Welcome to the Year End Financial Results Conference Call. My name is John, 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. Please note the conference is being recorded.
And I will now turn the call over to Jamie Leverton.
Good morning, everyone. 1st and foremost, thank you for taking the time to join us today. This is my first earnings call since taking the helm here at Hut 8 on December 1, And I want to thank you all as investors and members of the Bitcoin ecosystem for such a warm welcome into the role. I also want to thank the Board of Directors Hi, our team here at Hut 8 for making me feel so at home since my arrival and for continually throwing themselves day and night Into helping drive this company forward at a truly remarkable rate. Without further ado, I will now hand it over to Jimmy to walk us through our Q4 2020 audited year end financials.
Over to you, Jimmy.
Thank you, Jamie. Hi, everyone. This is Jimmy Viopoulos, CFO of Hutit. 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. 2020 was a transformational year for Hut 8 and the Bitcoin industry.
Huttig became the 1st company to successfully enter and exit the TSX Sandbox program and was actually the 1st cryptocurrency company to the TSX. We restructured the legacy Bitfury agreements to provide Huty more autonomy and the ability to purchase Bitcoin mining equipment from any manufacturer And Huttig also transferred the site operations from being run externally by Bitfury to bring all operations and staff in house to Huttig. This reduced costs significantly for the company and increased the quality and control of our operation. Also, on June 25, 2020, we closed an oversubscribed Prospectus offering for gross proceeds of $8,300,000 The net proceeds were used to purchase over 300 per second of latest generation equipment for MicroVT, which is installed between September 2020 January 2021 and is all running today. For Bitcoin, we saw a price drop significantly mid March to below US4000 dollars due to the aftermath of the COVID-nineteen shelter in place orders.
It took almost until May 2020 for the Bitcoin price to recover, at which point the Bitcoin halving event took place where the block reward was cut in half. We saw a subsequent drop in the network difficulty rate by 15%, but recovered quickly in pre halving levels in June 2020. Although we currently have record level Bitcoin prices creating incredible Bitcoin economics, it is easy to forget that most of 2020 was a difficult year for many Bitcoin miners, including Hut 8. Hut 8's revenue for the year ended December 31, 2020 was $40,700,000 from mining 2,798 Bitcoin and including hosting revenue of $1,700,000 This compares to the prior year of 8,618 Bitcoin mined with revenue of $82,000,000 of which there was no hosting revenue. The reason for the decrease is due to a difficult year for Bitcoin Economics, including the halving event as mentioned.
The site operating costs for the year were $39,700,000 compared to the prior year of $45,400,000 A reduction of 13%. When comparing the operating cost against the number of bitcoin mined for the year, the average cost of mining each bitcoin in 2020 was calculates average cost of mining and Hutty takes a conservative stance of using all operating costs, which is an audited figure. During the tight Bitcoin economics of 2020, Honey focused on maintaining the lean operation and reduced extension by 45% on a corporate level $6,100,000 in 2019 to $3,400,000 in 2020. The company was able to maintain a $2,900,000 gain on the use of Bitcoin throughout the year Despite the volatile Bitcoin price, by timing any sale of Bitcoin to the best of their ability, this compares to the prior year gain on the use of Bitcoin of 4 The unrealized gain on digital assets increased by 2 21 percent to $13,700,000 in 2020 From $4,300,000 in 2019 due to the increase in the Bitcoin price that did not include a $60,700,000 unrealized gain on The company reduced its net finance expense by 49 percent to $2,400,000 in 2020 From $4,800,000 in 2019 due to the reduction of the interest rate and finance expense related to Hut 8's Bitcoin collateralized loan.
This loan was fully repaid in February 2021 and all Bitcoin collateral was returned. Huttig recognized a gain of $13,200,000 Related to the reversal of an impairment from the year ended December 31, 2018, this was primarily due to the positive change in the Bitcoin economics throughout the end of the year of 2020. Huttig recognized a negative $2,000,000 in adjusted EBITDA for 2020 compared to a positive $33,500,000 in the prior year. It is important to note that the adjusted EBITDA for Q4 2020 in that quarter alone With a positive $1,400,000 meaning that the negative adjusted EBITDA in 2020 resulted primarily from the 1st three quarters. Net income before tax increased by 87 percent to $4,000,000 in 2020 from $2,100,000 in 2019.
This is the 2nd year in a row that Hut 8 has been able to achieve positive bottom line profits. Hut 8 recognized a $15,000,000 deferred income tax recovery, which had a net zero effect between the income statement and balance sheet as there was an offsetting amount recognized against the unrealized Gain to Bitcoin of $60,700,000 through the equity section of Huday's balance sheet. This resulted in net income of $19,000,000 Working capital as at December 31, 2020 was $75,700,000 a 2 46% increase The prior year working capital amount of $21,900,000 Looking forward into 2021, the company announced the March 24, 2021 Bitcoin balance has 3,233 Bitcoin, which had a price of 52,000 dollars The Bitcoin balance was approximately CAD 210,000,000 This Bitcoin balance is a 17% increase From the December 31, 2020 balance, showing Huttig's confidence in Bitcoin and ability to grow its Bitcoin holdings. This has Hutti on great footing for 2021 as it has fully repaid its debt and has one of the strongest balance sheets and established operation in the space. Back to you, Jamie.
Thank you so much, Jimmy. Despite an incredibly difficult year for Bitcoin Mining Economics, I couldn't be more pleased with how the team at Hut 8 performed, proving once again that prior experience navigating Bitcoin market bull and bear cycles is Paramount to success in this industry. The team demonstrated the criticality of timing and reduction of expenditures, thoughtful debt restructuring and seize the opportunity to strengthen the balance sheet without sacrificing our core Bitcoin assets. I'd also like to take this opportunity to Highlight some of the key progress made so far in the early days of 2021. In January, we closed a private placement offering for gross Proceeds of $77,500,000 with institutional investors.
As part of the proceeds from that financing, as Jimmy mentioned, we were able to fully repay The US20 $1,000,000 loan with Genesis Global Capital with all Bitcoin collateral returned to Hut 8 at that time. In January, Hut 8 also confirmed an additional 5,400 M30 S units to be shipped between January 2021 July With a US11.8 million dollars equipment financing loan with DCG Foundry, 400 units of which are already installed and hashing, bringing our total self money hash rate in production today to just under 1.1 exahash. We have also announced the creation of a yield account for 1,000 of our Bitcoin holdings, which generate yield at a rate of 4% per annum with Genesis Global Capital, thus adding a third revenue line for Hut 8 and further building on our revenue diversification strategy. Since my arrival in December, we've expanded the depth of talent on our leadership team, including a new Head of Investor Relations, Sue Ennis a new Head of Technology, Jason Zaleski And a new General Counsel and Executive Vice President of Regulatory, Tanya Woods. In addition to a number of fabulous new team members in the field in Alberta, as well as the welcoming of 2 incredible new board members in Sanjeev Senat and Chris Eldridge.
Last month, we were honored to be recognized as 11th out of 10,000 in the 2021 OTCQX Best 50, which ranks the top performing companies traded on the OTCQX QX Best Market last year. Year to date, we are thrilled to have increased our social media followers by 134% Since the end of 2020, as we work to increase our focus on engaging more directly with our investors and with the marketplace. While it has been a busy start to the year already, rest assured we are still just getting warmed up. I will now open up the call to Q and A.
Thank you. We'll now begin the question and answer session. And our first question is from Deepak Kaushal. Please go ahead.
Hi, guys. Good morning. I've got a handful of questions. I'll ask And then I'll jump back in the queue, maybe do follow ups. But thanks for taking them this morning.
Jamie, welcome to the conference call. Just curious, you mentioned that you have some capacity that's coming over the next several months. What do you guys expect in terms of your Self mining Hash rate when that's all installed, and I assume that should be fully installed by the end of
June, is that what you said?
End of July is our expectation to have it fully installed. And the hash rate that We expect is 1.3 exahash, assuming that we replace some of our older Equipment with the new equipment coming from MicroBT.
Okay. And what would be the ratio or What would be the amount of ex nash on top of that that you're hosting?
So We our hosting business right now hosts just under 9 megawatts. We haven't publicly stated the exahash involved in the hosting business, but it's just under 9 megawatts of the 109 megawatts that we have in production today.
Got it. And are you expecting to like what kind of ratio are you guys targeting long term hosting versus self mining?
We have not released the ratio that we're targeting, Deepak.
Okay. Got it. So I'm just curious, We're hearing about lead times of well over 9 months for new equipment. I'm just curious as to what levers you see you have To be able to expand capacity in 2021 or is this really a 2022 timing for a new expansion beyond the current planned rollout?
We are exploring a number of options, Deepak. And when I have something that I can publicly share, I will absolutely do so.
Okay. So can you comment just in general what you're hearing in the industry in terms of lead times or prices of new equipment?
In general, the lead times are definitely significant. We've seen orders with delivery dates well into But as you know, we were able to work with Foundry, our partner, to get equipment installed in the first of 2021 with our January order. So we do expect to look for various areas of But certainly, general lead times are currently going into 2022.
Okay, got it. And I noticed that there was a good OpEx reduction for the full year versus the prior year. It looks like it creeped up again in Q4 and you've hired some new bodies. What should we expect for a quarterly run rate for OpEx? $1,000,000 a quarter, dollars 1,500,000 a quarter, and how would that split between cash versus non cash OpEx?
Yes. I think we can't give guidance on that right now, Deepak. As you know, we are in a phase of transformation and high growth. So I can't give you guidance on a steady state OpEx run rate.
Okay. So but in a phase of transformation high growth that would suggest you're going to invest more, so that number should directionally be going up. Is that a fair assumption?
I wouldn't make that assumption because we're looking at all parts of our business On both sides of the line.
Okay. And then just a last question on expansion and then maybe I'll jump back in the queue If there's a chance. After the equity raise and the debt repayment, is it just simple math here, you have about Just over $50,000,000 to spend on new capacity expenses. Is that how we should think about it?
We haven't announced the use of proceeds, obviously, for the full $77,500,000 So I can't Speak to it directly, but directionally.
Okay. So can you comment on your current liquidity position today as of today In terms of the cash, not in terms of Bitcoin line.
I'll turn that over to Jimmy.
Yes, I'd like to comment on the specific number, but you have a general idea by seeing how much We typically, we have on cash at year end how much cash we just raised, which was announced and our Bitcoin that We just announced as well. So looking deep, I'm sure Deepak, it can paint a pretty strong picture for you.
Got it. And so just to reiterate, you have just over 3,000 Bitcoin on the balance sheet. You put 1,000 with Genesis. Should we assume that the other $2,000 is up is something that you might liquidate to fund expansion? Or are you Fully committed to holding that full balance on your balance sheet.
At this time, we have no intention of liquidating that balance, we are committed to our hobbling strategy.
Okay. That's helpful. Thanks again. I'll pass the line and maybe jump back in the queue.
Anytime, Deepak.
Our next question is from Stuart Schuyler.
Hi, Stuart. Good morning, everybody. Just a couple of quick things. First of all, the big elephant in the room, I think everybody wants to know if there is Anything that you can talk about as far as NASDAQ uplisting is concerned?
Yes. Stuart, we are aware that Others in our space are making announcements regarding their moves toward NASDAQ. As you know, the road to NASDAQ is very uncertain and applications to Lyft Do not guarantee listing success. In short, the outcome of being listed is not guaranteed. We recognize that our shareholders are encouraging us To announce intentions and listing commitments, and we can assure you that we're exploring our options and will inform the market once we have more information to share.
Okay. Next, noticed in your statement today that basically your cost of producing Bitcoin seems awfully high compared to The competition, is there a reason for that? Obsolete machinery potentially? What's going on?
I can touch on that, Jamie. So I voiced over high level in my But there's significant differences in what people are different issuers are including in their calculation For cost of mine Bitcoin, so there's not a consistent way, especially given this is a non IFRS Number, we've taken a conservative approach, which we see as a requirement under IFRS To use our unaudited number that is, the operating costs, So the full amount there. We've seen a varying amount of inclusion in the cost of mining. So really the key is in the detail for the cost of mining number. So although ours may look high, It's just inclusive of far more.
And so it's not really comparing apples to apples.
Are you including your G and A expenses in that?
Everything on-site. So all sites, expenses, electricity, everything that happens at the site level is included.
Okay. Okay. And the last question, basically from what we are hearing from Jamie at this point is 1 0.3 Exohash seems to be where you guys are going to be for the entire year. Am I wrong in assuming that? Or Do you have other things that potentially could happen?
That's the number that we expect to be at by the end of July When the equipment that we have ordered to date comes online, That is not the number for the entire year unless We don't make any incremental purchases in year. And at this time, I'm not at liberty to speak to that. But the 1.3 is Based on what we have ordered to date, assuming that we replace existing hardware and that would be as at the end of July.
Very good. Thank you very much for answering my questions. And I wish the new management team success.
Thank you, Stuart.
Our next question is from Kevin Dede.
Good morning, Jamie, Jimmy. Thank you very much for hosting the call and taking my questions. I was wondering Sure. I was wondering, Jamie, if you could just sort of speak conceptually. I know you're exploring all options and everybody sort of come at you in different From different directions, but you've obviously, you structured this deal with Validius.
And I was wondering if you just sort of speak conceptually to The power options that that agreement might offer you or what other power options you might have in Alberta
Or
what else might be on the table?
You guys are relentless. You know that I will tell you what I can when it's available to be publicly released. What I can answer with respect to the MOU we signed with Validus is that we're absolutely exploring Potential power options with Validus. Validus has a number of different options from a power perspective, primarily behind the fence generation. But at this point, it is still exploratory.
And when there is something official to announce, I promise I will do so immediately.
Okay. Fair enough. Appreciate the limitations you're forced to operate within. So Jimmy, can you add a little more color on that reversal of impairment, please? I just want to make sure I All of impairment, please.
I just want to make sure I understand the accounting background there. It was a big number, like 13.2.
That's correct. Yes. So it's important to understand the historical context here. So At
the end of
2018, it was very tough Bitcoin. Economics were in the heart of the crypto winter. Bitcoin was obviously hovering in the mid-3000s. And there was a large impairment that took place then. And some of that impairment was to the actual infrastructure of the sites that we have.
And so because Bitcoin has recovered and the Bitcoin economics, Especially in the past few months have been so strong, we were able to recover some of the impairment that was allocated to infrastructure on Right. And so it's a reversal of a prior impairment, to $13,200,000
Was it booked in 2018 or was it booked in 2020?
An impairment was booked in At the year ended 2018, and a reversal of that impairment was booked in 2020.
I see.
Okay. A
portion of that impairment.
Could either one of you sort of enlighten us On your plans for the equipment that's being phased out. I know I think maybe some of it is S9. So I'm just kind of wondering How you're handling it, even in the current environment and S9 can be run profitably, but given your power limitations, I'm just Sort of wondering what sort of value might be able to extract from things that are being replaced with the new microBT beer?
Yes. Great question. And we're exploring our options there.
Okay. That's how you walked in this morning, right? Our legal counsel instructed us to say, exploring our options.
Yes. You got that right. We are staying very much on-site here, my friend.
Okay. Well, I appreciate that. Thank you for indulging me. Thank you, Jimmy, for the Anytime, Kevin.
Our next question is from Gregg Petruiskey.
Yes, kind of along the lines of the other questions, I'm trying to understand the nature of the business and I'm trying to understand What is the actual physical run life of these miners? What is their depreciation life? And what is a CapEx per year requirement just to maintain existing mining capacity.
Jimmy, do you want
to start?
Yes. Yes. Exactly. I can pass it back to you on the last piece there. So The way that we account for we have 2 different columns in our notes On the types of how we separate our equipment, it's the chips and the infrastructure.
And so the chips And the actual units themselves, we have taken a conservative approach and have the useful life of 2 years where the infrastructure is at 4 years. We have already seen for we've already seen this equipment going past its useful life. So in these economics where you see strong Bitcoin economics, a big run-in the Bitcoin price, yet Constrained supply of new equipment, what we've seen is an elongated life on some of this older equipment. And the infrastructure, a lot of this consists of various pieces like transformers, boxes, wires and Everything that took to put the site together, and most of that we expect to go past 4 years as well. Or individually, all of these items have a life of more than 4 years.
Maybe I'll pass it back over to Jamie to talk on that last point there.
And sorry, Greg, remind me your last question.
Well, I'm trying to understand. So I think I understand that the infrastructure useful life is Plus 4 years, is that also true of the chip life? Is it plus 2 years? Is it the depreciable life plus An additional amount or I'm trying to get an understanding of what is the CapEx requirement to maintain existing capacity Production.
There's a last question there, Jamie. So go ahead.
Yes. Greg, it's a really difficult question to answer. We use an extremely Conservative depreciation schedule, as Jimmy spoke to, being a 2 year schedule for the mining hardware itself. Although, again, as Jimmy mentioned, the use the actual useful life of the hardware is certainly beyond that. And with the newest generation of equipment, we expect it to be significantly beyond that 2 year window.
And So it's really difficult to give you a CapEx projection based on where things are in the cycle, The very limited supply of the current generation of chips and the fact that, VICCIMONI Economics Has extended the useful life and it's difficult to predict how long that useful life will be given How difficult it is for the Hash rate to come up with the supply constraints.
Okay. So maybe to ask The CapEx question in a different way, how much does it cost per year just to maintain existing production level? And that's a pretty basic maintenance CapEx number.
Yes. It would be in a normal industry.
Go for it.
Well, I'll give my answer and then Jimmy, you can chime in. Greg, in a normal industry, it would be A pretty standard answer to give you, but the reality of what we've seen for the CapEx requirements for the current Newest generation of mining hardware. The price point has gone up about 6x in the last 6 months. And we so it's really, really difficult to give you a number. The pricing of that equipment changes So significantly in such a short period of time, any annual CapEx guidance I gave you would be Very heavily assumption based and it's difficult to give you a firm number, again, based on the volatility of the pricing involved in the hardware itself.
Okay. Thank you.
And our next question is from Rob Alloway.
Good morning and congratulations on the great numbers from last year, which was easy to forget. It was a difficult year. My question is much broader than the previous ones. Bank of America had a no out called Bitcoin's dirty little secrets. I just wondered if you could speak briefly to kind of what you see as the ESG challenges for mining going forward for the next year?
Yes. It's a really difficult question to answer. And We are doing a lot of work on building out our ESG narrative and our ESG strategic plans. So that That is something that we're looking at quite aggressively as a new leadership team. The Bikwe mining Industry, in general, because it's so focused on the lowest possible cost of energy, tends to focus on energy that otherwise Isn't being used, wasted energy, stranded energy, that's really the lion's share of energy consumed by the Bitcoin network.
And then the other comment I will make and I made this one last week. It's funny for me how This narrative comes at the Bitcoin industry so aggressively, but it doesn't come at The data the mainstream data center world, the cloud computing world. And there are all kinds of really, really The consumers of data and therefore of power, but that this narrative seems quite Targeted towards Bitcoin itself. And again, because Bitcoin cares most about the lowest cost of energy, It's usually using energy that would otherwise be wasted. So certainly a narrative that we're working on, you're going to see more and more come from us In this space, but that's kind of my thoughts at a very high Rob, Jimmy, I don't know if you have anything to add.
No, that's great.
I mean, we hear a lot about the kind of the stranded power, but if you're running from the grid, then you are taking kind of Available power or a miner is and there is a carbon dioxide Toll for that for the mining community, do you see any concerns about regulations? Do you see any Concerns that beyond the price of power that the renewable powered miners are going to have some sort of edge on a go forward basis?
I think it's not something I can speak to directly at this time. But Again, it's something we're spending a lot of time and energy focusing on, and we will be building out a strategy and sharing it over the next few months.
Great. Thank you very much.
Anytime, Rob.
Our next question is from Matt Szyminski?
Hi. I noticed the majority of that revaluation gain is ran through AOCI and not Net income, can you explain why?
Sure. So there's been guidance From the regulators and on how to approach Bitcoin and other cryptocurrencies. And the guidance is to classify Bitcoin as an intangible asset. It's under IFRS. The way that it works is that any if you have a loss On an intangible asset, then it goes through the income statement.
If any of that loss is reversed, then it goes through the income statement as a gain, We did for us for a portion of that gain. Anything above that Goes through goes straight to the equity section of the balance sheet. And so we're constrained with The requirements under IFRS and the guidance given by the regulators in Canada, which we have to follow.
Okay. So is it safe to say for future revaluation in quarters ahead for the appreciation in Bitcoin will be ran through AOCI Going forward?
Yes. Unless there is a period where we mark Our Bitcoin down, we will be able to reverse that through the P and L. Anything more would exactly as you say Go through the go through OCI.
Okay. Thank you.
And we have no further questions at this time.
Okay. In that case, again, I want to thank everyone so much for joining and for your support, and we look forward to Speaking to you again in the not too distant future on our Q1 financials. Thanks so much. Have a great day, everybody.
Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating and you may now disconnect.