Bit Digital - Q1 2024
May 16, 2024
Transcript
Operator (participant)
Hello, and welcome to the Bit Digital first quarter 2024 earnings conference call. Good morning, good afternoon, and good evening, depending on where you're joining us from. Thank you for being here. We're just giving a few more moments for attendees to dial in, so thank you for your patience. 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. If you have a question at that time, then simply press star one on your telephone keypad. Also, as a reminder, today's conference is being recorded. I'll now hand the call over to your host, Cameron Schnier, Head of Investor Relations at Bit Digital. Cameron, the floor is yours.
Cameron Schnier (Head of Investor Relations)
Thank you. Good morning, and welcome to the Bit Digital first quarter 2024 earnings call. Joining us on the call today are Sam Tabar, Chief Executive Officer, and Erke Huang, Chief Financial 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-K filings, and our other SEC filings. 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-K filings, which are on our website. After our prepared remarks, we will open the call up for questions. If you would like to ask a question, please hit star one on your keypad. With that, I'll turn the call over to Sam.
Sam Tabar (CEO)
Thank you, Cam. Ladies and gentlemen, thank you for joining us on the call today. In my prepared remarks, I'll discuss three things. First, 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 first quarter results speak to the effort and execution by our team. Our Q1 revenue grew by over 250% from the prior year and by over 85% sequentially. We generated $58 million in adjusted EBITDA and a fully diluted GAAP EPS of $0.43.
The first quarter marks the first time that our two primary business lines coalesced to produce what we view to be an emphatic start to the year. Pardon me. Our active hash rate was approximately 2.6776 exahash as of March thirty-first, compared to 2.52 at the year-end. The lifting of certain curtailment programs should bring that figure above 3.0 in the near term.
We employed a cautious approach to fleet expansion heading into the halving, and we are still evaluating the post-halving landscape for growing our mining fleet. Our goal remains to reach 6 exahash by year-end. We are in a number of 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 will only implement new growth programs if the economics meet our criteria. Having two 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. As of March 31, 2024, our Bitcoin mining fleet was approximately 85% carbon-free, 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. As mentioned last quarter, we still need to secure around 40 MW 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&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&A opportunity set will likely ripen further on the mining side if the hash price remains near current levels. Regarding potential M&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 forma 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-halving. I believe one reason that prospective sellers have approached us is the strength of our balance sheet. We had over $160 million worth of cash and digital assets at the end of March and zero debt. However, we are actively evaluating debt financing options to accelerate the growth of our Bit Digital AI business.
Our first quarter 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 $8.1 million in revenue and a gross profit of $3.2 million. You may notice that the revenue number is about $1.3 million lower than the sum of the monthly revenue numbers we published in our monthly reports for the first three months during the first quarter.
The delta is driven by a one-time $1.3 million 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 non-recurring charge.
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 one-time 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 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.
Our goal to grow the HPC business segment to $100 million 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 by, 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 with prospective customers and the overall view of the market, we continue to believe that we will achieve our revenue goal for the year. We are set up for a strong multi-year 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.
Erke Huang (CFO)
Thank you, Sam. I will now discuss certain financial results for the first quarter of 2024. Total revenue was $30.3 million, a 266% increase compared to the prior year. The revenue increase was primarily driven by the higher realized Bitcoin price and the start of our HPC services business. Our Bitcoin production increased 13% year-over-year to 410.7.
The increase was driven by an increase in our actual active hash rate and the partial offset by an increase in Bitcoin network difficulty. Our HPC services business began generating revenue in late January and recognized $8.1 million during the quarter. This is net of a one-time $1.3 million credit we issued to our customer, as previously mentioned.
Our Ethereum stake strategy generated approximately $326,000 during the first quarter, and the total cost of revenue was $16.2 million, compared to $5.2 million the prior year. The increase was primarily driven by an increase of our active mining fleet, higher Bitcoin network difficulty, and the start of our business 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.
However, following the halving and reduction of block rewards, profit sharing fees should decrease materially in Q2 and current Bitcoin prices, which should partially offset the margin impact from the halving. General and administrative costs were approximately $6 million compared to $5.2 million during the prior year quarter. The increase was mostly driven by higher professional and consulting expenses.
Depreciation and amortization expense was $6.8 million for the first quarter, compared to $3.6 million last year, with the increase driven by a larger mining fleet and our GPU fleet that was deployed in early 2024. Adjusted EBITDA of $58.5 million for the quarter, compared to $1.5 million in Q1 2023. The improvements was primarily driven by gross margin expansion and the introduction of high-margin HPC businesses 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 $43.5 million 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 million of cash and restricted cash as of March 31, 2024, and our digital assets position was worth approximately $128 million.
The total assets amounted to $291 million at the end of the quarter, while shareholders' equity was $265 million. Our balance sheet remains debt-free, but we are actively evaluating potential debt financing to grow our HPC business. CapEx was less than $1 million during the quarter and was used for the purchase of approximately 2,300 miners.
Note that our capital commitment to the quarter was reduced by the decision to enter into a sale-leaseback agreement for 96 HPC servers. We raised approximately $38.7 million of net proceeds from the issuance of 12.9 million ordinary shares during the first quarter.
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 halving. I'll now turn the call back to Sam for closing remarks.
Sam Tabar (CEO)
Thank you, Erke. Bit 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 hash 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. 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 the position of being held hostage by certain macro events we don't control. Bitcoin mining is speculative in nature, and we accept that risk/reward trade-off, but we don't want our entire business to be predicated on speculation.
This is why we diversified into the HPC space. Bit Digital's AI business is not aspirational, 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 two distinct business lines afford us optionality in terms of when and where we can allocate capital. We think this is a key advantage.
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. 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 exahash 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. 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 million 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 (participant)
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment.
A voice prompt on the phone line will indicate when your line is open. Again, you may press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Michael Grondahl with Northland Securities. Your line is now open. Please go ahead.
Michael Grondahl (Analyst)
Hey, thanks, guys. Hey, first question. You know, you received that letter about the second 2,000 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 thirtieth?
Erke Huang (CFO)
Hi, this is Erke speaking.
Sam Tabar (CEO)
Oh, I'm so sorry. I was on mute. I apologize.
Erke Huang (CFO)
Answer your next question.
Sam Tabar (CEO)
Go, go ahead, Erke. I was on mute by accident, but go ahead, Erke.
Erke Huang (CFO)
Okay. Yeah. So why it took so long was a combination of, you know, preparing all the vendors for the deployment. And ultimately, it's, you know, 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 thirtieth or around that time. So that's still the target.
Sam Tabar (CEO)
Yeah, Mike, so we're finalizing this in basically weeks.
Michael Grondahl (Analyst)
Got it. And June thirtieth is still, I don't know, your best guess of installation and when it's generating revenue?
Sam Tabar (CEO)
Give or take a week.
Michael Grondahl (Analyst)
Okay. Okay.
Sam Tabar (CEO)
Or two.
Michael Grondahl (Analyst)
Um-
Sam Tabar (CEO)
We're talking weeks here, not more.
Michael Grondahl (Analyst)
Got it. Got it. And related to that, you talked a little bit about a volume discount, which I think the customer is getting, you know, because it's a second 2000, but I think you also referred to, like, a purchase discount. Are you finding the market competitive for GPUs, so you're getting them at a lower price also? Could you just kind of explain that a little bit?
Sam Tabar (CEO)
Yeah, Erke, do you want to take that? I, I can... It's either one of us.
Erke Huang (CFO)
Yeah. So for a one-time credit was, you know, due to the setting up and the installation, then we, you know, give the customer that. And yes, we're seeing more competitive pricing for those servers as the manufacturing and production of chips and from OEMs are, you know, coming up. So we should be seeing better pricing for our procurement, from our procurement perspective as well.
Michael Grondahl (Analyst)
Got it. I think on the first 2,000, it was about $60 million 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, a direction?
Erke Huang (CFO)
Yeah, it's gonna be lower, but like previously said, it's being finalized, so it's not finalized yet. We should be able to announce that in the coming weeks.
Michael Grondahl (Analyst)
Got it. Got it. And then, in regards to, you know, potential customer two, three, and four, you said you're hiring a team, a sales team, I think you said, to help with that process. Has that process slowed down, or is that still moving rapidly? I guess I'm trying to understand what your message is there about, about getting-
Sam Tabar (CEO)
Yeah
Michael Grondahl (Analyst)
like, a second or third customer.
Sam Tabar (CEO)
I'm happy to take that. So, yeah, so the process with potential clients is moving forward, but nobody owns that process at the moment, and that's why we're hiring a head of revenue. We've been... We're pretty much in final discussions with a 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. But there is absolutely zero salespeople at Bit 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's owning the sales process.
Michael Grondahl (Analyst)
... 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?
Sam Tabar (CEO)
Oh, for a customer? Well, certainly, we'll. I believe, and I don't, 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, you know, 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, as you can imagine. 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.
Michael Grondahl (Analyst)
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-
Sam Tabar (CEO)
Yeah.
Michael Grondahl (Analyst)
- GPU purchases.
Sam Tabar (CEO)
That's right.
Michael Grondahl (Analyst)
Where does that stand? Is there a timeline for getting that done?
Sam Tabar (CEO)
Yeah. I mean, you know, in the past, we never took on debt because, because, you know, 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's gonna 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're drawing cash from the client, so that makes a lot of sense. We have been looking... There's a menu of options we've 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.
But for now, we're just speaking very aggressively with investors and counterparties who are enthusiastic to get involved in this business from a financing perspective, but we just wanna make sure we optimize the best term.
Michael Grondahl (Analyst)
Okay. Hey, I'll jump back in the queue.
Sam Tabar (CEO)
Thanks, Mike. Good questions.
Operator (participant)
If you find that your question has been answered, you may remove yourself from the queue by pressing star two. Once again, if you'd like to join the queue, you may press star one. We'll move to our next question from Joe Gomes with Noble Capital Partners. Please go ahead.
Joe Gomes (Senior Research Analyst)
Good morning. Thanks for taking the questions.
Sam Tabar (CEO)
Hi, Joe.
Joe Gomes (Senior Research Analyst)
I wanted to start 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?
Sam Tabar (CEO)
Eric, do you want to take that? It's more of a finance question.
Erke Huang (CFO)
Yeah. So for the first batch, it's gonna be the same margin, but for going forward, we do see some, you know, pricing compressing as well for, you know, $800, you know, cost per hour pricing. So I would say the margin would be decrease, but yeah, it's gonna be until, you know, the contract's being finalized in the market.
Sam Tabar (CEO)
The margins remain great.
Michael Grondahl (Analyst)
The gross margin that we report does include the lease expense for this first batch, so the second 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.
Joe Gomes (Senior Research Analyst)
Okay. And then, professional consulting expenses increased to $2.6 million from $1 million. Just maybe you could just give us a little more color on what was driving those costs.
Erke Huang (CFO)
Yeah, I can take that. So those costs were related to the sales process, you know, for, you know, pricing the deal, and, like, professional services related to installation of the equipment.
Joe Gomes (Senior Research Analyst)
Okay. And then I was wondering, maybe just, Sam, give us a little more color on what, you know, you've been seeing as kind of the overall environment since the halving. You know, kind of maybe give us a little more color or detail on what you're seeing out there today.
Sam Tabar (CEO)
With respect to how it relates to the HPC business or the Bitcoin mining business, or just generally?
Joe Gomes (Senior Research Analyst)
The mining business. The mining business.
Sam Tabar (CEO)
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's 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 growth at all costs, and that is dangerous.
And we've been able to avoid that because 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.
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. If you don't have all those three, it's just an aspiration. We have all those three. 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. Bit, 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. We're really comfortable with our position. We have levers, and hopefully, the market will understand that and begin to normalize our price.
Joe Gomes (Senior Research Analyst)
Okay, and then one more from me, and I'll jump back in queue. I'm assuming with the agreement so close for the second batch on the HPC side, you already have the hosting capacity. But once that is done, if you were to get customer two, three, four, do you need additional hosting capacity, or do you already have, under contract, enough hosting capacity to add on a customer two or a customer three on the HPC side?
Sam Tabar (CEO)
Yeah, we have enough capacity for sure to accommodate the client demand. And I will add that we are in the market to potentially even acquire and get vertically inter-integrated on the HPC side. The reason why that's interesting for us is basically the margins on the business, it's basically you could require just basically 90% less energy to produce the same amount of revenue on the HPC side than the Bitcoin 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. 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.
Joe Gomes (Senior Research Analyst)
Okay, great. Thanks for taking my questions.
Sam Tabar (CEO)
Thank you.
Operator (participant)
We'll move to our next question from Kevin Dede with H.C. Wainwright. Your line is now open.
Kevin Dede (Managing Director and Senior Technology Analyst)
Thanks. Morning, Sam. Hi, Erke, Cam. Thanks for having me on. Sam, just to go back to your, your last touch, which was on my question list and about building or acquiring your own infrastructure. Can you kind of just go through your rationalization of that, given, you know, 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. But,
Sam Tabar (CEO)
That's right.
Kevin Dede (Managing Director and Senior Technology Analyst)
Yeah, maybe, you know-
Sam Tabar (CEO)
For example, 4 MW on the HPC side produces the same amount of revenue as 40 MW on the Bitcoin mining side. So the math is nice.
Kevin Dede (Managing Director and Senior Technology Analyst)
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, you know, on the management team side to be able to accommodate that expertise, and what kind of timing you had in mind?
Sam Tabar (CEO)
Sure. Well, with respect to the expertise in the way we're doing it now, which is pretty successful, we have a track record already. We have, we've 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.
But if we're to acquire a data center to accommodate and vertically integrate this business, of course, there's gonna be a management team attached to that particular infrastructure, and we'll be leveraging that management team very, very deeply in order to to expand the margins on this business once, once we're vertically integrated, if and when we become vertically integrated on that side of the business.
Kevin Dede (Managing Director and Senior Technology Analyst)
Do I understand-
Sam Tabar (CEO)
Yeah, can I-
Kevin Dede (Managing Director and Senior Technology Analyst)
Yeah, sorry, go ahead.
Sam Tabar (CEO)
That's sort of the attractive component of M&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.
Kevin Dede (Managing Director and Senior Technology Analyst)
So the idea then, Cam, I should think about it, your expansion there, as buy versus build?
Sam Tabar (CEO)
That's correct.
Kevin Dede (Managing Director and Senior Technology Analyst)
Okay, thank you. Do I understand everything correctly, Sam, in that the next tranche for your existing customer, the GPU side, is that all Super Micro equipment? Have you had any issues with-
Sam Tabar (CEO)
Yeah
Kevin Dede (Managing Director and Senior Technology Analyst)
... getting that?
Sam Tabar (CEO)
No
Kevin Dede (Managing Director and Senior Technology Analyst)
Are you okay on the InfiniBand side, too?
Sam Tabar (CEO)
We are indeed, and that's a great question because a lot of people think the press, 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 yeah, we have that covered. 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.
Cameron Schnier (Head of Investor Relations)
Could, and we haven't-
Kevin Dede (Managing Director and Senior Technology Analyst)
Would you mind?
Cameron Schnier (Head of Investor Relations)
We haven't announced, Kevin, so I mean, that will be finalized in the terms when we announce it, but we're not necessarily beholden to a single vendor.
Kevin Dede (Managing Director and Senior Technology Analyst)
Okay. Would you gents mind walking me through the lease versus buy decision on the next tranche?
Sam Tabar (CEO)
Well, I guess it will basically be the math I just mentioned. That there, you need much less megawatts to produce the same amount of revenue, so that's very-
Kevin Dede (Managing Director and Senior Technology Analyst)
No, no, I'm sorry. I'm sorry, Sam. I just mean in terms of, right, the next set of 2,000 H100s and how you intend to finance it.
Sam Tabar (CEO)
We are looking at different things. We may use part of our balance sheet. You know, we're looking at different financing options. There are some credit options we're looking at. We wanna make sure that we get the best terms. It's much easier to get credit financing on the AI side versus Bitcoin mining side.
There aren't that many counterparties who wanna borrow money anymore for Bitcoin mining equipment, very understandably, because that got a lot of people in trouble the 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 wanna just optimize that. So we haven't signed anything yet with respect to that kind of facility, but we're very much in deep discussions with various counterparties to see where that goes.
Kevin Dede (Managing Director and Senior Technology Analyst)
Can you-
Sam Tabar (CEO)
Of course, we'll be announcing that as we move forward with that.
Kevin Dede (Managing Director and Senior Technology Analyst)
Right, right, right. Can you remind me on how you handled the first tranche in terms of Bit Digital owned versus leased?
Sam Tabar (CEO)
Yeah, I'll leave that to Erke.
Erke Huang (CFO)
Yeah, for the first tranche, we have 256 servers deployed, and 96 of them were through a lease financing arrangement. We own 156.
Kevin Dede (Managing Director and Senior Technology Analyst)
156 owned and 96 leased, right, Erke? Okay.
Erke Huang (CFO)
Yeah.
Kevin Dede (Managing Director and Senior Technology Analyst)
Eric, you mentioned a $0.05 per kWh power cost and potential changes to a rev share. Can you maybe elaborate on that, given you're still hunting around for 40 more MW? Is there a chance that we could see those prices go down?
Erke Huang (CFO)
So five cents are the pass-through we got from our hosts, and majority of our agreements were through a profit share arrangement, and the rest were, you know, what we paid on top of, you know, besides the electricity, we paid directly as a pass-through. As a power pricing, I think in summer the price will be higher.
But we should be able to see the pricing coming down going forward. Because, you know, compared to last year, the gas price has come down quite a lot. So some of our portfolio hosts are giving us some better quotes as forward looking.
Kevin Dede (Managing Director and Senior Technology Analyst)
Okay. Then, Okay, yeah, yeah, I guess you offered, Sam, thank you. You offered a great explanation for Mike on following customers on the GPU side. So I'll cede the floor at that point, at this point. Thank you very much, gentlemen.
Sam Tabar (CEO)
Thanks, Kevin.
Cameron Schnier (Head of Investor Relations)
For our next question, we'll return to Micheal Grondahl with Northland Securities. Your line is now open.
Michael Grondahl (Analyst)
Hey, thanks again, guys. Just a quick question. You reported $58.5 million of Adjusted EBITDA. If I back out the revaluation of digital assets, $45.7 million, you know, I get to $12.8 million. Would you guys kind of think of that $12.8 million as kind of core for the quarter, kind of what the operations produced, ex revaluing those digital assets? I don't know. Can you help me with that a little bit?
Sam Tabar (CEO)
Can you repeat the question, Micheal, just so that we understand clearly?
Michael Grondahl (Analyst)
Yeah. You guys reported adjusted EBITDA of $58.5 million.
Sam Tabar (CEO)
Yeah.
Michael Grondahl (Analyst)
As I was reading through the financials, in the P&L, there's a line, gains on digital assets. It's $45.7 million. And so if I just take the $58.5 million, minus the $45.7 million digital asset gain, I get $12.8 million. You guys running the business, does that $12.8 million feel right to you as, as sort of core EBITDA, if you didn't write up the BTC and the Ethereum, essentially?
Sam Tabar (CEO)
Yeah, Mike, I think that's in the ballpark, certainly, in terms of what we would 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.
Michael Grondahl (Analyst)
Got it. I just wanna 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?
Sam Tabar (CEO)
I mean, we definitely look to 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, you know, we're strong believers in HODLing our digital assets, otherwise, why be in this space? But we always liquidate some to fund our operations, but there is now an expansion into this lucrative business line.
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, you know, we're looking at various things, various ways of pools of capital in which we could expand that business line.
Michael Grondahl (Analyst)
Got it. And then just last question from me to you, Sam. You know, throughout this call, you've kind of described the HPC business, you know, you're pretty excited about it, and you've referenced, you know, 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, you know, over the next year or two to invest on the Bitcoin mining side?
Sam Tabar (CEO)
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 the very unique position in our sector to have capital allocation decisions.
We, you know, it's not just one lever going forward, just expand on exahash regardless of the price, 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, and if it makes sense, you know, we move forward on one of those two things.
Michael Grondahl (Analyst)
Got it. Helpful. And I think you pointed out, it takes 4 MW 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, thanks, guys.
Sam Tabar (CEO)
Thank you.
Operator (participant)
For our next question, we'll return to Kevin Dede with H.C. Wainwright. Please go ahead.
Kevin Dede (Managing Director and Senior Technology Analyst)
Hi again, Sam. The April production update included a reference to unaudited $4.1 million in HPC-related revenue. I'm just wondering if that's a fair proxy for, you know, your consistent, I guess, consistent production for that business going forward, at least until, you know, that, that second tranche is finalized.
Sam Tabar (CEO)
That's right. Yes, and that second tranche is gonna be finalized any week now.
Kevin Dede (Managing Director and Senior Technology Analyst)
Great.
Sam Tabar (CEO)
That number is going to change quite materially in a very wonderful way.
Kevin Dede (Managing Director and Senior Technology Analyst)
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, you know, hash, machine costs on a per-hash basis seem to be fairly low, relative, relatively compared to other points in previous cycles. So,
Sam Tabar (CEO)
That's right, and we're-
Kevin Dede (Managing Director and Senior Technology Analyst)
Maybe you could give some insight on that.
Sam Tabar (CEO)
Yep, we've been in the market to buy, you know, the latest gens of our fleet, to upgrade our fleet. You know, that's gonna be an announcement in the medium term, perhaps the short term. But yeah, 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. But, you know, look, we've been, as mentioned, during the call, we've been more judicious on growing the fleet because we were just wanting to see how things would shake out post-halving. 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 markets are softening for the equipment, this is kind of a good time to start doing some buys on that.
Kevin Dede (Managing Director and Senior Technology Analyst)
Are you thinking about staying on the air-cooled side or considering, you know, using hydros or immersion? How are you thinking about technology choices as you evaluate equipment and hosting partners?
Sam Tabar (CEO)
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. Iceland is a very cold place.
Kevin Dede (Managing Director and Senior Technology Analyst)
Great. Okay. Thank you, Sam. Appreciate it.
Sam Tabar (CEO)
Thank you.
Kevin Dede (Managing Director and Senior Technology Analyst)
Congrats on the quarter.
Sam Tabar (CEO)
Thank you.
Operator (participant)
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.
Sam Tabar (CEO)
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 (participant)
Again, this concludes today's call. We thank you for your participation. You may now disconnect and have a great day.
