Hut 8 Corp. (HUT) Q4 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter HUT 8 2021 Earnings Call. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions]. Please note this conference is being recorded. I will now turn it over to Shane Downey. And Shane you may begin.

Thank you, and good morning, ladies and gentlemen, and welcome to the 2021 annual earnings call for HUT 8 Mining Corp. I'm joined this morning by Jaime Leverton, CEO of HUT 8. It was a transformative year for the business becoming the first Canadian miner to list its common shares on the NASDAQ, surpassing two exahash and hash rate and well in excess of 5,000 Bitcon held in reserve at the end of 2021. I will run through some short disclaimer language and then jump into a summary of our annual results. I'll then turn things over to Jamie and we'll open it up to Q&A. In addition to the press release issued earlier today, you can find our financial statements, MD&A, and annual information form on SEDAR and shortly on both EDGAR and our website at hut8mining.com. Unless noted otherwise, all amounts referred to are denominated in Canadian dollars. I like to remind you that 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. These statements are 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 the company's annual information form for the year ended December 31 2020. Overall, we are pleased with the strong operating results for 2021, but the improvements in Bitcoin mining economics and our strategic capital investments including the acquisition of the data center business from TeraGo, Hut 8 remains well-positioned for continued growth. Along with record-breaking financial performance, we had a tremendous year in the capital markets being the first Canadian digital asset miner to list on the NASDAQ and also the first blockchain company to be added to the S&P TSX Index here in Canada. We also strengthened our relationship with MicroBT with the purchase of nearly 32,000 watts miners substantially increasing our hash rate to an excess of two exahash. We also demonstrated flexibility in our approach to capital structuring entering into a US$30 million equipment financing with Trinity Capital. This non-dilutive capital with limited collateral support has provided valuable flexibility as we continue to pursue our growth strategy. We achieved record revenue of CAD173.8 million for the year with sequential revenue increases in each quarter over the prior year quarter. This performance was driven by strong mining activity, increased hash rate throughout the year, and Bitcoin price. Our 2021 revenue was more than tripled 2020's revenue of CAD40.7 million. We achieved revenue of CAD165.4 million from mining activities as we mined 2,786 new Bitcoin at an average of approximately CAD59,400 per Bitcoin. This compares with 2,798 Bitcoin at an average of approximately CAD13,900 in the prior year. Our hosting line of business generated CAD8.4 million of revenue compared to CAD1.7 million in the prior year. Hosting benefited from onboarding a second customer in late May of this year, whereas, the prior-year reflected the initial launch of our first Hosting customer. Cost of revenue for the year CAD85 million, compared to CAD59.2 million in the prior year. This resulted in -- this increase is the result of higher site operating costs, mostly electricity and an increase in depreciation expense. The increased depreciation expense was driven by the addition of over CAD85 million of new mining equipment over the past 12 months, partially offset by the revised estimated useful life of the company's infrastructure assets from four to 10 years which was made in Q2 of this year. Site operating costs increased due to HUT 8's continued expansion, specifically the addition of miners to our fleet. I note that in absolute terms, site operating costs were depressed in the prior year when due to poor Bitcoin mining economics that can be ran much of our mining fleet in Eco Mode so as to reduce power consumption. General and administrative costs were CAD40.3 million, compared to CAD5.1 million in the prior year, after excluding non-cash share-based compensation expense of CAD9.9 million, one-time transaction costs of CAD3 million and non-operational sales tax expense of CAD10.7 million. G&A expense was CAD16.7 million, compared to CAD2.9 million in the prior year period. This increase stems from the strategic investment into building out a larger and deeper pool of executives and managers, professional fees associated with various capital markets initiatives, and the new management team's commitment to best corporate practices, as well as higher insurance and investor relations costs. The sales tax expense relates to amounts we expect ultimately to be refunded by Canadian tax authorities that have not been -- have been fully provided against due to collection uncertainty. The CAD10.7 million quantum is larger in 2021 due to sales tax import duties associated with our mining equipment purchases. We currently have Bitcoin lending arrangements with Genesis and Galaxy. We earned CAD2.9 million of income in 2021 from our Bitcoin lending arrangements, which are reported in finance income. These lending arrangements currently earned an annual return ranging from 2% to 2.25% and allow the company to generate additional fee out cash flow while supporting our hurdle strategy. We’ve recorded a net loss of CAD72.7 million for 2021, compared to a net income of CAD19 million in 2020. This net loss was driven by non-operational IFRS-driven accounting treatment as opposed to the company's operating performance, which achieved record gross profit of CAD88.8 million, compared to a gross loss of CAD18.5 million in 2020. The prior year, net income was driven by the combination of a CAD13.7 million revaluation of digital assets to the P&L, a CAD13.2 million impairment reversal and a CAD15 million deferred income tax recovery. 2021 earnings meanwhile are impacted by a CAD114.2 million unrealized loss on revaluation of warrant liability, as well as a CAD5.6 million deferred tax expense. With respect to the warrant liability, which to be clear, is a new classification as of 2021 year-end, we assess the classification of our issued warrants and determined that certain warrants which were issued in our January 2021 and June 2021 capital raised transactions at the definition of financial liabilities under IAS 32. As a financial liability, we first present these instruments in the liability section rather than the equity section of our balance sheet. And second, measure these warrants at fair value at each reporting period, offloading the unrealized mark-to-market gain or loss through the P&L. As at December 31, 2021, the fair value of the warrant liability was CAD99 million. We also recorded a cumulative unrealized revaluation loss in respect of warrant liability of CAD114.2 million in 2021, which was driven ultimately by the increase in the company's share price. The deferred tax expense of CAD5.6 million was due to higher taxable net income, which excludes the impact of the loss on revaluation of warrant liability. Finally, given the movement in the price of Bitcoin over the year, we recorded a CAD 57.9 million unrealized gain on digital assets, all of which went through OCI on an after tax basis. Taken together, this results and other comprehensive loss of CAD 14.9 million for 2021, driven by the strong operating performance, how they achieve adjusted EBITDA of CAD 96.6 million for 2021 compared to negative adjusted EBITDA of CAD 0.2 million in 2020. I will now turn to Q4 results, going to provide some additional commentary. Fourth quarter results for 2021 also reflects many of the themes and achievements I just touched on for our annual performance. We achieved record quarterly revenue of CAD 57.9 million compared to CAD 13 million in the prior year’s quarter. Our increased hash rate and BTC price resulted in CAD 55.0 million of digital asset mining revenue. Our hosting business contributed CAD 2.4 million. Cost of revenue was CAD 27.3 million versus CAD 14 million in the prior year’s quarter, with the increase driven by power consumption, consistent with our increased number of ASICs deployed, average power rates, as well as higher depreciation expense as a result of the expansion of our mining fleet. The cost of mining each Bitcoin for Q4 2021, excluding depreciation expense was approximately CAD 22,100 compared to approximately CAD 20,200 in the prior year quarter. But the slight increase primarily due to increase Bitcoin network difficulty as well as average power prices in Alberta. And I want to bring emphasis to the fact that our cost of mine figures are fully loaded costs inclusive of electricity, T&D and associated fees as well as personnel, network monitoring, equipment repair, and maintenance costs. General and administrative expenses were CAD 14.1 million for the fourth quarter versus CAD 1.6 million in the prior year period. After excluding non-cash share-based compensation expense of 2.5 million, one-time transaction costs of CAD 2 million and non-operational sales tax expense of CAD 4.9 million. G&A expense was CAD4.6 million versus one point -- excuse me, versus CAD1 million in the prior year. The higher general and administrative costs for the quarter reflect the same factors previously discussed in our annual results, namely the investment in building out our management team investor relations function and professional fees associated with corporate best practices. We reported a net loss for the fourth quarter of 102 point -- CAD111.2 million compared to net income of CAD27.3 million in the prior year's quarter. The net loss was again a result of our strong operating performance be more than offset by the previously discussed CAD 114.2 million unrealized loss on revaluation of warrant liability, which was recorded entirely in Q4. Our strong operating performance is reflected in our fourth quarter adjusted EBITDA of CAD35.3 million versus CAD1.6 million in the prior year's quarter. Our balance sheet remains healthy. We raised approximately CAD413 million across three equity issuances in 2021. The proceeds from these issuances were and will continue to be invested in the growth of the company through the acquisition of mining equipment, development of our third mining site in North Bay, Ontario, as well as the acquisition of TeraGo's Data Center Business. We also continue to evaluate non-dilutive measures to enhance liquidity, including securing a US$30 million equipment financing arrangement with Trinity Capital at the end of 2021. Our Bitcoin holdings are marked at fair value and totaled CAD323.9 million as of December 31, 2021. This balance consisted of 3,518 Bitcoin held in custody and 2,000 Bitcoin held subject to lending arrangements with Genesis and Galaxy. We continue to emphasize our long term hurdle strategy and did not sell any Bitcoin during the quarter. With that, I will turn the call over to Jaime, who will speak in more detail to our recent acquisition of TeraGo’s Data Center and Cloud Business. And from there, we'll move across to Q&A. Jaime?

Thank you so much, Shane, and good morning, everybody. 2021 was a tremendous year for Hut 8 and I'm incredibly proud to see our vision of transforming from CAD100 million market cap company into CAD1 billion global leader in digital asset mining and infrastructure innovation. I'd like to recognize the entire Hut 8 team and our Board of Directors for their hard work and leadership to get Hut 8 to where we are today. In 2021, we embarked on our diversification strategy and began to do things differently, from diversifying our fleet and beginning to mine Ethereum to being the first Canadian digital asset mining company listed on the NASDAQ and being the first digital asset miner to be named to the TSX/S&P Index; from upgrading our infrastructure by ordering nearly 32,000 top of the line miners and becoming a certified repair center for MicroBT, to leveraging our team's experience as data infrastructure specialists too, and most importantly, seize upon a crucial acquisition opportunity that will bring Hut 8 to the forefront of infrastructure innovation at the intersection between blockchain and Web 3.0. It's been a year of growth, shaped by our relentless dedication to innovate and our vision of building a company capable of providing the infrastructure to support the ecosystem working and rapidly growing blockchain environments and the nascent Web 3.0 space. Now that we've laid the crucial building blocks, we are laser focused on realizing continued execution, scale and growth. With over 6,000 Bitcoin on our balance sheet, we will continue to strengthen our position as market leaders, hurdlers and digital asset miners. But as we've said, we're not just miners. We are business building technologists. Through innovation, imagination and dedication, we are helping to shape the digital asset revolution to create value, a platform for the future of applications built on the internet and helping to power the Fourth Industrial Revolution. With our acquisition of TeraGo’s Data Centers and Cloud Business, we welcomed more than 400 enterprise customers to the Hut 8 family. We also gained 36,000 square feet of geo diverse data center space and cloud capacity powered by emission-free energy sources. This acquisition is giving us the white space to revolutionize these conventional assets and create the industry's first hybrid data center model that provides both traditional high performance computing and creates the infrastructure to capitalize on the nascent digital asset computing, blockchain gaming and web 3.0 industry’s. Our fleet of data centers now provides Tier 0 facilities traditionally used for our digital asset mining, all the way to two geo diverse Tier 3 data centers located in Mississauga and Kelowna as part of our new TeraGo acquisition and the Hut 8 high performance computing division. Location is key and we're so excited to now have eight locations across the map in Canada, with our mining sites in Drumheller and Medicine Hat. Our third site rapidly completing construction in North Bay, and our new data centers in Kelowna, two in Vancouver, Vaughan and Mississauga, Ontario, we are thrilled to be one of Canada's fastest growing technology companies. And with that, I will turn it back to the operator. And we'll open it up for Q&A.

Thank you, Jamie. We'll now begin the question-and-answer session. [Operator Instructions] From Canaccord Genuity, we have Joseph Vafi. Please go ahead.

Good morning, Joe.

Hi. Thanks, everyone. Pallav Saini on for Joe. Hi, Shane and Jamie. Congratulations on a strong finish for the year and thanks for taking the question. So first, can you remind us, what your mining production plan is for the rest of the year and any additional color you can offer on the operational side of the business?

Yes. So I'm happy to take that. As we've communicated, we have our third site rapidly completing construction in North Bay. We actually have racking being installed at that location this week. And expect to power it up within the next four to eight weeks, which will bring the first 35 megawatts online, which will be approximately, what, just over 1 exahash of incremental compute will come on when we power up that that North Bay facility. And then we are continuing to work towards a 6 exahash goal over the balance of the year as we look at the opportunities available in the supply chain for new mining equipment over the next few months as well.

Great. Thanks for that. Following up on the TeraGo acquisition, you are now operating a truly diversified business here. What's your vision for that piece of the business as we look out one to two years and we expect to see more M&A along those lines?

Look, we've been transparent that will continue to drive growth through organic and inorganic means. We have proven ourselves to be patient with our balance sheet and opportunistic when it comes to deploying capital and that's something that you'll continue to see from us. And so I can't speak to anything specific, because we do evaluate on a case-by-case basis. And again, we're really looking to make sure that when we deploy capital, it's into the right assets at the right point in time.

Right. Thanks for the questions.

No problem. Thank you.

And from Craig Hallum, we have George Sutton. Please go ahead.

Good morning, George.

Oh, it's actually Adam [ph] on for George. Hi, Jamie.

Good morning Adam.

Could you give us an update about your thinking about capital allocation, now that you've acquired the datacenter assets, specifically between mining, hosting and the DC business?

The capital requirements of the different businesses are fundamentally different. I’m not sure I’m in a better way to say it. Mining compute is, obviously, very capital intensive. There's a lot more power dedicated to the mining side of our business, whereas, the data centers that have come in through the TeraGo acquisition are more traditional enterprise style data centers, the capital required is fundamentally different and the power is, obviously, quite a bit less but it's a different motion as far as the white space, the infrastructure involved in those facilities. So we will continue to look at how we deploy capital based on where we see the market opportunity, the demand coming in from customers and from the ecosystem as we continue to build out some new -- some of our new product thinking.

Great. And to make that a little more simpler, any updated thinking on how you look at hosting versus proprietary mining?

We are -- don't quote me on the numbers. We're probably 94% prop mining today at our mining sites. And really the focus is shifting to hosting co-location and cloud managed services as really in the TeraGo data center. So the focus will be using the TeraGo data centers for that non-digital asset mining revenue and focusing our traditional mining sites will be predominantly prop mining.

Great. And then one final question for me, there's a modest pickup in cost per coin quarter-over-quarter, curious to know if you have any insight on with the third site coming online with lower power costs. Do you expect material changes in cost per coin over the next year?

Wow! That requires taking a view on the overall global network hashrate and difficulty and that's the challenging part, difficulty and hashrate have moved up quite quickly over the last few months and that's really the primary impact that's difficult to predict and everybody kind of needs to run their own models on where they think hashrate and difficulty are going in the short and medium-term.

Okay, great. Thanks.

No problem.

[Operator Instructions] And from D.A. Davidson, we have Chris Brendler. Please go ahead.

It's actually Chris. Hi, guys. How are you doing?

Good morning, Chris.

Good morning, and thanks for taking my questions. I just want to follow that last question. I understand that obviously hash rate and the network have a big impact on your cost per coin, but I do think that the North Bay facility, our understanding at least previously was, where we could potentially see a pretty significant improvement in cost. So absent like a big change in network, could we get sub 20,000 here potentially once North Bay is fully operational?

We potentially could. But again, it really depends how everything moves across the different variables that go into those -- to the cost and the Bitcoin mining economics globally.

That's a very good answer. You definitely can't say for sure. Okay, let's see the other side of the coin. How about the miner deliveries to get to six? I think, we have 10,000 still coming. So, you still need to close that gap. But I've heard that pricing has gotten a little better for new deliveries. Can you just talk about your strategy there as you get to ramp to six extra hash?

Yes. So, we're very consistent as far as, how we look to deploy capital into hardware. And you're absolutely right, the pricing that we had been seeing the last few months was, we thought out of sync with where the economics were, from an IRR perspective, we expected the price per terra hash to come down, particularly as we see new entrance moving into the ASIC manufacturing space. And we are starting to see some of that softening now and actually better delivery lead times as well. So, a softening in price and better delivery time. So, we're constantly evaluating what's going on in the marketplace and we'll continue to do so and be opportunistic accordingly.

Okay. They do expect to be pursuing as well, the strategy of lending out Bitcoin rather than borrowing against it, just given the predominant changes we've had in the capital markets appetite for Bitcoin miners and things don't improve or the stock price doesn't go higher, is lending it out better than borrowing against it?

Well, I can start and then have Shane chime in. We have borrowed against it in the past, when capital markets were constrained and mining economics weren't as good in order to preserve our Bitcoin balance. But access capital, we have used our Bitcoin to do that in the past. We currently don't have Bitcoin encumbered. We are using the yield relationships instead. But again, it's a decision that we make based on what's available in the market and we're certainly not against it. It's a tool we've used in the past. Shane, I don't know if you have anything to add there.

Yes, not a lot to add. I would say it's certainly something even like today with more or less a moment's notice almost or a day's notice, we could go ahead and execute on that borrowing against Bitcoin. So, yes, it's definitely something in the toolkit and we've to-date like Jamie said, very intentionally in the last year anyway, very intentionally not pursue that path.

Okay. Last one as I can't resist. Ethereum mining, how much did that contribute in the most recent like, I guess it's still doing a very good job like 15%, 20% of your Bitcoin mine is actually Ethereum. But that could change any update on what happens if that does change and we go Ease 2.0?

So, our answer remains the same. We really don't have a timeline for that move to -- for Ethereum to go proof-of-stake, it's obviously been talked about for many years. If and when that happens, we would move our compute to the next most profitable blockchain to mine using our GPUs and I think currently that is a Ethereum classic, but I haven't checked it in a while.

Okay, could wrap it up. Thank you.

Great.

No further questions at the moment. [Operator Instructions]

Thanks, Brandon.

And we have David Shapiro online. Please go ahead.

Yes, Jamie. I was just curious to what extent you've looked at immersion cooling to drive down your electricity costs?

Yes, we've looked at immersion, there is some interesting new tech happening in the space as the space matures and it's something our Head of Technology, Jason Zaluski pays very close attention to. We have the benefit of being in cold climates in our mining sites. Drumheller, Medicine Hat, and North Bay, all take advantage of significant free air cooling, which means we're not requiring CapEx or incremental OpEx to cool the equipment, we let Mother Nature up here in Canada do that for us. So, for us, it's a bit of a different conversation and the ROI calculations that we run are different. That said this space is maturing and we're paying close attention and when it makes sense for us, we'll look at it, but again, we let Mother Nature do the work and she doesn't charge us for it.

Thank you.

My pleasure.

All right. And looks like no further questions at the moment.

Okay. Then we wish everybody a very Happy St. Patrick's Day. Thank you all for joining and your continued support.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. And you may now disconnect.