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. Please note that this conference is being recorded.
I will now turn the call over to Jimmy Biopulos. You may begin.
Thank you. This is Jimmy Viopoulos, 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 Bitfury by increasing our loan facility with Genesis Global Capital, which decreased our interest rate by 2%. 2nd, we renegotiated our master agreements with Bitfury as well, which lowered our operating autonomy to purchase equipment from any other Bitcoin mining supplier. Huday 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 2.5 months of Bitcoin mining this quarter, but that changed quickly on March 12 when the Bitcoin price collapsed by 37%, along with the S and 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 was all changing very quickly. For the quarter, Hut 8 mined 1116 bitcoin, resulting in revenue generation of 12,700,000, 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 Huttig continues to focus on being a low cost miner by optimizing our operations. Huttig recognized a share based compensation gain 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 CAD 1,300,000 from adjusting the value of the digital assets held at 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. Huday recognized negative adjusted EBITDA of CAD558,000 for the quarter compared to the same period of the prior year adjusted EBITDA of $1,300,000 As mentioned, the adjusted EBITDA losses from Q1 2020 mostly came from the last 2 weeks of the quarter when the Bitcoin price collapse as 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 Honey has been operating at our maximum capacity again to take full advantage of that. I'll pass the call back over to the operator open it up for Q and A.
Thank you. We'll now begin the question and answer session. And our first question online comes from Dietit Kaushal. Please go ahead. Your line is open.
Couple of questions for me. It's having day, I guess, a big elephant in the room is what your plans are post having how long do you sit and watch prices and hash rates before you shut down mining? And what are kind of your thresholds for that timing and what you need to see to get back on again?
Yes. Thanks Deepak. So there are multiple factors here and we're obviously going to be 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 2 days, we saw a near 48% just complete drop in the Bitcoin price, which mimics behaviors to what the having would do for the Bitcoin mining economics.
And so we did see a pretty significant adjustment in the 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 over time, we will have to find ways to adjust and may have to shut down 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 closely with suppliers and are prepared to do this. So this is the real plan and everything else is kind of the contingency, but 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 off?
So we look at that on 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 at 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 could dip into there without eroding too much of the upside of Bitcoin runs here?
Yes. I can't get too deep into this, but we do have options working towards. What I can say is it's likely to be a mix of self financing debt and equity debt and equity injections 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 sheet versus some other miners which sell on a daily basis. Any plans or thoughts of changing that strategy at this point?
No. That 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 I have 2 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 to Bitfury and 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 option to try to negotiate or without operating, not using any electricity, not using any software, anything along those lines, it would be near 0 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 there's been 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 I'm not part of it. But yes, that's really all I can say at this point.
Okay. Thank you, Lucas. Thanks for taking my questions. Yes, I'll pass the line and good luck with the timing today.
Thank you.
Thank you. Our next question on the line comes from Matt Yamamoto. Please go ahead.
Hey guys, good morning. This is Matt from CoinDesk. A lot of my questions have already been asked, but I guess more specifically on the CEO succession plan. I know Andrew said last earnings call that this is what was it? This month was probably his last month or I think it was April.
Yes. April was.
Right. And but he originally said that he was going to stay on board till his 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 and I believe he was going to stay on the Board. What was the change there?
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. I keep in touch with him.
But yes, I'm everyone was comfortable with me taking on that role and the business is operating as expected there.
So it
was a 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 Jerry Sinclair, the Board member who resigned not that long ago. Is there a reason for her departure?
No, there was no there 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 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's 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 Bitmain and MicroBT. I believe you guys are 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 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 mean, the next at the end of this month or in a couple of months. And there are companies who purchase some of this equipment, so maybe 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 2.
Got
you. And 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, 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.
In terms of just looking at, yes, short term assets minus short term liabilities, that would be the biggest variable there.
Sounds good. Thank you very much.
No problem.
And our next question on line comes from Ivan Garaventa. Please go ahead.
Hi. I'm very curious about the extent to which you're going to upgrade the equipment. I'm looking at AtMiner S19 and even the other equipment manufacturers, essentially they're highly 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 finance all of this?
Thank
you. So I think it's the last part. I think it was breaking up just a bit. Do you mind just repeating that last part of
the share? Sure. I'd be happy to. So I'd like to know to what extent you wish to upgrade the equipment you currently have on hand. Is it 50%, 75% of it?
And if so, considering the 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, we ideally, we would upgrade so that our full capacity is utilized. But what's more likely is that it's going to be in phases up to that level. And so, yes, so I'll leave that there. And in terms of shares, that's just based on ongoing discussions.
We would be we, of course, wanted to do a deal that's most accretive for our shareholders. And so everything is on the table in terms of options. Nothing has been set as of yet, but I wouldn't put that off the table or again, everything's in discussions right now.
Thank you.
Thank you. Our next question online comes from Joe Cesar. Please go ahead. Okay. It looks like we lost Joe.
We do have a follow-up from Detock. Please go ahead.
Hey, Jimmy. 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 having 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 you even though if you're a mine on your own account, you would be below profitability?
Just help me understand that question a little bit better. So we see compensate like so the way the pool fee works is we're just paying a percentage on all the Bitcoin that we mine through that pool. So I'm not fully clear on the compensation part of that.
Well, no, I just I don't know how to what extent this is true, but I'd read some industry reports that some of pools were giving some incentives to miners to keep their base Hash rate up so they could maintain a relative Hash rate. 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 2 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 to getting to a certain level like getting your own node and 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 2 megawatts, for example.
Got it. And then any changes in the M and A environment since I know it hasn't been long since our last conference call, any change in the M and 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, let's say, everyone talks more than maybe other industries. So we always stay close with the full industry and have our eyes open.
But yes, that's all I can really say at this time.
Okay. Okay. Well, thanks again for my follow-up.
Thank you.
We have a question online from Michael Lang. Please go ahead.
Hi. I have a question about your electricity cost and mining efficiency. Can you share a little bit about that? Yes. So in terms of so when you say electricity so in terms of our efficiency, that's derived mostly from our equipment and the chips that those are using.
Of course, we have 3 different generations of body 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 2 sites, one of which we're purchasing directly from a city, which is in Medicine Hat 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 discussions. So hope everyone's staying safe, and I'm sure everyone will be watching like me how things evolved 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.