Hut 8 Corp.

Good morning, and welcome to HUD-8's Q1 2024 Financial Results Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded, and a transcript will be available on HUD-8's website. In addition to the press release issued earlier today, you can find HUD-8's quarterly report on Form 10-Q on the company's website at www.hud8.com, under the company's EDGAR profile at www.sec.com, and under the company's CDAR Plus profile at www.hud8.com. Unless otherwise noted, all amounts referred to during this call are denominated in U.S. dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable securities laws regarding HUD-8 court and its subsidiaries. The statements may 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 factors discussed in HUD-8's for the three months ended March 31, 2024, and Form 10-K for the year ended December 31, 2023, as well as the company's other continuous disclosure documents. 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-GAAP measures that are not separately defined under GAAP, such as adjusted EBITDA. Management believes that non-GAAP measures taken in conjunction with GAAP financial measures provides useful information for both management and investors. Reconciliations between GAAP and non-GAAP results are presented in the tables accompanying the press release, which can be viewed on HUD-AID's website. I would now like to turn the call over to Asher Janute, CEO of HUD-AID.

Thank you, and good morning, everyone. It has been a privilege to lead HUD-AID for the last three months. When I became CEO in February, I launched a comprehensive restructuring program designed to bring the operating rigor of U.S. Bitcoin Corp to the new HUD-8. Since then, I have methodically and meticulously drilled down into every facet of the business in an effort to drive efficiencies, increase profitability, and set the business on a new trajectory. We have centered HUD-8 on operating excellence and bottom line economics. making the difficult and necessary decisions to position the business for long-term success. While strengthening this foundation is an ongoing commitment, I'd like to share some highlights from the first quarter. In our digital assets mining or self-mining segment, we streamline and optimize our operations by shutting down our underperforming Drumheller site, retiring inefficient machines, initiating the relocation of our fleet from hosted to owned facilities, and beginning the implementation of our proprietary energy procurement software across our sites. In our Managed Services segment, we signed a four-year partnership with Ionic Digital and began managing the construction and operations of its West Texas facilities. And in our High Performance Computing, or HPC, segment, we completed our initial review of the business and executed initiatives to strengthen financial performance, which included sunsetting unprofitable products and reducing operating expenses. At an organizational level, we have restructured our leadership team, eliminated redundant and underperforming roles, and initiated an ongoing budget review process with the goal of further reducing our overhead expenses. Going forward, we will remain lean and focused on areas where we can build and sustain competitive moats, allocating resources thoughtfully while investing aggressively to build best-in-class talent, technology, and infrastructure design, construction, and operating capabilities. With that, I'll turn to our results for the quarter, which reflect the combined company's performance for the full period. Note that the results for the comparison period reflect U.S. Bitcoin Corp's performance as a standalone business prior to the merger. Our revenue for the quarter was $51.7 million, up 231% from the prior year. Nearly 25% of this revenue came from our managed services and HPC segments, both of which generate recurring fiat revenue streams that reduce the downside risk of Bitcoin exposure in our mining business. Net income attributable to Hudit for the quarter was $250.9 million versus $17.3 million in the prior year. And adjusted EBITDA was $297 million versus $11.1 million in the prior year. Like many of our peers, we benefited from the early adoption of the new FASB fair value accounting rules. Our average cost of mining Bitcoin excluding hosted facilities was $20,419. Our average cost of mining Bitcoin including hosted facilities was $24,594. Importantly, as of March 31st, we have ended all self-mining operations at hosted facilities and now only mine at our own facility, giving us a higher level of control over our fleet and operating costs moving forward. The increase in our cost to mine this period was driven primarily by higher network difficulty, which nearly doubled year over year. Driving down our all-in cost to mine through both direct cost reduction and revenue diversification remains a priority. Analysis from Counter Fitzgerald's latest cost per coin report validates our dual approach. In the fourth quarter of 2023, Cantor estimated that we had the third lowest all-in cost to mine among the 14 miners analyzed. As I shared last quarter, we are focused on two pillars of growth, strengthening and growing our self-mining business and continuing to diversify our broader business. Since the close of the quarter, we have made significant headway on both pillars. In our digital assets mining segment, we brought 63 megawatts of new capacity online after energizing our Salt Creek site and completing the relocation of our fleet to owned facilities. We did so just over three months after breaking the drought and an expected all-in cost of less than $275,000 per megawatt. Our projections continue to indicate that our cost of mine at the site will be 30% lower than our cost of mine at former hosted facilities at Kearney and Granbury. In our managed services segment, we completed the initial energization of IONIQ's 215 megawatt Cedarvale site. We also began the transition of operating responsibilities at four additional West Texas sites owned by IONIQ totaling 87 megawatts and plan on assuming full operating responsibility of the site in the third quarter. And after completing transition-related activities at Kearney and Granbury, we're now entitled to an early termination fee of $13.5 million from the new owner of the site. Lastly, in our HVAC segment, we launched our new AI vertical under GPU as a Service Model. We have executed the purchase order of our first cluster of 1,000 NVIDIA H100 GPUs and secured a customer agreement with a venture-backed AI cloud platform, which provides for fixed infrastructure payments plus revenue sharing. With engineering efforts now well underway, I'm thrilled to share that we expect this cluster to begin generating revenue in the second half of the year at a forecasted annual run rate of approximately $20 million. Our conviction is that building lasting shareholder value requires disciplined capital allocation. To that end, we continue to maintain a robust, liquid balance sheet that enables us to explore creative financing approaches and prioritize non-diluted sources of funding whenever possible. We close the quarter with 9,102 Bitcoin in our treasury, representing a market value of approximately $650 million as of March 31st. Speaking of growth, I'd like to share our long-term vision and how it informs our strategy today. Then I'll detail the investments we are making as we prepare to scale our platform in the coming quarters. Simply put, we are committed to building a company that endures for decades to come. Today, we believe Bitcoin mining generates the highest return on investment into large-scale stranded load interconnection assets. However, we also see a massive opportunity in the broader energy infrastructure sector as demand grows across new use cases like AI. While we remain intently focused on and invested in Bitcoin mining, our vision is to build a platform that can address new technologies and energy use cases with the largest market opportunity and best return profile both today and in the future. Achieving this vision requires a portfolio of assets that is competitive not only in mining, but also in other verticals. This means we're incredibly selective in the opportunities we pursue and will not chase short-lived stock appreciation by developing sites that are not competitive in the long term. We will continue to underwrite investments with rigor, maintain a high hurdle rate for return on invested capital, and execute decisively on opportunities that we believe position us for enduring market leadership. We are confident in this approach because it has enabled us to build a robust pipeline of expansion capacity of more than 1,100 megawatts under exclusivity as of the end of the quarter. In an environment where sourcing new capacity is extremely competitive due to the growing shortage of load interconnection assets, we believe our ability to source these opportunities is a direct reflection of the depth of our energy expertise and the differentiated value proposition we are bringing to our partners. Historically, Bitcoin miners have taken off-the-shelf retail tariffs and commercial power supply agreements to secure load capacity. Our strategy is different. We identify areas where Bitcoin mining can solve underlying market inefficiencies for energy infrastructure partners and the system as a whole. We then work with counterparties to design highly customized structures that enable us to extract value for solving these inefficiencies. These opportunities are primarily greenfield development projects. where we can bring our market leading infrastructure development capabilities to the table. We believe our track record of building sites quickly and cost effectively without sacrificing quality has differentiated us from our peers and enabled us to secure a large pipeline of greenfield opportunities. Ultimately, the implication is that the opportunities in our pipeline are complex, which results in long lead times, the involvement of many stakeholders, and intensive regulatory processes. Given the confidential nature of these discussions, we cannot share more detail today. However, we understand the importance of providing an outlook on growth, and we look forward to sharing more when we have committed projects to announce. Building a sustainable competitive advantage in energy requires a deep, nuanced understanding of the energy market. Our corporate development team, led by a founding member of Nextera's former digital infrastructure practice, has more than 60 years of collective experience across leading names in energy, such as Env Energy, Acciona, J.P. Morgan, Citigroup Energy, and GE Capital. Our strategy is also shaped by the members of our board of directors, who leverage their deep experience in relevant industries to help guide our plans for future growth. Mayo Shattuck III, for example, is a former chairman of Exelon, the largest electric utility company in the US, and the former chairman, president, and CEO of Constellation Energy, the largest producer of carbon-free energy in the US. Stanley O'Neill, as another example, is the former CEO of Merrill Lynch and a director of Clearway Energy, one of the largest renewable energy producers in the US. Both Mayo and Stan were early investors in U.S. Bitcoin Corp., and along with the rest of our talented board, have a vested interest in the success of our business. As I shared earlier, we have begun making strategic investments to prepare to scale our platform, specifically in areas where we can build and sustain competitive moats. The first area of investment is the expansion of our internal development team. Maintaining control over the development of our sites enables us to control bill timelines, costs, and quality. We continuously apply the lessons we have learned in operating a portfolio of nearly 27 exahash with the goal of optimizing the design and performance of our assets while maintaining a lean cost structure. We believe the speed, cost effectiveness, and quality of our site development is a key competitive advantage as potential partners evaluate HUD-AIDS. To that end, we aim to more than double the size of our engineering, procurement, and construction organization from 8 to 20 in the coming months as we prepare to build new sites. Given the scale of our pipeline, we believe the potential for cost savings under this strategy is significant. Even with the increase in headcount we are targeting, our internal development team is expected to cost a fraction of the general contractor fees required to build a pipeline of this scale. Ultimately, our goal is to sharpen the competitive edge we have created in infrastructure development, driving continued access to what we believe are the most attractive growth opportunities in the market. The second area of investment is technology. Having built a portfolio of 1.2 gigawatts under management, as of the end of April, we have learned the value of scalable data-driven operating processes. Software automation is a core element of our operating philosophy because it enables us to scale our footprint efficiently while maintaining a premium on asset management and visibility. As we prepare for the significant growth of our platform across new markets and use cases, We are doubling down on our commitment to build and deploy best-in-class operating technology to optimize our operations. Our investments will fund the continued development of a sophisticated, modular software suite with robust product management and data science functions. Without question, we believe our strategy will position us for market leadership, first in Bitcoin mining, then in the broader energy infrastructure sector. With our commitment to discipline capital allocation, focus on non-diluted sources of funding, and exceptional team and board, we are more confident than ever that we are building a business that endures for generations and delivers lasting shareholder value. With that, I'll turn it over to Shannon.

Thank you, Asher. Before we review the financial results, I wanted to remind you that U.S. Bitcoin Corp was deemed the accounting acquirer in the merger, and as a result, the historical figures in our income statement for Q1 2023 reflect U.S. Bitcoin's standalone performance. Results for Q1 2024, however, reflect the performance of the combined company. With respect to our balance sheet, Q1 2024 will be compared to year-end 2023, both of which reflect the combined company's performance. Turning now to our results, we generated revenue of $51.7 million in the current period versus $15.6 million in the prior year period, which represents a $36.1 million increase. The year-over-year increase was driven by growth in our digital assets mining and managed services segments. Digital assets mining revenue was $30.4 million for the current period versus $7.6 million for the prior year period. Revenue growth was due to an increase in Bitcoin mined and an appreciation of the average price for Bitcoin mined from approximately $23,400 during the prior year period to approximately $51,300 during the current quarter. Managed services revenue was $9.2 million in the current period versus $5.1 million in the prior year period. and includes $7.8 million from fees and $1.4 million in cost reimbursement, versus $2.9 million from fees and $2.6 million in cost reimbursement in the prior year period. The growth in managed services revenue is mainly due to our managed services agreement with Ionic Digital, which was signed at the end of January 2024. The current quarter includes two months of revenue from this new agreement. High-performance computing, co-location, and cloud revenue was $3.3 million for the current period. The revenue for this segment relates to the legacy HUD-8 business, which was acquired as part of the merger with HUD-8 Mining Corp. And as a result, the prior period includes no revenue from this segment. Other revenue was $8.8 million for the current period versus $2.5 million in the prior year period. Current period other revenue consists of hosting services revenue, including cost reimbursement of $4.4 million, equipment sales of $3.7 million, and $0.7 million of power revenues related to the newly acquired power plants in Ontario. Prior period other revenue of $2.5 million was driven by the recognition of deferred revenue on a hosting contract that was terminated at the Bravo site formerly owned by the company. I'll now review our costs and expenses. Cost of revenue for digital assets mining for Q1 2024 was $16.6 million versus $6.1 million in the same prior year period. The increase of $10.5 million was driven primarily by an increase in electricity and hosting costs from additional miners online, including miners acquired as part of the business combination agreement and nearly three months of hosted self-mining activity at Kearney and Granbury sites versus less than one month of activity in the prior year period. Cost of revenues for managed services for the current period was $2.8 million versus $2.4 million in the prior year period. The cost of revenue primarily consists of reimbursable payroll and other site operating costs. The $0.4 million increase was driven by a $0.8 million increase in reimbursable payroll costs, offset by a $0.5 million decrease in other site operating costs. Managed services gross margins were 70% in the current period versus 57% in the prior year period. Cost of revenues for high-performance computing, co-location, and cloud for the current period was $2.6 million and nil in the prior year period. Finally, cost of revenue for other for the three months ended March 31, 2024, was $6.2 million and consisted primarily of $3.3 million in cost of hosting services revenue, $2 million in cost of equipment sold and $0.9 million in the cost of power revenues. Cost of revenue for other for the three months ended March 31st, 2023 was less than $0.1 million and consisted primarily of cost of hosting services revenue. Depreciation and amortization expense was $11.5 million for the current period versus $2.9 million for the prior year period. The increase was primarily driven by property and equipment acquired as part of the merger and an increase in the number of miners at our U.S. site. Additionally, during the quarter ended March 31st, 2024, management performed a review of the operating efficiency and profitability of its mining fleet, which resulted in a change in the expected useful life of some of its mining equipment. The result was an increase in depreciation expense of $2.7 million for the three months ended March 31st, 2024. General and administrative expenses were $20 million for the current period versus $6.4 million for the prior year period. The increase in SG&A was driven by a $3.4 million increase in stock-based compensation, $2.9 million in restructuring costs due to our optimization initiative during the quarter, $1.4 million in expenses related to the Far North transaction, a $2.7 million increase in salary and benefits due to the headcount added as part of the merger and additional team members brought on to support the growth of the business, and a $3.2 million increase in other SG&A acquired as part of the merger. Gains on digital assets were $274.6 million for the current period and nil for the prior year period. The increase was due to the adoption of the FASB fair value accounting rule, which requires us to recognize our digital assets at fair value with changes recognized in net income during the reporting period. The price of Bitcoin on December 31st, 2023 was $42,288 versus $71,289 on March 31st, 2024, such that the increase in Bitcoin prices during the quarter resulted in the gain of $274.6 million. Other expenses total $4.2 million for the current period versus other income of $19.4 million for the prior year period. The decrease of $23.6 million was primarily due to gain on debt extinguishment in the prior period. This was partially offset by an increase in equity and earnings of an unconsolidated joint venture of $1.2 million during the current period versus a prior year period. Loss from discontinued operations was $7.6 million in the current period compared to nil in the prior year period. On March 6, 2024, we announced the closure of our Drumheller site in Alberta, Canada, in connection with our restructuring and optimization initiative designed to strengthen financial performance. Of the $7.6 million loss, the impairment of long-term assets contributed $6.1 million, and the remaining $1.5 million was from other operational activities. Next, I will turn to net income. Net income attributable to HUD 8 Corp for the current period was $250.9 million versus $17.3 million in the prior year period. We previously opted for early adoption of the new FASB fair value accounting rules, which resulted in a gain of $274.6 million for the current period. Excluding the reevaluation of our Bitcoin holdings to fair value, we would have recorded a net loss of $23.7 million. This reflects the impact of various one-time expenses incurred as part of our restructuring program, including $7.6 million related to the shutdown of Drumheller, $2.9 million in restructuring charges, and a $2.7 million charge related to the retirement of inefficient miners. The prior year period net income attributable to HUD-AIDS Corp of $17.3 million included a gain from debt extinguishment of $23.7 million. Turning now to adjusted EBITDA. Adjusted EBITDA for the period was $297 million versus $11.1 million in the prior year period, an improvement of $285.8 million. Including the gain from fair valuing our Bitcoin stack, adjusted EBITDA would have been $22.4 million for the current period. The improvement versus prior year period is due to higher margins in digital assets mining and managed services segments. Finally, I'll discuss our balance sheet. Our balance sheet remains healthy. We closed the quarter with $11.5 million in cash. In Q1 2024, We paid for our substation in Culberson County, began building our now fully energized 63 megawatt Salt Creek site, and made our first payment related to our investments in Ionic Digital. These activities were funded with cash on hand. Our Bitcoin holdings are marked at fair value and totaled $648.9 million as at March 31st, 2024, based on 9,102 Bitcoin held in reserve. Of this total, 7,230 Bitcoin valued at $515.4 million remained unencumbered at the end of the quarter. Our total debt was $177.6 million as at March 31st, 2024. During the quarter, we took an additional draw of $15 million from our Coinbase loan, bringing our total amount outstanding to $64.8 million. We also paid off a third party note for $11.5 million during the period. Of our $177.6 million of total debt outstanding, $112.8 million is project level debt to be repaid based on a suite of cash generated at the project level with no minimum monthly repayment. Lastly, our Q1 2024 balance sheet includes the assets and liabilities related to the newly acquired validus assets. We continue to explore a range of strategic options for these assets. As Asher shared earlier, our results this quarter reflect the impact of an extensive restructuring program designed to set a new standard of operating rigor for HUD-8. While we continue to identify opportunities to drive efficiency and reduce costs across the business, we believe we have taken meaningful steps towards achieving profitable long-term growth. As we turn our focus to executing on our pipeline of opportunities, We remain committed to maintaining a strong, liquid balance sheet, prioritizing non-diluted sources of funding, and allocating capital with an unwavering focus on maximizing shareholder value. That concludes my commentary. I will turn the call back to our operator.