Welcome to the Q1 2020 earnings call. My name's 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. During the question and answer session, if you have a question, please press star then one on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Jimmy Vaiopoulos. You may begin.
Thank you. This is Jimmy Vaiopoulos, Interim CEO of Hut 8. Hope everyone's staying safe. We'll be discussing 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%. 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. 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. That changed quickly on March 12th 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. We limited our production to limit any losses, as this was all 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 CAD 692,000, excluding share-based compensation, compared with Q1 2019 of CAD 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 this quarter of CAD 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 1.3 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 CAD 7,194 on December 31st, 2019, to the March 31st, 2020, price of CAD 6,439. We've seen the Bitcoin price subsequent to Q1 2020 has since recovered significantly. Hut 8 recognized negative adjusted EBITDA of CAD 558,000 for the quarter, compared to the same period of the prior year adjusted EBITDA of CAD 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 as mentioned. 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 CAD 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 when Bitcoin miners make the most of their profits. 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. We'll now begin the question- and- answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, for any questions on the line, that's star then one on your touch-tone phone. Our first question on line comes from Deepak Kaushal. Please go ahead. Your line's open.
A couple of questions for me. It's halving day. I guess the big elephant 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? What are your thresholds for that timing and what you need to see to get back on again?
Yeah. Thanks, Deepak. 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. On March 12th, not that long ago, within two days, we saw a near 48% just complete drop in the Bitcoin price, which mimics behaviors to what the halving would do for the Bitcoin mining economics. We did see a pretty significant adjustment in the network difficulty rate. We expect something similar to happen today when the halving does happen. We have to watch that to really understand, and of course, we've seen some beneficial movement in natural gas pricing, which also positively affects us and allows us to operate at a higher rate for longer.
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. As I mentioned briefly on the call, we are working towards an upgrade, and that is in sight. We've been testing, we've been working very closely with suppliers and are prepared to do this. This is the real plan, and everything else is kind of the contingency bridging the gap to that point.
Okay, you don't have a threshold on Bitcoin price or net or hash rate that you're looking at right now for the switch on, switch off?
We look at that on a minute-to-minute basis. 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 12th. I didn't mean to interrupt you there.
Yeah. Okay. That makes sense. Okay. In terms of new equipment, 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?
Yeah. 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 injections, that would be. We do have capital on hand, willing to go alongside this and are able to partially self-finance an upgrade.
Oh, okay. To be clear, I know that you're in a CEO transition here. 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.
Right.
Any plans or thoughts of changing that strategy at this point?
No. That strategy stands. 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. I have two more questions, if I may. Just in the event that you do shut in your mining, what's your minimum burn rate you'd have to pay to Bitfury and the power companies to keep the lights on?
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. We do have that option to either negotiate or without operating, not using any electricity, not using any software or anything along those lines, it would be near zero there. In terms of scale of our business, it would be quite negligible.
Okay. That's helpful. Thank you. 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. I can't say too much, mostly because I'm not part of that 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 here in the near term of their plans. Because this is a CEO search, I am a candidate in that, so I'm not part of it. That's really all I can say at this point.
Okay.
Thanks for the questions, Deepak.
Thanks for taking my questions. Yeah. I will pass the line, and good luck with the halving too.
Thank you.
Thank you. Once again, for any questions or follow-ups, hit star then one. 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 had already been asked, I guess more specifically on the CEO succession plan. I know Andrew said last earnings call that this month was probably his last month, or I think it was April.
April it was.
Right. He originally said that he was going to stay on board till his successor was found. I believe he said 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. That could give you an idea of how near-term things are with the board. Yeah, there was a discussion that they had, and they said they're comfortable with me taking on that interim role.
while the board continues that search. I'm very close with Andrew. I keep in touch with him. Yeah, everyone was comfortable with me taking on that role and the business is operating as expected there.
Is Andrew
It was a mutual discussion.
Got you. Is Andrew still going to have a hands-on say in the operations, or is he not involved anymore?
Andrew does not have a formal role at Hut 8 anymore.
Got you. I wanted to ask about Gerri Sinclair, the board member who resigned not that long ago. Is there a reason for her departure?
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. This was 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, "I'm looking to step off.
Got you. How's the search for a new board member on that end?
Yeah. That's ongoing as well. The board's actively looking to fill that position as well.
Okay. For sure. 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 were looking at the newest equipment they had available, but as far as I know, that's largely been sold out. I'm just curious, what are your current options in terms of equipment purchases?
Yeah. 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. When I say that, I mean at the end of this month or in a couple of months. There are companies who purchase some of this equipment. It may be sold out from the actual supplier, but other companies or maybe perhaps you can say resellers also still have access to this equipment. 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 CAD 600,000. If you look at current assets, a large portion of that is Bitcoin locked in collateral. I'm just curious, a few months have passed since the end of March, I'm just curious what your current working capital situation is.
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, it's about CAD 6,400 that that Bitcoin is valued at. 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 for that.
In terms of just looking at, yeah, short-term assets, my short-term liabilities, that would be the biggest variable there.
Sounds good. Thank you very much.
No problem.
Our next question online comes from [Ivan Gaviria]. Please go ahead.
Hi. I'm very curious about the extent to which you're going to upgrade the equipment. I'm looking at ANTMINER 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. My question is, to what extent are you going to swap out the current equipment for the more efficient equipment? To what extent are you planning to issue new shares, possibly, to finance all of this? Thank you.
I didn't catch the last part. I think it was breaking up just a bit. Do you mind just repeating that last part about the shares?
Sure. I'd be happy to. I'd like to know to what extent you wish to upgrade the equipment you currently have on hand.
Right.
Is it 50%, 75% of it? If 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.
Yeah. In terms of the extent, ideally we would upgrade so that our full capacity is utilized. What's more likely is that it's going to be in phases up to that level. Yeah. I'll leave that there. In terms of shares. That's just based on ongoing discussions. We, of course, want to do a deal that's most accretive for our shareholders. Everything's on the table in terms of options. Nothing's been set as of yet. 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. If your line's muted, please unmute. If you're on a speaker phone, please pick up the handset. Oh, okay, it looks like we lost Joe. We do have a follow-up from Deepak. Please go ahead.
Oh, hey, Jimmy. Yeah, thanks for the follow-up.
Of course.
I know that last quarter you guys announced that you were switching over to a different pool. I am just wondering if that relationship changes the dynamics in the post-halving environment in terms of compensation. In the event that you do shut down or you are asked to keep running to support the base hash rate of the pool, are there any opportunities for them to compensate you even though if you were to mine on your own account, you would be below profitability?
Just help me understand that question a little bit better. When you say compensate, the way the pool fee works is, we're just paying a percentage on all the Bitcoin that we mine through that pool. I'm not fully clear on the compensation part of that.
No, I don't know to what extent this is true, but I read some industry reports that some of the pools were giving some incentives to miners to keep their base hash rate up so they could maintain.
Oh, okay.
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. Just any thoughts there would be helpful.
Yeah. There is two different rates for different levels of hash rate. Those aren't massively different. I wouldn't say there's any compensation worth noting related to that.
Okay.
There are some benefits to getting to a certain level, like getting your own node and certain items like that. Of course, you get more VIP status and more better customer service the larger you are, as opposed to being 2 MW, for example.
Got it. Then any changes in the M&A environment since, I know it hasn't been long since our last conference call, but any changes in the M&A environment that's notable or interesting to consider?
Yeah, 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, I'd say everyone talks more than maybe other industries. We always stay close with the full industry and have our eyes open. Yeah, that's all I can really say at this time.
Okay. Well, thanks again for my follow-up.
Thank you.
Once again, for any questions, that's star then one. Standing by. We have a question online from Michael Wang. Please go ahead.
Hi. I have a question about your electricity cost and mining efficiency. Can you share a little bit about that?
When you say electricity, in terms of our efficiency, that's 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. At a high level, our electricity costs mostly come from natural gas in Alberta, in the Alberta market. We have two sites, one of which we're purchasing directly from a city which is in Medicine Hat. 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. 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 three times from our oldest generation.
Okay. Thank you.
Okay, it looks like we have no further questions in queue.
Okay. Well, thank you everyone for joining the call. I'm always available for any offline conversations and further discussions. Hope everyone's staying safe, and I'm sure everyone will be watching, like me, how things evolve during the halving. All the best. Take care.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.