Welcome to the Hut 8 Mining second quarter filing conference call. My name is John, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you do have a question, press star then one on your touch-tone phone. Please note the conference is being recorded. Now I'll now turn the call over to Andrew Kiguel.
Thank you very much, Welcome everybody to the Hut 8 Q2 conference call. As per previous quarters, the call is being recorded and will be posted on our website. As well, joining me here is Jimmy Vaiopoulos, our CFO, who will review the financials, and then we will open it up to questions. For the second quarter, just to get right into the highlights, we recorded record quarterly revenue of CAD 28.3 million and adjusted EBITDA of CAD 17.3 million. We mined the most Bitcoin that we've ever mined in a quarter at 2,816. Our net income for the quarter, including the revaluation, was CAD 33.7 million, which works out to CAD 0.43 per share. That included a gain of CAD 22.4 million on the reassessment of our Bitcoin inventory. As most people on the call would know, part of our value proposition is to retain our Bitcoin inventory.
For that quarter, we were able to benefit from the price of Bitcoin increasing throughout the quarter. We were also successful in decreasing our corporate overhead. It was reduced to CAD 637,000 from CAD 747,000 in Q1 and CAD 994,000 in Q4 2018. We're quite proud that we were able to reduce our various initiatives to reduce our cost per Bitcoin to CAD 2,757 per Bitcoin as compared to CAD 3,950 in Q1 and US $3,950 in Q4, Q2, our working capital has also increased. Just maybe with that, I'll turn it over to Jimmy, I'll make some closing remarks.
Thank you, Andrew. This is Jimmy Vaiopoulos speaking, CFO of Hut 8. Before continuing, I'd like to remind everyone that all amounts in the financial statements and discussed on this call are in CAD, unless stated otherwise. This was a record quarter for Hut 8 in nearly every respect, including revenue, Bitcoin mined, lowering of operating expenses and overhead, cost per Bitcoin, adjusted EBITDA, and net income. This quarter started strong as the Bitcoin price began a significant rally on April 2nd, 2019, when Bitcoin increased by 18% in one day. Over the quarter, the Bitcoin price increased 160%, while the network difficulty increased by only 24%, allowing for an increased overall mining profit margin of 63% for the quarter.
In the second quarter of 2019, Hut 8 mined 2,816 Bitcoin, resulting in revenue of $28.3 million, compared with the same period of the prior year of 786 Bitcoin mined with revenue of $7.8 million. The reason for the difference year-over-year was because Hut 8 increased the number of BlockBox under operation to 85 in Q2 2019 from 17 in Q2 2018. We continued to focus on the optimization of electricity, allowing for the decrease in operating cost by 18%, from $12.6 million in Q1 2019 to $10.4 million in Q2 2019. Hut 8's cost per Bitcoin for Q2 2019 was $2,757, a 30% decrease from the prior quarter in Q1 2019 of $3,950. In a quarter where network difficulty increased by 24%, it was an achievement for Hut 8 that the cost per Bitcoin decreased by nearly $1,200.
During this time of improved Bitcoin mining economics and increased margins, we stayed focused on maintaining our lean cost structure as the overhead expenses continued to decrease quarter-over-quarter steadily. Expenses excluding non-cash share-based compensation for Q2 2019 were CAD 637,000, compared with CAD 747,000 in Q1 2019 and CAD 994,000 in Q4 2018. Our strategy of mining and holding Bitcoin has paid off as there was a CAD 22.4 million gain on the remeasurement of Bitcoin holdings in Q2 2019. The gain from remeasurement in this quarter was larger than the losses related to these remeasurements in all of 2018 combined and was a result of a consistent strategy to retain the most amount of Bitcoin through operations. Adjusted EBITDA was CAD 17.3 million for Q2 2019, which nearly equals the adjusted EBITDA for the full 2018 year of CAD 19.3 million.
Overall, in the second quarter, net income was CAD 33.7 million, which was an earnings per share of CAD 0.43 per share. The increase in Bitcoin price in Q2 2019 also strengthened the balance sheet of Hut 8, as the adjusted working capital as at June 30th, 2019 was CAD 38.2 million, a large increase from the March 31st, 2019 adjusted working capital deficit of CAD 497,000. I will now pass the call back over to Andrew.
Just some closing remarks. The strategy paid off for us in Q2. We continue to see that the strategy, I think, will continue to pay off in Q3. Where we valued the Bitcoin at the end of Q2 is roughly where it's trading today. The only key differences is that through Q2, the average price of Bitcoin was around $7,300 through the quarter, and it's been fairly consistently in the five figures so far in Q3. While the quarter is just a little bit over halfway done, we would anticipate that revenues for Q3 would be higher as a result of that. We see how it goes. We continue to focus on the same strategy, which is we only want to mine Bitcoin. We want to be the lowest cost producer out there, and continue to strive for that effect.
As I said in my quote, had we sold off a bunch of our Bitcoin at the end of Q1 as a lot of people were suggesting, we would've missed out on that gain. We continue to monitor it. We view ourselves partially as managing that inventory. We continue to monitor it and be strategic as to when we sell to try and make sure even when we're financing our fiat cost, that we try and time when we're selling. So far this quarter, we've been very successful in doing that. So despite where you might see the price of Bitcoin at every given moment, generally, we've been selling at higher prices and taking advantage of those peaks that we've been seeing. My last comment, just with respect to correlation between the Hut 8 price and the price of Bitcoin. Correlation is a historical-looking figure.
One of the things I've been questioned on is in the past, when we have had a correlation of around 90% for the price of Bitcoin, it's always a backwards-looking measure as to, at that time, if you do the analysis and the correlation, that's where we've been. One of the things that we saw over the course of Q2 is unfortunately, that the correlation between the Hut 8 price and the price of Bitcoin sort of decoupled a little bit. While we still have a pretty good correlation to the price of Bitcoin, it's dropped over the quarter closer to 69% from what used to be closer to 90% or even higher. Again, we don't control the share price. We don't control that. We do our best to perform, be transparent to the market, and stay within the mandate that we have.
We hope that the market responds. Obviously, we'd love to have a higher correlation to the price of Bitcoin, but again, we don't control the buying and selling of the market. We're just trying to be transparent and do a good job. With that, Operator, we will turn it over to our Q&A.
Thank you. I'll begin the question and answer session. If you do have a question, 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. Once again, if you do have a question, press star then one on your touch-tone phone. Our first question is from Deepak Kaushal from GMP Securities.
Hey, guys. Good morning. Thanks for taking my questions.
Sure.
Pretty straightforward quarter following your pre-release earlier in the summer. Andrew, you mentioned that you're strategic on when you sell your Bitcoin. By all math, I kind of noticed your fiat cash balance has kind of increased in the quarter. Does that imply that you guys sold more Bitcoin than you needed to cover your costs? If so, what's the rationale behind that?
It's never selling more than we need to cover our costs. There was a period of time there where Bitcoin was trading well over CAD 13,000. We can make the choice to say, "Okay, do we sell some additional Bitcoin here to cover two months of fiat expenses or three months of fiat expenses so we know that that's locked in?" Provide the additional safety at what we think is a pretty good price, relative to what some other companies do, which is they just mine it and just sell it as soon as they mine it. You're not able to capitalize on that. I wouldn't say that we're selling more than we need to.
What we're doing is being strategic to say we know what our costs are going to be over the next four weeks, eight weeks, 12 weeks, we're capitalizing on those higher prices to make sure that we have that fiat on call. If the price of Bitcoin was to drop to $9,500 as it did early last week, we're not forced to sell in an unfavorable environment in order to finance our fiat costs.
Got it. Okay. That makes sense. On that vein, so by my math, roughly, you guys sold forward, maybe that's not the best term, but between 600 and 700 Bitcoin. Between the CAD 5 million. Is that math correct or within the core range?
It sounds like it's in the right range, and one of the things we've done, again, you have to wait till you see Q3, but subsequent to Q2, we've significantly, what I would say is, improved the balance sheet. Again, we were able to take advantage of some of those peaks in order to continue to make the company stronger. One of the things that I would hope you'll see in the next quarter is an improved cash balance, improved balance sheet, far less payables. Overall, since getting in here, we want to keep the balance sheet as clean and as stable as possible. We'll continue to strive towards that.
Okay. Speaking of the balance sheet, in terms of debt, I know that you have debt with Galaxy and Bitfury, and historically, it's been tough to get financial services as a cryptocurrency company. Have you seen any changes in that? Any options to fund the lower debt cost at this stage?
Yeah. We're always talking to various providers and going out to see if there's ways to refinance what we have at better rates. There's advantages and disadvantages to the two pieces of debt that we have. We're talking to people, but we haven't, at this point, seen something that is significantly more attractive. For example, you can find better rates on the coupon, but it comes with other strings attached, like allowing that third-party lender to hold all your Bitcoin and play around with it. We don't deem that necessarily as being a good risk trade-off, because you're taking substantial counterparty risk. Obviously, we're always looking. At any stage of Hut 8, since inception, we're always in discussions with various capital providers to see what's been done. We haven't issued any equity or done anything on that side since the company went public.
That's just because we haven't seen anything attractive, and so we'll keep our cards in play.
Okay. That makes sense and helpful. Excess Bitcoin selling only to pay forward some OpEx and trying to maintain that strategic balance sheet, still constrained on the debt side. How do you expand your mining capacity from here? Are you kind of in a pause mode until the capital markets get a bit better?
We're definitely not in a pause mode. We're always in conversation. There's a few things I obviously can't disclose material non-public here on the call. I think given our current Bitcoin balance, our current cash balance, we would be in positions potentially to do incremental steps to increase our capacity that could be done without jeopardizing a significant amount of our Bitcoin balance or our balance sheet position.
Okay, great. I just have one last question. Great cost controls. Just from a forecasting perspective, I guess the run rate of roughly CAD 650,000 a quarter in cash OpEx, is that something we can continue to expect going forward, or is there some seasonality in there? Then same on the non-cash side, on the stock-based comp side, what can we expect?
Yeah, I'm a guy who likes looking for, apart from the big picture, but I also like looking for nickels and dimes in the corners. Something that's not reflected is we went into the City of Medicine Hat, and we were able to renegotiate our land lease costs and decrease it by about 89%. That's something that'll show up. It's somewhat significant. I think it's about CAD 160,000 a year. We continue to negotiate things, all of our contracts to see what we can do better. We've recently moved into a new office, and while we had very cheap rates before, we've been able to even lower that further. We're always looking for ways to decrease, but I don't see that, unless there was something out of the ordinary, I don't see that our overhead would be increasing.
With respect to the mining operations, we continue to find ways to optimize and run that better. The one there is just the difficulty. For listeners on the call, if difficulty goes up, inherently that means that we're mining less Bitcoin, and as a result, our price per Bitcoin goes up because our costs are somewhat fixed. We continue, again, to look at every single aspect of the operations to see where can we reasonably reduce our costs and continue to deliver value to shareholders.
Okay. Great. Well, thanks for taking my questions. I will pass them on.
Our next question is from Matt. Please go ahead. Matt, your line is open for your question. I'll go to our next question, it's from Dan Weiskopf.
Hi, Andrew. Dan Weiskopf here.
Dan.
Good quarter. Thank you.
Thanks.
Last quarter, I think we touched on electric cost volatility. Maybe my term's not exactly correct. Have you seen a lot of spikes in that area again? It's an art to manage it, so can you make any comments on how you're managing the volatility in your cost in that area?
Sure. I would divide it into, what I would say, three different areas. About half of our electricity purchases are somewhat locked in, and that's through the 10-year agreement with the City of Medicine Hat, and that's been very successful. While it's not 100% locked in at a price, it's fairly predictable and, in our view, very low cost, not just on a Canadian basis, but on a worldwide basis. On the balance, there's two areas. We buy some additional electricity in the City of Medicine Hat. As I've mentioned before, we always look at it in terms of a very large matrix, the price of Bitcoin versus the price of electricity. In some areas, it makes sense for us to curtail our use of electricity and sell it back into the grid. We find ways to make money there.
In situations where the price of Bitcoin has been lower, but the price of electricity spikes on the grid, we're actually able to make more money in those instances than actually mining. There's another piece of it, which we call. This is very interesting. Again, we continue to improve upon this. So far this year, we've done a good job and we continue to improve. Because what we're doing, Hut 8 isn't running a hospital or a manufacturing-intensive process. We're able to shut down our operations within two minutes and start them back up within two minutes. What we have found is, without actually having to curtail, so that's without actually having to shut anything off, the utility provider will actually pay us for the ability to potentially turn us off for limited periods of time.
There's been periods throughout the summer where, again, we haven't actually ever had to curtail it, but they've come to us and said, "Look, we will compensate you or lower your price just for the potential ability to shut you down for a period of time completely at our choice." They'll pay us for that. The initiatives we've done around managing our electricity prices have been very successful, and continue to get better.
Thank you. One other question, maybe I probably see this in the filings, but it looks like you personally bought stock. Is that exercise of options, or did you buy in the open markets? Were you awarded the shares? I'm seeing it on Bloomberg, but I don't know.
That was part of my RSU package.
Okay. Thank you.
Once again, if you have a question, press star then one on your touch-tone phone. We do have that question again from Matt. Please go ahead. Matt, your line may be on mute.
Hello?
Hi, Matt just came through.
Okay.
Can you hear me?
We can.
Oh, thank you. Yeah, my question was around the Bitfury partnership, where they've been able to give you some financing to do the expansion of the infrastructure. Do you have the flexibility in the right Bitcoin environment where you could pay off those types of loans in Bitcoin if you wanted to, and then expand down the road?
Yes. The loan agreement we have with Bitfury has no prepayment penalties, no security. It's just a lot of flexibility. It's a very attractive loan from our standpoint. Because that loan is so attractive, I think we'd be less inclined to repay it. But we absolutely have the ability to pay off the loan in Bitcoin, as well as our monthly expenses in Bitcoin to Bitfury.
Great. Then just a follow-up to that, do you foresee, and again, we don't know with Bitfury, but do you see a potential where they would have a nanometer shrinkage with their ASIC chip where, say hypothetically, it's a 12 nanometer, 10 nanometer? Is that something you envision they could do because of the network hash rate difficulty going up over time with Bitcoin? Do you foresee that that's potential? I have no issue with what you guys have done. You've done an excellent job with your operations. Let's say 6-12 months down the road, do you think Bitfury may potentially release a new die shrink of their ASIC? If you can speak to that or not.
Yeah. Again, we have various types of chips from Bitfury. The last purchase that we did was our most profitable and our best performing piece of hardware. I think if we were to do anything with them, it would have to be at least at that level or better. They're a very large company. They're continually looking for ways to make the chips more sophisticated and more efficient. Absolutely, it's a little bit of an interesting quandary, which is we can invest money to upgrade the efficiency today by selling a whole bunch of Bitcoin, potentially lose the appreciation on that. The existing equipment, even our oldest equipment with our least efficient chips, still showing very strong profit margins.
From our perspective, I think if we were to look at doing something like this, we'd look to first look to upgrade the oldest equipment, although it's still profitable. We want to wait and see what happens with the halving coming up, what happens with the price of Bitcoin. It would never be our intention to just operate chips that aren't efficient or aren't providing profit for shareholders.
Absolutely. I think from my perspective, because I've looked at the sector from CryptoStar to a lot of other ones in the U.S., you guys, I think, are the only real group that can pay some costs in Bitcoin and you're stacking sats. I congratulate you guys on that. I think most shareholders like myself are pretty happy with that. I guess my last question would be, in Alberta, do you guys still have allocation for power capacity that you could expand there with those partnerships? That will be it for me for questions. Thank you.
Yeah. We're looking at a bunch of different potential sites for expansion. We haven't locked anything down. I think a lot of it depends on to build out a new site. I think in Medicine Hat, currently, there isn't much room for expansion there. They're in the process of building another turbine there that potentially could allow us to expand by 42 MW, and that would be contiguous to where we're set up now. That's probably 24 months away from being built or longer. We're in discussions with various other potential sites in Alberta, Quebec, the U.S. The question there is there any availability of capital? There certainly has been limited in the past. Can we do something that is accretive to shareholders?
We don't want to be in a position that a lot of other people are in, where you're just issuing a bunch of cheap equity and then having to suffer for that later on. It's important for the management team to keep the balance sheet or the capital structure somewhat clean. I think from a warrant perspective and an options perspective, we're extremely clean compared to lots of other small caps and other guys who are in the space.
Our next question is from Hafin Shah. Please go ahead.
Good morning, guys. Great quarter. I want to see if you could comment on any changes on the competitive landscape. Because Blockstream recently announced that they have like 300 MW capacity in Quebec, and maybe you can comment on some changes in the industry.
Yeah, I saw the Blockstream stuff, and they announced an affiliation with Fidelity. I can't seem to find any information as to whether or not they've raised any capital. Look, I could put out a press release later this afternoon that says we have access to 300 megawatts. We have sites and things that are ready. The issue is that building out the sites requires a lot of capital. We prefer to err on the side of being conservative, and until we are able to actually finance and build a site, announcing that we have availability of megawatts shouldn't actually mean very much to people. Blockstream seems like a credible company, but again, other than them saying that they have access to this capacity in Quebec, we speak to Quebec all the time, and there's certainly potentially availability there. It comes down to what's the price.
I think they announced that they have access to power at CAD 0.06. I would say that's about 30%-40% higher than what we're paying now in electricity. Until we see an announcement that they were able to raise capital, order the equipment, and the timeline as to when that's going to be built, to me, it's just promotional rhetoric. Again, we keep an eye on them. We keep an eye on all of the other publicly listed miners and some of the privately listed miners. There's good companies. Competition, I view that as more as the difficulty because our competition is worldwide from a public market standpoint. I think there's some good companies out there. There's some companies with challenges. We try and focus on us and making sure we run the operations as best as we can.
Does it make sense for you guys to have your own maybe solar or wind hardware?
We've looked at it. Solar is not very efficient. The problem with wind and solar is you're never going to get 100% uptime. Solar, we've not seen that the price is actually more competitive. We've seen it's more expensive. We have looked at, and we are looking at a bunch of wind sites. The issue is you can get some very low-cost, efficient power for wind, but if the wind isn't blowing, you can't operate your equipment, and so that's a bit of a risk. The things we're looking at is there a way to do a combination of wind? When the wind's not blowing, can you buy your balance off the grid? We're looking at all sorts of different alternatives, but like I said, we wouldn't be building our own wind stuff.
We know what we can do well and where we don't have expertise, so we wouldn't be building our own solar. We're working with several utilities, clean energy utilities, to see if there's something that makes sense. So far, we haven't found anything that makes sense. Again, because solar seems to be more expensive and not reliable, and wind is definitely attractive pricing, but the math needs to work. If you can only run your equipment 65% or 75% of the time, your IRR and return on that property is not going to be very strong despite the price of electricity.
Great. Thanks, guys.
Our next question is from Deepak Kaushal from GMP Securities.
Hey, guys. Thanks for taking my follow-up. Just a quick one, Andrew. Last quarter, you commented on the constraints you saw on the supply chain for new chips via TSMC, and what's kind of the update on that, and what's your thinking today on hash rates, which seem to be rising again? That's it for me.
Yeah, I think the commentary remains the same. We're constantly evaluating different forms of equipment that's out there, when you go to the large Chinese manufacturers, whether Whatsminer, Canaan, and Bitmain. If you go to their websites, and you try and look at the equipment, it all says, "Sold out." That's because they didn't manufacture a lot of it, and it says they will begin shipping in November. We're certainly seeing that the hash rate's increasing. I think that's probably just a bunch of older equipment that's being turned on. I think there's been some influx of new equipment, the question remains for people that are wondering if you're lucky, they're able to get the manufacturing done on time.
You can get on the priority list, but if it's being shipped out in November, that tells me that'll go to the people on the priority list for them. How fast can we get that up and running? My view is that you could see the hash rate increasing here, but the big fear is with the halving coming, do you want to invest in a whole bunch of new expensive equipment that may not necessarily pay off? Certainly, I think when we look at the Bitmain and the other stuff out there, the price per terahash is highly efficient equipment to the extent you can get it, but the price per terahash is high, and so you've got to wait.
At this point, I suspect people will still be waiting another 6 to 7 months between when they receive it, and then there's going to be time in putting it up. What happens between now and then? I think one of the advantages we have is that Bitfury does have chips available. They also have legacy sites available that can be upgraded. Our ability, should we choose to allocate our capital in that direction, when we're able to raise new capital, we could probably be up and running near and around the same price, similar efficiency, but we wouldn't have to wait until 2020 in order to get up and running. We could probably be up and running within 2 weeks with incremental capacity.
Okay. That's helpful. Thank you.
Once again, if you have a question, press star then one on your touchtone phone. I have no further questions at this time.
Okay, great. Thank you very much, everybody.
Thank you very much.
Thank you, ladies and gentlemen. That concludes today's call. Thank you for participating. You may now disconnect.