Bit Digital, Inc.

Hello, and welcome to the BitDigital second quarter 2024 earnings conference call. Good morning, good afternoon, and good evening, depending on where you're joining us from. Thank you for being here. We're just giving a few more moments for attendees to dial in, so thank you for your patience. While we wait, please note that during this call, all participant lines will be in a listen-only mode. Following the officer's update, we will open the floor for a question and answer session. If you have a question at that time, simply press star 1 on your telephone keypad. Also, as a reminder, today's conference is being recorded. I'll now hand it over to your host, Cameron Schneer, Head of Investor Relations at BidDigital. Cameron, the floor is yours.

Thank you. Good morning and welcome to the BidDigital second quarter 2024 earnings call. Joining us on the call today are Sam Tabar, Chief Executive Officer, and Eric Long. Chief Financial Officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 20F filing, yesterday's 6K filing, and our other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and reconciliations of the most directly comparable GAAP financial measures can be found in our 20F filing and yesterday's 6K filing, which are on our website. After our prepared remarks, we will open the call up for questions. If you'd like to ask a question, please hit star 1 on your keypad. With that important note covered, I will now turn the call over to Sam to discuss our performance. Cam?

Thank you, Cam. Ladies and gentlemen, thank you for joining us on the call today. Today, I will dive into our second quarter results, discuss some of our ongoing strategic initiatives, and provide some color on what we envision as the future for Bid Digital. Eric will then provide more detail on our financial results, and then we will open the line for your questions. Our second quarter results were solid. We are encouraged by the progress we've made in diversifying our business. Our revenue more than doubled from the prior year. Our gross margins expanded by over 1,000 basis points. Adjusted EBITDA and EPS were impacted by an unrealized loss on our digital asset position. The first full quarter contribution from our HPC business is well-timed. It helped offset the decline stemming from the post-having reduction in block rewards. Our balance sheet remains pristine with zero debt. It affords us significant flexibility to prudently invest in the most creative opportunities. The groundwork is firmly in place for us to realize our long-term vision of creating a diversified, durable platform that generates consistent cash flows and significant returns. On the mining side of the business, we were mostly quiet during the quarter. That was by design. We were keen to wait and see how the environment shook out following the halving. Network hash rate proved to be resilient despite the reduction in block rewards and hash price subsequently fell to new all-time lows. Our active hash rate ended the quarter at approximately 2.6x the hash. This is a slight decrease compared to the end of Q1. The decline is attributed to curtailments in Iceland and energy saving measures at sites where electricity prices were unusually high. We produced 244 Bitcoins during the quarter. This is a 23% decrease from the prior year, driven by increased network difficulty and a reduction in block rewards. For the quarter, our average electricity price per Bitcoin was approximately 4.7 cents per kilowatt hour. Our electricity price per Bitcoin was 29,300. Our total cost of production defined as electricity and other hosting fees divided by Bitcoin production amounted to approximately 43,200 for the quarter. Profit sharing fees amounted to around 11,100 per Bitcoin for the first quarter. On profit sharing fees, they vary. based on the amount of gross profit per Bitcoin we receive. This fee accounts for the fact that we don't own our own mining infrastructure. Other companies have charges under different line items that account for the costs of running a mining site, including labor. This is often overlooked by comp sheets comparing production costs. Our average realized Bitcoin price during the second quarter was around $65,800. This leaves around $22,700 in gross profit, or a mining margin of around 34%. However, current economics present challenges, especially with the depreciation costs. This makes it difficult to recover the investment in new mining rigs within a reasonable time frame. We're bullish on the future of Bitcoin, but we are realists. The economics are difficult right now, and we are choosing not to aggressively grow into that backdrop without higher conviction that we can make a justifiable return on new equipment. Our principal bottleneck to extra hash growth right now is our own menu of growth options. We see better investment options in HPC at the moment. So based on what we see today, we think it's unlikely that we will hit six exahash by the year end. Material exahash growth for us into year end would require either a significantly better view on mining economics or a significant deterioration in the opportunities that we currently see on the HPC side. Near term, our focus on the mining side is on improving the efficiency of our active fleet and lowering production costs. Switching gears, The HPC segment generated $12.5 million of revenue at 63% gross margins during the second quarter. That was the first full quarter of operations for this business. We recently announced a binding term sheet with a new customer, Goosteroid, the world's third largest cloud gaming provider, following Microsoft and NVIDIA. We believe that this represents a key end market expansion for our HPC business beyond AI applications or LLM training specifically. This term sheet carries a locked five-year term. It also provides for up to 50,000 GPUs over a five-year period following the signing of the MSA. The entire contract, if Boostroid and Lexa deploy the entire 50,000 GPU allotment, It would be worth more than $700 million of revenue for BitDigital over the five-year contract, subject to market conditions. The initial deployment will be a test plus fee. This will likely represent a $2 to $3 million annualized revenue opportunity in its starting form. We expect that initial deployment to take place over the next few months and expect to scale that contract throughout 2025. We'll be able to provide further details on the timing and build out of the contract after we execute the MSA, which we are working hard on completing as soon as possible. We look forward to growing alongside Boostroid and helping them achieve their goal of becoming the global leader in cloud gaming. This deal has great growth potential and aligns with our business model of growing alongside our customers. Our pipeline in HPC remains strong and continues to grow. The major bottleneck to date in terms of completing incremental contracts has been bandwidth. We simply haven't had the adequate manpower to move highly customized customers' deals through the finish line. But we have begun to solve for that need. We made our first full-time hires in the HPC segment to help lead the revenue process. We will formally announce those hires very soon, and we're excited for them to ramp up and lead the sales charge. These people have had very impressive track records in growing an HPC platform and customer base. We are also working on additional hires to complement our existing strengths and fill in strategic gaps. Beefing up our tech stack is a key priority on the hiring front near term. For our anchor customer, We previously announced that we were expecting to install an incremental 2,000 H100s and begin revenue generation on those units in the late third quarter. In late July, our customer brought in some new technical talent that ultimately led to the review of their future hardware portfolio. As a result, our customer asked us to pause the H100 order while they assessed the possibility of upgrading the servers to newer generation models. We reached an agreement with the OEM to delay our server order and have paid only for certain longer lead time networking equipment. It's important to note that there is no change in this customer contract. The contract remains in full force and effect. The biggest change from going from a Bitcoin mining to HP services is the customer facing aspect within HPC. You don't have to worry about keeping your customers satisfied in Bitcoin mining. There are no customers in Bitcoin mining. We're very keen on keeping our customers in HPC happy, and we want to help position them for long-term success. So when our customer asks us to pause an order while they assess their technological needs, we oblige them with that courtesy, despite the potential negative impact that delaying the onset of the revenue may have. We will have greater clarity on the customer's plans over the next several weeks and will provide an update as soon as feasible. Recent headlines suggest that NVIDIA's Blackwell B200 chips may not be available until early 2025. So, there is a chance that if our customer opts to upgrade to the contract to those chips, the revenue contribution to BitDigital would be delayed until such time until we can procure those chips. However, we are confident that we can secure an early allotment of those chips based on the conversations we've had with some of our key relationships. There is also a chance that our customer just decides they'd rather continue forward with the H100s or possibly the H200s. I would note that the lead times for the H100s have come down quite significantly, and we're confident that we can procure those units today in about three to four weeks' time. Lastly, If our customer does decide to press forward with the Blackwell B200 chips, revenue recognition will likely be pushed into 2025, but we would expect the scope of revenue to be greater than the $42 million annual figure stipulated under the H-100 contract. Notably, and in case there are any doubts of how serious our customer is, we received a non-refundable $30 million prepayment from our customer earlier this month. Our growth pipeline remains quite strong. We continue to believe that we'll be able to reach our $100 million annualized revenue target by the end of 2024, even if the 2000 GPU expansion deployment with our current existing anchor customer is pushed to 2025.