Hut 8 Corp.

Welcome to the HUT8 Q1 2022 earnings call. My name is James, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please put us to 01 on your touch-tone phone. As a reminder, this conference is being recorded. I'd now like to turn the call over to Jamie Leverton. Jamie, you may begin.

Thank you so much. And good morning, everyone. Thank you for joining us to discuss Head8's financial results for the first quarter of the year. We had a very strong quarter, outperforming our results for the same period in the year prior by a considerable margin with respect to revenue, net income, mining profit, and adjusted EBITDA. Our Bitcoin holdings also increased, and as of the end of March, we had 6,460 Bitcoin in reserve. Notably, we also advanced our corporate strategy with the strategic acquisition of TerraGo's five data centers at the end of January. With 400 cloud services and co-location clients across a number of sectors, it has moved us further into the high-performance computing world, where we are excited to be ramping up our offerings to uniquely support companies in the blockchain and Web 3.0 spaces. We are the only digital asset miner that is diversified in this way. And while we continue to be bullish on Bitcoin, we also believe in the continued growth of the HPC industry overall. Before I turn it over to our CFO, Shane Downey, who will review our key financial results, I would like to thank the executive team for their leadership, the entire Hut8 team for their execution, and our investors for your continued support. Shane, over to you.

Great. Thank you, Jamie. Good morning, everyone. I will run through some short disclaimer language and then jump into a summary of our quarterly results. In addition to the press release issued earlier today, you can find our financial statements at MD&A on CDAR and shortly on both EDGAR and our website at huddyatemining.com. Unless noted otherwise, all amounts referred to are denominated in Canadian dollars. I'd like to remind you that comments made during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of HUD-8 Mining Corp and its subsidiaries. These statements are current expectations and, as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include, but are not limited to, the factors discussed in the quarterly MD&A for the three months ended March 31, 2022, as well as the company's MD&A and annual information forum for the year end of December 31st, 2021. Overall, we were pleased with the strong operating results for Q1 2022. With our expanded and efficient Bitcoin mining fleet, driving a profitable quarterly performance in our core digital asset mining operation, combined with the initial results of our recently acquired high-performance computing business, HUD-8 remains well-positioned for continued growth in a dynamic and challenging market environment. Revenue. We achieved solid revenue of $53.3 million for the quarter, a 67% increase over the prior year quarter of $32 million. This performance was driven by strong digital asset mining activity and increased hash rate from under 900 petahash in Q1 2021 to approximately 2.2 exahash in Q1 2022. We achieved revenue of $49.3 million from digital asset mining activities. As we mined, 942 new Bitcoin at an average price of approximately $52,300 per Bitcoin. This compares with 539 Bitcoin at an average of approximately $56,700 in the prior year. Our hosting line of business generated $0.8 million of revenue compared to 1.4 in the prior year. The decrease in hosting revenue is due to a reduced number of hosting customers as the company acquired equipment from one of its two hosting customers in December of 2021. We have since exited digital asset mining hosting business with the April 2022 acquisition of equipment from our remaining hosting customer. And then our newly acquired data center business contributed an additional $3.3 million of revenue in line with management's expectations for two months of operation, given the January 31st acquisition date. Reflecting early and ongoing efforts of our sales team, we expect to deliver recurring revenue growth for the high-performance computing business in the 15% to 18% range over the course of 2022. On to operating costs. Cost of revenue for the quarter was $36.9 million, compared with $19.8 million in the prior year. The increase is the result of higher depreciation expense and site operating costs, mostly electricity. Increased depreciation expense from $5.8 million to $18.4 million was driven by the addition of approximately $130 million of new mining equipment and infrastructure assets over the past 12 months, as well as approximately $25 million of data center fixed assets through the previously mentioned acquisition. Site operating costs increased due to HUD-H's continued expansion, specifically the addition of incremental miners to our fleet, which drove an absolute increase in operating costs, albeit much improved margins, as I will discuss in a moment. The data center business incurred $1.6 million of operating costs, reflecting those two months of operations. In terms of margins, our core digital asset mining operation generated mining margins of approximately 67%. versus 57% in the prior year period, reflecting our substantially more efficient mining fleet, and that's given that average quarterly Bitcoin price was actually down slightly period over period. Our preliminary view is that the high-performance computing business will generate gross margins in the 35% to 40% range. We're continuing to delve deeply into our business integration exercise, which includes formulating granular, bottom-up views on profitability across this line of business. We've also begun to identify and implement opportunities to further optimize high-performance computing margins going forward, including, for example, streamlining the product stack. These initiatives are in their early stages and will progress over Q2 and Q3. On to general and administrative costs. G&A costs were $11.5 million compared to $6.5 million in the prior year quarter. The increase was primarily driven by sales tax expense, higher professional fees to support the company's growth, as well as insurance expense. Insurance premiums reflect increases driven by global insurance markets combined with an expansion of director and officer liability insurance and incremental coverage related to the high-performance computing operations. Sales tax expense increased by $2.5 million, mainly driven by capital investments attracting sales tax and duties, as well as just overall increase in the company's purchases. The data center business contributed an additional 0.7 million of SG&A expense as well, and we will continue to refine our expectation of quarterly SG&A for this line of business going forward. Net income, we recorded net income of $55.7 million for the quarter compared to net income of 19.1 million in the prior year period. Net income was impacted by the company's strong operating performance, as previously noted, as well as a $54.1 million non-cash gain on revaluation of the company's warrants liability. Given movement in the price of Bitcoin, we recorded a $4.9 million unrealized loss in digital assets, all of which went through OCI on an after-tax basis. Taken together, this results in other comprehensive income of $50.8 million for the quarter. Adjusted EBITDA is driven by the strong operating performance HUD had achieved adjusted EBITDA of $27.1 million for Q1 2022 compared with $16.2 million in the prior year quarter. And I'll conclude my comments with respect to financial position. Simply put, our balance sheet remains healthy. We entered into a U.S. $65 million balance at the market offering program in February of 2022 and raised net proceeds of $32.5 million during the first quarter. The proceeds from these issuances were and will continue to be invested in the growth of the company. We continue to evaluate non-dilutive alternatives to optimize our capital structure as well. Our Bitcoin holdings are marked at fair value and totaled $367.6 million as of March 31st, 2022, based on six based on 6,460 Bitcoin held in reserve. We continue to emphasize our long-term total strategy and did not sell any Bitcoin during the quarter. The acquisition of TerraGo's data center business added approximately $30 million of net assets to our balance sheet, and we will finalize the purchase price allocation here over the balance of 2022. With that, I will turn the call back to our operator for questions.