Earnings Call Transcript - HUT Q1 2020

Operator, Operator

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 a question-and-answer session. The operator will provide instructions for the Q&A. Please note that this conference is being recorded. I'll now turn the call over to Jimmy Vaiopoulos. You may begin.

Jimmy Vaiopoulos, Interim CEO

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 during 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 production to limit any losses as the market was 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 a share-based compensation gain in this quarter of $708,000 as a result of the forfeiture of a Restricted Share Unit 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. Since Q1 2020, the bitcoin price has 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 mentioned, the adjusted EBITDA losses from Q1 2020 mostly came from the last two weeks of the quarter when the bitcoin price collapsed. Although our revenue margins and adjusted EBITDA were negatively affected by this event, we avoided selling any bitcoin at the bottom prices, and our lowest sale price was more than 50% above 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. It is during times when there is a run in the bitcoin price that bitcoin miners make the most profit. 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.

Operator, Operator

Thank you. The operator will provide instructions for the Q&A. Our first question on the line comes from Deepak Kaushal. Please go ahead; your line is open.

Deepak Kaushal, Analyst

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

Jimmy Vaiopoulos, Interim CEO

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

Deepak Kaushal, Analyst

Okay, so you do have thresholds on bitcoin price or network hash rate that you're monitoring right now for switch-ons and switch-offs?

Jimmy Vaiopoulos, Interim CEO

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

Deepak Kaushal, Analyst

Yes, okay. That makes sense. And then, in terms of new equipment, how are you planning to finance that? Has your strategy changed around holding bitcoin on your balance sheet? How much do you think you can dip into those holdings now—are you selling too much or too little, and what is your stance on the bitcoin position?

Jimmy Vaiopoulos, Interim CEO

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

Deepak Kaushal, Analyst

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?

Jimmy Vaiopoulos, Interim CEO

No, that strategy stands. We plan to give exposure to investors through our mining operations and by holding as much bitcoin as we possibly can to capture that upside.

Deepak Kaushal, Analyst

Okay. And just in the event that you do shut in your mining, what's your minimum burn rate? What would you have to pay to power companies to keep the lights on?

Jimmy Vaiopoulos, Interim CEO

Some of that would need to be negotiated, but it would be very minimal. Our site costs and almost every cost in our business is quite variable. We do have options to negotiate reduced costs or not use electricity or software while not operating, which would bring those costs near zero. In terms of the scale of our business, it would be quite negligible.

Deepak Kaushal, Analyst

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

Jimmy Vaiopoulos, Interim CEO

Sure. I can't say too much, mostly because I'm not part of the formal process. What I can say is that the Board is nearing the end of their process. They do plan to put out a press release in the near term about their plans. I am a candidate in that process, so I am part of it, but that's really all I can share at this point.

Deepak Kaushal, Analyst

Okay.

Jimmy Vaiopoulos, Interim CEO

Thank you for the questions, Deepak.

Deepak Kaushal, Analyst

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

Jimmy Vaiopoulos, Interim CEO

Thank you.

Operator, Operator

Thank you. The operator will provide instructions for the Q&A. Our next question comes from a reporter at CoinDesk. Please go ahead.

Matt Yamamoto, Reporter / Analyst

Hey guys, good morning. This is Matt from CoinDesk. A lot of my questions have already been asked, but more specifically on the CEO succession plan: I know Andrew said on the last earnings call that May—actually I think it was April—would probably be his last month. He originally said he'd stay on the board until a successor was found. What changed there?

Jimmy Vaiopoulos, Interim CEO

April it was. The idea is that the process is very close to the end and the Board didn't think an extension for Andrew was needed. That gives you an idea of how near-term things are with the Board. There was a discussion and they were comfortable with me taking on the interim role while the Board continues the search. I'm very close with Andrew and I keep in touch with him, but Andrew does not have a formal role anymore.

Matt Yamamoto, Reporter / Analyst

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

Jimmy Vaiopoulos, Interim CEO

Andrew does not have a formal role anymore.

Matt Yamamoto, Reporter / Analyst

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

Jimmy Vaiopoulos, Interim CEO

No, that was a planned departure. There was no cause or issue worth noting. She was just looking to step off the Board. Given the timing—our audited financials were done—she indicated she was willing to step off at that point.

Matt Yamamoto, Reporter / Analyst

Got you. How is the search for a new Board member going?

Jimmy Vaiopoulos, Interim CEO

That's ongoing as well. The Board is actively looking to fill that position.

Matt Yamamoto, Reporter / Analyst

Okay. A question on equipment purchases: last quarter you said you were in discussions with manufacturers like MicroBT and looking at their newest equipment. As far as I know, some of that's largely sold out. What are your current options in terms of equipment purchases?

Jimmy Vaiopoulos, Interim CEO

Some equipment has been sold out, but MicroBT put out a bunch of new models that are still available in the near term—by the end of this month or in a couple of months. There are companies that purchase and resell this equipment, so while it may be sold out from the supplier, resellers still have access. We have been able to find ways to get equipment shipped in the next month or two.

Matt Yamamoto, Reporter / Analyst

Got you. One more on the working capital side: your working capital went down to 600,000. If you look at current assets, a large portion of that is bitcoin locked in collateral. A few months have passed since the end of March—what is your current working capital situation?

Jimmy Vaiopoulos, Interim CEO

I can't comment on financial information subsequent to quarter end, but what I can say is if you look at our bitcoin and the amount that is not locked up, you can value that using the current bitcoin price. The bitcoin price is really the biggest variable in calculating working capital. Short-term assets and short-term liabilities are the biggest variables there.

Matt Yamamoto, Reporter / Analyst

Sounds good. Thank you very much.

Jimmy Vaiopoulos, Interim CEO

No problem.

Operator, Operator

The operator will provide instructions for the Q&A. Our next question on the line comes from an analyst. Please go ahead.

Unidentified Analyst, Analyst

Hi, I'm very curious about the extent to which you're going to upgrade the equipment. Looking at Antminer S19 and other manufacturers, they're much more efficient in terms of hash rates and energy consumed. To what extent are you going to swap out the current equipment for more efficient models? And to what extent are you planning to issue new shares to finance all of this?

Jimmy Vaiopoulos, Interim CEO

I think the last part of your question was breaking up a bit, but to address both parts: in terms of extent, we would aim to upgrade so that our full capacity is utilized, but it's more likely to be done in phases up to that level. In terms of issuing shares, that's part of ongoing discussions. We would, of course, look to do a deal that's most accretive for our shareholders. Everything is on the table at this point and nothing has been set yet.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

We attempted to connect a line from Joe Cesar but the line was lost. We do have a follow-up from Deepak Kaushal. Please go ahead.

Deepak Kaushal, Analyst

Oh, hey Jimmy. Thanks for the follow-up. I know that last quarter you announced switching over to a different pool. I'm wondering if that relationship changes the dynamics in the post-halving environment in terms of compensation—for example, in the event you shut down, would the pool compensate you to keep running to support base hash rate? Are there any incentives or is there any difference compared to mining on your own account?

Jimmy Vaiopoulos, Interim CEO

Help me understand the compensation question a little better. The way the pool fee works is we pay a percentage on all the bitcoin we mine through that pool. There are different rates for different levels of hash rate, but those differences aren't massive. There aren't notable compensations to keep running beyond those fee structures. There are benefits to reaching certain levels—like running your own node, VIP status, and better customer service the larger you are—but there's no specific incentive program worth noting to pay miners to stay online beyond the usual fee and service structure.

Deepak Kaushal, Analyst

Got it. And then any changes in the M&A environment since our last call—anything notable or interesting to consider?

Jimmy Vaiopoulos, Interim CEO

Nothing I can note on this call. We always have our eyes open on the market. The mining industry is highly discussed and competitive, so we stay close to the industry and watch for opportunities, but I don't have anything to announce at this time.

Deepak Kaushal, Analyst

Okay. Thanks again for the follow-up.

Jimmy Vaiopoulos, Interim CEO

Thank you.

Operator, Operator

We have a question online from Michael Wang. Please go ahead.

Unidentified Analyst (Michael Wang), Analyst

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

Jimmy Vaiopoulos, Interim CEO

Yes. In terms of our efficiency, it's derived mostly from our equipment and the chips those use. We have three different generations of mining equipment, and with an upgrade that efficiency level would increase. At a high level our electricity costs mostly come from natural gas in the Alberta market. We have two sites: one where we're purchasing directly from a city in Medicine Hat, and the other site in Drumheller where we're purchasing more from the grid. That's the high-level breakdown.

Unidentified Analyst (Michael Wang), Analyst

I have a follow-up: after this upgrade, how much do you expect mining efficiency to improve?

Jimmy Vaiopoulos, Interim CEO

Close to, in the ballpark of, around three times compared to our oldest generation.

Operator, Operator

It looks like we have no further questions in the queue.

Jimmy Vaiopoulos, Interim CEO

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

Operator, Operator

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