Welcome to Hut 8's first quarter 2023 financial results analyst and investor call. In addition to the media release issued earlier today, you can find Hut 8's financial statements and MD&A on the company's website at www.hut8.io, under the company's SEDAR profile at www.sedar.com and under the company's EDGAR profile at www.sec.gov. Unless noted otherwise, all amounts referred to during this call are denominated in Canadian dollars. Any comments made during this call may include forward-looking statements within the meaning of applicable securities legislation regarding the future performance of Hut 8 Mining Corp. and its subsidiaries. The statements made reflect current expectations and as such, are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations.
These risks and uncertainties include, but are not limited to, the factors discussed in Hut 8's annual information form for the year ended December 31st, 2022, and the company's other continuous disclosure documents. Except as required by applicable law, Hut 8 undertakes no obligation to publicly update or review any forward-looking statement. During the call, management may also make reference to certain non-IFRS measures that are not separately defined under IFRS, such as Adjusted EBITDA and mining profit. Management believes that non-IFRS financial information taken in conjunction with IFRS financial measures provide useful information for both management and investors. Reconciliations between IFRS and non-IFRS results are presented in the tables accompanying our press release, which can be viewed on our website. I would now like to turn the call over to Hut 8 CEO, Jaime Leverton. Please go ahead.
Thank you so much, Colin. Good morning, everyone, and thank you for joining us to discuss Hut 8's results for Q1 2023. As you will have seen in the release, we began the year with some complications on the broader level, including a steadily increasing difficulty rate and high energy prices. At our Drumheller site, high energy input levels at the site have been causing equipment failures. In response, we began implementing multiple versions of custom firmware across all of our miner models. This firmware is designed to lower the power supply's maximum output voltage, ensuring our equipment operates within safe limits. Our teams at both Drumheller and Medicine Hat are actively engaged in repairing damaged equipment and remediating the issues at site.
We are actively increasing repair staff, are adding an additional repair center shift and have procured new hardware to expedite repairs and accelerate the speed at which we bring miners back online. At this point, we expect to have the site restored within 10-12 weeks. We are closely monitoring the situation and will continue to make the necessary adjustments as needed to restore, safeguard, and optimize our equipment. At the same time, our operations team is actively finalizing options to operationalize the bulk of the approximately 7,000 miners that were removed from our North Bay site. We were also pleased to report an all-time operating high for our Medicine Hat site of 1.72 exahash after energizing nearly 1,000 additional miners transferred from our North Bay site.
As previously discussed, 428 Bitcoin were sold in Q1 to continue to support our operational costs. We are not abandoning the HODL strategy, far from it, and continue to be the company with the largest unencumbered self-mined amount of Bitcoin held in reserve. In addition to managing our operations, we are laser-focused on completing our transaction with USBTC and have made solid progress on that front. We recently filed an amended Form F-4 registration statement with the SEC, confirming that New Hut's expected installed self-mining capacity will be 7.02 exahash, a nice bump from the 5.6 exahash which we previously disclosed, thanks to energizing additional miners at USBTC's sites. USBTC entered into a settlement with the City of Niagara Falls in early April, concluding all claims and paving the way to resuming mining activity at the site.
We also received a no action letter from the Canadian Commissioner of Competition, which confirms they do not intend to challenge the transaction before the Competition Tribunal. Finally, the waiting period under U.S. HSR antitrust legislation with respect to the business combination expired in early March, which is another step toward closing the transaction. Over the past quarter, discussion has increased around the halving, which is now less than a year away. In that context, our business combination with USBTC is a very strategic one. Under New Hut, we will create geographic diversity in our self-mining business, which will include differentiated energy sources in Texas, New York and Nebraska. We plan to improve efficiencies at the miner level by using USBTC's proprietary purpose-built software that can identify and mitigate machine and energy price issues in real time.
We will have flexibility for growth in new fiat revenue lines of business, including the 220 megawatt hosting business and 680 megawatt managed infrastructure operations business, with opportunities to amplify it further. I believe that in a post-halving world, single-threaded miners are more likely to struggle to stay competitive and will have more exposure to diminishing returns given the continued increase in global hash rate and the expectation that more sovereign nations and large enterprises with deep pockets will continue entering the mining space. We believe that having business lines that are CapEx light and scalable will prove to be of great benefit after the halving. Until then, we will continue to strategically grow our stack of Bitcoin. We will also work on capturing increasing HPC market share.
This week, we launched vulnerability scanning for current and future customers, which leverages automated tools and techniques to assess and identify potential security vulnerabilities before they can be exploited by hackers. We are also focused on growing our HPC customer base in the AI space. Our liquid stack, other GPUs, and additional infrastructure sets us apart from traditional data center peers in this space, and we are able to manage the shorter-term, higher demand requirements of these unique customers. Before I turn it over to our CFO, Shenif Visram, I would like to thank our board for their support and guidance, our executive team for their leadership, our team for their execution across the business, and our investors for their continued commitment to Hut 8. Thank you. Over to you, Shenif.
Thanks, Jaime, and good morning, everyone. Q1 was a challenging quarter from an operational perspective as we worked through the electrical issues at Drumheller and explored options for our miners that were displaced from our North Bay site due to the ongoing legal disputes. Both of these had an impact on our Q1 results. We achieved revenue of CAD 19 million for Q1 2023, a CAD 34.3 million decrease relative to the same quarter prior year of CAD 53.3 million. The year-over-year decrease was driven by a combination of lower Bitcoin mined and reduction in the price of Bitcoin, which more than offset the incremental contributions from the high-performance computing business we acquired at the end of January 2022. Revenue from digital asset mining activities was CAD 14.5 million as we mined 475 new Bitcoin.
This compares with CAD 49.3 million of digital asset mining revenue in Q1 2022 when we mined 942 Bitcoin. The year-over-year reduction in new Bitcoin mined was driven by a combination of impacts of the electrical issues at the Drumheller site, resulting in less mining activity, the completion of GPU mining, which we were doing in Q1 2022, and an increase in network difficulty. Our high-performance computing business contributed an additional CAD 4.5 million of revenue in Q1 2023, compared to CAD 3.3 million in Q1 2022. The increase was due to having one extra month of revenue in the current quarter. It is worth noting that Q1 2022 revenue included revenue from low-margin products and services that were eliminated during Q2 2022.
Cost of revenue for Q1 2023 was $25.2 million, lower than the prior year by $11.7 million, and consists of depreciation and site operating costs. Depreciation expense decreased to $10.9 million during the first quarter of 2023, compared to $18.4 million in the same quarter in 2022. The decrease was due to the lower net book value of digital asset mining assets after the recognition of the non-cash impairment charge in Q4 2022. This reduction was partially offset by a $1.3 million increase in additional depreciation from the HPC business. Site operating costs of $14.4 million was lower than the same quarter prior year by $4.1 million. Within the digital asset mining operation, site operating costs reduced by $4.8 million, mainly due to lower power costs.
The average cost of mining each Bitcoin for the first quarter of 2023 was approximately CAD 25,100, compared to approximately CAD 18,000 per Bitcoin in the prior year for the same quarter. The increase was due to higher power consumption per Bitcoin mined, increased energy prices, and ongoing electrical issues at the Drumheller facility, which was partly offset by the company's decision to curtail and increase efficiencies in the miners deployed compared to the prior year same quarter. We incurred CAD 2.4 million in operating costs related to the high-performance computing operation, compared to CAD 1.6 million in Q1 2022, due to the 1 additional month of operations in the current quarter.
In terms of margins, our digital asset mining operation generated mining profit of CAD 2.6 million in Q1 2023 versus CAD 32.9 million in the prior year same quarter. The decrease in mining profits is due to the reduction of Bitcoin price, increased network difficulty year-over-year, and the ongoing electrical issues at Drumheller. General and administrative costs were CAD 24.3 million for the quarter, compared to CAD 11.5 million for the same quarter prior year. The key drivers in the increase was the inclusion of one-time transaction costs in the first quarter of 2023 related to the merger with USBTC, along with one-time costs related to the decommissioning of our North Bay site.
We recorded net income of CAD 108.5 million for Q1 2023, compared to net income of CAD 55.7 million in Q1 2022. In Q1 2023, we booked a gain on the reevaluation of our as- digital assets of CAD 134.8 million due to the increase in Bitcoin prices since December 31, 2022. No gain was booked in the same quarter prior year. Q1 2023 included a loss on the reevaluation of warranty liability of CAD 0.1 million. Q1 2022 included a gain of CAD 54.1 million. Excluding these two items in both periods, net income in the current quarter was CAD 27.7 million lower than prior year same quarter due to the lower revenue from Bitcoin mining and the inclusion of transaction costs related to the USBTC merger.
Reflecting the operating results discussed previously, Hut 8 achieved Adjusted EBITDA of -$3.7 million in Q1 2023 compared to a positive Adjusted EBITDA of $27.1 in Q1 2022. Our balance sheet remains healthy, with minimal debt and a cash balance of $15.9 million as at March 31, 2023. Our Bitcoin holdings are marked at fair value and totaled $352.4 million as at March 31, 2023, based on 9,133 Bitcoin held in reserve. As previously announced, the company will be selling Bitcoin production to help fund operations while we work on closing the merger with USBTC. In the current quarter, while we mined 475 Bitcoin, our Bitcoin held in reserve increased by 47 as the remaining 428 were sold. Thank you.
With that, I will turn the call back to our operator for analyst Q&A.
Thank you. Thank you, Jaime and Shenif. We will now move on to the Q&A portion of the call. If you'd like to ask a question, press star, then the one on your telephone keypad. If you'd like to withdraw your question, please press star followed by 2. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Your first question comes from Mike Colonnese from H.C. Wainwright. Mike, please go ahead.
Good morning, Mike.
Hi, good morning. Thank you for taking my questions. Morning, guys. How are you?
Fantastic, thank you.
Great. Great. Well, yeah, first question from me. You mentioned Drumheller is operating at 15% of installed capacity currently. If you could just remind us of the total installed capacity at the site currently, and if any portion of your mining fleet has been permanently damaged from the ongoing energy issues at the facility?
We believe everything will be able to be fully repaired in that 10 to 12-week interval. The Drumheller site operates at just under 900 petahash at full capacity.
Got it. Got it. That's great to hear things will be back up online in the near term here. Then, you know, Jaime, you mentioned, you know, some interesting comments there on the post-halving environment in your release, and again, in your prepared comments. Could you elaborate more on your expectations for diminishing returns for the mining industry after the next halving and your thoughts around, you know, some of these new entrants that could come into the space?
I mean, I think we've seen new entrants continue to come into the space, even during these difficult bear market conditions. We continue to see network hash rate hitting all-time highs. From my perspective, just based on what we're hearing and continuing to see, I think that hash rate is going to continue to grow. We know that there are some sovereign nations that have started to mine directly themselves. We think that's a trend that is going to continue. We think we're gonna see new entrants come into the space over the next short to medium term, in particular, from the oil and gas sector.
Obviously the halving brings a 50% reduction in the block reward and with our expectation that we're gonna continue to see new entrants that have lower sensitivity in some cases to operating expenses and in some cases, access to deep pools of capital. I think for us, we're very focused on having a diversified strategy that allows us to continue to self-mine while also introducing new fiat-based revenue streams. Obviously, Hut started with our HPC business last year, and USBTC has done a great job building out their hosting business as well as the new category, which is managed infrastructure operations. We very much like the optionality the diversification gives us in a post-halving world.
As I mentioned, we continue to believe in holding our Bitcoin on balance sheet and think that will continue to be a source of advantage for us as we move past the halving.
It's really interesting color. I appreciate your views and good luck with completing the merger here.
Thank you so much. I really appreciate it, Mike.
Your next question comes from Joseph Voci from Canaccord Genuity. Joseph, please go ahead.
Hey, guys. Good morning.
Hi, Joe.
g the questions. I was just wondering, going back to comments on cost per Bitcoin, if you could perhaps parse out where how much of the electrical infrastructure issue at Drumheller drove that price Bitcoin cost per Bitcoin produced up versus perhaps energy prices? Then I'll have a follow-up.
Jaime Leverton, over to you for that one.
Yep. Thank you, Jaime. Thanks for the question. When we kind of look at the Drumheller location, it was a combination of issues. Where we did see power rates increase was specifically in that location. At our Medicine Hat location, year-over-year, our power costs per kilowatt hour were roughly the same. You know, the bulk of the increase from a power rate perspective was in the Drumheller location. The other piece that we saw the increase in the overall cost was just the number of kilowatt hours we're using to actually mine the Bitcoin, which is really a reflection of the network growth across the Bitcoin, along with the fact that some of our more productive miners were offline in Drumheller as we fixed them.
That's kinda at a high level what drove the increase there. I'm happy to take on a follow-on if needed.
Sure. That's good color. Maybe just on the USBTC merger, I know that's a, you know, you know, you're in the middle of it still. Could you provide us maybe perhaps, you know, some a timeline around when that amended document went into the SEC? You know, how extensive was their commentary first time around? Just trying to get a feel for, you know, perhaps, you know, the scrutiny the SEC may be putting on this before it gets done.
Yeah. I mean, we submitted the updated S-4 nearly three weeks ago. We can't give specific color to SEC commentary. I can say that we're still working toward closing the transaction in late Q2, possibly early Q3, just given where we are in the process.
Sure. That's enough color, Jaime. Then, you know, maybe you've got a little more deep dive update on how USBTC is doing right now and, you know, perhaps some progress they made in the quarter here before the merger. Thanks a lot, guys.
Yeah. I touched on as much as I can touch on, which is, we're now expecting 7.02 exahash on the other side of a successful merger from a self-mining perspective. I also touched on the successful resolution that they had at the site in Niagara Falls. That's really as much as I can give with respect to their progress over the last three months.
Sure. That's great. Thanks a lot, Jaime.
No, my pleasure. Thanks, Joe.
Your next question comes from Bill Papanastasiou from Stifel. Bill, please go ahead.
Morning, Bill.
Hi, guys. Hi. Good morning. Thank you for taking my questions. Just had some questions related to kind of the outlook of the market and Bitcoin. You know, recently we've seen an increase in the appetite to mine Bitcoin outside of North America. Jaime, perhaps you can speak to how management views geographic diversification and whether it's becoming an increasing importance to the company. Have there been any markets recently that, you know, have seen exahash come online that have caught your attention?
Well, look, I think, for us, we were the only scaled publicly traded miner that had operations entirely based in Canada. For us, when we were looking at the merger partner that we thought made the most sense, bringing geographic diversity, was certainly a key component of that. In the case of USBTC, that brings some diversity within the U.S. as well, their sites being in Nebraska, Texas, as well as New York. Certainly that was our primary jurisdiction that we were looking to expand into and really looking forward to getting to the other side of this transaction.
I've looked at a number of geographies over the last couple of years, and I think the energy crisis has really changed some of those dynamics and markets that may have been more interesting to me prior to the energy crisis. I think, we are seeing an increase of hash rate and interest in coming out of South America, which is a more recent expansion of development. As we've seen recently, interest really in all things blockchain and crypto is very much at the forefront within the UAE, and we expect to see that focus and attention continue.
Great. Thank you for that. For my second question, if I may. You know, we've recently seen significant demand for block space with introduction of Ordinals and kind of this new token standard, BRC20.
Mm-hmm
... which has led to, you know, substantial increases in transaction fees and has greatly benefited the Bitcoin miners. You know, it's also caused a significant amount of debate in the community on whether, you know, the base blockchain should be used to settle JPEGs or things that don't pertain to transactions. I'm just wondering, hoping you could share your thoughts on the matter and its implications to the network and Hut 8 in the long run.
Yeah. Look, we're very excited about the promise of Ordinals, which is truly the first iteration of this type of transactions that we think we'll eventually continue to see on the blockchain. As you're kind of alluding to, we did see production double on May seventh, eighth when transaction fees hit a 2-year high because of the Ordinals activity. As we move closer to the halving, we do think an increase in the volume and amount of transaction fees provides a good incentive for miners like us to continue securing the network. Frankly, this has been a debate that's existed really since the beginning.
We know that the last Bitcoin won't come into circulation until the year 2140. When it does, miners will be entirely dependent on transaction fees in order to continue to have that monetary incentive to process transactions and secure the Bitcoin blockchain. I think for us to kind of see for the very first time transaction fees hit a level equivalent to block rewards in this most recent cycle of Ordinal activity is encouraging for the long-term prospects of the network and certainly the long-term viability of miners that are coming into this space or will continue to come into this space over the next 100 years or so. I think, yeah, that's really our perspective.
I think obviously this debate about block size is an age-old one when it comes to Bitcoin. I think what we'll see over the short and medium term is a significant increase in development across the ecosystem on layer 2s and we'll have to get more efficient in how we manage this type of activity in the Bitcoin ecosystem. I think it's really exciting for us as an industry to see so much innovation and development happening directly on Bitcoin.
Thank you, Jaime. You know, I've asked several management teams, that same question, and yours has been the most well informed.
Thank you.
They're calling you the guru. That's all they're asking.
Oh, that's so lovely. Oh my gosh, thank you so much. That's great.
There are no further questions at this time. I'll turn it back to you, Jaime, for closing remarks.
Okay. Well, look, thank you so much, everybody for joining us on the first quarter 2023 call. We look forward to continuing to update you as things progress over the balance of the year. Again, thank you for your time this morning.
This concludes the call. A transcript of this call will be available on the Hut 8 website in the investor section. Thank you for joining us at the Hut 8's first quarter 2023 financial results analysis and investor call. You may now hang up.