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Operator
Welcome to Hut 8's fourth quarter and full year 2022 financial results, analyst and investor call. In addition to the press release issued earlier today, you can find Hut 8's financial statements and MD&A on the company's website at www.hut8.io. Under the company's CEDAR profile at www.cedar.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 made during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Mining Corp and its subsidiaries. The statements made reflect 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 HUD-8's annual MD&A and annual information form for the year ended December 31, 2022. Except as required by applicable law, HUD-8 undertakes no obligation to publicly update or review any forward-looking statements. During the call, management may also make reference to certain non-IFRS measures that are not separately defined under IFRS such as adjusted EBITDA and MindProfit. Management believes that non-IFRS financial information taken in conjunction with IFRS financial measures provide useful information for both management and investors. Reconciliations between IFRS and non-IFRS results are presented in the tables accompanying our press release, which can be viewed on our website. I would now like to turn the call over to HUD-8 CEO, Jamie Leverton. Please go ahead.
Jamie Leverton
Thank you, Joelle. Good morning, everyone, and thank you for joining us to discuss HUD-H's results for the 2022 fiscal year. I will start by restating the obvious. 2022 was a challenging year for our entire industry. For us, this meant that pivoting and changing was essential. This is where our balance sheet first approach, which has been in place since the early days of the previous bull market, enabled us to continue pursuing opportunistic moments throughout the year. Closing our acquisition of five high-performance computing data centers and integrating them into our business operations. Managing through the eSmerge last fall. Expanding our leadership team and growing our team members to over 100 across British Columbia, Alberta, and Ontario. Continuing to advance our ESG goals by finding innovative ways to e-recycle our miners and computing infrastructure. And self-mining Bitcoin throughout 2022 at modest costs despite challenges. fluctuating power prices, resulting in a 28.1% year-over-year increase in Bitcoin mines and a 25% year-over-year increase in hash rate, thanks to steadily plugging in new miners throughout the year. We continue to believe in our expansion into the high-performance computing business as we renovated our flagship data center in Kelowna and refreshed our data centers in the Greater Toronto Area and Vancouver. We welcomed new customers, including Enthusiast Gaming, Venlayer, and Luxor, We're replacing our networks with new Cisco carrier-grade routing and switching hardware. We're re-architecting our network carrier uplinks to provide increased resiliency, diversity, and capacity. We recertified the organization under our SOC 2 compliance program, ensuring security best practices across 158 unique operational controls. As we look ahead, we are confident that 2023 will be a year of extraordinary growth. As announced last month, we look forward to the future where HUD-8 Mining Corp and U.S. Bitcoin Corp will combine in an all-stock merger of equals to grow into a highly diversified U.S. domiciled publicly traded organization. The combination will see us with established self-mining operations at five mines, two in Canada and three in the U.S., running a total of 5.6 exahash with 244 megawatts of total energy available. It will give us six exahash of installed hosting capacity powered by 220 megawatts of hosting infrastructure at our site in Texas with clients that include some of the largest miners in the industry. It will take us into the very nascent space of managed infrastructure operations at two U.S. sites where USBTC has pioneered a new business model to capture untapped value from the mining ecosystem, which is incredibly exciting. With managed infrastructure operations, the team goes into a miner's existing site or site and runs the day-to-day operations manages the property, performs maintenance, and importantly, optimizes performance using USBTC's purpose-driven software, which provides real-time monitoring capabilities to optimize the energy consumption of thousands of machines across the site. It also enables profitable participation in demand response programs and can help to balance the grid, improving grid stability while reducing energy costs. And speaking of energy, the U.S. Bitcoin team brings outstanding energy sourcing, management, and hedging capabilities to new huts, significantly enhancing our ability to better plan around stable and predictable energy usage and mitigate fluctuating prices across markets. We look forward to the expected completion of the business combination in Q2 and beginning to work together as a team. I'm very proud of our team's commitment to operational excellence across the business and the trajectory of HUD-8. We look forward to continued success in 2023 as a further diversified digital asset mining, hosting, manage infrastructure operations, and high-performance computing organizations. Before I turn it over to Shanif Bisram, our CFO, who will review our key financial results, I would like to thank our board for their support and guidance, our executive team for their incredible leadership, and our team across the country for their execution across all of our business lines. I would also be remiss if I didn't take a minute to thank our investors for their continued commitment to HUD-8, 2022 is an incredibly dynamic time for Bitcoin and the broader industry, and your support of our organization is very much appreciated. Janice, over to you.
Bitcoin
Thanks, Jamie, and good morning, everyone. Let's begin with the full year results for 2022. We achieved revenue of $150.7 million for the year, a $23.1 million decrease relative to the prior year of $173.8 million. This year over year decrease was driven by the reduction in 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 2022. Revenue from digital asset mining activities was $133 million as we mined 3,568 new Bitcoin. This compares to $165.4 million of digital asset mining revenue in 2021 when we mined 2,786 Bitcoin. We increased our mining production by 28% compared to 2021, and our average cost to mine each Bitcoin reduced by 7% relative to the prior year, reflecting more efficient miners deployed, partially offset by higher energy prices in the year. Our high-performance computing business contributed an additional $16.9 million of revenue in 2022, the majority of which is monthly recurring revenue. Cost of revenue for the year was $175.6 million compared to $85 million in the prior year and consists of depreciation and site operating costs. The increased depreciation expense from $23.3 million in 2021 to 93.9 million was driven by the increased number and overall cost of miners deployed during the year and $5.1 million of additional depreciation from the newly acquired HPC business. Site operating costs increased by 20.1 million to 81.8 million from 2021. Within the digital asset mining operation, site operating costs increased by $11.7 million consistent with our expansion of mining fleet and increased power costs. We incurred $8.4 million in operating costs related to the high-performance computing operation, all of which are incremental year over year. In terms of margin, our digital asset mining operation generated profit of $60.4 million versus $108.1 million in the prior year, reflecting the combination of lower Bitcoin prices, and increased electricity costs. General administration costs for the year were $49.8 million compared to $40.3 million in the prior year. The increase was primarily due to the combination of higher personnel costs, insurance premiums, and other costs largely in support of the high-performance computing line of business. We recorded a net loss of $242.8 million for the year, compared to a net loss of $72.7 million in the prior year. In the fourth quarter of 2022, the company conducted impairment testing of its three digital asset mining cash generating units, also known as CGU, Medicine Hat, Drumheller, and North Bay. Due to depressed digital mining economics, specifically the decline in price of Bitcoin throughout periods during the year ended December 31st, 2022, the company recorded an impairment charge on its digital asset mining CGUs. The difference between the pre-impairment carrying value and the recoverable amount of the company's digital asset mining CGUs is $98.6 million. In addition, due to Ethereum merge during the year ended December 31st, 2022, where the Ethereum network changed its consensus mechanism from proof of work to proof of stake, the company recorded an impairment charge on its GPU mining group assets as a result of being unable to find an alternative digital asset to mine with profitable mining economics. The difference between the pre-impairment carrying value and the recoverable amount of the company's CGU mining group of assets is $15.2 million. The combined impairment booked in 4Q 2022 was 113.9 million. As a reminder, this is a non-cash entry. Also impacting the net loss, we recorded a 134.8 million non-cash loss on the reevaluation of our digital assets as a result of a decrease in the price of Bitcoin. We incurred a non-cash gain of $98.8 million on reevaluation of our warrant liability compared to a $114.2 million non-cash loss in 2021. The remainder of the net loss was primarily driven by the lower revenue from digital asset mining operations and higher cost of revenue in 2022. Reflecting the operating results discussed previously, HUD 8 achieved adjusted EBITDA of $32 million for 2022 compared with $96.6 million in the prior year. Our balance sheet remains healthy with minimal debts and a cash balance of 30.5 million as at December 31st, 2022. On August 17th, 2022, we entered into an equity distribution agreement pursuant to which we established an at-the-market equity program with maximum proceeds of up to $200 million U.S., approximately 270.9 million Canadian. As of December 31, 2022, we raised $32.8 million U.S. net proceeds, approximately 44.1 million Canadian under this program. We have now seized issuance under the ATM program given the currently proposed business combination with U.S. BTC. Our Bitcoin holdings are marked at fair value and totaled $203.7 million as at December 31st, 2022, based on 9,086 Bitcoin held in reserve. I will now turn to our Q4 results and provide some additional commentary. Our fourth quarter results for 2022 were impacted by the reduction in Bitcoin prices and our ongoing dispute with Validus related to our North Bay mining facility where we stopped mining in mid-November. We achieved quarterly revenue of $21.8 million compared to $57.9 million in the prior year's quarter. Revenue was impacted by a substantial drop in Bitcoin prices. The average Bitcoin price in the quarter was approximately $24,600. compared to approximately $70,400 in the same quarter a year prior. We mined 698 Bitcoin this quarter, compared to 789 Bitcoin in Q4 2021. The reduction in mined Bitcoin is due to electrical issues at the Drumheller location and a higher than normal level of curtailing due to a sharp increase in power rates. We also generated $4.5 million in revenue from the high performance computing business in the quarter, while we generated $2.4 million in revenue from hosting during the same period in 2021. Cost of revenue was $45.2 million in Q4 2022 versus $27.3 million in Q4 2021. with the increase driven by increased depreciation expense as a result of our expanding our mining fleet. The cost of mining each Bitcoin for Q4 2022 was approximately $20,100 compared with approximately $22,800 in the same period a year ago. General and administrative expenses were $14.8 million for the fourth quarter versus $14.1 million in the prior year period. We had a reduction in sales tax due to lower purchases in Q4 compared to Q4 2021. This was offset by the inclusion of SG&A related to the HPC business. We reported a loss for the fourth quarter of $186.7 million compared to a loss of $99.1 million in the prior year's quarter. As previously discussed, we took an impairment charge of $113.9 million this quarter. In addition, we recorded a $37.2 million non-cash loss on the reevaluation of our digital assets as a result of a decrease in the price of Bitcoin. In Q4 2021, we booked a $114.2 million non-cash loss on the reevaluation of warrant liability. compared to a gain of $4.3 million in the current quarter. Adjusted EBITDA was a loss of $3.9 million versus a positive EBITDA of $35.3 million in the prior year's quarter. For the three months ended December 31st, 2022, adjusted EBITDA was negatively impacted by three factors. Firstly, the shutdown of North Bay mining site impacted our Bitcoin mind in the quarter. Secondly, we saw a sharp increase in power rates at our Drumheller site in the quarter, which resulted in lower profitability, higher than normal levels of curtailing, and fewer Bitcoin mined. Lastly, a further reduction of Bitcoin prices had a negative impact on our revenue and adjusted EBITDA. Our balance sheet remains healthy. We closed the year with $30.5 million in cash. Our debt continues to be relatively low. Our Bitcoin holdings are marked at fair value in total $203.6 million as of December 31st, 2022 with 9,086 of Bitcoin in custody. Thank you for joining us. With that, I will turn the call back to our operator for analyst Q&A.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press the star followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Your first question comes from Mike Coloniz with HC Wainwright. Please go ahead.
Mike Coloniz
Hi, good morning. Thank you for taking my questions. First one for me, I saw that you relocated 7,000 miners from North Bay to Medicine Hat. How long do you guys think it will take to redeploy those miners there? And do you have the sufficient infrastructure and power availability to support the additional capacity?
Jamie Leverton
Yeah, so I'll take that one. We've moved miners really into temporary storage for now while we assess – various options of where we could redeploy them. We don't currently have that much available capacity in Medicine Hat today.
Mike Coloniz
Got it. Got it. And I appreciate the clarity there. And then the next one for me, you know, if we look at post-merge environment here, you'll be operating several different business lines. How should we think about strategic priorities for the balance of 2023 after the transaction closes and how you intend to allocate capital?
Jamie Leverton
Yeah, we're entirely focused on getting this transaction closed, as you can imagine, and working with the combined teams to plan out the integration. So too soon for me to say where we're going to be prioritizing capital allocation.
Mike Coloniz
Got it. Thank you for taking my questions.
spk01
Anytime. Your next question comes from Joseph Vafi with Canaccord. Please go ahead.
Joseph Vafi
Good morning, Joe.
Joe
Sorry, I was on mute. Hey, good morning, Jamie.
Jamie
Good morning, team. Thanks for taking my questions. I know you probably can't talk too much about Validus, but is there at least a timeframe that perhaps we should be looking at where we may get a resolution on that and then have a quick follow-up?
Jamie Leverton
So yeah, to be transparent, we've had some setbacks at our North Bay site, which affected our results in the latter part of the year. an issue that we continue to be addressing. In November 2022, we delivered a notice of event of default to Validus, and as we announced in January 2023, we filed a statement of claim against Validus. In February of 2023, we received a statement of defense and counterclaim from Validus, which denies the majority of the allegations in the statement of claim and brings counterclaims. We believe the counterclaim is meritless, and intend to vigorously defend all the claims in the counterclaim while pursuing the claims set out in our statement of claims. Having said that, these matters are in the early stages of litigation, and we can't make any assessment regarding the likely outcomes with a high degree of certainty. Unfortunately, the current litigation means that the North Bay site is not currently operational, as we've discussed. and miners and electrical equipment has been removed from the site. As I just mentioned to the prior question, we're assessing opportunities to energize the approximately 7,000 miners from North Bay, which represents approximately 680 petahash of capacity. But given this is a legal matter, we cannot comment further at this time, although I appreciate the question, Jill.
Jamie
Sure, absolutely, Jamie. That was a very clear answer, and I'm glad that you had it ready to say. So that's fair enough. Just, you know, if you kind of look out at the landscape now, I mean, it does feel like, you know, mining today is in better shape than it was a few months ago with spot prices being higher and, you and mining equipment, you know, pricing still hasn't responded that much at this point. How do you feel about the supply side of the business, you know, looking into 2023? I know you got a lot of moving parts. You got to, you know, finalize your merger here. But, you know, it does seem like mining rigs are attractively priced right now. I'm not sure how long they will be. And Any thoughts on exploiting this pricing environment right now? Thanks a lot.
Jamie Leverton
No problem. Yeah, we still see a lot of available supply in the market from a minor capacity perspective. The long pole in the tent, as I think we've discussed before, is on the access to power side, but also the power distribution infrastructure. And so I think We're just going to continue to assess the market and again, really, really focused on getting our merger closed. We're incredibly excited about the increased diversification of new huts within the combined entity and the optionality that it'll give us to strategically pivot as this supply environment continues to adjust.
Jamie
Great. Thanks a lot, Jamie.
Jamie Leverton
Of course.
Operator
Anytime, Joe. Your next question comes from Chris Brendler with DA Davidson. Please go ahead.
Chris Brendler
Hi. Thanks, and good morning. Thanks for your questions. I wasn't able to tease out the exact number, but it looks like the gross margins or profit margins in the Bitcoin mining side of the business came in a lot better than I was expecting. And I saw there was, I guess, a full year number around 20,000 Canadian cost per mine. Can you talk about the fourth quarter? And if you can, provide some insight into average power costs. Are they increasing? Are they decreasing? And the outlook for 2023. Thanks.
Jamie Leverton
I'm happy to turn it over to Shana to answer your question.
Bitcoin
Thank you, Jamie. Thank you for the question. So the cost of mining in the fourth quarter of this fiscal year was $20,100. That compares to $22,800 in the prior year. In the fourth quarter this year, we did see an increase in the power costs that we were seeing, particularly in our Drumheller location, as we saw some stark increases in the power rates there. So that impacted our numbers. The offset to that is we did have a lot of month and a half of mining in North Bay. As you know, we've got favorable power rates at the time with Valvidus. At that time, we were mining still. So those two factors kind of led to the $20,100 average cost of mining in the quarter. Okay.
Chris Brendler
And so going forward, you won't have North Bay, but how much does this precipitous drop in natural gas prices help out the outlook for 23?
Bitcoin
You know, I really can't get too much guidance specifically about what the impact will be in 2023. Certainly, you know, we have seen some drop in our power rates in Alberta since the end of the year. So, you know, we'll hope to see that trend continue as we move forward.
Chris Brendler
Okay. James, I'd just like to sort of ask a an industry question that you may or may not be able to comment on. I'm just thinking about Silvergate and what's happening to the traditional banking system in the United States where a lot of crypto related companies have been using Silvergate as their banking partner. Where's how they stand there and what do you think it means for the industry?
Jamie Leverton
Yes, I'm happy to take that one. Obviously, we know Silvergate and the team, although we've never had a direct um working relationship with them so we don't there is there is no direct impact to hut uh in that regard from a broader ecosystem perspective certainly um it's not something that any of us wanted to see it's it's going to have ripple effects as i think we've already seen overnight and but from a hut perspective there is no direct implication okay i'm going to squeeze in one more if you don't mind is um
Chris Brendler
You know, HPC revenue came in almost exactly where I had it, so, you know, solid progress there. But with all the hype around AI in the fourth quarter, and I've heard other companies indicate that, you know, HPC demand is still rising rapidly. Can you give us any color on what you expect in terms of how that business is going to look this year? Sure.
Jamie Leverton
I can't give you any forward-looking guidance, but what I can say is we are very pleased that we did that acquisition. It's been just over a year since we diversified into that area, and then ultimately were able to not just integrate the business, but spent a significant amount of time focusing on upgrading that business. So I think we've timed the market incredibly well. And we continue to be bullish on the space and really thrilled that we're a bit ahead of the curve on that diversification strategy.
Joe
Awesome. Thanks so much.
Jamie Leverton
No problem. Thank you.
Operator
Your next question comes from George Sutton with Craig Hallam. Please go ahead. Good morning, George.
George Sutton
Good morning, Jamie. Also on HPC, just asking the question a different way, can you talk about the key use cases that you currently have relative to the HPC segment?
Jamie Leverton
So as I think you know, when we purchased that business, we purchased it with an existing fleet of enterprise customers. So we've got just under 400 enterprise customers across the five data centers, and they're consuming HPC. A mix of products from us, which includes co-location, cloud, and managed services. And those customers are from very diverse industries. I think really all major industries are represented in our current customer base. And when we kind of look forward and think about the demand profile that we're seeing in um really increase from it's it's we're definitely seeing more more inbound demand from um from artificial intelligence gaming continues to be strong and machine learning is is another area that that's got traction but i would say the the leading use case right now from a demand perspective that we're seeing in an inbound capacity is coming from from ai projects
George Sutton
So, Shen, if I wonder if you could address the Drumheller question this way. You know, your overall cost was $20,100. I'll use $15,000 as an equivalent U.S. dollar amount per Bitcoin. Natural gas prices are down 50% year to date. So my assumption would be that, you know, you should be seeing those fall. And I'm getting to the curtailment question in terms of, trying to understand when you ostensibly would curtail. Is it simply at the production cost number, or are there additional considerations relative to that?
Bitcoin
So first of all, I would just kind of highlight that in Drumheller specifically, we are investigating some electrical issues at our Drumheller site, which have reduced our overall production there. We're in the early stages of exploring some preliminary options to mitigate the challenges and hope we have a more definitive plan ready in due course. So it's a bit more complicated in Drumheller in that you're right that we're seeing energy prices drop. But we are seeing an impact on production right now due to these electrical issues. So a bit more is going into play into the first quarter as we look into these issues that we're having in that site specifically. It's a bit more complicated than just energy price reduction.
George Sutton
I assume that was the case. And then finally, is there any update you can give us on the closing process in terms of things that you are awaiting in terms of stipulations or anything that we need to be aware of in any sense of the timing of the close?
Joseph Vafi
Great question, so I'll take that.
Jamie Leverton
The closing of the proposed merger of equals with USBDC continues to be a top priority as we've discussed, and we're happy to share that we have received a no action letter from the Competition Bureau of Canada in respect of the proposed merger. The letter confirms that the Competition Bureau does not at this time intend to challenge the proposed transaction under the merger provisions in the Competition Act. This is a very positive development as we continue to work to obtain all necessary regulatory shareholder exchange and other approvals required to close the transaction. So that's as much of an update as I've got for you today.
George Sutton
That was impressive off the top of your head.
Joseph Vafi
You know me. I'm always prepared. Your next question comes from Bill Papanastasiu.
Operator
from CIFL. Please go ahead.
Bitcoin
Hi, good morning, Jamie. Thank you for taking my questions. I just want to first touch on the high-performance computing business. You know, we've continued to see upward movements in margin performance for the business unit, and, you know, they now sit over 50%. Just wanting to hopefully get some more color on how we should be thinking about margins in the long term and how the team is strategizing on what I believe is still excess capacity at some of the TerraGo sites.
Joseph Vafi
Yeah, I'm struggling how to answer that question.
Jamie Leverton
We've done a lot of work, as I've talked about, and I went into some of the specifics already on the call this morning. We've got an incredible sales team in place that's actively driving expansion of the pipeline. But I don't know how to get into more specific details with you. We do have some expansion capabilities remaining. In a few of the sites, not all five are expandable, but we'll continue to look to expand as required when the capacity that we have built out already is filled up. So it's really a data center by data center question as opposed to a fleet demand question.
Bitcoin
Right. Great. Thank you. Yeah, I appreciate the color and I understand that, you know, the data centers will be specifically focused to particular regions. So that makes sense. Yeah. Thank you. Exactly. Yep. So shifting gears to the mining space, you know, the company was able to see, you know, fairly strong gross mining margins just given where break-even electricity costs were and, you know, assumed power costs may be for these sites and It appears that things are trending in a positive direction in 2023, just based on that same analysis. Given the relationships that you guys have and just your take on the space with manufacturers, how do you see further consolidation in this space as we approach the halving? Do you see an improvement in overall mining economics? What's your take on 2023?
Jamie Leverton
Yeah, I mean, I wish I had a crystal ball. I think we've all been surprised by the continued growth of the hash rate and difficulty levels despite relatively sideways trading of the Bitcoin price in general. Obviously, a nice development that we've seen natural gas prices come down and as Shana mentioned, hopeful that that will continue. But it's really, really difficult for us to make a prediction on ultimately where hash rate and difficulty are going to go as well as Bitcoin price. So what we've always tried to do as a business and a leadership team is make sure that we have optionality built into the system, which for us only increases when we get the merger closed with USDTC. And we really believe in the diversified business model that we've kicked off and ultimately, again, expands with this merger because we really cannot predict where Bitcoin price is going to go or hash rate in the short term for sure. And keeping in mind, we're right about a year away from the halving, which has its own unique implications, as I think everyone's aware.
Bitcoin
Great. I guess it helps to have that huge Bitcoin treasury too as we approach the halving and hopefully get the upside there. Thank you for taking my questions.
Operator
My pleasure.
Jamie Leverton
Anytime.
Operator
There are no further questions at this time. Please proceed.
Jamie Leverton
Okay. Thank you again, everybody, for joining today and for your continued support. We truly appreciate it and we look forward to an exciting 2023 ahead. Have a great day, everybody.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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