Highlights:

  • On April 12, 2024, Stronghold Digital Mining, Inc. filed a registration statement to sell up to $250 million in securities to reduce its debt through share dilution. The company is currently trading at $3 per share and could add about 83 million shares to the current 12.97 million shares, potentially dropping the share price below $1. If the share price remains below $1 for 30 days, the Nasdaq may issue a deficiency notice. The company would then have 180 days to improve its financials, raise investor confidence, or face delisting.
  • On April 25, Sopris Capital purchased 2,906,976 Class A common shares of Bitcoin Depot (BTM), making them one of the company’s largest independent shareholders with a 20.13% stake. The next largest shareholders are AWM Investment Company, Inc., with 7.07%, and BTM’s CEO, Brandon Mintz, with 4.82%. A stake of this size could lead to significant influence over the company’s decisions. This uncertainty could explain why the stock dropped by -6.25% following the news.
  • In Q1 2024, Coinbase’s (COIN) net yearly profit reached $1.18 billion, up from $95 million in 2023. In Q1 2022, on the other hand, the company had made a year-over-year loss of—$2.62 billion. This improved performance is primarily the result of higher transaction volumes for most cryptocurrencies.

Forecast

Miners seeking higher margins and revenue diversification are increasingly drawn to AI despite its demands for costly infrastructure and specialized skills. Leading the way, companies such as TeraWulf, Bitdeer, Core Scientific, BitDigital, Hive, and Hut 8 are already actively developing AI strategies. As AI becomes a major revenue source, it could significantly raise the stock prices of mining companies if they are valued on cash flows.

Sentiment

A widespread sell-off in the cryptocurrency market has also caused crypto stocks to decline. Some companies are already seeing a hit from reduced mining rewards due to the Bitcoin halving. Poor past management and debt burden are further straining the financial stability of some of these companies.

Analysis

Between April 9 and May 17, the crypto stock market declined by -7.12% across 28 stocks . Stocks again followed the broader crypto market, whose capitalization fell by -10.45%. Naturally, the two markets are strongly correlated. Year-to-date, the Pearson correlation coefficient between Bitcoin/Ethereum and these 28 crypto stocks was 0.96. However, some major companies stand out with more idiosyncratic reasons for their decline in stock price. This monthly report will specifically analyze Bitfarms (BITF) and Stronghold Digital Mining Inc. (SDIG).

On May 13, Bitfarms, a Canadian Bitcoin mining company, terminated CEO Geoffrey Morphy after he filed a lawsuit against the company. He claimed $27 million in damages for a breach of contract, wrongful dismissal, and aggravated and punitive damages. The company had planned for Morphy to leave after finding a new CEO but decided to accelerate his termination. Nicolas Bonta, Chairman and Co-Founder, now acts as interim CEO while the search for a permanent replacement continues. Following this news, Bitfarms’ stock dropped -8.09% due to investor concerns over the company’s uncertain trajectory amid the controversial situation. This brings its year-to-date loss to -47.13%.

Yet, the leadership shake-up is not the only challenge for Bitfarms. Bitfarms’ healthy Q1 balance sheet shows $65.96 million in cash and $57.5 million in digital assets, against $61 million in mostly short-term debt. Despite reducing debt and increasing assets year-over-year, the company faces profitability challenges, partly due to its older fleet of miners. Older mining equipment is less energy-efficient, has higher maintenance costs, and produces lower hash rates compared to newer models, impacting overall profitability.

To address these issues, Bitfarms plans to upgrade its entire fleet by the end of 2024. However, the company’s current cash resources and Bitcoin sales proceeds may not cover the necessary capital investments. This is where Bitfarms’ $375 million at-the-market (ATM) equity offering program comes in, which can raise the necessary funds. With the right leadership from the new CEO, Bitfarms could effectively manage these financial challenges and achieve a successful turnaround.

Stronghold Digital Mining Inc.’s stock has also significantly decreased, reaching a low of $2.83 on May 10, 2024. This downtrend has persisted for several years. One key factor is the company’s high production cost for BTC. These costs are largely driven by the company’s reliance on coal to generate electricity for mining, which leads to substantial fuel and maintenance expenses, particularly due to the use of older mining hardware.

Another factor contributing to Stronghold’s financial challenges is its aggressive expansion strategy. The company has been trying to rapidly expand its operations to increase revenue. However, this ongoing cycle of expansion increases both expenses and revenue but fails to cover the rising costs. To break this cycle, Stronghold needs to focus on reducing its initial expenses rather than expanding further, especially since it lacks the financial resources for sustainable growth. This cycle has led the company to acquire more debt and deepened its financial challenges even more.

For example, in Q1 2024, Stronghold reported a total operating revenue of $27.52 million and operating expenses of $31.10 million. This resulted in a year-over-year, continued high operating ratio exceeding 100%. Moreover, the company’s total debt stood at $94.5 million, while its total assets were $251.56 million. Nearly 87% of these assets were tied up in property, plant, and equipment. After accounting for $107.29 million in accumulated depreciation and amortization, the net book value of these property, plant, and equipment assets was only $144.27 million.

The high level of debt is particularly concerning because, if we exclude the value of property, plant, and equipment, the remaining assets are insufficient to cover the debt. To provide more context, the company has only $7.54 million in cash and equivalents (liquid assets), which is insufficient to cover the service on its $36.03 million in short-term debt, let alone the $43.15 million in long-term debt. Additionally, while Stronghold recorded a net income of $5.8 million in Q1 2024, it had an accumulated deficit of $315.0 million by March 31, 2024. 

The financial challenges faced in the last year were severe enough that Stronghold Digital Mining Inc. had to restructure its debt on Feb. 7, 2023. Under the amended terms, amortization payments were postponed until July 2024. Starting July 31, 2024, Stronghold Digital Mining Inc. will resume monthly amortization payments. Since June 30, 2023, the company has been making monthly prepayments equal to 50% of its average daily cash balance exceeding $7.5 million.

In response to these ongoing financial challenges, Stronghold Digital Mining Inc. is proactively seeking to maximize shareholder value through a strategic review. The company has initiated a formal process to evaluate a range of options, including selling all or parts of the business or engaging in other strategic transactions. Selling parts of its substantial fixed assets, valued at $144.27 million, appears to be a feasible approach to reducing the financial burden and better aligning its expenses with the revenue generated from its core mining operations.