Digihost Technology: There Are Warning Signs

Summary

• Digihost is a no-debt bitcoin miner trading below book value.
• The discount to book is probably justified given no meaningful HODL stack to speak of and declining BTC production.
• If I were a DGHI shareholder, I'd be praying for a buyout before the company goes into debt or blows any more capital on call options.
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One of the Bitcoin (BTC-USD) miners that I've had on watch for some time is Digihost Technology (NASDAQ:DGHI). It's a much smaller cap public miner but it has a potentially compelling setup in that the company has no debt, doesn't spend as much on SG&A relative to peers, and trades below book value. The company released its full year earnings and March production figures on Monday and I see a few warning signs.

Full Year 2022 Performance

Purely from a revenue standpoint, it could have been worse. Digihost pulled in $24.2 million from digital currency mining in 2022. This was down just 3% from the $25 million the company earned in 2021. Many other miners saw revenue decline between 15 to 25% year over year. For Digihost, the decline in the headline number is a result of lower Bitcoin prices rather than declining production as the company had a 60% year over year increase in the amount of BTC mined.

However, the increase in production did come with a larger move up in expense as Digithost's cost of revenue nearly doubled from 2021:

	December 312022	December 312021	YoY Change
Revenue from digital currency mining	24,190	24,952	-3.1%
Cost of sales	-20,278	-10,542	92.4%
Depreciation and amortization	-10,709	-3,281	226.4%
Gross profit	-6,797	11,129	-161.1%

Click to enlarge

Source: Digihost, figures in millions of USD

The 92% increase in cost of revenue and the 226% increase in machine amortization followed what was $11.1 million gross profit in 2021 with a $6.8 million gross loss in 2022. When we add in the other expenses for Digihost, we come to a full year operating loss of $28.3 million:

	December 312022	December 312021	YoY Change
General and administrative and other expenses	-8,352	-10,646	-21.5%
Loss on settlement of debt	-294	-390	-24.6%
Gain (loss) on disposition of cryptocurrencies	-11,574	291	-4,077.3%
Loss on digital currency option calls	-1,950	-
Operating income (loss)	-28,285	2,923	-1,067.7%
Revaluation of warrant liabilities	32,010	1,551	1,963.8%

Click to enlarge

Source: Digihost, figures in millions of USD

While it certainly wasn't the biggest driver of the company's negative operating income for the year, it is a bit concerning seeing Digihost give away $2 million in options calls. I should also point out that Digihost is showing a $4.3 million positive net income year that is entirely attributed to a $32 million liability revaluation of the company's 9.1 million outstanding warrants:

DigiHost

Those warrants have a weighted average exercise price of $7.04 and don't begin expiring for another year.

Assets, Liabilities, & Production

Digihost ended the year with $52.6 million in assets and just $2.1 million in long term liabilities. This is a dramatic improvement from the $36.2 million in long term liabilities at the end of 2021:

Digihost

The company's debt situation is in a much better position than it was in 2021, but I'd say there is a chance we could see that change this year. Digihost is trying to scale an additional 100MW by the end of next year and has already foreshadowed through its MD&A that the company will have to raise capital through financing to do so:

The Company presently anticipates that additional financing maybe required to acquire additional power generation facilities in the future in order to meet the Company's objective of obtaining access to an additional 100MW of power by the end of 2024. The Company also anticipates that additional financing will be required to purchase the miners required to utilize its maximum capacity.

We've already seen share dilution over the last year and the company just raised another $380k through share issuance over the last 3 months. The majority of the company's $52.6 million in assets are property, plant, and equipment. As of the March production update, DGHI has about $3 million in cash, BTC, and deposits.

Monthly BTC production (Digihost)

The fundamental problem for all miners is the global BTC mining exahash continues to make new highs each month. Without being able to scale mining capacity in line with global EH growth, the share of block reward each miner earns becomes more difficult to acquire. We can see that playing out with Digihost which has seen declining BTC production over the last several months

Summary

Unless we get a drastic improvement in the price of Bitcoin, I can't see much of a reason to long DGHI at this point. And if that move up in BTC does occur, there are simply other miners that will benefit more because of the considerably larger BTC stacks that they hold relative to their market capitalizations. For example, Marathon Digital's (MARA) $1.3 billion market cap is backed roughly 24% by a $322 million unencumbered BTC position. DGHI simply doesn't have that backstop to drive valuation higher.

In Digihost, I see a company that is probably going to lag mining peers. Because of the debt-free balance sheet, the company could theoretically be a buyout candidate for a larger firm that wants to scale with rigs that are already energized. But if there is any possibility of that, if I were a shareholder, I'd hope it happens sooner rather than later before more capital gets lost in call options.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BTC-USD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not an investment advisor.

Comments

[Tigerbond]

I think NYDIG should take both DGHI and GREE under its wing in some type of combined merger/take-private. DGHI and GREE each own & operate a natgas power plant in upstate NY, so there would be some economy of scale to be had by combining forces.

GREE is mostly just a host for NYDIG now after its debt reorg. Cutoff from new debt, and dilution a non-starter at 40 cents/share, the company appears to be in a very difficult situation to expand its miner rig count (as well as having no place to host them, given their hosting of NYDIG miners now comprises 100% of their NY & SC mining locations).

DGHI is in better shape financially, but will also struggle to grow its miner rig count with negative earnings & similarly limited dilution potential.

The unrelenting rise in global BTC hashrate all but assures the smaller players will be competed out of existence at some future point. It's likely better for the mergers to get underway now before the 2024 halving crushes industry margins even further.

[Mike Fay]

@Tigerbond yup, I see it similar.