Bitcoin Miner Stronghold Digital Bolsters Balance Sheet by Cutting Costs, Slashing Debt by More Than 60%
Bitcoin miner Stronghold Digital Mining (SDIG) terminated a hosting deal, which is a cost for the miner, with miner Northern Data (NB2X:GER) and lowered some of its debts, in its latest bid to turn around its distressed balance sheet.
The end of Stronghold's deal with Northern Data will eliminate all profit sharing obligations, which it estimates would have been $10 million-$25 million (depending on the price of bitcoin) until September 2024, according to a statement on Friday. The cash outflow under the previous deal would be about 35% of miner revenue, net of a $0.027 per kilowatt-hour (kWh) in power costs, according to the statement. On top of that, Stronghold is absolved of about $2.6 million payable to Northern Data.
Hosting is a service that data centers provide to crypto miners so that customers, such as Stronghold, can store their mining rigs and mine their preferred digital assets for a fee or profit sharing without having to build the accompanying infrastructure themselves. Norther Data both self-mines bitcoin and operates data center for hosting other miners.
The troubles for Stronghold started earlier this year, when it failed to meet Wall Street's earnings expectations and slashed its own hashrate expectation for 2022. Since then, challenges for the company continued to mount as both crypto and equity markets kept falling. However, the miner has been actively trying to strengthen its balance sheet and turn around the company by restructuring its debt, cutting costs and raising capital. The miner said in a presentation on Friday, that it has also lowered the principle amount of its debt burden by nearly 60% since May to $59.1 million.
The termination of the deal provides Stronghold "with improved operational control of our bitcoin operations" and a "material uplift" to cash flow generation for the next two years, as well as optionality, said co-chairman and CEO Greg Beard in the statement. "Overall, we believe that we continue to make significant progress towards improving our balance sheet, liquidity and cost structure to deliver shareholder value,” he added.
Under the terms, Stronghold will also gain the right to operate about 50 megawatts (MW) worth of Northern Data's bitcoin mining containers for $1,000 per year for two years, and will retain the option to buy the containers at the end of the term for somewhere between $2 million and $6 million.
In return for the termination of the deal, Stronghold has to pay Northern Data $2 million, on top of $2.5 million which it has already given to its hosting partner. The miner has previously returned 2,675 mining machines to Northern Data, which eliminates Stronghold's obligation to pay about $8.8 million to the data center operator.
Stronghold has also managed to extinguish $65 million in loan obligations under a previous deal with lender NYDIG to hand over 26,000 mining rigs in exchange for debt relief, the firm said in the presentation. Another $2 million will be written off as soon as Bitmain mining rigs are released from customs, the presentation said. The miner expects they could buy these machines for under $40 million at current market prices, which have fallen sharply this year.
Stronghold has been struggling, along with other bitcoin miners, amid a low bitcoin price and high energy prices. The mining industry has been looking to cut costs and keep their heads above water this year as bitcoin has lost more than 50% of its value. The shares of the miner have fallen about 93% this year, while the stocks of the larger bitcoin miners such as Marathon Digital (MARA), Riot Blockchain (RIOT) and Core Scientific (CORZ) have all lost more than 70% of their value.
Northern Data has also had a challenging year and said it will be dropping hosting clients as self-mining has been more profitable and predictable for the company, in a Sept. 19 letter to shareholders. The firm also slashed its year-end mining rig deployment expectation by more than half to a maximum of 42,000 and announced a "tighter investment strategy."