Hut 8 Mining, one of Canada’s largest mining operations, reported less-than-stellar first-quarter 2020 earnings Monday, the same day as the bitcoin halving.

Earnings lowlights included falling revenue, decreased adjusted EBITDA margin and increased collateral requirements on debt.

For the third consecutive quarter, revenues declined; this time by 14% sequentially to C$12.7 million (US$9.1 million). This was caused by a 32% decrease in the number of bitcoin mined during the quarter as the network hashrate continued to rise. This was partially offset by a 27% increase in the average price per bitcoin mined.

Site operating costs came in slightly elevated compared to the previous quarter (C$11.1 million in 4Q19 vs. C$12.6 million in 1Q20), possibly caused by a seasonal increase in electricity prices during cold weather.

Read more: The Rise of ASICs: A Step-by-Step History of Bitcoin Mining

With revenue down and site operating costs up, reported adjusted EBITDA slid in the red. Adjusted EBITDA margin came in at negative 4%, down from the positive 19% margin reported in 4Q19.

Management noted that bitcoin’s price plunge on March 12 caused adjusted EBTIDA to come in at negative C$822,000 for the month of March, more than offsetting the C$264,000 worth of gains recognized in the first two months of the quarter.

Liquid assets almost entirely locked behind collateralized debt

The amount of bitcoin retained on the balance sheet remained relatively flat sequentially as the vast majority (94%) of the bitcoin mined during the quarter were sold off to pay operating expenses. As of the end of March, Hut 8 held just shy of 3,000 bitcoin worth approximately C$35 million (US$25 million) using current market prices.

During the quarter, an unsecured loan from Bitfury was refinanced with a C$7 million extension loan from Genesis Capital. According to company filings, the terms of the extension loan were similar to that of its existing C$21 million loan with Genesis. However, the new extension loan came with a shorter payment period and a higher collateral requirement.

hut-8-loans

As a result of the refinancing, the amount of bitcoin locked in collateralized loans increased from 58% of Hut 8’s total bitcoin holdings (1,700 bitcoin) in 4Q19 to 94% (2,823 bitcoin) in 1Q20.

Plan to upgrade equipment still in the works

With Hut 8’s existing mining equipment quickly aging, management continues to consider upgrading to more efficient ASICs from Chinese manufacturers. Few new details were disclosed on the earnings call. However, the company did mention that it would likely finance any purchases primarily from a combination of self-financing debt and equity.

Looking ahead

The halving continues to be a major headwind for the miners like Hut 8 as the block rewards gets reduced. On the earnings call, Interim CEO Jimmy Vaiopoulos said the halving could cause the company to shut off part of its operations. However, Hut 8 remains hopeful that bitcoin prices will rise in the near future, boosting the company’s profitability and the value of its assets.

See also: Bitcoin Halving Arrives: Mining Rewards Drop for Third Time in History

The company’s plan to upgrade its equipment will surely increase operating efficiency. However, the financing needed to secure any significant purchases is still pending. Given the material risks and uncertainties of the business, Hut 8’s company filings state there is “significant doubt about the Company’s ability to continue as a going concern.” Since the earnings release, Hut 8’s stock price has pulled back 21%.

For additional insights, check out CoinDesk Research’s deep dive into Hut 8.

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