Bit Digital Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2024

There are 7 speakers on the call.

Operator

Hello, and welcome to the Bit Digital First Quarter 2024 Earnings Conference Call. Good morning, good afternoon, and good evening, While we wait, please note that during this call, all participant lines will be in listen only mode. Following the officers' updates, we will open the floor for a question and answer session. Also as a reminder, today's conference is being recorded. I'll now hand the call over to your host, Cameron Schneer, Head of Investor Relations at Bit Digital.

Operator

Cameron, the floor is yours.

Speaker 1

Thank you. Good morning.

Speaker 2

Welcome to the 5th Digital First Quarter 2024 Earnings Call. Joining us on the call today are Sam Tabar, Chief Executive Officer and Eric Huang, Chief Officer. Before we begin, I would like to remind all participants that some of the statements we will be making today are forward looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 20 F filing, yesterday's 6 ks filings and our other SEC filings.

Speaker 2

Our comments today may also include non GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures can be found in our 20 F filing and yesterday's 6 ks filings, which are on our website. After our prepared remarks, we will open the call up for questions. With that, I will turn the call over to Sam.

Speaker 3

Thank you, Cam. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I'll discuss 3 things: 1st, our first quarter results secondly, an update on our strategic initiatives and third, our thoughts on the outlook for the remainder of 2024. Cam and Eric will then provide more detail on our financial results, and we will then open the line for your questions. We started the year off strong, and our Q1 results speak to the effort and execution by our team.

Speaker 3

Our Q1 revenue grew by over 2 50% from the prior year and by over 85% sequentially. We generated $58,000,000 of adjusted EBITDA and a fully diluted GAAP EPS of $0.43 The first quarter marks the first time that our 2 primary business lines coalesced to produce what we view to be an emphatic year to the start emphatic start to the year, pardon me. Our active HaaS rate was approximately 2.67 76x the HAFS as of March 31 compared to 2.52 at the year end. The listing of certain curtailment programs should bring that figure above 3.0 approach to fleet expansion heading into the having, and we are still evaluating the post having landscape for growing our mining fleet. Our goal remains to reach 6 exahash by year end.

Speaker 3

We are in a number discussions with counterparties for new hosting opportunities and fleet deployments, some of which we expect to be finalized imminently. However, we are still approaching fleet growth cautiously, and we'll only implement new growth programs if the economics meet our criteria. Having 2 uncorrelated revenue streams allows us to be selective on the timing of deploying growth capital. Our average fleet efficiency for our active fleet was 28.3 joules per terahash as of March 31, 2024, a slight improvement compared to the year end 2023. We aim to improve that metric considerably as we build out our mining fleet with more efficient miners.

Speaker 3

As of March 31, 2024, our Bitcoin mining fleet was approximately 85% carbon free, a decrease a decrease from our year end 2023 run rate of 93%. The decrease was driven by an increased consumption of power grids that use more carbon based energy sources. We continue to strive for our operations to become entirely carbon free, but we must weigh the economic trade offs in each deployment. Ultimately, we do hope that the market starts to demand greater transparency on the power sources that miners use. This will help incentivize greater sustainability practices from the mining industry at large.

Speaker 3

As mentioned last quarter, we still need to secure around 40 megawatts to reach our 6 exahash goal. We are currently in late stage discussions with several potential hosting partners that would put a significant dent into that requirement if the respective agreements were consummated. We are also actively evaluating several M and A opportunities, both on the mining side and for high performance computing services or HPC. We've seen an increase recently in reverse inquiries from entities either looking to be acquired outright or for some sort of strategic partnership. We expect the M and A opportunity set will likely ripen further on the mining side if the hash price remains near current levels.

Speaker 3

Regarding potential M and A, we're not particularly interested in solely acquiring Hash rate. We're more interested in opportunities that fill a strategic gap in our portfolio or improve pro form a margins and returns. One of the reasons that we have slow played our Exahash build out this year is because we wanted to maximize our flexibility to capitalize on opportunities that might arise post having. I believe one reason that prospective sellers have approached us is the strength of our balance sheet. We had over $160,000,000 worth of cash and digital assets at the end of March and 0 debt.

Speaker 3

However, we are actively evaluating debt financing options to accelerate the growth of our Bit Digital AI business. Our Q1 2024 results represent the first time that the contribution from this business, referred to as high performance computing services within our financials, has impacted our income statement. For the quarter, this business produced $8,100,000 in revenue and a gross profit of $3,200,000 You may notice that the revenue number is about $1,300,000 lower than the sum of the monthly revenue numbers we published in our monthly reports for the 1st 3 months during the Q1. The delta is driven by a one time $1,300,000 credit that we issued to our customer as compensation for reduced utilization during the initial deployment period, which included testing and optimization phases. To be clear, this is a nonrecurring charge.

Speaker 3

For illustrative purposes, if we add the credit back to revenue, gross margins for the HPC segment would be approximately 72.5% compared to the reported 61% that includes the onetime customer credit. I would also like to point out that the gross profit includes our lease expense as we treat that as an operating lease for accounting purposes. As previously disclosed, our anchor talent our anchor client for our Bit Digital AI business has requested that we double the size of the GPU deployment and contract another 2,048 GPUs. We are in process of finalizing the terms with our customer and respective vendors, and we hope to announce the final terms in the coming weeks. We also continue to progress in our discussions with other prospective customers.

Speaker 3

Our goal to grow the HPC business segment to $100,000,000 of annualized revenue by year end remains intact. Given the market pricing trends and volume based discounts, it's unlikely that we will achieve this run rate only from only an additional 2,048 GPU deployment from our existing customer, assuming that the contract is finalized. However, we expect to be able to procure the GPUs at a reduced rate relative to our initial purchase. This should help us maintain a similar returns profile and payback period relative to our initial deployment. Nonetheless, based on our conversations sorry, nonetheless, based on our conversations with prospective customers and the overall view of the market, we continue to believe that we will achieve our revenue goal for the year.

Speaker 3

We are set up for a strong multiyear growth in this business. To date, we have invested minimally in the business development or customer acquisition side of the HPC business. However, it's become clear to us that we need to expand our team and add dedicated headcount to support the growth of this business. So we are now actively working on making very key hires that will help us accelerate that growth. I'll now hand over the line to Eric, who will discuss our financial results.

Speaker 3

Thank you, Ping.

Speaker 4

I will now discuss certain financial results for the first quarter of 2024. Total revenue was $30,300,000 a 2 66% increase compared to the prior year. The revenue increase was primarily driven by higher realized Bitcoin price and the start of our HPC services business. Our Bitcoin production increased 13% year over year to 410.7 percent. The increase was driven by an increase in our excess tax rate and partially offset by an increase in Bitcoin network difficulty.

Speaker 4

Our HPC services business began generating revenue in mid January and recognized $8,100,000 during the quarter. This is net of a one time $1,300,000 credit we issued to our customer as previously mentioned. Our incentive strategy generated approximately $326,000 during the Q1, and the total cost of revenue was $16,200,000 compared to $5,200,000 in the prior year.

Speaker 3

The increase

Speaker 4

was primarily driven by an increase of our active mining fleet, higher Bitcoin network difficulty and the start of our services business. Our electricity price was approximately $0.05 per kilowatt hour for the quarter. Our production cost per bitcoin, defined as electricity and other hosting fees divided by bitcoin production, amounted to approximately $19,700 for the quarter. Profit fees amounted to around $10,300 per Bitcoin for Q1. Profit sharing fees spiked due to the sharp increase in Bitcoin price.

Speaker 4

However, following the happening and reduction of bulk rewards, profit sharing fees should decrease materially in Q2 and current Bitcoin prices, which should partially offset the margin impact from the happening. General and administrative costs were approximately $6,000,000 compared to $5,200,000 during the prior year quarter. The increase was mostly driven by higher professional and consulting expenses. Depreciation and amortization expense was $6,800,000 for the Q1 compared to $3,600,000 last year, with the increase driven by a larger mining fleet and our GPU fleet that was deployed in early 2024. Adjusted EBITDA was $58,500,000 for the quarter compared to $1,500,000 in Q1 2023.

Speaker 4

The improvement was primarily driven by gross margin expansion and the introduction of our high margin HPC business and of course higher Bitcoin prices. We implemented the new FASB fair value accounting rules during the quarter, which results in a pre tax gain of approximately $43,500,000 on our digital assets. GAAP earnings per share were $0.43 for the quarter compared to a loss of $0.03 the prior year. Turning to our balance sheet. We held approximately $35,000,000 of cash and restricted cash as of March 31, 2024, and our digital asset position was worth approximately after $28,000,000 The total assets amounted to $291,000,000 at the end of the quarter, while shareholders' equity was 265,000,000 dollars Our balance sheet remains debt free, but we are actively evaluating potential debt financing to grow our HPC business.

Speaker 4

CapEx was less than $1,000,000 during the quarter and was used for the purchase of approximately 2,300 minuteers. Note that our capital commitment to the quarter was reduced by the decision to enter into a sale leaseback agreement for 96 SPC servers. We raised approximately $38,700,000 of net proceeds from the insurance of 12,900,000 ordinary shares during the Q1. The majority of the shares were issued in January when our share price was higher and the proceeds were raised to both partially fund the build out of our HPC business and to fortify our balance sheet ahead of the half need. I will now turn the call back to Sam for closing remarks.

Speaker 3

Thank you, Eric. Fit Digital is focused on building a company that succeeds in all phases of the cycle. We gladly benefited from the run up in Bitcoin prices, but we knew that the halving would offset that benefit, and it has, with the Hess price falling to all time lows at the end of April. We were expecting a difficult mining environment post halving, and we prepared accordingly. We have a formidable balance sheet and an HPC business that already generates enough income to cover our cash overhead.

Speaker 3

It's also worth reminding ourselves that there is no halving event in AI. Look, we still run a profitable mining business at the current hash price, but the margin for error has been reduced. This is why we designed our business to be resilient to hash price as we don't want to find ourselves in a position of being held hostage by certain off, but we don't want our entire business to be predicated on speculation. This is why we diversified into the HPC space. Fit Digital's AI business is not aspirational.

Speaker 3

It's real. And we see significant growth runway on the HPC side, and we are actively looking to capitalize on those secular tailwinds. We are starting to build out our team, and we've earmarked capital to expand our GPU fleet and also enhance the breadth of our offerings. Having 2 distinct business lines afford us optionality in terms of when and where we can allocate capital. We think this is a key advantage.

Speaker 3

We are not forced to always reinvest in a single business line regardless of the returns profile. We don't just have one lever. We are able to weigh different options at any given time and invest our capital in the area we expect to yield the best return on capital. Bitcoin Mining is a capital intensive business. Returns are primarily dictated by macro factors.

Speaker 3

It can be a great business or a terrible business at any given time depending on the hash price. We don't believe it's prudent for our company to pursue a perpetual ex the hash growth model that many in the sector champion. The idea of having to continuously raise external capital to chase exahash growth when marginal utility is naturally diminished by the consensus mechanism is a perplexing notion to us. We would prefer to invest in an uncorrelated business line that generates predictable free cash flow that can then be reinvested into the Bitcoin mining business when the returns justify the investment at any given time. As I mentioned earlier, we don't just have one lever.

Speaker 3

Finally, we believe our company remains considerably misunderstood by the markets. It is our opinion that our Bitcoin mining business and the HPC business are complementary and synergistic business lines, and we're able to grow the HPC business to a $50,000,000 run rate revenue business in a very short time with the same team we use to run the mining business. That said, it does seem like the retail side of the market is more concerned about growing the mining business, while institutional investors would like to see us invest exclusively in the HPC business. It's unclear how this plays out, but regardless, we do believe our valuation will normalize over time. With that, I would like to open the line up for some questions.

Operator

We'll take our first question from Mike Grondahl with Northland Securities. Your line is now open. Please go ahead.

Speaker 1

Hey, thanks guys. Hey, first question, you received that letter about the 2nd 2000 GPUs back in late March. What's kind of taking so long there for final terms or final contract? And then do you think those GPUs will still be sort of installed and live by June 30?

Speaker 4

This is Eric speaking.

Speaker 3

I'm so sorry, I was on mute. I apologize. Go ahead, Eric. I was on mute by accident, but go ahead, Eric.

Speaker 4

Okay. Yes. So why it took so long was a combination of preparing all the vendors for the deployment and your ultimate as we're working with the vendor and the client to for deployment, so it took a little bit more time. And we are expecting to see installation by June 30 or around that time. So that's still the target.

Speaker 3

Yes, Mike. So we're finalizing this in basically weeks.

Speaker 1

Got it. And June 30 is still a, I don't know, your best guess of installation and when it's generating revenue?

Speaker 3

Give or take a week. Okay. Okay. Or 2. We're talking weeks here, not more.

Speaker 1

Got it. Got it. And related to that, you talked a little bit about a volume discount, which I think the customer is getting because it's a second 2000. But I think you also referred to like a purchase discount. Are you finding what the market competitive for GPUs, so you're getting them at a lower price also?

Speaker 1

Could you just kind of explain that a little bit?

Speaker 3

Yes. Eric, do you want to take that? I can it's either one of us.

Speaker 4

Yes. So for one time credit was due to the backing up and installation. Then we give the customer that. And yes, we're seeing more competitive pricing for those service as the manufacturing and production of chips from OEMs are coming up. So we should be seeing better pricing for our procurement from our procurement perspective as well.

Speaker 1

Got it. I think on the first two thousand, it was about $60,000,000 for the GPUs and the networking equipment. Is it meaningfully below that? Or I don't know, can you kind of give us a sense of direction?

Speaker 4

Yes, it's going to be lower, but progress to say it's being finalized. So it's not finalized yet. We should be able to announce that in the coming weeks.

Speaker 1

Got it. Got it. And then in regards to potential customer 2, 3 and 4, You said you're hiring a team, a sales team, I think you said to help with that process. Has that process flown down or is that still moving rapidly? I guess I'm trying to understand what your message is there about getting like a second or third customer?

Speaker 3

I'm happy to take that. So yes, so the process with potential clients is moving forward, but nobody owns that process at the moment, and that's why we're hiring ahead of revenue. We've been we're pretty much in final discussions with very experienced people in the relevant space. And we need somebody who actually owns the sales process to accelerate and unleash the business. And so we intend to do that key hire and announce that and in the medium term build that team.

Speaker 3

But there is absolutely 0 salespeople at Pitt Digital. Everything has been done with the existing management team so far. But in order to unleash and grow this business and to take on all the inquiries that we're getting, it's important that somebody owns that process, which is why we are in the process of interviewing this Head of Revenue person, and we look forward to making that announcement soon. But in the meantime, Mike, there's the clients, the potential clients that is moving forward, but frankly, it could move forward faster if we had a head of revenue. And that way someone is owning the sales process.

Speaker 1

Got it. I mean, it's hard to draw a timeline, but do you think you could announce something summer, fall, about a second or third customer? What's your best guess?

Speaker 3

For a customer, Well, certainly, I believe, and this is just my view, we'll certainly be announcing the Head of Revenue, hopefully, soon. And I would prefer to get that answer from the question you just asked from our Head of Revenue because he or she will have to look at the landscape of all the inquiries we have and where the status quo is with these clients. But it's still it remains a pregnant pipeline. It's just, again, we need somebody to own that process to accelerate the sales cycle. It doesn't work for management, to be running the business and also owning the sales cycle, you could imagine.

Speaker 3

This is a sales business and we need that sales team and that's one of the reasons why hiring the sales team will help unleash and accelerate all these leads that we have right now.

Speaker 1

Got it. Got it. And then just lastly, on the last call, you guys talked about getting a credit facility put in place to kind of help finance GPU purchases. Where does that stand? Is there a timeline for getting that done?

Speaker 3

Yes. I mean, in the past, we never took on debt because taking on debt and borrowing money for a Bitcoin mining equipment is a fool's errand. You can't predict the cash flows because you don't know where Bitcoin is going to be. But of course, we remain very open minded to looking at credit facilities with respect to the AI business because it's very predictable cash flow. Every month, we are drawing cash from the client.

Speaker 3

So that makes a lot of sense. We have been looking. There is a menu of options we have been looking at. There are certain terms that we want, and we just want to optimize the very best financing term. But until that is signed, we have to look at all our options.

Speaker 3

But for now, we're just we're speaking very aggressively with investors and counterparties who are enthusiastic to get involved in this business from a financing perspective. But we just want to make sure we optimize the best terms.

Speaker 1

Okay. Hey, I will jump back in the queue.

Speaker 3

Thanks, Mike. Good questions.

Operator

We'll move to our next question from Joe Gomes with NOBLE Capital Partners. Please go ahead.

Speaker 5

Good morning. Thanks for taking the questions.

Speaker 3

Hi, Joe.

Speaker 4

I wanted to start

Speaker 5

off on the HPC adjusted gross margin there. I think you said it was about 72.5. Should we expect that similar type of a margin going forward? Or do you think that margin could possibly even increase from there?

Speaker 3

Eric, do you want to take that? It's more of a finance question.

Speaker 4

Yes. So for the 1st batch, it's going to be the same margin. But going forward, we do see some pricing compressing as well for 8 100 cards per hour pricing. So I would say the margin would be decreased, but yes, it's going to be until the contract is being finalized and the market.

Speaker 3

And the margin remain great.

Speaker 2

The gross margin that we report does include the lease expense for this 1st batch. So the 2nd batch, whenever those terms are finalized, the gross margin will also be dictated whether there is some extent of a lease expense in that as well.

Speaker 5

Okay. And then professional consulting expenses increased to $2,600,000 from $1,000,000 Just maybe you could just give us a little more color on what was driving those costs?

Speaker 4

Yes, I can take that. So those costs were related to the sales process for placing the deal.

Speaker 3

And

Speaker 4

like professional services related to installation of the equipment.

Speaker 3

Okay.

Speaker 5

And then I was wondering maybe just Sam, give us a little more color on what you've been seeing as kind of the overall environment since the having, kind of maybe give us a little more color detail on what you're seeing out there today?

Speaker 3

With respect to how it relates to the HPC business or the Bitcoin mining business or just general?

Speaker 5

The mining business. The mining business.

Speaker 3

Well, I mean, everything is dictated by the hash price. And I think that the sector is sometimes myopic and that they only have one lever. There is an old saying, if all you have is a hammer, everything you see are nails. And so with respect to our sector, they only have one lever and that lever is gross at all costs. And that is dangerous.

Speaker 3

And we have been able to avoid that because we have a real related we have a real business on the HPC side that we're able to leverage our existing know how with respect to procurement of specialized machines and identifying data centers. And so we were able to establish that business line. And I just want to emphasize, it's only a business if you have the following three things. If you have access to these machines, which are difficult to get if you have access to a data center to park those machines. And lastly, you have clients.

Speaker 3

If you don't have all those 3, it's just an aspiration. So we have all those 3. We have a real business. We're drawing revenue every month. And that is really important with respect to the Bitcoin mining business because we're able to allocate at the right time and not overpay for things.

Speaker 3

Bit Digital historically has always ran a countercyclical growth strategy, and that has worked out very well so that we're not overpaying just to get sexy headlines. So we're really comfortable with our position. We have levers and hopefully the market will understand that and begin to normalize our price.

Speaker 5

Okay. And then one more for me and I'll jump back in queue. I'm assuming with the agreement so close for the 2nd batch on HPC side, you already have the hosting capacity. But once that is done, if you were to get customer 2, 3, 4, do you need additional hosting capacity or do you already have under contract enough hosting capacity to add on a customer 2 or customer 3 on the HPC side?

Speaker 3

Yes. We have enough capacity for sure to accommodate that client demand. And I will add that we are in the market to potentially even acquire and get vertically integrated on the HPC side. The reason why that's interesting for us is basically the margins on the business, it's basically you require just basically 90% less energy to produce the same amount of revenue on the HPC side than the BigQuery mining side. So it's an interesting vertical integration that we're seriously considering, and we are talking to various counterparties to potentially get vertically integrated on that side of the business.

Speaker 3

But to answer your question directly, once again, we definitely have enough capacity to meet client demand. That is something we already have. But we are looking to vertically integrate on that side of the business.

Operator

We'll move to our next question from Kevin Dede with H. C. Wainwright. Your line is now open.

Speaker 6

Thanks. Good morning, Sam. Hi, Eric, Cam. Thanks for having me on. Sam, just to go back to your last touch, which was on my question list and about building or acquiring your own infrastructure.

Speaker 6

Can you kind of just go through your rationalization of that given your commentary regarding investments and timing. I guess you're just more comfortable there because you can see return, right, regardless of hash price.

Speaker 3

But That's right.

Speaker 6

Yes, maybe

Speaker 3

you could offer For example, 4 megawatts on the HPC side produces the same amount of revenue as 40 megawatts on the Bitcoin mining side. So the math is nice.

Speaker 6

So can you give us some insight on the expertise that you think you'd need to do that? The what you'd have to do on the management team side to be able to accommodate that expertise and what kind of timing you had in mind?

Speaker 3

Sure. Well, with respect to the expertise and the way we're doing it now, which is pretty successful, we have a track record already. We have contracted with that data center in Iceland and things are going very well. If things were not going very well, the client would not be asking to grow the fleet. So things are going pretty well there, and our expertise is pretty good on that front.

Speaker 3

But if we were to acquire a data center to accommodate and vertically integrate this business, of course, there is going to be a management team attached to that particular infrastructure, and we'll be leveraging that management team very, very deeply in order to expand the margins on this business once we are vertically integrated, if and when we become vertically integrated on that side of the business.

Speaker 6

Do I understand correctly? Yes, sorry, go ahead.

Speaker 3

I mean, that's

Speaker 2

sort of the attractive component of M and A on that side is that we would be able to acquire an existing team in place to run the operation and also just acquiring an existing book of business and an existing pipeline of new leads.

Speaker 6

So the idea then, Cam, I should think about it, your expansion there as buy versus build?

Speaker 2

That's correct.

Speaker 6

Okay. Thank you. Do I understand everything correctly, Sam, in that the next tranche for your existing customer GPU side, is that all super micro equipment? Have you had any issues with gaining that? And are you okay on the InfiniBand side too?

Speaker 3

We are indeed. And that's a great question because a lot of people think the I mean, of course, the H100s are precious, but the InfiniBand is actually even more precious. So a lot of people got caught with their pants down just getting H100s, not realizing they also need the InfiniBand. Otherwise, they have very expensive paperweights. So, yes, we have that covered.

Speaker 3

We had that covered when we executed on the first tranche. So we'll have that we already have that very well covered on the second tranche.

Speaker 6

And we haven't announced that, Kevin. So, I

Speaker 2

mean, that will be finalized in the terms when they announce it, but we're not necessarily beholden to a single vendor.

Speaker 6

Okay. Would you gents mind walking me through the lease versus buy decision on the next tranche?

Speaker 3

I guess it will basically be the math I just mentioned. You need much less megawatts to produce the same amount of revenue.

Speaker 6

No, no, I'm sorry, Sam. I just mean in terms of, right, the next set of 2000 H100s and how you intend to finance it?

Speaker 3

We are looking at different things. We may use part of our balance sheet. We're looking at different financing options. There's some credit options we're looking at. We want to make sure that we get the best terms.

Speaker 3

It's much easier to get credit financing on the AI side versus Bitcoin mining side. There aren't that many counterparties who want to borrow money anymore for Bitcoin mining equipment, very understandably because that got a lot of people in trouble past couple of years. But on the HPC side, because it's so predictable on the free cash flow per month, we have a much better menu of options, but we want to just optimize that. So we haven't signed anything yet with respect to that kind of facility, But we're at very much deeply and deep discussions with various counterparties to see where that goes. We'll be announcing that if we move forward with that.

Speaker 6

Right, right, right. Can you remind me on how you handled the first tranche in terms of bit digital owned versus leased?

Speaker 3

Yes. I'll leave that to Eric.

Speaker 4

Yes. We for the first ones, we have 256 servers deployed and 96 of them were through a lease financing arrangement. And we own 156.

Speaker 6

156 owned and 96 leased, right, Eric? Okay. Eric, you mentioned a $0.05 per kilowatt hour power cost and potential changes to rev share. Can you maybe elaborate on that given you're still hunting around for 40 more megawatts? Is there a chance that we could see those prices go down?

Speaker 4

So $0.05 are the pass through we got from our hosts and majority of our agreements were through a profit share arrangement and the rest were what we paid on top of besides the electricity, we pay directly as a pass through. As of prior pricing, I think in summer, the price will be higher, but we should be able to see the pricing coming down going forward because compared to last year, the gas price had come down quite a lot. So some of our portfolio hosts are giving us some better quotes as forward looking.

Speaker 6

Okay. Yes, yes. I guess you offered Sam, thank you. You offered a great explanation for Mike on the following customers on the GPU side. So I'll cede the floor at this point.

Speaker 6

Thank you very much, gentlemen.

Speaker 3

Thanks, Kevin.

Operator

For our next question, we'll return to Mike Grondahl with Northland Securities. Your line is now open.

Speaker 1

Hey, thanks again guys. Just a quick question. You reported $58,500,000 of adjusted EBITDA. If I back out the revaluation of digital assets, dollars 45,700,000 I get to $12,800,000 Would you guys kind of think of that $12,800,000 as kind of core for the quarter, kind of what the operations produced ex revaluing those digital assets is, I don't know, can you help me with that a little bit?

Speaker 3

Can you repeat the question, Mike, just so that we understand clearly?

Speaker 1

Yes. You guys reported adjusted EBITDA of $58,500,000 And as I was reading through the financials, in the P and L, there is a line gains on digital assets. It's 45 point $7,000,000 And so if I just take the $58,500,000 minus the 45 point $7,000,000 digital asset gain, I get $12,800,000 You guys running the business, does that $12,800,000 feel right to you as sort of core EBITDA if you didn't write up the BTC in the Ethereum essentially?

Speaker 2

Yes, Mike. I think that's in the ballpark certainly in terms of what we define as core. It certainly depends on how you calculate EBITDA and what the reconciliations you make there are, but I think that is in the ballpark.

Speaker 1

Got it. I just want to figure out if that's how you guys think about it going forward. And then secondly, any updated thoughts on selling Bitcoin or Ethereum to fund some of this growth?

Speaker 3

I mean, we definitely will use our balance sheet every now and again, but we do it judiciously. We don't have a formula. We don't have a preset formula, but we're strong believers in hodling our digital assets. Otherwise, why be in this space? But we and we always liquidate some to fund our operations, but there is now an expansion into this lucrative business line.

Speaker 3

So we're looking at different options that could be liquidating our digital assets, using our balance sheet, looking at these financing terms with these counterparties that we've been negotiating with. So we're looking at various things, various ways of pools of capital in which we could expand that business line.

Speaker 1

Got it. And then just last question for me to you, Sam. Throughout this call, you've kind of described the HPC business. You're pretty excited about it and you've referenced some of the challenges and the volatility in the mining BTC Mining business. Is it fair to assume that the bar on the mining side is pretty high for incremental capital and things you're looking at over the next year or 2 to invest on the Bitcoin mining side?

Speaker 3

Well, look, as mentioned, we run a countercyclical growth strategy. And so, we prefer to expand on the Bitcoin mining side when the prices for equipment and the deals that we get with our contracted partners are good. We just make decisions based on economics. And fortunately, we're in a very unique position in our sector to have capital allocation decisions. It's not just one lever going forward, just expound on exahas regardless of the price.

Speaker 3

And we are in a very lucky position, to have that option. But at the same time, the markets have not given us credit for being able to run this business judiciously and profitably. We have a profitable Bitcoin mining business. We have a very profitable HPC business, and we have the ability to be dynamic on the capital allocation towards both. And so we just look at the returns profile.

Speaker 3

And if it makes sense, we move forward on one of those two things.

Speaker 1

Got it. Helpful. And I think you pointed out, it takes 4 megawatts on the HPC side to run the same amount of revenue versus 40. So that's probably a helpful way to think about it going forward too. Okay.

Speaker 1

Thanks, guys.

Speaker 3

Thank you.

Operator

For our next question, we'll return to Kevin Dede with H. C. Wainwright. Please go ahead.

Speaker 6

Hi again, Sam. The April production update included a reference to unaudited $4,100,000 in HPC related revenue. I'm just wondering if that's a fair proxy for consistent I guess consistent production for that business going forward, at least until that second tranche is finalized.

Speaker 3

That's right. Yes. And that second tranche is going to be finalized any week now. So that number is going to change quite materially in a very wonderful way.

Speaker 6

You also referenced hoping to improve fleet efficiency. And I'm wondering on the Bitcoin mining side, I'm just wondering how you're thinking about that time wise. I mean, from what I've seen, machine costs on a per hash basis seem to be fairly low relatively compared to other points in previous cycles. So maybe you could give us some insight on that.

Speaker 3

Yes. And we've been in the market to buy the latest gens of our fleet to upgrade our fleet. That's going to be announced in the medium term, perhaps the short term. But yes, of course, we're looking at the pricing very, very closely, and we have noticed that the market is softening up, which is what we like. That's what we want.

Speaker 3

But look, we've been as mentioned during the call, we've been more judicious on growing the fleet because we just wanted to see how things would shake out towards having. Nobody has an accurate crystal ball on that. You have to kind of wait and see. And we just wanted to be judicious on that. Now that the market is softening for the equipment, this is kind of a good time to start doing some buys on that.

Speaker 6

Are you thinking about staying on the air cooled side or considering using hydros or immersion? How are you thinking about technology choices as you evaluate equipment and hosting partners?

Speaker 3

Well, look, we're not in Texas. So it's kind of it's nice to be in Iceland. It's nice to be in Canada. We have our machines parked in cold, crisp places that doesn't have too much dust. So the air cooling works pretty well for us.

Speaker 3

Iceland is a very cold place.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back over for any additional or closing remarks.

Speaker 3

Well, if there are no more further remarks, thanks very much for joining us today. And we welcome your participation, and we value our shareholders. Thank you very much for today, and I conclude the call.

Operator

Again, this concludes today's call. We thank you for your participation. You may now disconnect and have a great day.

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Earnings Conference Call
Bit Digital Q1 2024
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