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spk01: Welcome to Hud8's third quarter analyst and investor call. In addition to the press release issued earlier today, you can find Hud8's financial statements and MD&A on the company's website at www.hud8mining.com, under the company's CDAR profile at www.cdar.com, and under the company's EDGAR profile at www.sec.gov. Unless noted otherwise, all amounts referred to during this call are denominated in Canadian dollars. Any comments during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of HUD-8's Mining Corp. and its subsidiaries. The statements made... reflect current expectations and as such are subject to a variety of risk 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 quarter ended September 30th, 2022, as well as the company's MD&A and annual information form for the year ended December 31st, 2021. I would now like to turn the call over to Hot 8 CEO, Jamie Leverton. Please go ahead.
spk08: Thanks so much, Colin. Good morning, everyone, and thank you for joining us to discuss HUD-8's financial results for the third quarter of the year. The industry continues to face challenging headwinds, fluctuating energy prices, an increasing global hash rate, the Ethereum merge, and Bitcoin now in its fifth month of hovering around the 20,000 USD range. With the benefit of hindsight, it's clear that we were prescient in taking a balance sheet first approach which has allowed us to continue operating thoughtfully and strategically. Throughout the quarter, we remained focused on optimizing operations for both our mining and high-performance computing businesses. We were successful in reducing our cost per coin by nearly 30% over the second quarter and installed an aggregate of 2,205 new miners at our mining sites during Q3, bringing our operating capacity to 3.07 exahash, which is a 10% improvement over Q2. In our HPC business, we completed renovations and upgrades to our flagship data center in Kelowna, British Columbia, and generated $4.4 million in revenue, comprised primarily of monthly recurring revenue from a number of client segments, including the blockchain and emerging technology industry. Ahead of the Ethereum merge, we redeployed 180 GPU units to the Kelowna data center, and are currently redeploying the balance of our fleet to our data centers to explore new opportunities to leverage the hardware, including in the zero-knowledge proof and layer two space. Moving on to Bitcoin, with the largest self-mined unencumbered reserves of any publicly listed company, we continue to be bullish on Bitcoin. In spite of the prolonged downward pressure on the digital asset over the last several months, HODLing continues to be the right approach for HUD-8 and our shareholders. Particularly as we get closer to the next halving, we believe we will see Bitcoin go up and to the right, which will further enhance our balance sheet. In the meantime, our stack sets us apart from our peers, given the inherent flexibility it affords us as we continue to prudently manage the business going forward. While we still intend to explore opportunities that will allow us to generate additional income from our stack, given the ongoing market instability and risk profile at the present time, We will remain conservative and maintain our stack in cold bridge. We have a long-term vision to execute a business strategy with three pillars, continuing to mine Bitcoin in a pool environment, maximizing the value of our Bitcoin reserves, and growing our HPC data center business. This strategy continues to be the right one for HUD-8. It is keeping us focused through this bear market, and we are in a strong position to continue to make the right decisions for our continued growth. 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 ongoing 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.
spk00: Great. Thanks, Jamie, and good morning, everyone. Given the challenging macro environment, we produced solid results for Q3 2022. We achieved revenue of $31.7 million for the quarter, an $18.6 million decrease relative to the prior year third quarter of $50.3 million. This year-over-year decrease was driven by the price of Bitcoin, which more than offset the expansion of our Bitcoin mining fleet and incremental contributions from the high-performance computing business we acquired in Q1 of this year. We achieved revenue of $27.3 million from digital asset mining activities as we mined 982 new Bitcoin. This compares with $47.9 million of digital asset mining revenue in the same quarter of 2021 when we mined 905 Bitcoin. We increased our mining capacity by a further 10% in the quarter, while our average cost of mining Bitcoin fell by 29% relative to the second quarter of 2022. reflecting favorable power rates combined with our progressively more efficient fleet. Our high-performance computing business contributed an additional $4.4 million of revenue in the quarter, the majority of which is monthly recurring revenue. Cost of revenue for the quarter was $45.6 million compared to $21.2 million in the prior year and consists of site operating costs and depreciation. The increased depreciation expense from 5.2 million in Q3 2021 to 25.3 million in Q3 2022 is primarily attributed to the increased number of miners deployed, as well as mining infrastructure and data center assets acquired. Site operating costs increased by $4.3 million to $20.3 million from Q3 2021. Within the digital asset mining operation, site operating costs increased by $2 million, consistent with expansion of our mining fleet. We incurred $2.3 million in operating costs related to the high-performance computing operation, all of which are incremental year over year. Of note, with respect to our operations, late yesterday, we delivered a notice of events of default to Validus Power Corp., a third-party supplier of energy to our North Bay site, over failure of Validus to achieve key operational milestones by the dates contemplated under the power purchase agreement. Validus has also demanded that the company make payments for delivery of energy that are higher than those negotiated under the terms of the PPA. We intend to pursue all legal remedies available to us to enforce the terms of the PPA, and we'll share additional updates as appropriate. In terms of margins, our digital asset mining operation generated mining profit of $9.3 million versus $33.5 million in the prior year period, reflecting a combination of lower Bitcoin price and increased electricity costs. In light of these external factors, we are generally satisfied with the operating performance in the quarter. General and administrative costs in Q3 were $11.2 million compared to $10.8 million in the prior year. The increase was due to a combination of higher personnel costs, insurance premiums, and other costs, largely in support of the high-performance computing line of business. This increase was partially offset by lower sales tax expense and share-based compensation payments expense. Sales tax expense decreased by $2.5 million, primarily related to an overall decrease in the company's purchases and imports of mining equipment relative to the third quarter of 2021. SG&A expense related to the high-performance computing business was $1.6 million for the quarter. We recorded a net loss of $23.8 million for the quarter compared to net income of $23.4 million in the prior year period. This net loss was primarily driven by lower revenue from digital asset mining operations and higher cost of revenue in the third quarter of 2022. Also impacting the net loss We recorded a $7.39 million non-cash gain on revaluation of our digital assets as a result of the increase in price of Bitcoin quarter end over quarter end. And we incurred a non-cash loss of $2.9 million on revaluation of our warrants liability. Reflecting the operating results discussed previously, Hadeed achieved adjusted EBITDA of $2.1 million for Q3 2022 compared to $30.7 million in the prior year period. into terms of financial position. Our balance sheet remains healthy with minimal debt and a cash balance of $33 million as of September 30th, 2022. On August 17th, 2022, we entered into an equity distribution agreement pursuant to which we established an out-the-market equity program with maximum proceeds of up to US $200 million or approximately Canadian 270 million. To date, we've raised US $2 million or approximately 2.6 million Canadian in net proceeds under this program. 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 we have in place and that our substantial digital asset holdings remain fully unencumbered. Our Bitcoin holdings are marked at fair value and totaled $223.4 million as of September 30th, 2022, based on 8,388 Bitcoin held in reserve. Our conservative approach to balance sheet management means we've been able to continue our long-term huddle strategy. We have not sold any Bitcoin since early 2021. With that, I will turn the call back to Colin for analyst Q&A.
spk01: Thank you. Ladies and gentlemen, we'll now conduct a question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, your first question comes from Joseph Vathy from Canaccord Genuity. Joseph, please go ahead.
spk02: Hi, good morning, everyone. Nice to see your conservative strategy shining right here today. Maybe we'll just start with, you know, looking as, you know, as we're sitting here, you know, getting ready to exit 22 and we look to next year. I mean, there's a lot of uncertainty out there relative to Bitcoin, the macro, etc., And I know you're staying conservative. I was just wondering if you could provide some insight for us and, you know, what the plan may be for next year in terms of maybe increasing hash rate or power capacity or, you know, continuing to diversify the business maybe over in the high compute side. And then I'll have a quick follow-up.
spk08: I'll take that. Thanks so much, Joe. We've been transparent since, well, really a year ago now with our strategy to be opportunistic for both organic and inorganic growth. Obviously, I can't give any guidance, but that continues to be our plan.
spk02: Got it. I think that short answer does say a lot. So maybe I'll just kind of follow up on that, Jamie. And, you know, how do you, you know, when you look at the industry, you know, there's clearly some distress out there in the industry today. How do you think this industry evolves in 23, you know, given what's happening? Do you expect to see merger activity accelerate industry-wide? or perhaps some other dynamics. And what do you think happens with this hash rate with Bitcoin down here? It's been kind of a very resilient hash rate. So just any comments you have on that would be great. Thanks a lot.
spk08: Yeah, no, my pleasure. I think the hash rate continues to surprise us all. I mean, it isn't behaving the way we would have thought it would behave given the continued pressure on the price of Bitcoin and the increases we've seen in the energy markets. So really, really difficult to predict whether it'll continue kind of defying expectations and continue to climb or start to behave in a more expected manner. So we really, it's impossible to guide, Joe. It's quite a dynamic situation, more so now than I think we've seen in cycles in the past. And I think with respect to your first question, inevitably, we will see consolidation in this space. I think we've seen a number of announcements come out from various parties in the space that are struggling on the leverage side of their business. So I do think over the next six to 12 months, we inevitably will see consolidation.
spk02: Great. Thanks for those comments and thoughts, Jamie.
spk08: My pleasure. Thanks, Joe.
spk01: Your next question comes from Gus Gala from Pruist. Gus, please go ahead.
spk03: Hi, Jamie. Hi, Jamie. I wanted to follow up on Validus. I mean, it seems – I just want to get the sense that this maybe pushes strategically to consider further – getting further vertical, maybe look at the power generation side of things. And I just want to unpack, like, the dynamics of what's going on with Validus exactly and is essentially they are, they offer a price they're not be able to like attain in the power markets themselves. Is that essentially like the Nate's going on? And is there any chance we're able to retain that nice pricing they had previously offered? Thanks.
spk08: Yeah. So it's difficult for us to comment on it, given that it is, an active and live negotiation. But as we have updates on how the situation unfolds, of course, we will share them.
spk03: Gotcha. But do we consider getting further vertical? I mean, just strategically, we have, there's a bit of a nice pile, cash pile there. I know that things are distressed out there. It just plays into that type of question.
spk08: Yeah, so we are actively looking at a variety of different opportunities, and it's really difficult to say at this point what's going to be the most strategic, opportunistic path forward.
spk03: Gotcha. That's super helpful. And, I mean, just as we look into next year, on balance, how are we feeling if we were going to invest in either the HPC business or the self-mining business? Right now, where do you think the best returns are?
spk08: That's an incredibly difficult question. Again, it's opportunity. I think it's fair to say there's more distressed in the mining space right now. But I'll continue to look at opportunities in both areas, again, looking for the best strategic alternatives.
spk03: Thank you. Appreciate the call, Jamie.
spk08: My pleasure. Thanks, guys.
spk01: Your next question comes from Bill Papamastazio from Stiefel. Bill, please go ahead.
spk07: Morning, Bill. Hi, guys. Hey, good morning. Thanks for taking my questions. And nice print today. You know, we've seen a lot of crazy events happen in the space this week, especially when it comes from the two exchanges, FTX and Binance. We also have a lot of miners distressed in the space. Just wondering what you think the implications to what's going on and what happened this week will be on the Bitcoin mining space, especially when it comes to the distressed miners. You know, we've heard news from Core Scientific and Argo and probably will continue to hear more news on that end. Just wondering what your perspective is.
spk08: Thanks. Yeah, I think one of the struggles for the industry right now on the back of what we're seeing happen with FTX in particular and Alameda is we really don't understand what the contagion is going to be as a result of that. We don't know where all of the exposed counterparties are. And so for the industry, it's really going to depend where new holes show up. As I mentioned in my opening comments, we've made the determination to continue to keep our stack in cold storage, again, until we really have a good understanding of where the potential contagion goes and where the counterparty risks are. Our view is that we need to continue to be conservative and let it shake out.
spk07: Great. Thank you. And then, you know, congrats on wrapping up the the hash rate capacity to nearly 3.1x a hash. Just wondering, you know, given the news with North Bay and what's going on there, has guidance changed at all? Does it still remain at 3.6x a hash by the end of the year?
spk08: Well, obviously that becomes a bit fluid given the North Bay situation. So we're really going to have to wait and see how North Bay plays out.
spk07: Okay, great. That's all the questions I have. Thanks, guys.
spk08: No problem. Thanks, Bill.
spk01: Your next question comes from Chris Brendler from DA Davidson. Chris, please go ahead.
spk05: Good morning, Chris. Hi, thanks. I'd like to – I think I heard that the cost per coin went down 30% sequentially, and I just wanted to know if you could sort of give us a little more detail on what drove that. Obviously, costs are a huge focus today. Was it sort of moving to North Bay, which sounds like that may not be the case anymore, or is it just lower costs, seasonal costs for power? Just help me think about the improvement in cost for coin.
spk08: Yeah, I'll let Shane take that one.
spk00: Perfect. Good question, Chris. And I'd say it's sort of a combination of the above. So getting operations spun up at North Bay was – a modest net contributor there. And the real point, though, is that as everyone's really aware, almost globally almost, that in the Q2 period, there was really a real spike in power costs, natural gas impacting us in a lot of ways as a result of the global macro situation or in Ukraine and Russia and so forth. And yeah, seeing that as we were sort of hoping and expecting, seeing that normalize somewhat over the course of Q3, What was a big sort of quarterly sequential driver? That would be the biggest piece.
spk05: Okay. And then the summer weather versus winter weather, does that also have an impact? Like should we expect to go back up in the fourth quarter or stay around here?
spk00: Well, that gets to a broader question that typically in Alberta, our primary markets, there is some seasonality to power markets, but not particularly large or dramatic. So it's needless to say, unfortunately, it's difficult to handicap in light of the broader uncertainty and in global markets today. But again, as of now, we've been comforted in seeing things sort of normalized relative to where they were in the middle part of this year.
spk05: Okay. One last one for me, along the same lines. Looks like the gross margin in the HPC business came down a little bit. Was that power related or something else?
spk00: on the hpc side no i would i would say not not power related we we continue to um the the rationalizations that we we sort of announced and spoke to as part of our q2 uh earnings really you know taking hold here in q3 uh i.e it was it was very late in q2 that some of those sort of product rationalizations occurred so yeah think of it as sort of a very modest and anticipated um impact on margins in Q3, and then really points back to that same message that we've delivered previously, that this is sort of an intentional move on our part, and we really do think positions us well for growth as we head into 2023. Yeah, it's really nice to have a little diversification these days.
spk05: Thanks a lot, Shane. Appreciate it. Pleasure.
spk01: Your next question comes from Kevin Deed from HCW. Kevin, please go ahead.
spk04: Thank you. Good morning. Good morning, Kevin. Hi, Shane. Thanks for having me. Can we drill in a little bit, pardon the pun, on North Bay? How much of the almost 3.1x to hash is there, and how much of that is at risk? What sort of timeline do you think you can offer with regard to your negotiation with Validus? And if everything goes sort of the ugly scenario way, I guess what of that 3.6 target is something that we shouldn't consider hashing, you know, maybe the early part of next year. As much of that as you can quantify, please.
spk08: Yeah, so as we previously disclosed, North Bay was running at approximately 25 megawatts compared to our Alberta sites, which are combined over 100 megawatts. So it's been our smallest site, and I can't give you a timeline. It's really difficult to handicap how long this will take to resolve with Validus.
spk04: So of that 25, is it all running now? How much of it ran through the third quarter? It is running now. Oh, it is running.
spk08: Okay, okay. It's running right now, and it has been running consistently through – it ran consistently throughout the third quarter.
spk04: Okay. Have – So have you filled all 25 megawatts? Is it at full capacity? It is, yep. Yeah, okay, with the M30 machines? Okay.
spk08: Yep.
spk04: All right, that helps a lot. Thanks, Jamie. No problem. Yeah, on the ZEN layer side, can you give us some insight on how you're progressing there? Any insight on how they may be helping you fill out capacity utilization at the former TerraGo sites?
spk08: The XenLayer partnership, which we announced a few weeks ago, we actually had a great meeting with the team in Toronto two weeks ago now. The hardware is still being delivered, so the environment, we don't expect to be stood up for, I think, I'd have to double-check on the timeline, but towards the end of this year is when those environments will be stood up and available to start to be sold into.
spk04: Okay. Is your team responsible for the sales and marketing there, or is that all Zenlayer?
spk08: It's combined. The teams work together.
spk04: Okay. Are those machines, do you think, the ones that will be directed toward rendering zero-proof
spk08: and other hpc applications and could you give us sort of a run through on how that partnership or the financial side of that partnership looks for hud eight so the the zen layer partnership is it's really more bare metal it's not it's not the gpus that that we've repurposed into the data center so those are two different environments and when we speak about um repurposing the GPUs and using them for Layer 2 and zero-knowledge proof, that's separate from the relationship and partnership with VenLayer.
spk06: Okay.
spk04: Any more insight to how, I guess, how things translate for you on both accounts, like on the GPU side? Do you have any expectation on... what your computing power there could generate in revenue? And on the ZEN layer side? Okay, too early.
spk08: It's too soon to give guidance. Kevin, we're trialing a number of different types of workloads and applications with those GPUs. So, no, I can't give you guidance this morning.
spk04: Any other variants on the ETH mining side, though, have you considered?
spk08: We've looked at the alternative chains. We haven't found anything where the economics are what we would want them to be, but looking at opportunities potentially for machine learning and AI workloads as well.
spk04: Okay. Can you speak at all to capacity utilization? At the HPC sites, say the end of 2Q versus the end of 3Q?
spk08: I don't have those metrics, Kevin, but what I will do is we'll pull them and share them when we have them. I just don't have them at my fingertips, but it's a good question.
spk04: Okay. Just remind me, please, though, Jamie, what was North Bay slated to be all told? I mean, I seem to remember there was an expansion option for you there. Was it to go to 100 or something? I can't remember.
spk08: Yeah, the PPA was for up to 100 megawatts, with the first phase being 35 megawatts.
spk04: Okay, okay. have you considered at all, I guess, given how the energy markets roiled you, sort of trying to hedge your power costs in Alberta?
spk08: We have explored options, none that we've pursued at the present time.
spk04: Okay. And given your very comfortable position In cold storage, when do you think you might consider putting your Bitcoin to work again?
spk08: Yeah, I mean, we were hopeful that we'd be in a different position, frankly. But as a result of the incidents that kicked off over the weekend, we just really don't feel comfortable again until we see that contagion run through. So my guess is we'll revisit towards the end of this year, beginning of next year. But again, very, very much about the state of the market, where we think the risks are, because obviously protecting that stack is critically important.
spk04: Appreciate it, Jamie. I think the potential for the tether on hedge is pretty ugly, too. So I think everyone on the call is with you on that. Thank you very much.
spk08: Thank you. Thanks, Kevin. Our pleasure.
spk01: There are no further questions at this time. I'll turn it back to you for closing remarks.
spk08: Okay. Thank you so much, Colin. Thank you again, everybody, for joining, for your continued support. We really, truly appreciate it. And we'll talk to you soon.
spk01: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.
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