Hut 8 Corp. (HUT) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the Q1, 2020, Earnings Call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct question-and- answer session. [Operator Instructions]. Please note that this conference is being recorded. I'll now turn the call over to Jimmy Vaiopoulos. You may begin.

Thank you. This is Jimmy Vaiopoulos, interim-CEO of Hut 8. Hope everyone is staying safe. We'll be assessing our Q1, 2020 results today, which also falls on a special day as we'll be witnessing the halving today as well. Before continuing, I'd like to remind everyone that all amounts in the financial statements and discussed on this call are in Canadian dollars unless stated otherwise. We've made a lot of progress in Q1, 2020. First, we refinanced our debt with [this period] by increasing our loan facility with Genesis Global Capital, which decreased our interest rate by 2%. Second, we renegotiated our master agreements with Bitfury as well, which lowered our operating costs significantly, and allows Hut 8 autonomy to purchase equipment from any other bitcoin mining supplier. Hut 8 has also been actively testing new equipment on site, and we're excited about their performance and compatibility with our existing infrastructure as we work towards an upgrade. Regarding the financial performance, we had a successful first two and a half months of bitcoin mining this quarter. But that changed quickly on March 12, when the bitcoin price collapsed by 37%, along with the S&P 500 and DOW also realizing a historic nearly 10% drop as well. Hut 8 was very quick to act at this time and we limited our production to limit any losses as this result changing very quickly. For the quarter Hut 8 mined 1,116 bitcoin resulting in revenue generation of CAD 12.7 million, an increase of 5% from the same period of the prior year. Expenses for Q1, 2020 were $692,000 excluding share based compensation compared with Q1, 2019 of $747,000. Hut 8 continues to focus on being a low cost miner by optimizing our operations. Hut 8 recognized the share-based compensation gain in this quarter of 708,000 as a result of the forfeiture of Restricted Share Units grant by the outgoing CEO. For Q1, 2020, Hut 8 had a revaluation loss of 1.3 million from adjusting the value of the digital assets held in inventory to the market value on the reporting date. This loss was from the decrease in the bitcoin price from $7,194 on December 31, 2019, to the March 31, 2020 price of $6,439. We've seen the bitcoin price subsequent to Q1, 2020 has -- since recovered significantly. Hut 8 recognized negative adjusted EBITDA of 558,000 for the quarter compared to the same period of the prior year, adjusted EBITDA of 1.3 million. As adjust -- as mentioned, the adjusted EBITDA losses from Q1, 2020 mostly came from the last two weeks of the quarter when the bitcoin price collapses mentioned. Although our revenue margins and adjusted EBITDA were negatively affected by this event, we avoided selling any bitcoin at the bottom level prices, and our lowest price sold was above 50% from the bottom. This was reflected in the $914,000 gain on the revaluation of bitcoin sold. Subsequent to Q1, 2020, we were happy to see a quick return of the bitcoin price. And it is during times when there is a run in the bitcoin price when bitcoin miners make the most of their profits. And Hut 8 has been operating at our maximum capacity again, to take full advantage of that. I'll pass the call back over to the operator and open it up for Q&A.

Thank you. [Operator Instructions]. And our first question on line comes from Deepak Kaushal. Please go ahead your line is open.

A couple of questions for me. It's halving day, I guess the big [indiscernible] in the room is what your plans are post halving -- how long do you sit and watch prices and hash rates before you shutdown mining? And what are kind of your thresholds for that timing and what you need to see there to get back on that again?

Yes, thanks Deepak. So there are multiple factors here and we are obviously watching things very closely and adjusting our operations to maximize profitability here. We actually were able to get a bit of a glimpse at what the halving might be like. So on March 12, not that long ago, within two days, we saw a near 48% peak just complete drop in the bitcoin price, which mimics behaviors to what the halving would do for the bitcoin mining economics. And so we did see a pretty significant adjustment in the difficult -- network difficulty rate. So we expect something similar to happen today when the halving does happen. So we have to watch that to really understand and of course, we've seen some beneficial movements in natural gas pricing, which has -- which also positively affects us and allows us to operate at a higher rate for longer. But of course, eventually overtime we will have to find ways to adjust and may have to shutdown parts of our operation if needed. But, as I mentioned briefly on the call, we are working towards an upgrade. And that is insight we've been testing, we've been working very, very closely with suppliers and are prepared to do this So this is the real plan and everything else is kind of the contingency bridging the gap to that point.

Okay, so you don't have a threshold on bitcoin price or network hash rate that you're looking at right now for the switch-on, switch-offs?

So we looked at a minute-to-minute basis. So that's -- so we do have those thresholds. I'd have to check where they are right now with this network. I guess it really depends on how much the network difficulty adjusts. But we're able to operate a significant part of our operation with the expectations that we have from seeing things on March 12. But I didn't mean to interrupt you there.

Yes, okay. That makes sense, okay. And then, in terms of new equipment, how are you planning? How are you guys planning to finance that? Has your strategy changed around holding bitcoin on your balance sheet? How much do you think you can dip into there [indiscernible] now rolling too much and what side of the bitcoin [indiscernible]?

Yes, I can't get too deep into this, but we do have options working towards it. What I can say is, it's likely to be a mix of self financing debt and equity, debt and equity injection that would be. But we do have capital on hand willing to go alongside this -- and are able to partially self finance and upgrade.

Okay, and to be clear, I know that you're in a CEO transition here, but the initial strategy was to maximize the amount of bitcoin being held on the balance sheet versus some other miners which sell on a daily basis, any plans or thoughts of changing that strategy at this point?

No, that's strategy stands and we plan to give exposure to investors through our mining operations and both holding as much bitcoin as we possibly can to have that upside.

Okay, And just in the event -- and two more questions, if I may, just in the event that you do shut in your mining, what's kind of your minimum burn rate, you'd have to pay a bit [here] in the power companies to keep the lights on?

So some of that would need to be negotiated. It would be very minimal. Our site costs and almost every cost in our business is quite variable. So we do have that that option to try to negotiate or without operating not using any electricity, not using any software or anything along those lines. It would be near to zero there. So in terms of scale of our business, it would be quite negligible.

Okay. Okay, that's helpful. Thank you. And then my last question, and thanks again for taking all of them. Can you give us an update, I know you've been appointed Interim CEO, and then some other moves on the CFO side on an Interim basis, can you give us an update on the CEO search, anything that you can share on that front would be helpful? Thanks.

Sure. So I can't say too much, mostly because I'm not part of that process. And so, what I can say is that the Board is nearing the end of their process. And, they do plan to put out a press release here in the near-term that -- of their plans, but because this is a CEO search, I am a candidate in that so they're – so I am now part of it. But – yes, that's really all I can share at this point.

Okay.

Thank you for the questions Deepak.

Okay. Well, thanks for taking my questions. Yes, I'll pass the line and good luck with the halving day.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from CoinDesk. Please go ahead.

Hey guys, good morning. This is Matt from CoinDesk. A lot of my questions that already been asked, but I guess more specifically on the CEO succession plan. I know Andrew said last earnings call that May -- this month was probably his last month or I think it was April?

April it was.

Right and but he originally said that he is going to stay on Board till the successor was found. I believe he said he was going to -- I mean, he was going to stay as a CEO until the successor was found, I believe he was going to stay on the Board. What was the change there?

That's the idea there is that, the process is very close to the end that they didn't think an extension for Andrew was needed. So that could give you an idea of how near-term things are with the Board. But yes, there was a discussion that they had and they said they're comfortable with me taking on that interim role and while the Board continues that search. And so, I'm very close with Andrew and I keep in touch with him but yes, I'm -- everyone was comfortable with me taking on that role and up and the business is operating as expected there. So the mutual discussion.

Got you. Is Andrew still going to have like a hands on say in the operations or is he not involved anymore?

Andrew does not have a formal role anymore.

Got you. And I want to ask about Gerri Sinclair, the Board member who resigned not that long ago. Is there a reason for her departure?

No, there was no -- that was a planned departure. There was no cause or reason for that, that is worth noting. She was just looking to step-off the Board. And this is planned and of course, you can tell by the timing, the fact that we got our audited financials done and she said at that point, I'm willing to step-off or -- like looking to step-off.

Got you. And how is the search for a new Board member on that end?

Yes. So that's ongoing as well. So the Board is actively looking to fill that position as well.

Okay, for sure. And I guess, a question on equipment purchases. Last quarter, you guys said you were in discussions with manufacturers like that name MicroBT. I believe you guys were looking at the newest equipment they had available. But as far as I know, that's largely been sold out. So I'm just curious, what are your current options in terms of equipment purchases?

Yes, so there are some – some equipment that has been sold out, but there are -- I don't know, if you saw, MicroBT put out a bunch of new models that are still available in the near-term, and I say that I'd in be the next -- at the end of this month or in a couple months. And there are companies who purchase some of this equipment, so it may be sold out in -- from the actual supplier, but other companies or maybe perhaps, you can say resellers also still have access to this equipment. So there is access and we have been able to find ways that we can get that equipment shipped in the next month or two.

Got you. I guess just one more on the working capital side. Your working capital went down to 600,000. And if you look at current assets, a large portion of that is bitcoin locked in collateral. I'm just curious. I mean, this -- a few months have passed since the end of March. So I'm just curious what your current working capital situation is?

Yes, I guess I can't comment on the financial information afterwards, but what I can say is, if you look at our bitcoin and the amount that is not locked up, and so it's about $6,400 that that bitcoin is valued at. So if you take that portion and use the current bitcoin price, that's really the biggest variable in calculating it.

Got you. Okay. Thank you very much.

Just looking at – yes, short-term assets, short-term liabilities all will be the biggest variable there.

Sounds good. Thank you very much.

No problem.

And our next question on line comes from [indiscernible]. Please go ahead.

Hi, I'm very curious about the extent to which you're going to upgrade the equipment. Looking at Antminer S19 and even the other equipment manufacturers essentially, they're hiring more [efficient] in terms of hash rates as well as the energy they consume. So my question is, to what extent are you going to swap out the current equipment for the more efficient equipment? And to what extent are you planning to issue new shares, possibly, to do finance all of this? Thank you.

So I think it's a last part, I think it was breaking up just a bit, you might just repeat that last part of the question --

Sure, I'd be happy to. So I like to know to what extent you wish to upgrade the equipment you currently have on hand is at 60%, 75% of it. And it's so considering to what extent the new equipment is so much more efficient. I'd like to know to what extent you're going to be issuing new equity in order to finance this?

Yes. So in terms of the extent, and duly we would upgrade so that our full capacity is utilized. The --but what's more likely is that it's going to be in phases up to that level. And so -- yes, so I leave that there. And in terms of shares, that's just based on ongoing discussions, we would be -- we of course wanted to the – do a deal that's most accretive to -- for our shareholders. And so everything's on the table in terms of options. Nothing's been set as of yet. But, I wouldn't put that off the table or -- again, everything is in discussions right now.

Thank you.

Thank you. Our next question on line comes from [Joe Cesar]. Please go ahead. If your lines muted, please un-mute. if you're on speakerphone, please pick up the handset. Oh, okay, looks like we lost you. We do have a follow up from Deepak. Please go ahead.

Oh, hey, Jimmy. Yes, thanks for the follow up. I know that last quarter, you guys announced that you were switching over to a different pool. I'm just wondering if that relationship changes the dynamics in the post halving environment in terms of compensation like in the event that you do shut down or you're asked to keep running to support the base hash rate in the pool. Are there any opportunities for them to compensate that you didn’t know, if you were to miner on your own account? You would be below profitability.

Yes, just help me understand that question a little bit better. So we see compensate -- like so the way the pool fee works is we are just paying a percentage on all the bitcoin that we mined through that pool. So I'm not fully clear on the compensation part of that.

Well, I just -- I don't know how -- to what extent this is true. But, I'd read some industry reports that some of the pools were giving some incentives to miners to keep their base hash rate up, so they can maintain relative hash rate. So I don't know if that affects you guys or that's not part of your agreement or it's not relevant at all or if it's not even real news. So just any thoughts there would be helpful?

Yes, no – there is no -- there is there is two different rates that -- for different levels of hash rate, but those aren't massively different. And so, I wouldn't say there's any compensation worth noting related to that. But there are some benefits getting to a certain level like getting your own node and in certain items like that and of course, you get more VIP status and more better customer service, the larger you are, as opposed to being two megawatts for example.

Got it. And then any changes in the M&A environment, since -- I know it hasn't been long since our last conference call but any change in the M&A environment that's notable or interesting to consider?

Yes, nothing I could note on this call, we always have our eyes open on the market. And, I would say the mining industry from a competitive stance is -- it's everyone talks more than maybe other industries. So we always stay closed with the full industry and have our eyes open. But yes, that's all I can say at this time.

Okay. Okay, well, thanks. Thanks again for my follow-up.

Thank you.

[Operator Instructions]. We have a question online from [Michael Wang]. Please go ahead.

Hi, I have a question about your electricity costs and money efficiency. Can you share a little bit about that?

Yes. So, in terms of -- so when you see electric -- so in terms of our efficiency, derived mostly from our equipment, and the chips that those are using, of course, we have three different generations of mining equipment and with an upgrade that efficiency level would of course, increase but at a high level our electricity costs mostly come from natural gas in Alberta – in the Alberta market and we have two sites, one of which we're purchasing directly from a city which is in Medicine Hat. And, and the other site which is in Drumheller. We're purchasing more from the grid. That's kind of the high level, if that answers your question.

Right. I have a follow up question, so in terms of your mining facilities after this future kind of upgrade, how much do you expect the mining efficiency to go up?

Close, in the ballpark of around 3 times from our oldest generation.

Okay. Thank you.

And it looks like we have no further questions in queue.

Well, thank you everyone for joining the call. I'm always available for any offline conversations and further discussion. So hope everyone's staying safe. And I'm sure everybody -- everyone will be watching like me how things evolve during the halving. So all the best. Take care.

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.