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Welcome to Hut 8 Second Quarter Analyst and Investor Call. In addition to the press release issued earlier today, you can find Hut 8's financial statement and MD&A on SEDAR and shortly on both EDGAR and the hut8mining.com.
Unless noted otherwise, all amounts referred 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 Hot 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 the quarterly MD&A for the 3 months ended June 30, 2022, as well as the company's MD&A and annual information form for the year ended December 31, 2021.
Any forward-looking statement speaks only as of the date which it is made, and the company disclaims any intent or obligation to update any forward-looking statement unless required by law.
I would now like to turn the call over to Hut 8 CEO, Jaime Leverton.
Thanks, Michelle. Good morning, everyone, and thank you for joining us to discuss Hut 8's financial results for the second quarter of the year. In our first full quarter generating fiat-based monthly recurring revenue through our 5 data centers and an increased mining capacity that grew to 2.78 exahash by June 30, we generated strong quarterly revenue while also increasing our Bitcoin holdings.
Notably, we continue to ramp up mining activities at our third mining site in North Bay, Ontario, and installed nearly 7,200 new miners across all 3 of our mines. We increased our hash rate by more than 9% since the end of Q1 as our sites continue to generate strong revenue and support the continued vitality of the company.
Looking forward, we anticipate organically growing our mining capacity to approximately 3.55 exahash by the end of 2022, while being ready as we always have to be opportunistic about any inorganic opportunities that might arise. Hut 8 is one of the only digital asset miners that hasn't sold down or encumbered our stack of Bitcoin, which speaks to our financial acumen and commitment to our balance sheet first approach.
Maximizing the value of the Bitcoin on our balance sheet is very much a priority for us and a key pillar of our business. We were very intentional in recalling the 2,000 Bitcoin that we had in our yield programs into our possession in mid-May before the contagion spread across the industry and plan to resume working our stack as soon as it's prudent to do so.
To that end, we continue to explore opportunities that will allow us to generate additional income in a responsible manner and anticipate that as markets stabilize, we will see compelling options materialize. We are one of the only digital asset miners that have diversified into the infrastructure space. And while we continue to be bullish on Bitcoin, we also believe strongly in the high-performance computing industry and the potential opportunities that lie ahead for HPC and the nascent blockchain and Web 3.0 industry.
We spent much of the second quarter rationalizing our HPC business and eliminating products and services that weren't delivering meaningful returns for us. We've completed the cleanup and are now ready to increase capacity and invest in building out the HPC infrastructure with the latest technology that will attract high-margin clients going forward.
We have a long-term vision to execute a business strategy with 3 pillars: one, continuing to mine Bitcoin in our pool environment; two, maximizing the value of our Bitcoin reserves; and three, growing our HPC data center business. Our long-term vision is to generate enough revenue from our high-performance computing business and working the stack to fund our digital asset mining operations without being reliant on capital markets, which can be both expensive and at times unreliable.
We have intentionally and successfully abstained from selling Bitcoin to fund our mining operations business, unlike many of our peers. We believe current Bitcoin prices are repressed and we're taking a long view on our reserves. For us, it doesn't make sense to sell Bitcoin at low prices only to fund additional Bitcoin mining. And we're cognizant that the having is not too far away.
I have mentioned this before, but it bears repeating. We have been anticipating and preparing for possible market volatility for approximately a year. We were thoughtfully conservative in the back half of 2021 to operate prudently and avoid becoming flip up into the bull run we saw last fall and winter, and I'm confident that we've managed the downturn well to this point, and we'll continue to successfully navigate the market by maintaining a balance sheet first approach going forward.
Before I turn it over to our CFO, Shane Downey, who will review our key financial results, I would like to thank our Board for their support and guidance, our executive team for their leadership and our team for their execution across the business. To our investors, thank you. We know it has been a very dynamic time for the broader industry and your support of Hut 8 is very much appreciated. Shane, over to you.
Super thanks, Jaime, and good morning, everyone. Given the challenging macro environment, we produced a solid result for Q2 2022. We achieved strong revenue of $43.8 million for the quarter, a 31% increase over the prior year quarter of $33.5 million. This performance was driven by strong digital asset mining activity with a solid contribution from the first full quarter of operations from the high-performance computing business, which we acquired earlier this year.
We achieved revenue of $39.1 million from digital asset mining activities as we mined 946 new Bitcoin. This compares with $31.4 million of digital asset mining revenue in the same quarter in 2021 when we mined 553 Bitcoin. Additionally, the -- sorry, operationally, this significant 71% increase in Bitcoin mined reflects the substantial increase in hash rate and efficiency as we've upgraded and expanded our entire fleet of ASICs and came despite the increase in year-over-year Bitcoin network difficulty.
Our newly acquired data center business contributed an additional $4.7 million of revenue, reflecting a full quarter's worth of revenue since we acquired the business at the end of January 2022. Cost of revenue for the quarter was $47.7 million compared to $16.6 million in the prior year and consists of site operating costs and depreciation. Increased depreciation expense from $3 million in Q2 2021 to $20.9 million in Q2 of 2022 was driven by the addition of approximately $178 million of new mining equipment and infrastructure over the past 12 months as well as approximately $25 million of data center fixed assets through the previously mentioned acquisition.
Site operating costs increased by $13.1 million to $26.8 million. Within the digital asset mining operation, site operating costs increased by $10.8 million, driven by electricity costs, which stemmed from a combination of higher power prices and a modest increase in consumption. $2.3 million of operating costs related to the high-performance computing operation, all of which are incremental year-over-year.
We have now substantially onboarded the team we need to drive profitable growth in our high-performance computing business. This includes sales, networking and cloud and data center operations personnel. In terms of margins, our digital asset mining operation generated mining margins of approximately 38% versus 62% in the prior year period, reflecting the combination of lower Bitcoin prices and the increased electricity costs. In light of these external factors, we were generally pleased with operating performance in the quarter.
Margins in our high-performance computing business were strong, and we continue to expect to fall into the 35% to 40% range as previously communicated. And as Jaime mentioned, in completing the integration of our HPC business, we identified certain low-margin products and services and have rationalized these offerings as a result. Following that exercise, we've withdrawn the revenue growth guidance provided as part of our Q1 2022 results, but I want to emphasize that we believe these rationalizations were prudent and position us well to realize profitable revenue growth in 2023.
General and administrative costs in Q2 were $12.3 million compared to $8.8 million in the prior year. The increase was primarily driven by sales tax expense, share-based compensation expense, higher insurance premiums and then salaries and benefits costs related to ongoing build-out of our team. Insurance expense reflects increased premiums driven by tight global insurance markets, combined with an expansion of director and officer liability insurance and then the incremental coverage related to our high-performance computing operations.
Sales tax expense increased by $1 million, primarily related to equipment purchases and imports during the quarter. SG&A expense related to the high-performance computing business were $1.9 million. We recorded a net loss of $88.1 million for the quarter compared to a net loss of $4 million in the prior year period. This net loss was substantially the result of noncash revaluation losses during the quarter.
Firstly, we recognized a $43.3 million gain on our warrants liability stemming from the revaluation under the Black-Scholes valuation model. And then secondly, the revaluation gain was more than offset by a revaluation loss on digital assets as a result of the decline in Bitcoin price during the quarter.
The company incurred a total noncash loss of $217.8 million on the revaluation of our Bitcoin holdings. $112.9 million of the loss was offset against accumulated gain recorded in other comprehensive income, and the remaining $104.9 million noncash loss was recorded as an expense in the statement of operations. Hut 8 achieved adjusted EBITDA of $6.8 million for Q2 2022, reflecting our ability to maintain profitability despite a challenging macro environment for digital asset mining. This compares with $14.4 million in the prior year period.
To address financial position. Our balance sheet remains healthy with a cash balance of $60.1 million at the end of the quarter. As previously announced, we entered into a USD 65 million at-the-market offering program in February of 2022. We raised approximately USD 61 million during the first 6 months of the year, which is approximately CAD 77 million. Subsequent to quarter end, we completed the remainder of the program and raised an additional USD 4 million or approximately CAD 5 million. The proceeds from these issuances were and will continue to be invested in the growth of the company.
In light of the challenging capital markets environment generally, combined with our -- combined with ongoing volatility impacting the digital asset space, we remain committed to our conservative approach to balance sheet management. We are pleased with the modest level of nonrecourse equipment financing in place and that our substantial digital asset holdings remain fully unencumbered.
Our Bitcoin holdings are marked at fair value and totaled $188.8 million as of June 30, 2022, based on 7,406 Bitcoin held in reserve. Our conservative approach to balance sheet management means we've been able to continue our long-term HODL strategy. We have not sold any Bitcoin since early 2021.
With that, I will turn the call back to our operator, Michelle, for analyst Q&A.
[Operator Instructions] Your first question comes from Chris Brendler of D.A. Davidson.
Congrats on the results. I guess I'll start with the cost per coin and the -- to the increase there. Can you talk about sort of just in general terms what your power cost did in the second quarter? And then perhaps most importantly, what it looks like going forward as North Bay ramps up? And then along with side that, just sort of give us some guideposts on how big as part of your operation North Bay will be at the end of this quarter?
You want to start?
Thanks, Chris. We expect North Bay to be at the full 35-megawatt capacity of Phase I by the end of this quarter. So I'll take your questions in reverse order. From a power perspective, we actively manage power at our sites in Alberta on a kind of a 15-minute increment cycle. Meaning we're always watching where power prices are. And when power prices get too high, we adjust operations accordingly. And that's a process that has always been in place and will continue to be in place as we pay close attention to the energy market. So I really can't speculate on where energy prices are going, but that's how we dynamically manage the sites that are grid connected in those 15-minute increment windows. And just as a reminder, we have -- our site in Drumheller is connected to the Alberta grid, whereas our site in Medicine Hat is connected directly to the Medicine Hat grid, which is separate from the broader Alberta grid, and we have different PPAs in place between those 2 sites. And then as you know, our site in North Bay is behind the meter, it's not grid connected.
Right. And I guess I wasn't really looking for a forecast on where energy prices are going, but just like the idea that we've talked about, I think, for months that this third site will have a much better power cost. So your cost per coin should start to fall even regardless of what power costs do. And I think power costs this quarter became problematic for many folks, just given the where energy prices were. We weren't expecting sort of the spike in natural gas prices. So not that surprised to see your site operating costs go up this quarter, but hoping that for the next couple of quarters, we'll see that start to stabilize as the North Bay ramps up?
Yes, exactly. That assuming we don't have more surprises on the grid side.
Got it. Okay. And just from a growth perspective in the mining operations. It looks like you -- there's some additional deposits. So can you talk about what new equipment -- new mining rigs you have coming? And maybe what you paid for them relative to what you may have paid in the past, and prices have probably come down?
So we haven't made any incremental orders from a mining equipment perspective. The remaining deliveries that we have are from a prior order that we made towards the end of last year, beginning of this year with MicroBT. And they come in, we get 1,000 units a month from that order through the balance of 2022, but we haven't made an incremental order.
Okay. Is that something that you think will be part of the plans in the second half? Like how much capacity do you have to expand beyond where you are today?
So as it stands today, we've placed the orders that we need to maximize the power that we have built out at the 3 sites.
Okay. And how much of the -- when you get there, how much of the operation will be North Bay, just roughly, percentage-wise?
Yes. So Phase 1 of North Bay maxes out at 35 megawatts, Drumheller is 42 megawatts and Medicine Hat is 67 megawatts.
Is there a second phase for North Bay at some point?
It is under contemplation.
The next question comes from Joseph Vafi from Canaccord.
Nice to see the emergence of kind of this 3-pillar strategy, just kind of a very differentiated approach, I think, at this point relative to peers. To start with, is the high-performance compute business kind of starts to move forward into growth mode, I guess, is the right way to look at it. How do you look at kind of investment costs and returns in the mining business versus high-performance compute, if you kind of look out over the next year? And where you want to invest or why you would deploy more investment capital into one side of the business or the other? And then I'll have a follow-up.
Yes. So great question, Joe. As I think we've proven over the past 18 months, we like to be opportunistic when we look at growth opportunities. So we run models based on, of course, projected returns. And I think this market environment is going to provide some unique opportunities for that continued opportunistic approach to growth. But really difficult to say what opportunities are going to present themselves in which pillar. We continue to look at growth in both and analyze the opportunities as they come forward.
Fair enough. So I guess it's fair to say is evaluate opportunities in real time based on all the dynamics and the economics on the mining side and what's going on in high-performance compute. Could you then give on high performance -- just give us a broader view of where you believe the demand environment is on the HPC side of the business at this point? Say you did start to ramp capacity there, how do you see that capacity being put to work and kind of what kind of tempo or cadence or even growth rate, I guess?
Yes, so we have 5 data centers, as you know, and each of them have addressed different market segments and have different capacity available. So we are looking at each of them and making determinations on where we want to invest, how we want to grow them out based on the demand that we're seeing in each geographic market. But at a high level, we're very active and engaged in conversations in the Web 3 ecosystem. We see a lot of really positive momentum coming in that segment with respect to our data centers and our offerings. It's a very unique position for us to be in, to have this full stack of infrastructure from mining all the way up two Tier 3 traditional data center assets, which really allow us to provide infrastructure for that Web 3 ecosystem that's unique in the space for us as a digital asset native company. So we see increasing momentum coming out of that ecosystem but also continued strength in growth from the existing base of enterprise customers that we have today and are incredibly grateful for.
Okay. That's great. And then just on the balance sheet cash, which is kind of a nice amount in addition to your HODL, is some of that cash committed on that order flow on the MicroBT units? Or would part of it at least be able theoretically kind of could be deployed or used for other initiatives that haven't already begun?
I'll let Shane answer that one with some specificity.
Yes. Perfect. We're substantially paid up on that final MicroBT order? So certainly, the intention all along is that, that $60 million cash balances at the end of the quarter, yes, it gives us an appropriate level of flexibility as we think forward through the balance of the year and looking towards the start of 2023.
The next question comes from George Sutton of Craig-Hallum.
Very nice to see the HODL strategy is starting to really pay off the last handful of days. So I was fortunate to listen to elevator music instead of your presentation for the first several minutes. So if you discussed this, I apologize. But I'm just curious, can you talk about the scope of the rationalization that you mentioned relative to the HPC opportunity? And how quickly do you think you can refill the square footage that you're talking about?
The rationalization was more specific to lower-value product offerings that existed. And so we rationalized 2 of those product offerings that were not in our target margin window as opposed to specifically white space rationalization.
I understand. Okay. That's helpful. And I know you've been in my word slow playing the machine purchases a little bit going out given the fact that the prices have been coming down. Where do you think things sit from a broader perspective here with Bitcoin prices starting to strengthen?
There's a lot of mining hardware available that is landed in North America. We haven't seen the price move much over the last few weeks. But as I think I've touched on before, we have the mining equipment that we need for the power that we have built out or ramping for the balance of the year. So at this point, I'm not really looking at mining equipment for 2022.
Understand. If we look out a year from now, let's say, are we more likely to hear you've expanded more aggressively into additional HPC areas or Bitcoin mining areas?
Yes. So Joe, Vafi just asked me a similar question, and I'll give you a similar answer. It's really difficult for me to predict where the right opportunities for growth are going to arise over the next 6 to 12 months. We're in really unique market conditions. And we like to be incredibly opportunistic when we deploy capital as you saw from us last year. So if the right opportunity doesn't present itself in 1 pillar or the other, then we're not going to move forward with it. So it's impossible for me to say where the right opportunities are going to evolve over the next 6 to 12, but we actively are pursuing in both categories.
The next question comes from Kevin Dede, HCW.
And Jaime, did power prices ever go high enough in Alberta that you felt compelled to wind machines down at all? Or were you struck by heat at all there in the quarter?
We did have some peak power pricing during some of the hotter days. And when we see peak power pricing, we do power down. We don't mind when power prices are too high. In the case of our site in Drumheller, we do participate in ancillary services, and that program remains active. So yes, Kevin, we monitor power pricing every 15 minutes and react accordingly.
Yes, right. Yes, I heard you made that comment, hadn't realized it. That's why I thought I'd ask. Is there any way to quantify that at all for us?
I can have Shane's team take that away for us, I have no problem.
Okay. In the meantime, could you give us a little insight on the investments you have to make on the 5 HPC centers that you have running? It's unclear to me how fully utilized they are, how fully stacked they are with equipment. Given you sort of reset things, does that mean old equipment left and gives you an opportunity to move new equipment in?
Yes, so the rationalization comment was specific to a couple of low-margin product lines as opposed to equipment. And the -- we have white space available at a few of the sites. And so we're actively looking at how do we best utilize -- sell or utilize that white space. So those activities are actively underway led by our SVP of Operations, James Beer.
So how $60 million in cash, how do you see spending going in building out the white space that you have available?
We haven't gotten into any specifics on where the growth is going to come, but I assure you we will let everybody know when those specifics are narrowed down.
Okay. Just another -- I know you've talked to this a little bit, but just help me understand the sort of the sales and marketing effort? And the -- on the HPC side, just how are you building that out? And how are you taking Hut 8 to the market?
Yes. So we have -- we've got an incredible sales leader that is responsible for go-to-market for the HPC side of the business, Josh Rayner, who joined us earlier this year. As you know, the -- when we made the acquisition from TeraGo, it came with a full team that supported it. So we did bring over some great sales resources. And then we've added a number of sales team members to that -- to Josh's group as well. The new hires have been more specific to -- their skill set is more aligned to driving into the Web 3 ecosystem. So in total, we're up to just about 10 people that are in that sales team. And then we also have Erin Dermer, who joined our team earlier this year add to lead marketing and public affairs. And so in that marketing team, we now have 3 resources that are focused on the overall go-to-market strategy for Hut 8, and including the marketing message and the lead generation work for the HPC side of the business.
Okay. And could you talk a little bit about how you are able to tie into other companies sort of in the digital mining space, understand working something with Foundry, but I didn't really understand how that sort of came to pass?
Yes. So that's really -- Foundry. We've had a long-standing strategic relationship with Foundry. As you know, they're our largest mining pool partner on the Bitcoin mining side. We've done the purchase financing with them before. We worked closely with their sister company, Genesis as well. And then when we purchase these data center assets and Foundry made a decision to put some of their core infrastructure into our data center facilities as well. So they are now a client of ours as we have historically, and we are also a client of their.
Okay. Understood. Was that new equipment? Or are you just able to spool up servers you had?
So that -- it was existing infrastructure that we had that they're moving into in our data center.
The next question comes from Bill Papanastasiou of Stifel.
Yes. My first question is related to the HODL strategy that Hut 8 has. Obviously, you guys are one of the few public miners that have not sold in this bear market. So hats off to you. Just wondering how you guys are looking at potentially reentering a lending program later this year? I know that you guys concluded that in May. Are you considering kind of loaning out your Bitcoin again? Or have market conditions not kind of improved to the level that you're liking?
So I did address that a bit in my remarks, and I'll have Shane go into a little bit more color on it. We absolutely intend to revisit and evolve our work-the-stack strategy as we call it. I think we're not quite comfortable that with where everything sits in the market from a counterparty perspective, but it's absolutely something that we expect to move into again, and we're exploring a variety of opportunities around how we can best work the stack without taking undue risk on those Bitcoin reserves. But I'll turn it over to Shane to add a little color, who keep leading that project on our side.
Yes. Thanks, Jaime. I mean overall, Bill, I think Jaime said it well. We've been intentionally were quite selective, very selective throughout 2021 with the counterparties that we worked with, being Genesis and Galaxy, 2 highly reputable, well-capitalized firms that we continue to sort of engage and really just ongoing discussions as part of being active participants in that digital asset space. So as we've said, sort of in an abundance of caution, we made that determination back in May to sort of nothing else put on pause, the yield program. . Yes, looking at sort of our thinking around and explorations around how we reengage around working the stack. I guess maybe more specifically, that would mean from our perspective generating yield, generating income associated with our substantial and unencumbered Bitcoin holdings. So yes, that will range from sort of direct yield programs very similar to what we've done in the past, to explore more sort of algorithmic approach to trading against a small portion of our stack, perhaps. And then, of course, something we've been exploring for some time and again, intentionally being cautious, I suppose, is employing a derivative strategy where we can look to drive yield with -- again, with acceptable sort of risk associated with counterparties. So that's where we're at now. And we'll continue to do some of that work as we hopefully continue to look towards a relative stability within the broader digital asset space.
Great. And apologies, I wasn't able to get in on the call. I was waiting as well in the whole period. I guess my next question, and hopefully, you didn't address this either, is related to -- if there's proof of stake, the company had about 11% of total mined Bitcoin equivalent, I guess, coming from Ethereum operations. Wondering how you guys are looking at this potential upgrade? And the strategy behind Hut 8?
Yes. Obviously, it's something we're paying very close attention to. There's a lot of talk right now about a hard fork in a new Ethereum proof-of-work chain. So we're obviously paying close attention to see how that evolves. One of the things we love about our GPU fleet is that we put it in enterprise-grade chassis, which ultimately today the Ethereum mining is done at our mining site in Medicine Hat. But over time, we will look to move some, if not all, of that compute into our data center environment.
And then having that compute in the data center environment allows us to really look at other types of workloads that we can apply that compute to and the team has been doing a ton of work on looking at other available workloads in addition to continuing to mine the next most profitable proof-of-work chain, whether that's a new hard fork or Ethereum Classic or any of the other proof-of-work chains. So we -- I think our strategy will be to parse that compute into a few different areas. And -- but again, we're very happy with the mining economics today. Ethereum continues to perform very, very well. So we'll stick with the strategy that we have until we get more clarity on a post merge world from a proof-of-work chain perspective.
Our last question comes from Gustavo Gala of Truist Securities.
This is Julian on Gus. But most of my questions have been answered. But one thing I would say is, are there any -- is there a total BTC holding that you're comfortable holding? Or is it like a moving target? I know you said you haven't sold anything in early '21, but we're just wondering how do you make those decisions between hold and selling? And if there's like a target holding -- core holding that you're particularly looking at?
No. There's no target. Our commitment is to hold the Bitcoin on balance sheet, particularly at these levels. And I just -- I don't think it makes sense to sell Bitcoin and then reinvest in equipment that's going to have a payback period that extends post having. And so ultimately, the math would suggest if you sell Bitcoin now, it's going to cost you more to mine it later. So that's really how we're thinking about it today. And that thinking will always be tested and evolve as market conditions change and as Bitcoin price adjust as well.
Got it. And just from Shane comments, I was going to ask a question about maybe an asset management overlay strategy, but it seems like you are already thinking about that or have done it in the past, particularly around maybe hedging or non-correlated type exposure or [ DFI ]. And it seems like you are all exploring that now after this, obviously, [indiscernible] and some of the other counterparties that we've seen on the space. So is that fair to say that you're looking at that at this moment to kind of step back into that? Or when would you discuss about that?
So yes, Shane just touch on that and his team are actively exploring potential strategy to work with that going forward. But we haven't settled on timing or strategy at this point. It's an ongoing active investigation.
There are no further questions at this time. Please continue with closing remarks.
Okay. Well, thank you again, everyone, for joining the call and for your support and have yourself a wonderful day, and thanks, Michelle, for your help.
Thank you. Ladies and gentlemen, this does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.