Amendment: SEC Form SC 13D/A filed by Stronghold Digital Mining Inc.

(3)    The percentage set forth in Row 11 of this Cover Page is based on 14,483,110 shares of Class A Common Stock outstanding as of August 23, 2024 and 2,405,760 shares of Class V Common Stock redeemable for shares of Class A Common Stock (as described above), as reported by the Issuer.

Agreement and Plan of Merger

 

Overview

 

On August 21, 2024, the Issuer entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bitfarms Ltd., a corporation incorporated under the Canada Business Corporations Act and continued under the Business Corporations Act (Ontario) (“Bitfarms” or “Parent”), Backbone Mining Solutions LLC, a Delaware limited liability company and a wholly-owned, indirect subsidiary of Parent (“BMS”), and HPC & AI Megacorp, Inc., a Delaware corporation and a wholly-owned, direct subsidiary of BMS (“Merger Sub”).

 

Merger Consideration and Treatment of Equity Awards

 

The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (i) Merger Sub will be merged with and into the Issuer (the “Merger”), with the Issuer surviving and continuing as the surviving corporation in the Merger and (ii) at the effective time of the Merger (the “Effective Time”), after giving effect to the Conversion and Exchange (each as defined below), (1) each issued and outstanding share of Class A Common Stock immediately prior to the Effective Time (other than certain excluded shares) will be converted into the right to receive 2.520 (the “Exchange Ratio”) common shares of Parent (“Parent Common Shares”), and (2) each issued and outstanding share of Class V Common Stock and, together with the Class A Common Stock, the “Common Stock”) shall be automatically cancelled and shall cease to exist and no payment shall be made with respect thereto. Any holder of Class A Common Stock who would otherwise be entitled to receive a fraction of a share of Parent Common Shares pursuant to the Merger (after taking into account all the Class A Common Stock held immediately prior to the Effective Time by such holder) shall receive in lieu thereof an amount of cash, without interest, equal to such fraction of a share of Parent Common Shares multiplied by the closing price per share of Parent Common Shares on the Business Day immediately prior to the Effective Time.

Immediately prior to and conditioned upon the Effective Time, (1) pursuant to the terms of a Conversion Agreement, dated August 21, 2024, entered into by Parent, the Issuer and the holders of the issued and outstanding shares of the Issuer’s Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”), concurrently with the execution and delivery of the Merger Agreement (the “Conversion Agreement”), each share of Series C Preferred Stock issued and outstanding as of such time shall convert into 250 shares of Class A Common Stock in accordance with the Certificate of Designations of the Series C Preferred Stock, filed with the Secretary of State of the State of Delaware, effective February 20, 2023, and all shares of Series C Preferred Stock shall no longer be outstanding and shall cease to exist (the “Conversion”), and (2) pursuant to Section 3.6(q) of the Stronghold LLC Agreement, the Issuer shall require each member of Stronghold LLC (other than the Issuer and its wholly owned subsidiaries) to exchange all of the issued and outstanding LLC Units held by such member, together with the surrender for cancellation of a corresponding number of shares of Class V Common Stock, for a corresponding number of shares of Class A Common Stock (the “Exchange”).

The Merger Agreement provides that, at the Effective Time, each Issuer restricted stock unit award that is outstanding immediately prior to the Effective Time will immediately vest in full, and each Issuer restricted stock unit shall be treated as a share of Class A Common Stock for all purposes of the Merger Agreement, including the right to receive the merger consideration, except that, pursuant to the schedules to the Merger Agreement, each Issuer restricted stock unit that is granted between the date of execution of the Merger Agreement and the Effective Time (the “Interim Issuer RSU”) will be assumed by Parent and converted into a number of Parent restricted stock units with the same terms and conditions as were applicable to such Interim Issuer RSU immediately prior to the Effective Time (including with respect to vesting and termination-related vesting provisions) and relating to the number of Parent Common Shares equal to the product of (a) the number of shares of Common Stock subject to such Interim Issuer RSU immediately prior to the Effective Time, multiplied by (ii) the Exchange Ratio, with any fractional shares rounded to the nearest whole share.  Further, the Merger Agreement provides that, at the Effective Time, (1) each outstanding vested or unvested compensatory option to purchase shares of Class A Common Stock (each, an “Issuer Option”), other than any such option that is held by a former employee or former non-employee director of, or former other service provider to, the Issuer or its subsidiaries (each, a “Former Employee Option”), shall be automatically converted into an option to acquire Parent Common Shares (each, a “Parent Option”) on substantially the same terms and conditions as were applicable to such Issuer Option as of immediately prior to the Effective Time, except that (a) the number of shares of Parent Common Shares subject to such Parent Option will be the number of shares of Class A Common Stock underlying the Issuer Option multiplied by the Exchange Ratio, and (b) the exercise price of each Parent Common Shares issuable upon the exercise of the Parent Option will be equal to the exercise price per share of the Class A Common Stock under such Issuer Option divided by the Exchange Ratio, and (2) each Former Employee Option shall be automatically cancelled and converted into the right to receive a number of shares of Parent Common Shares equal to the product of (x) the number of shares of Class A Common Stock subject to such Former Employee Option as of immediately prior to the Effective Time and (y) (i) the excess, if any, of the Merger Consideration Value (as defined herein) over the exercise price per share of Class A Common Stock applicable to such Former Employee Option, divided by (ii) the product obtained by multiplying the Exchange Ratio by the volume-weighted average price of a share of Parent Common Shares reported by The Nasdaq Stock Market LLC (“Nasdaq”) for the five consecutive trading day period ending on the trading day immediately prior to the Effective Time (the “Merger Consideration Value”).

The Merger Agreement further provides that, at the Effective Time, in accordance with the terms of each outstanding and unexercised warrant to purchase shares of Class A Common Stock (each, an “Issuer Warrant”), unless otherwise mutually agreed by the holder of any Issuer Warrant and Parent, each Issuer Warrant will be converted into a warrant to acquire shares of Parent Common Shares (each, a “Parent Warrant”) on substantially the same terms and conditions as were applicable to such Issuer Warrant as of immediately prior to the Effective Time. The number of shares of Parent Common Shares subject to such Parent Warrant will be the number of shares of Class A Common Stock underlying the Issuer Warrant multiplied by the Exchange Ratio, and the exercise price of each Parent Common Shares under such Parent Warrant will be the exercise price of the Class A Common Stock under such Issuer Warrant divided by the Exchange Ratio.

The foregoing description of the Merger Agreement and the transactions contemplated thereby is only a summary and does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is filed as Exhibit F hereto and incorporated by reference herein.

Voting Agreement

 

On August 21, 2024, concurrently with the execution and delivery of the Merger Agreement, Parent entered into a Voting Agreement (the “Voting Agreement”) with each of Q Power and Mr. Beard, pursuant to which and on the terms and subject to the conditions thereof, among other things, Q Power and Mr. Beard have agreed to vote their shares of Class A Common Stock and Class V Common Stock in favor of the matters to be submitted to the Issuer’s stockholders in connection with the Merger, subject to the terms and conditions set forth in the Voting Agreement.

 

The Voting Agreement will terminate upon the earliest to occur of (i) the Effective Time of the Merger, (ii) the date and time the Merger Agreement is validly terminated pursuant to its terms or modified or amended in a manner that adversely affects Q Power or Mr. Beard in any material respect, and (iii) the termination the Voting Agreement by mutual consent of the parties thereto.

 

Until the termination of the Voting Agreement, each of Q Power and Mr. Beard have agreed not to, directly or indirectly, (i) sell, transfer, assign, tender in any tender or exchange offer, pledge, encumber, hypothecate or similarly dispose of (by merger, by testamentary disposition, by operation of law or otherwise), or enter into any contract or arrangement with respect to the same (together, “Transfer”), any shares of Common Stock owned by such holder as of, or acquired by such holder after, the date of the Voting Agreement (the “Shares”); (ii) deposit any Shares owned by such holder into a voting trust or enter into a voting agreement or arrangement or grant any proxy, consent or power of attorney with respect thereto other than the Voting Agreement; (iii) agree to take any of the actions referred to in clauses (i) or (ii); or (iv) take or agree to any action inconsistent with the Voting Agreement.  Pursuant to the terms of the Voting Agreement, each of Q Power and Mr. Beard may Transfer Shares (i) to one or more affiliates or trusts established for the benefit of such holder or its affiliates, provided that the transferee agrees to be bound by the Voting Agreement or a separate agreement with Parent having substantially identical terms, or (ii) with Parent’s prior written consent.