Hut 8 Corp.

Welcome to HUT8's second quarter analyst and investor call. In addition to the press release issued earlier today, you can find HUT8's financial statement and MD&A on CDAR and shortly on both EDGAR and the HUT8mining.com. Unless noted otherwise, all amounts referred during this call are denominated in Canadian dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Minings Corp. and its subsidiaries. The statements made reflect current expectations and, as such, are subject to the 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 MDNA for the three months ended June 30, 2022, as well as the company's MDNA and annual information form for the year ended December 31, 2021. Any forward-looking statement speaks only as of the date on which it is made, and the company disclaims any intent or obligation to update any forward-looking statement unless required by law. I would now like to turn the call over to HUD-8 CEO, Jamie Leverton.

Thanks, Michelle. Good morning, everyone, and thank you for joining us to discuss HUD-8's financial results for the second quarter of the year. In our first full quarter, generating fiat-based monthly recurring revenue through our five data centers and an increased mining capacity that grew to 2.78 exahash by June 30th, we generated strong quarterly revenue while also increasing our Bitcoin holdings. Notably, we continue to ramp up mining activities at our third mining site in North Bay, Ontario, and installed nearly 7,200 new miners across all three of our mines. We increased our hash rate by more than 9% since the end of Q1 as our sites continue to generate strong revenue and support the continued vitality of the company. Looking forward, we anticipate organically growing our mining capacity to approximately 3.55 exahash by the end of 2022, while being ready, as we always have, to be opportunistic about any inorganic opportunities that might arise. HUT8 is one of the only digital asset miners that hasn't sold down or encumbered our stack of Bitcoin, which speaks to our financial acumen and commitment to our balance sheet first approach. Maximizing the value of the Bitcoin on our balance sheet is very much a priority for us and a key pillar of our business. We were very intentional in recalling the 2000 Bitcoin that we had in our yield programs into our possession in mid-May before the contagion spread across the industry and plan to resume working our stack as soon as it's prudent to do so. To that end, we continue to explore opportunities that will allow us to generate additional income in a responsible manner, and anticipate that as markets stabilize, we will see compelling options materialize. We are one of the only digital asset miners that is diversified into the infrastructure space, and while we continue to be bullish on Bitcoin, we also believe strongly in the high-performance computing industry and the potential opportunities that lie ahead for HBC and the nascent blockchain and Web 3.0 industry. We spent much of the second quarter rationalizing our HPC business and eliminating products and services that weren't delivering meaningful returns for us. We've completed the cleanup and are now ready to increase capacity and invest in building out the HPC infrastructure with the latest technology that will attract high-margin clients going forward. We have a long-term vision to execute a business strategy with three pillars. One, continuing to mine Bitcoin in a pool environment, two, maximizing the value of our Bitcoin reserves, and three, growing our HPC data center business. Our long-term vision is to generate enough revenue from our high-performance computing business and working the stack to fund our digital asset mining operations without being reliant on capital markets, which can be both expensive and at times unreliable. We have intentionally and successfully abstained from selling Bitcoin to fund our mining operations business, unlike many of our peers. We believe current Bitcoin prices are repressed and we're taking a long view on our reserves. For us, it doesn't make sense to sell Bitcoin at low prices only to fund additional Bitcoin mining. And we're cognizant that the halving is not too far away. I have mentioned this before, but it bears repeating. We have been anticipating and preparing for possible market volatility for approximately a year. We were thoughtfully conservative in the back half of 2021 to operate prudently and avoid becoming swept up up into the bull run we saw last fall and winter, and I'm confident that we've managed to downturn well to this point and will continue to successfully navigate the market by maintaining a balance sheet first approach going forward. Before I turn it over to our CFO, Shane Downey, who will review our key financial results, I would like to thank our board for their support and guidance, our executive team for their leadership, and our team for their execution across the business. To our investors, thank you. We know it has been a very dynamic time for the broader industry, and your support of HUD-8 is very much appreciated. Shane, over to you.

Super, thanks, Katie, and good morning, everyone. Given the challenging macro environment, we produced a solid result for Q2 2022. We achieved strong revenue of $43.8 million for the quarter, a 31% increase over the prior year quarter of $33.5 million. This performance was driven by strong digital asset mining activity, with a solid contribution from the first full quarter of operations from the high-performance computing business, which we acquired earlier this year. We achieved revenue of $39.1 million from digital asset mining activities as we mined 946 new Bitcoin. This compares with $31.4 million of digital asset mining revenue in the same quarter in 2021, when we mined 553 Bitcoin. Additionally, this, sorry, operationally, Significant 71% increase in Bitcoin mined reflects the substantial increase in hash rate and efficiency as we've upgraded and expanded our entire fleet of ASICs and came despite the increase in year-over-year Bitcoin network difficulty. Our newly acquired data center business contributed an additional $4.7 million of revenue, reflecting a full quarter's worth of revenue since we acquired the business at the end of January 2022. Cost of revenue for the quarter was $47.7 million compared to $16.6 million in the prior year and consists of site operating costs and depreciation. The increased depreciation expense from $3 million in Q2 2021 to $20.9 million in Q2 of 2022 was driven by the addition of approximately $178 million of new mining equipment and infrastructure 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 by $13.1 million to $26.8 million. Within the digital asset mining operation, site operating costs increased by $10.8 million, driven by electricity costs, which stem from a combination of higher power prices and a modest increase in consumption. $2.3 million of operating costs related to the high-performance computing operation, all of which are incremental year over year. We have now substantially onboarded the team we need to drive profitable growth in our high-performance computing business. This includes sales, networking, and cloud and data center operations personnel. In terms of margins, our digital asset mining operation generated mining margins of approximately 38% versus 62% in the prior year period, reflecting the combination of lower Bitcoin prices and the increased electricity costs. In light of these external factors, we were generally pleased with operating performance in the core. Margins in our high-performance computing business were strong, and we continue to expect to fall into the 35% to 40% range as previously communicated. And as Jamie mentioned, in completing the integration of our HPC business, we identified certain low-margin products and services and have rationalized these offerings as a result. Following that exercise, we've withdrawn the revenue growth guidance provided as part of our Q1 2022 results, but want to emphasize that we believe these rationalizations were prudent and positioned us well to realize profitable revenue growth in 2023. General and administrative costs in Q2 were $12.3 million compared to $8.8 million in the prior year. The increase was primarily driven by sales tax expense, share-based compensation expense, higher insurance premiums, and then salaries and benefits costs related to ongoing build out of our team. Insurance expense reflects increased premiums driven by tight global insurance markets, combined with an expansion of director and officer liability insurance, and then the incremental coverage related to our high performance computing operations. Sales tax expense increased by $1 million, primarily related to equipment purchases and imports during the quarter. SG&A expense related to the high performance computing business were $1.9 million. We recorded a net loss of $88.1 million for the quarter compared to a net loss of $4 million in the prior year period. This net loss was substantially the result of non-cash revaluation losses during the quarter. Firstly, we recognized a $43.3 million gain on our warrants liability stemming from the revaluation under the Black-Scholes valuation model. And then secondly, the revaluation gain was more than offset by a revaluation loss on digital assets as a result of the decline in Bitcoin price during the quarter. The company incurred a total non-cash loss of $217.8 million on the revaluation of our Bitcoin holdings. $112.9 million of the loss was offset against accumulated gain recorded in other comprehensive income and the remaining $104.9 million non-cash loss was recorded as an expense in the statement of operations. HUD-8 achieved adjusted EBITDA of $6.8 million for Q2 2022, reflecting our ability to maintain profitability despite a challenging macro environment for digital asset mining. This compares with $14.4 million in the prior year period. To address financial position, our balance sheet remains healthy with a cash balance of $60.1 million at the end of the quarter. As previously announced, we entered into a U.S. $65 million at the market offering program in February of 2022. We raised approximately U.S. $61 million during the first six months of the year, which is approximately Canadian $77 million. Subsequent to quarter end, we completed the remainder of the program and raised an additional U.S. $4 million, or approximately CAD $5 million. The proceeds from these issuances were and will continue to be invested in the growth of the company. In light of the challenging capital markets environment generally, combined with ongoing volatility impacting the digital asset space, we remain committed to our conservative approach to balance sheet management. We are pleased with the modest level of non-recourse equipment financing in place and that our substantial digital asset holdings remain fully unencumbered. Our Bitcoin holdings are marked at fair value and totaled $188.8 million as of June 30, 2022, based on 7,406 Bitcoin held in reserve. Our conservative approach to balance sheet management means we've been able to continue our long-term hodl strategy. We have not sold any Bitcoin since early 2020-21. With that, I will turn the call back to our operator, Michelle, for analyst Q&A.