting agreement's initial term is from October 1, 2024, to December 31, 2025, with automatic one-year renewals unless either party provides a 60-day non-renewal notice.
• Bitfarms will pay Stronghold a monthly fee equal to 50% of the profit generated by the Bitfarms miners, subject to adjustments for an upfront payment of $210,000 and for taxes and power costs.
• Bitfarms deposited $7.8 million with Stronghold, representing the estimated power cost for three months of operation, refundable at the end of the initial term.
• The deposit will accrue interest at a floating rate based on the secured overnight financing rate plus 1.0%, payable in kind quarterly.
• An amendment to the merger agreement between Stronghold and Bitfarms was also executed on September 12, 2024.
• The amendment includes a Parent Termination Fee Offset, requiring Bitfarms' consent for Stronghold's equity issuances under its at-the-market offering program, and amends certain representations and warranties of the Company.
• Up to $5.0 million of the Deposit shall be refunded by way of a corresponding $5.0 million reduction in the amount of the Parent Termination Fee, payable in accordance with the Merger Agreement Amendment if the Merger Agreement is terminated.

Sentiment

Score: 7

Explanation: The document outlines a positive business development for Stronghold, securing a hosting agreement and amending the merger agreement. However, risks and uncertainties associated with the merger and cryptocurrency markets temper the overall sentiment.

Positives

• Stronghold secures a hosting agreement that will generate revenue from Bitfarms' mining operations.
• The $7.8 million deposit provides Stronghold with upfront capital.
• The hosting agreement includes a profit-sharing arrangement, aligning incentives between Stronghold and Bitfarms.
• The amendment to the merger agreement provides Stronghold with some protection regarding equity issuances.

Negatives

• The hosting agreement's profitability is dependent on the performance of Bitfarms' miners and Bitcoin prices.
• The Parent Termination Fee Offset could reduce the amount of the termination fee Stronghold receives if the merger is terminated.
• Stronghold now requires Bitfarms' consent for equity issuances, potentially limiting its financial flexibility.

Risks

• The hosting agreement could be terminated if either party defaults and fails to cure the default within fifteen days.
• The merger agreement could be terminated, potentially impacting Stronghold's business and stock price.
• The profitability of the hosting agreement is subject to fluctuations in Bitcoin prices and mining difficulty.
• Delays in the installation or hosting of the Bitcoin Miners and PDUs unless such delays are caused by the gross negligence or willful misconduct of Stronghold.

Future Outlook

The document contains forward-looking statements regarding the proposed merger and the anticipated benefits thereof, which are subject to risks, uncertainties, and assumptions.

Industry Context

The hosting agreement reflects a trend in the cryptocurrency mining industry where companies with infrastructure provide services to other miners, allowing them to expand operations without significant capital expenditure. The merger agreement and subsequent amendment reflect consolidation trends in the industry.

Comparison to Industry Standards

• Hosting agreements are common in the Bitcoin mining industry, with companies like Core Scientific and Compute North (before its bankruptcy) offering similar services.
• The 50% profit-sharing arrangement is within the typical range for hosting agreements, although specific terms vary based on factors like power costs and miner efficiency.
• The $7.8 million deposit is substantial and provides Stronghold with a financial cushion, similar to security deposits or prepayments in other hosting agreements.
• The merger agreement and subsequent amendment reflect consolidation trends in the industry, similar to the merger of Hut 8 and US Bitcoin Corp.

Stakeholder Impact

• Shareholders: The hosting agreement and merger amendment could impact shareholder value.
• Employees: The hosting agreement could create new operational demands.
• Customers: The hosting agreement could improve the efficiency of the Panther Creek facility.
• Suppliers: The hosting agreement could increase demand for power and maintenance services.
• Creditors: The hosting agreement and deposit could improve Stronghold's financial position.

Next Steps

• Bitfarms will deliver the Bitfarms Miners to Stronghold's Panther Creek mining facility.
• Stronghold will install and operate the Bitfarms Miners.
• Stronghold will provide monthly calculations of the Monthly Service Fees and the Actual Payment Amount to Bitfarms.
• Stronghold will file a registration statement on Form F-4, which will include a proxy statement of Stronghold that also constitutes a prospectus of Bitfarms.

Key Dates