Compute North Holdings, Inc., a developer and operator of data centers used by customers in the blockchain, cryptocurrency mining, and distributed computing space, made voluntary Chapter 11 filings in the United States Bankruptcy Court for the Southern District of Texas (Houston Division).
Compute North’s Chapter 11 bankruptcy filing involves $128.3 million of long-term debt obligations and was triggered by a halt in funding from lender Generate Capital, supply chain issues, dislocation in the capital markets, energy price volatility, and the decline in the price of Bitcoin.
Of Compute North’s $128.3 million in long-term debt, the company owes $99.8 million in the form of a senior secured promissory note to NextEra Energy (TZ Capital), $21.0 million in the form of an unsecured senior promissory note to cryptocurrency miner Marathon Digital, and $7.47 million to repay equipment financing for cryptocurrency mining equipment to Foundry Digital, a wholly-owned subsidiary of Digital Currency Group. In addition, Compute North owes $18.4 million to general unsecured creditors – for a total of $146.7 million in obligations.
In terms of equity ownership, Compute North lists its key shareholders as Coeranbrooke, LLC which has a 23.2795% equity interest and Perrill Technology LLC (Dave Perrill, founder and former CEO of Compute North), which has a 24.3981% equity interest. Notably, Compute North’s former CEO Dave Perrill stepped down earlier in September 2022 but remains on the company’s board of directors.
What Events Led to Compute North’s Bankruptcy Filing?
Compute North’s liquidity crisis and subsequent Chapter 11 bankruptcy filing was driven by five main factors: a halt in funding from Compute North’s primary lender Generate Capital, supply chain issues, dislocation in the capital markets, energy price volatility, and the decline in the price of Bitcoin.
In turn, Compute North’s ability to complete the development of several new data centers that had already commenced construction was severely impeded.
1) Generate Capital Halts Funding
In February 2022, Generate Capital agreed to lend up to $300 million in project financing to pay for development costs at certain of Compute North’s facilities. Of this total funding from Generate Capital, $101.4 million is currently outstanding.
In Q2 2022, Generate Capital stopped funding new projects other than Compute North’s Kearney, Nebraska and Wolf Hollow (Granbury, Texas) facilities. Generate’s decision to stop financing new projects forced Compute North to seek alternate funding sources at a time of dislocation in the credit and capital markets – these funding sources ultimately did not materialize.
Compute North’s lack of liquidity impacted its ability to continue funding the development of data centers that were being built-out and to fulfil inventory purchases that were already in process.
In July 2022, Generate Capital asserted several technical events of default on its loans and exercised its right to take control of Compute North’s Kearney, Nebraska and Wolf Hollow (Granbury, Texas) data centers. Also, Generate took control of the bank accounts of those entities, which at the time contained $23.6 million.
2) Supply Chain Issues
Compute North’s fixed assets consist of modular containers, pad-mounted electrical transformers, and other electrical infrastructure necessary to develop a data center – which are all long-lead-time products. Therefore, Compute North is required to place orders for such products well in advance of a data center coming online and generating revenue.
In 2020 and 2021, global supply chain disruptions impacted the availability of the materials necessary for Compute North to develop data centers and exacerbated the company’s inherent mismatch of expenditures and revenue. Particularly, Compute North was required to procure large quantities of inventory in advance, to secure manufacturing and delivery capacity, so that it could meet projected development schedules.
As such, Compute North made the following advance payments in 2021 and 2022, which materially reduced its liquidity:
- 2021: upfront deposits of $30.9 million
- 2022: upfront deposits of $41.4 million
As this inventory/equipment is completed, Compute North is required to take delivery and pay for any outstanding balances. Without a funding source, Compute North’s limited resources are insufficient to pay the outstanding amounts for the fixed assets, necessitating the commencement of these Chapter 11 bankruptcy filings.
3) Dislocation in the Capital Markets
Historically, Compute North has largely funded its growth through debt and equity capital. With the tightening of the credit markets in 2022, Compute North was not able to raise new financing to meet its liquidity needs, continue developing new facilities, and fund fixed asset purchases.
Presently, Compute North has 4 facilities under development for which it does not have the funds to continue construction. Absent additional funding, Compute North must sell these partially developed facilities as part of its Chapter 11 bankruptcy filings.
4) Energy Price Volatility
Compute North notes that the rates charged for the electricity required to mine Bitcoin have essentially doubled over the past year. Specifically, energy prices have in-part increased due to the rise in natural gas prices as a result of recent geopolitical instability.
As energy prices increase, Compute North’s gross margins decrease and if energy prices rise significantly, the gross margins can, and have, shrunk to levels at which Compute North is unable to pay for its fixed costs of operations during certain periods. Importantly, Compute North’s typical hosting service agreement (HSA) does not expressly allow it to pass increased energy costs through to customers.
5) Decline in Bitcoin Price
Cryptocurrency prices have collapsed, with Bitcoin prices recently hitting lows that were almost 75% below its all-time highs in late 2021. For Compute North, this occurrence is impactful because substantially all of the company’s revenue is related directly and indirectly to the mining of Bitcoin. Examples include:
- Hosted Services: most of Compute North’s hosting services customers mine cryptocurrency
- Bitcoin Mining: Compute North mines its own Bitcoin to help fund operations
- Equipment Sales: Compute North’s sale of equipment to customers relates almost exclusively to mining hardware
Bitcoin’s sustained downturn in value and prices has had a significant impact on Compute North’s business. At current Bitcoin prices, coupled with high energy costs in ERCOT (which operates Texas’ electrical grid), it is difficult for Bitcoin miners to profitably operate during certain periods of the day due to fluctuations in energy prices, including Compute North’s mining operations.
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Overall, the decline in the price of Bitcoin has negatively affected Compute North’s ability to generate revenue throughout all its business segments (discussed below) contributing to the commencement of these Chapter 11 bankruptcy filings.
Next Steps for Compute North
Through the Chapter 11 bankruptcy process, Compute North is seeking to continue its business operations and cash management system without interruption, preserve relationships with employees, and ensure that there is sufficient liquidity to run its business. To this end, Compute North’s funding is extremely limited, with the company holding only $8.7 million in unencumbered cash.
Ultimately, Compute North expects to pursue either a reorganization of its business, resulting in a scaled-down company focused on ownership and project management of certain facilities, or a sale of Compute North’s data centers as a going concern. As such, Compute North will be filing a sale motion which seeks approval to commence a sale process, to market and sell Compute North’s assets under section 363 of the Bankruptcy Code.
Company Overview – Compute North
Compute North was founded in 2017 and is headquartered in Eden Prairie, Minnesota. The privately-held company develops and operates data centers used by customers in the blockchain, cryptocurrency mining, and distributed computing space.
Presently, Compute North employs 148 people, made up of 87 full-time salaried employees, 60 full-time hourly employees, and 1 part-time hourly employee.
Compute North has 3 fully operational data centers with 135 megawatts of aggregate capacity at Big Spring, Texas; North Sioux City, South Dakota; and Kearney, Nebraska.
Additionally, Compute North has 2 partially operational facilities, with 124 megawatts of aggregate capacity at King Mountain (McCamey, Texas) and Wolf Hollow (Granbury, Texas), with total expected capacity at those facilities of 580 megawatts.
Finally, Compute North operates or will operate 2 data centers that are in development at Minden, Nebraska and Bootstrap (Corpus Christi, Texas), representing an additional 335 megawatts of aggregate capacity.
Overall, Compute North’s operational or partially operational facilities provide services to 84 customers and contain over 466 modular containers, housing more than $700 million worth of its customers’ equipment.
Compute North identifies two key steps in building out a data center: i) identifying the geographical location for the facility and ii) developing the structure and layout of the facility.
Due to the immense amount of energy consumed in cryptocurrency mining, the biggest overhead cost for these operations is the cost of power. At the same time, cryptocurrency miners have a public perception problem, related to their energy consumption, that has been prominent in the mainstream media.
Compute North helps cryptocurrency miners address these problems by providing the ability to bring a customer’s energy load directly to efficient energy sources. When selecting locations for its data centers, Compute North focuses on cost-effective energy sources, energy efficiency, and, in some instances, the potential for on-site renewables consumption.
Facility Structure and Layout
Compute North constructs its data centers from modular containers which house all of the components of the data centers and can be deployed more efficiently than the construction of a traditional data center. Particularly, Compute North has worked with its modular container supplier to create a design that is:
- Optimized specifically for Bitcoin mining
- Less expensive to manufacture
- Quicker to construct than a traditional data center
Overall, these features make Compute North’s data centers optimal for cryptocurrency mining businesses.
Data Centers – Compute North
Compute North’s data centers are owned in three asset silos: Operating Companies, Generate Project Financing, and Joint Ventures (comprised of the NextEra JV and the Marathon JV), which are shown in the following organizational structure chart:
Below are further details on Compute North’s facilities in the Operating Companies, Generate Project Financing, and Joint Ventures asset silos:
|Data Center||Asset Silo||Status|
|Big Spring, Texas||Operating Companies||Operational|
|North Sioux City, South Dakota||Operating Companies||Operational|
|Bootstrap (Corpus Christi, Texas)||Operating Companies||Development|
|Minden, Nebraska||Operating Companies||Development|
|Kearney, Nebraska||Generate Project Financing||Operational|
|Wolf Hollow (Granbury, Texas)||Generate Project Financing||Partially Operational|
|King Mountain (McCamey, Texas)||Joint Ventures (NextEra)||Partially Operational|
|Marathon Digital||Joint Ventures||Non-Operating Entities|
Compute North directly owns and operates two facilities – known as Big Spring, Texas and North Sioux City, South Dakota – that represent 20 megawatts of remote computing capacity:
Big Spring, Texas
Big Spring, Texas has 13 megawatts of remote computing capacity, is located on a former World War II propeller manufacturing facility, and was chosen for its access to energy sources. The facility is a large building with the core infrastructure to serve blockchain remote computing and utilizes modular containers as well as traditional data center space.
North Sioux City, South Dakota
North Sioux City, South Dakota, has 7 megawatts of remote computing capacity and was built on a former Gateway computer site.
Compute North also owns the rights to facilities that are still in the development phase – known as Bootstrap (Corpus Christi, Texas) and Minden, Nebraska:
Bootstrap (Corpus Christi, Texas)
Bootstrap is a planned 300-megawatt data center on a 40-acre site located in Corpus Christi, Texas. The facility is anticipated to host 167 modular containers when completed.
To date, Compute North has invested more than $14 million in the development of its Corpus Christi facility, but liquidity constraints have delayed Compute North’s ability to finish development of this facility and bring it online.
Minden, Nebraska is a data center development which is projected to come online in Q1 2023. The facility is anticipated to host 19 modular containers and have 35 megawatts of capacity.
To-date, Compute North has invested $3.5 million in the development of its Minden, Nebraska facility but liquidity constraints have delayed the completion of this project as well.
Generate Project Financing
Initially, Generate Capital agreed to finance a facility that Compute North had opened in 2019 in Kearney, Nebraska. Subsequently, just a few months later, Generate Capital agreed to finance a new 300-megawatt facility that Compute North was developing near Granbury, Texas, called Wolf Hollow.
Kearney, Nebraska is a data center which is considered the “crown jewel” of Compute North’s portfolio. Compute North initiated a major expansion of the Kearney, Nebraska facility that materially increased its ability to support customers by scaling it to 100 megawatts of capacity. Presently, the Kearney, Nebraska facility is fully online.
Overall, Kearney, Nebraska was chosen for its location in America’s heartland and its direct access to a variety of energy sources. This facility utilizes a containerized model, built to optimize power and heat management in a tightly integrated framework, specifically designed for high-computing needs.
Wolf Hollow (Granbury, Texas)
Wolf Hollow, located near Granbury, Texas, sits on a 45-acre site next to one of the cleanest, most efficient natural gas plants in the United States.
Wolf Hollow was set to be Compute North’s largest data center development, with total capacity of up to 600 megawatts and the ability to host more than 160 modular containers. In the initial phase, the Wolf Hollow facility was planned to have 300 megawatts of capacity, however, it is presently only partially online.
Compute North owns, operates, or is developing other data centers through joint venture companies with NextEra Energy and Marathon Digital.
King Mountain (McCamey, Texas) – NextEra
King Mountain is a 280-megawatt data center located on a 29-acre wind farm in McCamey, Texas. Presently, the facility has 110 megawatts operational with the remainder under development, but expected to come online in the coming weeks.
NextEra Energy owns the other 50% of the King Mountain project, while Compute North operates and manages the facility.
Marathon Digital Joint Ventures
Since 2017, Marathon Digital has been hosting Bitcoin miners with Compute North at their mining facilities in North Sioux City, South Dakota and Kearney, Nebraska.
In May 2021, Marathon Digital entered into a binding letter of intent with Compute North to host 73,000 of its Bitcoin miners at a new 300-megawatt data center in Texas. Subsequently, in December 2021, Marathon Digital expanded its agreement to include up to 100,000 of its Bitcoin miners.
Compute North and Marathon Digital have established two joint ventures for the purposes of jointly hosting Bitcoin miners. Specifically, Compute North owns 40% of Marathon Compute North 1 LLC and 18% of Marathon Compute North 2 LLC, with Marathon Digital owning the remaining equity in each joint venture.
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Business Segments – Compute North
Compute North offers services at its data centers through three main business segments: Hosted Cryptocurrency Mining Services, Bitcoin Mining, and Cryptocurrency Equipment Sales. In 2021, Compute North’s three main business segments produced an aggregate of $65.3 million of revenue.
Compute North – Revenues by Business Segment
|Business Segment||2021 Revenue||2020 Revenue||% Change|
|Hosted Services||$34.1 million||$11.6 million||194%|
|Bitcoin Mining||$12.1 million||$0.3 million||n.m.|
|Equipment Sales||$19.1 million||$1.3 million||n.m.|
|Total||$65.3 million||$13.2 million||395%|
Hosted Cryptocurrency Mining Services
Compute North’s core business is providing hosting services to cryptocurrency miners at its facilities. As a hosting service, Compute North delivers rack space, energy, and broadband access. Additionally, the company provides cryptocurrency mining customers with managed services including monitoring, troubleshooting, firmware management, miner configuration, and mining pools.
Cryptocurrency mining is the process by which new blockchain transactions are verified and new cryptocurrency assets enter the market. “Mining” is the term used to refer to a process where networks of specialized computers perform and solve extremely complex mathematical problems to generate new digital “coins” and verify new transactions. The first computer that solves the equation is awarded the newly created cryptocurrency asset.
In terms of hardware, Compute North offers application-specific integrated circuit (ASIC) mining services powering up Bitcoin mining gear. Customers may choose to provide their own mining equipment, which Compute North installs and manages, or may purchase such equipment directly from Compute North (see below).
Compute North offers both basic and comprehensive hosted cryptocurrency mining services:
- Basic: customers can self-manage their miners, while Compute North provides the rack space, power, and network necessary to operate the miners. In addition, Compute North offers on-site personnel that can perform miner maintenance activities, as directed by the customer
- Comprehensive: Compute North manages the miners and provides a wide-range of managed blockchain services, including daily hashrate monitoring & alerting, miner configuration, troubleshooting, network upgrades, and firmware management. In turn, Compute North’s managed blockchain services monitor potential issues such as offline devices, low hashrate, or high temperature
Compute North provides access to its data centers and services to customers through hosting service agreements (HSAs), which have terms between 3 and 5 years.
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Compute North generates revenue by mining Bitcoin of its own, at its facilities. As Bitcoin is mined, Compute North converts it to U.S. dollars on a daily basis, meaning that the company does not typically hold Bitcoin on its balance sheet.
Compute North maintains cryptocurrency wallets for its Bitcoin mining operations and those cryptocurrency wallets also contain customer subaccounts or subwallets. Presently, Compute North holds 7 cryptocurrency wallets for its mining activities on the Genesis and Bitstamp exchanges.
Cryptocurrency Equipment Sales
Compute North provides customers who utilize its hosting services (and those who do not) with the option to buy the equipment needed for all their cryptocurrency mining and hosting needs from Compute North. Specifically, Compute North helps source and distribute mining products from a variety of brands, including Bitmain and MicroBT.
As part of this service, Compute North handles all aspects of the logistics surrounding the purchase and sale of the mining equipment, from ordering to hardware implementation.
Chapter 11 Bankruptcy Advisors – Compute North, Generate Capital
Compute North’s investment banker is Jefferies, financial advisor is Portage Point Partners, and legal advisor is Paul Hastings. Additionally, Generate Capital’s legal advisors are Kirkland & Ellis and Hunton Andrews Kurth.