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Operator
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.
James
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.
Bitcoin
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.
Operator
Thank you. We can begin our Q&A session now. If you have a question, please press 01 on your touch-tone phone. If you wish to be removed from the question queue, you may press 02. And if using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your phone. Our first question is from George Sutton of Craig Holland. Morning, George.
George Sutton
Looking at the MRR of $1.6 million in your HPC area, can you just give us a sense of where capacity utilization is today? How significant could it be with the existing assets?
James
Yeah, so that – I mean, Shane alluded to the deep dive that we're doing into the business, and we'll continue to update as we roll forward here. We definitely have available – incremental sellable capacity in the assets today. If that's your question, George.
George Sutton
We'll get more clarity on that is the point once this deep dive is completed.
James
Yeah, exactly. Exactly.
George Sutton
Okay. And then just one other question, the difficulty rates went up during the quarter. You actually had, in my opinion, a very good cost for Bitcoin mind. Can you just give us a sense of where that credit is due? Is it the micro BT or, Machines that have come in, are there other components that we should be aware of?
James
Yeah, I mean, certainly the increased efficiency of our hardware stack is the biggest contributor to that, George.
George Sutton
Gotcha. Thank you.
James
Anytime.
Operator
Our next question comes from Chris Brendler of DA Davidson.
James
Good morning, Chris.
Chris
Yeah, good to talk to you again. Yeah, again, on the cost per coin, really impressive. I just wanted to drill down a little bit more. You know, is there anything other than the machines that's happening there? Because it seems like we're still waiting for, I guess, the third facility to open. And I think there's going to be an even lower cost per coin. So we just talk about the outlook for cost per coin as that new facility comes on, given the progress this quarter.
James
Yeah, so we're really excited with the progress that we're making in North Bay, and we expect to turn up the first phase, which will initially be 15 megawatts later this month, in the month of May. And then the balance, which will be just over 30 megawatts in total in North Bay, we expect that to be stood up by the end of June. And yes, as you referenced, that will be our lowest cost site from a power perspective. But of course, we can't project where the difficulty rate will move over the course of the quarter. But absolutely, our average utility cost will go down as that facility comes online.
Chris
Great. Can you just remind us where you stand from a cost of electricity standpoint? I think you had a five-year PPA that you were smart enough to pay for last year. Is there any exposure in 2022 to the rise in natural gas prices?
James
So the North Bay PPA is at a fixed rate that's sub three cents, just under three cents Canadian. Our other sites that are in Alberta do have some exposure to natural gas pricing because they're grid connected, whereas the North Bay facility is behind the meter. So definitely a significant advantage to having this new site come online in North Bay.
Chris
Okay, so maybe is it possible that the North Bay will help offset some of the increases you see in the other two sites? And I guess why didn't we see it? Can you benchmark maybe where we're running today, just given what's happening in the world?
James
Well, that's difficult to say, to benchmark, because it does move quite a bit, and we don't have a consistent price across the two assets in Alberta. So it's a range and I can't give you a specific number and I can't project what the number will be where there is variability and volatility in natural gas pricing and our exposure to that in Alberta although as you can see even though there was incremental volatility in Q1 as well around the energy markets our margins were incredibly healthy. So I don't expect the volatility to get outside of that band. And then don't forget we – thank you. Don't forget we also – a portion of the Bitcoin we mine, we mine using – by mining Ethereum using GPUs, which has a significantly lower cost per Bitcoin to mine. So that all blends into the overall cost per Bitcoin as well.
Chris
Great. I'm going to ask one more then. Let the other folks ask questions. On your equipment order, things have changed quite a bit in the rig market recently. I'm hearing prices coming down even further. I just want to know, from your standpoint, do you lean into that opportunity? Do you feel good from an equipment perspective? And what are the remaining payments that you need to make? I see these large deposits on your balance sheet. So you've got some equipment on the way, and usually they have some payments at the end. Is that something that you've already funded?
James
Yeah, so the remaining order that we have coming in is with microBT. We get approximately 1,000 units monthly, and that runs through the balance of 2022. So those machines continue to come in, and they're actually coming in consistently on schedule, which is great. And we have the funding required for the balance of those. those payments. And as you know, we haven't deployed incremental capital into ASICs because we did believe that pricing was going to come down. And I actually don't think that we are at the bottom of the market from an ASIC pricing perspective yet. So we will continue to be patient and watch as the market dynamics evolve.
Chris
Yeah, very smart move. Thanks, Jamie. Appreciate it.
James
Thank you. My pleasure.
Operator
Our next question from Kevin Deedy. And as a reminder, if you have questions, press 01.
James
Good morning, Kevin.
Kevin
Hi, Jamie. Thanks for having me.
James
How are you? Of course.
Kevin
I'm good. I'm good. Great to talk to you. Thanks. So the micro-BT machines, can you just give us an idea on how much you've completed the transition of the B8 a Drumheller medicine hat versus machines that will go to North Bay?
James
Yeah, so currently all of the B8s are offline. We're continuing to hold them in inventory, but they're not operating. The fleet is almost entirely micro-BT that we're running right now, and it is micro-BT that will be turning up in the initial 15 megawatts at North Bay. We have... We have some Clarks that are still operational, but no B8s.
Kevin
Okay. So what's the intention with the Clarks? Are you going to continue to run them? Are you happy with the efficiency that you're getting?
James
Yeah, we're happy with the efficiency that we're getting. Obviously, they are through their depreciation schedule as well. As you know, we use an aggressive two-year depreciation schedule. So they are profitable and in the money, as it were.
Kevin
Okay. So the BH that you decommissioned, what's your intent there? To sell? Just hold them?
James
I don't know yet, Kevin.
Kevin
Still contemplating. Okay, fair enough.
James
Still contemplating.
Kevin
I mean, you do have open sockets. Yeah, you have open sockets at Terrago, right? Right.
James
Oh, we wouldn't put ASICs in enterprise data centers.
Kevin
Fair enough.
James
It's a completely different type of compute. It doesn't play nicely in an enterprise data center environment. So, no.
Kevin
Okay. The holding strategy, have you reviewed that and laid a capital requirement and the market environment?
James
Yeah, we've actively been reviewing the strategy and are very committed to it. I think holding Bitcoin is the right move. We have our capital requirements funded. Our Bitcoin is currently unencumbered, though there always is an option if we wanted to raise capital by using a portion of the Bitcoin as leverage. That's always an option for us to do so. But no, selling Bitcoin in this environment to ultimately buy machines would yield less Bitcoin in the long term than the value of just holding on to the Bitcoin that we have today.
Kevin
Okay. The loans that you have, the Bitcoin loans that you have, what's your intent there given your Bitcoin balance? You considering expanding them or how are you reviewing that?
James
Are you, are you're talking about their, our yield program or the yield accounts that we have with galaxy? Exactly. Yes.
Kevin
Just looking for your thinking on that now.
James
So our thinking hasn't changed, although it is something that we're consistently evaluating and yields are around the 2% range right now. We, We continue to have 1,000 Bitcoin with each of Galaxy and Genesis, but again, it's something we're constantly evaluating.
Kevin
Plans for the balance, the, what is it, 4,400 plus? Yeah, are you looking to deploy that asset in any way that might generate yields?
James
Not at present, although we are going through an exercise to really look at our entire treasury management program. But at present, we don't have any plans to do anything differently with those Bitcoin that are held in custody.
Kevin
Okay. Last question for me, Jamie, please. Have you kicked around using machines outside of micro VT?
James
We always kick around everything, Kevin. You know me. We like to make sure that we're in all of the right conversations. We test a ton of different types of equipment. There are some new entrants coming, as you know, and we're excited to see what may come out of those providers as well.
Kevin
Great. Thank you for entertaining my questions as always, Amy. Look forward to talking to you. Anytime. Anytime.
Operator
Thanks, Kevin. And we have no more questions.
James
Okay. Thank you all for your time and, again, for your patience this morning. Definitely never a dull moment in our world. Again, thank you so much. Have a great day, everybody.
Operator
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Disclaimer