Hut 8 Corp.

Good morning, and welcome to HUD-8 Q3 2024 Financial Results Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note that 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.cdarplus.ca. Unless noted otherwise, all accounts referred to during the call are denominated in U.S. dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable security laws regarding HUD-8 Corp 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 risk uncertainties include but are not limited to factors discussed in HUD-8's Form 10-Q for the three and nine months ended September 30 of 2024 and Form 10-K for the year ended December 31, 2023, as well as the company's other continuous disclosures documents, except as if required by applicable law. HUD-8 undertakes no obligation to publicly update or review any forelooking 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 provide 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-8's website. I would now like to turn the call over to Asher Janute, CEO of HUD-8.

Good morning, everyone, and welcome to our third quarter earnings call.

The digital infrastructure industry is on the brink of transformation. As AI drives unprecedented demand for computing scale and density, we are witnessing a fundamental re-evaluation of every link in the data center development value chain, from power sourcing to infrastructure design and construction. As this transformation unfolds, we believe we are well positioned to capitalize on these secular tailwinds. Our vision is to build a platform that integrates energy and digital infrastructure at scale, transforming how energy capacity is secured and deployed to power the technologies of today and tomorrow. In the near term, we are focusing on capitalizing on the significant demand for AI computing capacity with a distinct power-first approach. Looking ahead, we see an opportunity to build a flexible energy infrastructure platform that evolves alongside breakthrough technologies for decades to come. Before discussing how we are positioning the business to achieve these objectives, I'll share some highlights from the quarter. As a reminder, the current period reflects the performance of the combined company, while the comparison period reflects U.S. Bitcoin Corp's performance as a standalone business prior to the merger. Turning to page three, our revenue grew 102% year-over-year to $43.7 million through the three months ended September 30th, 2024. Looking ahead, we anticipate continued top-line growth driven by two initiatives from the quarter, a 15-exahash co-location agreement for ASIC compute at our Vegas site and the launch of our GPU-as-a-service business. Together, these initiatives are expected to generate nine figures of annualized revenue. Net income for the quarter was $0.9 million versus a loss of $4.4 million in the prior year. And adjusted EBITDA was $5.6 million versus $11.5 million in the prior year. Both net income and adjusted EBITDA reflect a loss on digital assets of $1.6 million and a gain on debt extinguishment of $6 million. Our ongoing focus on operating rigor and cost management continues to drive improvements to unit economics. Despite rising difficulty, declining hash price, and older generation machines in our self-lining business, for example, we continue to prioritize the most challenging levers to optimize our operation and drive costs down. These initiatives have led to a nearly 28% reduction in our average cost of energy per kilowatt hour over the past two quarters. Turning to page four, we executed three major strategic initiatives this quarter. First was our partnership and co-location agreement with Bitmain to commercialize a rack-ready liquid-cooled ASIC miner through a 15-exahash co-location deployment at our Tier 1 Vega data center, which will be capable of cooling server density up to 200 kilowatts per rack. Second was a launch of our GPU as a service business, High Rise AI. And third was a conversion of the outstanding balance of our Anchorage loan to equity. After the quarter, we also signed a purchase agreement with Bitmain to upgrade 111 megawatts of self-mining capacity across our existing fleet in the first quarter of 2025. Let's discuss how these initiatives advance our ambition to build a next generation energy infrastructure platform. We start at the foundation of our platform in the power layer. Historically, data center operators often treated power as an afterthought in developing digital infrastructure. We are taking a different approach, putting the acquisition of high quality power assets at the forefront of digital infrastructure development. Our playbook is straightforward. we seek to secure as many megawatts as possible, assign each megawatt to the highest return use case, and maximize yield over time. Building tier one data centers for Bitcoin mining ASIC compute is central to this approach because we believe it enables us to monetize power assets rapidly and cost effectively to generate strong unlevered returns, even when traditional tier three data center workloads are not immediately viable due to factors like time to energization, land size, load capacity dynamics, or fiber access. In other words, developing tier one data centers for Bitcoin mining is a tool that allows us to scale our power layer and maximize load capacity secured for the long term. In practice, the advantages of this model are exemplified by our 205 megawatt Vega project. When Vega came across our desk, its potential was clear. A large scale behind the meter site with an existing substation and immediate access to some of the lowest power prices in North America. However, a contractual obligation to begin consuming power at the substation by the second quarter of 2025 impose a tight timeline to commercialize and develop a tier three data center for AI compute at the outset. Demand for tier three data centers is robust, but commercialization timelines are typically longer compared to the rapid deployment possible for Tier 1 data centers for Bitcoin mining. Our underwriting, however, supported acquisition and rapid development of the site for a Tier 1 data center to power Bitcoin mining ASIC compute as the initial use case. Today, we are on track to energize Vega and start generating approximately $135 million in annualized revenue at the site in the second quarter of 2025. less than a year after acquiring it, we retain the flexibility to repurpose the site for other use cases like AI to optimize long-term value. We continue to target high potential assets like Vega, prioritizing both speed and quality in developing our portfolio. Increasingly, we are focusing on front of the meter opportunities to meet rising demand from AI hyperscalers and other strategic partners. Front-of-the-meter assets can provide crucial benefits for AI data center development projects, including full ownership of interconnections and robust substation infrastructure designs. Turning to page five, we've applied our power-first approach to expand our development pipeline significantly since our last update by more than two gigawatts of assets under diligence and 500 megawatts in assets under exclusivity. As of October 31st, we were actively evaluating more than six gigawatts of expansion capacity with more than 1.5 gigawatts under exclusivity. Three projects from this pipeline are particularly promising for large-scale AI data center projects. Collectively, they represent over 430 megawatts of capacity with power delivery expected to be available before the end of 2025. We are actively exploring various commercial structures for these projects across a range of customer profiles. Next, I'll turn to the digital infrastructure layer, where we design, build, and monetize purpose-built facilities to maximize returns on our power assets. Our goal is to develop a platform that meets current demands while evolving alongside new technologies and markets over the coming decades. This requires us to design for where the industry is headed, not just where it stands today. Our framework for digital infrastructure development uses a tiered classification system based on redundancy and resiliency levels, rather than specific workloads like ASIC or GPU compute. This application agnostic approach allows us to innovate and deliver scalable value engineered solutions that support a range of current and future workloads. Today, we focus on designing, building, and operating data centers at both ends of the spectrum. At one end are Tier 3 data centers for GPU compute, powering AI workloads, which require significant capital investment and 5.9 reliability with N plus 1 redundancy for mission-critical applications. At the other end are Tier 1 data centers for ASIC compute, powering Bitcoin mining workloads, where lower capital requirements and minimal redundancy requirements make low operating costs and rapid deployment a priority. The cost difference in data center development between these extremes is substantial. Bitcoin mining ASIC workloads can be deployed in tier one data centers that cost less than $400,000 per megawatt to develop. While mission critical AI GPU workloads require tier three data centers that cost approximately $10 million per megawatt. Looking forward, however, we see a new paradigm emerging between these two extremes. Let's turn once more to our Vega project, where we are pioneering a new Tier 1 data center form factor that narrows the gap between Tier 1 and Tier 3 infrastructure. Historically, Tier 1 data centers designed for Bitcoin mining relied on shelving and forced air cooling, limiting them to ASIC compute. With our Vega project, we're disrupting this paradigm. The custom infrastructure we developed and engineered in-house for the project features a high-density rack, direct liquid-to-chip cooling, and HVAC-supported air cooling. Inspired by Tier 3 data center architecture, this design will enable Vega to support rack-based deployments of ASIC compute at densities of 180 kilowatts per rack. surpassing even the 120 kilowatt density required by NVIDIA's latest Blackwell GPUs. And despite these innovations, we expect to build Vega for less than $400,000 per megawatt, a fraction of traditional data center costs. Our partnership with Bitmain to launch the U3S21EXPH was integral to the development of this new tier one data center form factor. This will be the first ASIC miner mass commercialized by Bitmain to feature direct liquid-to-chip cooling in a U form factor, allowing for higher density deployment of ASIC compute in the rack-based architecture we developed for Vega. Turning now to page six. With construction progressing rapidly, we expect to energize Vega in the first half of 2025. The project will be an early proving ground for our next generation rack-based Tier 1 data center design, where we can demonstrate our ability to commercialize innovative data center architecture with the speed and capital efficiency that have historically set us apart in Bitcoin mining. Thoughtful commercialization also plays an important role in maximizing returns in our digital infrastructure layer. Our co-location agreement with Bitmain at Vega exemplifies a balanced, risk-adjusted approach to growth. structured to offer the benefits of a traditional data center co-location deal, but with a shorter 18-month term, this agreement is expected to generate $135 million in annualized hosting revenue upon full rent, supported by a $30 million payment credited towards a fixed purchase price option for the 15 exahash ASIC deployments. With recent catalysts for Bitcoin price appreciation, We believe this structure positions us well to capitalize on the future upside while mitigating risk on the downside. More broadly, we apply a use case agnostic approach to monetizing our digital infrastructure, focusing on return profiles and risk-adjusted economics. When signing a tenant lease to co-locate a customer at a data center like Vega, for example, the primary factors we evaluate are normalized revenue relative to investments, contract duration, counterparty credit profile, and cost of capital, not whether the tenant operates ASICs or GPUs. A publicly traded miner or a major ASIC manufacturer with a strong balance sheet and stable cash flows, for example, might offer a more secure profile than a Series A funded AI startup. Finally, let's turn to the compute layer, where we invest strategically in application-specific hardware like ASICs and GPUs to capture the lucrative economics offered by emerging technologies like Bitcoin mining and AI compute. Our approach to scaling at this layer is fundamentally similar across applications given shared investment risk dynamics. Revenue in both ASIC and GPU compute markets is closely tied to supply demand volatility due to rapidly evolving technologies. For ASICs, revenue is driven by hash price. reflecting the market rate for computing power in Bitcoin mining. For GPUs, on-demand revenue is derived from compute markets where real-time demand determines pricing. On page seven, we outline the impact of our recently announced A6 fleet upgrade. Last week, we announced the purchase of more than 31,000 Bitmain S21 Antminer units to upgrade 111 megawatts of self-mining capacity across our existing fleet in the first quarter of 2025. We expect this initial upgrade to increase our self-mining hash rate by 66% from 5.6 to approximately 9.3 exahash per second, while improving our fleet efficiency by 37% from 31.7 to 19.9 joules per terahash. At a hash price of 4.5 cents, this upgrade could drive up to 18 percentage points of gross margin expansion in our self-mining segments. Our selection of the S21 Plus was guided by rigorous return-driven analysis. We evaluated ASIC models ranging in efficiency from 13.5 to 17 joules per terahash and determined that the S21 Plus would deliver the fastest payback at any hash price above $0.02. In choosing the S21 Plus, we are optimizing for financial metrics like capital efficiency and payback rather than chasing less meaningful metrics such as hash rate and fleet efficiency. More broadly, our ability to execute across a wide range of hash price scenarios and machine efficiencies is rooted in operating rigor and proprietary technology. In recent quarters, we've demonstrated our ability to manage the most operationally demanding drivers of profitability, optimizing energy costs and enhancing unit economics. Building on this foundation, our initial fleet upgrade now represents a straightforward lever to drive future growth and bottom line impact. Our purchase option for 15 exahash of hosted miners at Vega provides further potential for disciplined growth. Taking into account the fleet upgrade and assuming we fully exercise the option, we have a path to approximately 24 exahash per second with an average fleet efficiency of 15.7 joules per terahash as early as the second quarter of 2025. At a hash price of 4.5 cents, this could drive up to seven additional percentage points of gross margin expansion. As for AI compute, our GPU as a service vertical is now fully online and generating revenue under the high-rise AI brand. Our customer agreement provides for fixed infrastructure payments and a revenue share that will enable us to capture market demand upside. Initially incubated with balance sheet capital, the business unit is now progressing initiatives like capital raising and development of a cloud product. We recognize that businesses in both the ASIC and GPU compute markets are highly subject to supply-demand volatility, which can be partially offset by implementing hedging strategies such as forward cash price derivative markets for ASIC compute and long-term customer agreements that lock in hourly pricing for GPU compute. While we continue to explore strategies to mitigate risk, we believe our continued focus on operating rigor, proprietary technology, and structured dealmaking is central to our ability to capture the upside of that volatility while protecting against the downside risk. I'll conclude my remarks today by taking a step back and reaffirming our commitment to disciplined, fundamentals-driven growth. As we scale aggressively across each layer of our platform, our focus remains on building a robust balance sheet and maintaining high standards for capital allocation. We believe this discipline, combined with a strategy rooted in innovation, thoughtful commercialization, and operating rigor, positions us not only to deliver outsized value in the near term, but also to build an enduring generational business at the intersection of energy and technology. With that, I'll turn it over to Sean to discuss the impact of our strategy on our financial results in detail.