CA - DMG Blockchain Solutions Inc. (DMGGF) Q2 2023 Earnings Call Transcript

2023-05-31 22:11:02 ET

DMG Blockchain Solutions Inc. (DMGGF)

Q2 2023 Earnings Conference Call

May 31, 2023, 04:15 PM ET

Company Participants

Jules Abraham - CORE, IR

Sheldon Bennett - CEO

Steven Eliscu - COO

Conference Call Participants

Presentation

Jules Abraham

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the DMG Blockchain Solutions Q2 2023 Update Conference Call. My name is Jules Abraham from CORE IR, the company's Investor Relations firm.

Participants on this call are advised that the audio of this conference is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available on the company's website.

Joining us today from DMG Blockchain Solutions is Sheldon Bennett, the company's Chief Executive Officer; and Steven Eliscu, Chief Operating Officer.

During this call, management will be making forward-looking statements including statements that address DMG Blockchain Solutions expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in DMG Blockchain Solutions most recently filed periodic reports and the company's recent press releases, particularly the cautionary statements within.

The contents of this call contain time sensitive information that is accurate only as of today May 31, 2023. Except as required by law, DMG Blockchain Solutions disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call.

It's now my pleasure to turn the call over to Sheldon and Steven. Sheldon?

Sheldon Bennett

Thanks Jules. And thanks to everyone today for joining the call. We have a lot to get through, including a large number of questions that have been submitted, which we will answer at the end of our presentation.

As per our last quarters, I would like to start with a highlight of our recent achievements. On software, we realized our first Petra-based revenue replacing ordinals in the March quarter. Our initial revenue was small as we placed a few high profile large ordinals. But we are building the foundational technology for this revenue to grow.

We stated in our MD&A that we have built a new version of our breeze wallet for ordinals, which we call multi breeze. We were applying this branding to a project we disclosed in April, where we reformed description of a large ordinal collection called [Bitmaps] with or no rights transfer. This is the holy grail for artists and striving in a carbon neutral manner, a collection sequentially within a block and enabling the artists to transfer each or not individually as the content is sold.

We also stated in our MD&A that we are exploring other revenue opportunities related to ordinal inscriptions, based on the type Satoshi mainly creating an inventory of uncommon sets, which is the first Satoshi in a block. These and other sets, which may be valuable to collectors could expand DMG's revenue opportunity with respect to ordinal inscriptions. We may be able to sell these collectible SATs either individually or in combination with ordinal subscribe through Terra Pool. We've also increased our marketing of Terra Pool on a full pay per share or FPPS basis, which is currently the industry's preferred method of compensating full participants.

On mining, DMG has realized the hash rate of 0.89 EH/s and mine 255.8 BTC. We also announced that we purchased 350 Bitmain S19 Pro's, 350 Bitmain S19 XP's and 850 Bitmain S19j Pro pluses which totals an additional 1,550 units contributing 188 PH/s. The 350 Bitmain S Pro's are a spot deal and have already been delivered and arrived. The remaining miners will be added in the coming months to DMG's Christina Lake data center. The company is discussing further purchases with Bitmain and other suppliers.

We are particularly interested in new offerings of emerging technology specific miners and are considering this for future direction in mining. As we disclosed, we purchased the first set of long lead equipment that could provide up to 12 megawatts of immersion cooling capacity. Our goal is unchanged with respect to immersion to cost effectively leverage the technology to enable increased capital efficiency and deploy it with miners that will have a long useful life, especially as the Bitcoin havening were 3.215 Bitcoin will be the block subsidy amount instead of the current 6.25 is approximately 11 months away.

We also announced that we have entered into a non-binding agreement that will result in development of a new data center site with access to low cost reliable renewable energy located in Canada and a province outside of British Columbia. We have begun the project planning process and may be able to disclose more details this summer based on Project reaching some key initial milestones. Our overall goal is to ensure DMG has access to sufficient amounts of competitively priced power for years to come.

Now, a review of our strategy. First, our Core+ our software. With respect to our large - larger strategy to develop software to monetize Bitcoin transactions, what we call Core+. We are encouraged by recent market developments, with nearly 10 million ordinals inscriptions to-date, and over 40 million of related on chain transaction fees. The ordinals market has clearly established itself.

Even as these have significantly subsided from their recent peak, we believe 2023 represents an important milestone for the blockchain ecosystem, whereby the utility of the blockchain has significantly increased in a way that has been talked about for the last decade, and is now only being realized.

While some traditionalists may discount the value of placing art and other content on a blockchain that was intended to be the basis for a new decentralized financial system proof of control by central authorities, we are agnostic on these Bitcoin culture wars and believe anything that increases the utility of the blockchain is good for the ecosystem. New blockchain utility ultimately should result in sustained higher fees, which supports our business model.

As DMG strategy is focused on monetizing Bitcoin transactions, we believe we are well positioned to capitalize on this new opportunity that may be looked upon years from now as an inflection point for the industry.

As a reminder, our key objectives for Core+ remain; one, throw our Terra Pool hash rate with a long term goal of reaching 10% of the network share. Two, actively transact Bitcoin in a carbon neutral Terra Pool in Petro technology. And lastly, to create a carbon neutral B2C marketplace. In the near term ordinals has arisen as a short term catalyst for Petro. And our goal is to build upon initial success, even as we are continuing to work towards our long term goal of enabling carbon neutral transactions for financial institutions. We believe achieving these goals will enable us to grow our Core+ revenue to be significantly larger in the long term.

For DMG's core mining strategy, we've completed installation of our initial 1 exahash of capacity, and have disclosed purchasing of an additional 180 petahashes, and 40 megawatts of containers which will exhaust our accumulated credits with Bitmain. Going forward for our next exahash capacity, we intend to focus on deploying emergent cooling technology in a way that should enable greater capacity efficiency versus air cooled mining - sorry, capital efficiency versus air cooled mining. We will provide updates as we get closer towards our initial deployment.

Even as we are focused on developing our Core+ strategy, we remain committed to growing our hash rate in the most capital efficient way possible, as mining remains a foundational technology for everything else we do.

I'll now hand over to Steven to review the company's performance.

Steven Eliscu

Thank you, Sheldon. I'm Steven Eliscu DMG's COO.

Now a few words about the company's overall position. We are encouraged that our cash plus crypto balance nearly doubled sequentially, which is giving us more room to spend on capital equipment so we can more rapidly deploy our recently purchased containers at our Christina Lake facility, as well as purchase the longest lead time items for our immersion cooling deployment.

We expect to deploy immersion cooling technology in 12 megawatt tranches in our building which can accommodate three tranches, each of which will provide half an exahash for mining based on current technology. We have not decided if we will deploy solely with new generation immersion miners, or some combination of existing equipment retrofitted to work in immersion, and new equipment.

Outside of new miner purchases, we do not expect significant capital expenditures in the near term. When we decide to purchase immersion specific miners, we do not expect the nameplate capital costs per hash to be materially different versus air cooled miners. While Sheldon referenced that we have a non-binding agreement to develop a new data center site in Canada outside of British Columbia, it is too early to provide CapEx guidance on development of that site.

While we're still being very cautious regarding spending, we will be hiring more developers for our Core+ business as we see significant business opportunity that will require more resources. As discussed last quarter, we have been devoting resources mainly to our underlying software infrastructure. We're now transitioning from that to expand our capabilities to ensure we can properly support substantially more Terra Pool, ordinals clients, as well as financial institutions.

Finally, we've continued to search for reasonable cost sources of debt to accelerate our hash rate growth plans. We are in active discussions with debt providers.

Regarding revenue, in our March quarter, our revenue increased 6% sequentially to $7.6 million from $7.2 million in the prior quarter. Our self-mining revenue increased 17% to $7.8 million from $6.7 million on a 26% increase on the average price of Bitcoin for recognized revenue, which was partly offset by a 7% decline in mine Bitcoin for 255.8 driven by a 13% lower network production of BTCs per exahash.

You will also note in our financial disclosures, a new line in our revenue breakout called net pool revenue, which was negative point $0.7 million. This is the result of Terra Pool members selling hash rate to Terra Pool and being paid according to the full pay per share, or FPPS payout formula, which was an amount greater than the amount of bitcoin that Terra Pool actually mined in the March quarter.

As we discussed in our financial disclosures, we expect this net cool revenue line results to be either positive or negative depending on the quarter with the resulting fluctuations to sum to zero over time. As Terra Pool's hash rate increases, we would expect the volatility of net core revenue to decline over time as well.

On margins, our margin on our revenue less operating and maintenance costs was 40% in the March quarter, up from 39%, the prior quarter. Excluding net pool the net pool revenue line, it was 45%. As a proxy for cash flow from our business, assuming we're selling about 100% of our generated Bitcoin, our earnings before other items, excluding depreciation, amortization and share based comp was $1.7 million, or 22% on a percentage basis in the March quarter. So up from $1.3 million and 18% in the prior quarter.

On our earnings before other items, was minus $4.6 million in the March quarter. This is a smaller versus minus $5.3 million in the prior quarter.

Expenses excluding depreciation, amortization and share based comp, decreased to $1.3 million from $1.4 million as non-cash - I'm sorry, non-binding cash expenses remain relatively steady. Depreciation decreased 4% to $5.9 million. Future changes in depreciation will depend on the rate of capital equipment additions.

Our net income loss narrowed to $3.8 million, which is an improvement from the $5.6 million loss in the prior quarter. Favorable Bitcoin pricing trends have provided a tailwind both for mining revenue, as well as realized digital currency gain losses that show up below the operating income line.

On our balance sheet, our cash plus digital currency holdings increased 98% sequentially to $21.7 million from $10.9 million in the prior quarter, as the value of our Bitcoin held increased 65%. This asset increase was partly offset by a decrease in our property and equipment on long term deposits to $61.5 million from $66.9 million in the prior quarter as our depreciation exceeded the amount of new equipment deployed. Our total asset base increased 2% to $94.3 million from $92.1 million.

Regarding our mine BTC, in the March quarter, we mined nearly 256 Bitcoin, a 7% decrease sequentially as a realized cash rate of 0.89 exahash was incrementally up from the prior quarter, but this was more than offset by a 13% decrease in the network BTCs per exahash. In the current quarter, we expect a modest decline in hash rate due to unseasonably warm temperatures as a heat dome took hold in the Pacific Northwest. We have brought in additional cooling infrastructure to mitigate the ongoing warm temperatures for the remainder of the summer, but we still expect challenges.

In the March quarter, DMG sold nearly 249 Bitcoin generating 7 million of cash and the average price of $28,270 Canadian. Thus, DMG sold 97% of the Bitcoin amount in mines, versus the prior quarter of selling 60% of the Bitcoin at mines.

Our hosting revenue declined 21% sequentially in the March quarter to $0.4 million. We expect hosting revenue to remain the prior quarter levels, at least for the near term. And as discussed above, we're looking for opportunities at every step to help us accelerate our immersion cooling build out for our first 12 megawatts.

I will now hand the call back to Sheldon to summarize the prepared comments and answer questions submitted prior to the call. Sheldon, you're muted.

Sheldon Bennett

Thank you, Steven for unmuting me.

As Steven described, the company is focused on tightly managing expenses and generating cash while still investing for future growth. DMG mined 256 Bitcoin in Q2 down 7% from the prior quarter, which was more than offset by 26% higher Bitcoin price. In the near term with our 1 exahash installed a new miner orders on their way yet not delivered, we should have in place 1.2 exahash of installed mining capacity.

Beyond that we expect deployment of immerge to cooling capacity to enable us to reach our 2 exahash long-term goal. Additionally, as a proxy for cash flow from our business, our earnings before other items, excluding depreciation, amortization and share base comp was 1.7 million, or 22% margin.

Our cash BTC on hand at the end of the quarter was $21.7 million, nearly doubling sequentially, with total assets of $94.3 million. We are pleased that we have made progress, but know that Bitcoin mining and software development are both challenging to do well. We know where we want to go. And we're solely focused on execution.

So now, as I introduced at the beginning, we have a long list of questions that came in for our Q&A. And I will I will read out the questions and answer them. I'll defer a few of them to Steven and Steven may make a few comments along the way.

Question-and-Answer Session

A - Sheldon Bennett

Our first question is a timely question. I read that foundry USA pool is now charging fees. Do you see this benefiting Terra Pool?

Yes, of course, we see an increase resettlement is towards Terra Pool now. We encourage so far by the conversations we've had with like-minded carbon neutral miners. And we believe that the fact that Terra Pool is now charging fees versus a no fee pool is allowing people that are fee conscious and carbon neutral to make the switch over to Terra Pool.

The next question, software revenue has been very low this year, how are you going to turn this number around?

Okay, our focus is on bolstering our Core+ strategy with increased Terra Pool share, and hence pool fees, as well as capturing as much of the ordinals business as we can. We're finding that customers want ordinals to be inscribed using a carbon neutral pool, and carbon neutral energy. Although they may not understand all the mechanics of how this works. Our prior year numbers were lifted by licensing deal with a particular customer, which we're no longer recognizing our books as we do not expect recurring revenue from that deal.

So we'll have a bit of a low in our software revenue. However, with the bolstering of ordinals revenue and the signing of new agreements to bring on more and mills, we believe that we can turn this number around in the next few quarters.

Next question, I have heard in the past that DMG is trying to enable carbon neutral transactions with financial institutions. Is this progressing or not?

Great question and the answer is yes. So originally, we were working with a couple of financial institutions to kick off our software called Petra, Petra is now reliably operating on the main net continuously placing transactions. Right now it's placing, ordinal transactions as that's the most demand we have.

But we do see this as a long-term opportunity, working with financial institutions to place transactions in a carbon neutral way, especially as European regulation is moving in the direction to reduce carbon emissions associated with the use of cryptocurrency. So we expect financial institutions to perform extensive testing of our platform. And we see this as a long-term opportunity, which will have perhaps little impact in the current quarter to finishing this financial year, but we see it uplifting in the next financial year.

Steven hasn't jumped in yet, so I'll keep going. Discuss DMG's relationship with NFT miners and the opportunity that presents the company going forward?

So DMG, we've currently placed many high profile ordinals or NFT's on the Bitcoin Blockchain. Going forward, we are setting up partnership agreements with marketplace providers to ensure that DMG has a steady stream of ordinals for its Terra Pool and Petra to place.

We recently signed a first partnership agreement. That's actually recently as in a few days ago, we have three others out being negotiated with other marketplaces. So we're hoping that we end up you know, with four or more signed partnership agreements in the coming weeks.

Steven Eliscu

Yes, and I would just add that, in fact, we have had direct discussions with artists as well. And they're excited about it, but they have really no idea how the Bitcoin ordinal inscription infrastructure works, especially for the large ordinals which are larger than 400 kilobytes. And they are really excited to work with us. So we have both, we have relationships with both artists directly as well as indirectly with partners who have access to lots of artists content.

Sheldon Bennett

Yes, there's a bit of a learning curve there that we're helping them overcome and figuring out the best way for them to use the Bitcoin Blockchain. But there's definitely more to come for DMG placing large ordinals.

Next question, with all your talk about immersion, what mining equipment do you plan to use or purchase?

So as most of you know, Bitmain has so far declined design equipment for immersion cooling, so specifically for fluid immersion cooling, not hydro equipment, which is water cooling. MicroBT is the furthest ahead and we have units of its first emerging immersion miners in house that we've run and test. Cannon also has announced and immersion cool miner we've been following chain reaction and we're always excited about the potential for a new mining company to enter the market.

Just as we were hoping Intel would stay in the market. We hope that at some point there will be additional immersion choices. However, of all the products on the market currently, from our research MicroBT has one of the most competitive products. And we'll be following what they do closely, along with others as we release more information.

Steven Eliscu

And I just want to emphasize part of that our key goal here is to have the highest capital efficiency This is achieved by being able to overclock the miners, we're going to be doing extensive testing to ensure we can sufficiently overclock the miners such that when you combine the use of the miners, and the purchasing the miners and operating them in the immersion environment, that it's actually less expensive than an air cooled solution.

We still believe that's the case. And we're excited about new generation equipment potentially gives us a leg up, especially as we look at the havening coming up, not too distant future.

Sheldon Bennett

Thank you, Steven. Next question, what power prices has DMG seen? How is the power contract structured? And what guarantees does the company have on pricing and availability?

So DMG, we use a fixed tariff price with our utility. That fixed price is, for everyone in our territory that is a large commercial operating a substation, which is usually us and lumber mills and pulp mills and the site and places like that own their own infrastructure. So as such, using the utility care for not subject to swings in market prices for energy, so we're not on a wholesale price.

So our price monthly is the same whether or not the market price of power is extremely high or extremely low. We found over the last two years, that this approach has been beneficial - we've not needed to curtail power when prices are high. We don't get taken advantage of prices being really low. But in our region, we haven't really had really low power prices in the past year or so. As well you know, for curtailment. You'll we are on fixed power with our utility.

So, we're not really subject to containment without consent by DMG, unless it's an emergency. So, we have had calls from a utility, where they were interested if we would curtail power, we have the ability to do. We have the software that controls our unit subs and our substation that we can turn - remotely turn power on and off. But to-date, we haven't had to use it.

And so right now, when you talk about pricing availability, I mean availability power is available to us, close to 100% of the time, depending on the transmission lines not being affected or shut down by any sort of storms or lightning.

And on price we believe we're getting the best price through our utility, as we don't have to ride up and down the market prices and have to curtail and lose hash rate when market prices are too high, so very long answer to a very short question.

Next question, where does the DMG's mining control software stand in development? Does it include functionality that would allow overclocking or underclocking in a curtailed environment?

So very similar to a little bit my last answer. So our mining software, it's called Helm, it continues to work and it's evolved over the years we've started building Helm, I would say five years ago, something like that. It does allow overclocking and underclocking. The way the Helm works, is it actually goes in to every miner in our operations has an API, it understands what miner it is, what firmware it is, understands how to talk to each miner.

And we could write these scripts that automatically overclock and underclock as we see fit or our mining needs. So the Helm software works quite well. It also creates heat maps and efficiency maps. So basically we have a map of the mine, and we could see hot and cold spots in the mine as well. We could see where, we're hitting 100% nameplate or under or over, we can see miners that are overclocked or in low power mode.

So it really gives us a lot of versatility in, how we manage our mine and our mine operations. Helm also interior connects with our power management. And so, it pulls all the data from all over unit subs and our substation. And this is how, we have the ability to curtail as I said in the previous question, we'd have been not needed to curtail for our utility yet. We have the ability to do it.

If we didn't need to curtail we can do it in chunks of two megawatts at the unit cell, or the entire the entire substation if need be. But we can basically curtail in seconds by hitting a button that will open a breaker. And we can hit another button, and close that breaker and be back up in seconds. So, we are or I, in a previous company as Steven designed this almost 10 years ago, this system. And we still use it today.

Steven Eliscu

And I would just add with capability, we haven't Helm this works, this will work really well as we move to immersion, to be able to be able to dynamically update miner profiles and change the amount of overclocking or underclocking depending on the conditions. So, this will become a key competitive advantage for us in our immersion deployments.

Sheldon Bennett

Exactly, did you want to take the next question, Steven?

Steven Eliscu

Yes, certainly. Thanks, Sheldon. The next question is, as somebody is asking what's so unique about this multi breeze wallet?

The other thing is, everything about ordinals is new. And any specific implementation that we do, is likely to be unique by definition. But I think we put together something that's really interesting, in terms of enabling this per ordinal rights transfer. This gives the artists full control of selling each piece of art - on the Bitcoin Blockchain, and being able to parse that out as they're able to be able - to have the art sold.

We've also as Sheldon mentioned, about having this continue - having the ordinals place contiguously in the same block without adding carbon. So all of these pieces together have, create what is an amazing value proposition for these artists. And we're now just in the first ordinal, the first one we did, there was a lot of manual work. And - what we're doing now is to make it so it's more automated, and we can serve as a lot more customers.

I'll take the next few questions as well. So why did our cash balance jump so much to $4.8 million? And do we expect our cash balance to grow from here?

And the short answer is - that we got at the end of the March quarter, a refund on our provincial sales tax of $3.4 million that was owed to us, this was on our amounts recoverable balance. So that you saw on our balance sheet dropped. We are still bullish on the price of Bitcoin. And in April, we reported that we had 534 Bitcoin on our balance sheet. And we're likely going forward just continue to sell as we need to fund operations and CapEx. So you probably shouldn't expect our cash balance, at least in the near term to significantly grow.

We got this. This is, as a former equity research analysts got a really an interesting question asking about the revenue potential for Petra, and how to model that and be able to provide some commentary, as to how we're working to create volume for Petra. And at this time, it's just early to provide specific guidance. But let me give some idea of the mechanics, how you could model Petra revenue for longer term.

First of all, we plan to charge a premium versus the market rate for transactions and also have a built in floor price. So at least, it's what we've done today. And what our expectation is, is to be able to charge more for, be able to have Bitcoin transaction fees that are higher than what are being realized the network. And we've seen transaction fees grow from low single-digit percentage, the overall block reward to a much higher percentage.

And this recent rise given the popularity of ordinal should give some indication of the potential for Petra fees. And think about our goal of Petra share of 10% that translates to about 15 blocks a day, think of that as the supply for placing Petra transactions. And on demand side, is where as Sheldon was talking about ordinals partners to really work with them, and with financial institutions to have that supply, or have that demand to fill that supply of blocks that we're creating.

So when you think about growing Terra Pool and think about Petra, these are really, inner these are very closely related. And in our view, it's self-reinforcing, because the benefits that we get from higher revenues, in terms of Petra should benefit the miners who are on Terra Pool, and really create a self-reinforcing cycle. So that is, in a nutshell, how we expect it to grow. And over in the coming quarters, we could give you more specifics as to what we're achieving to help you update your model.

Another question explaining, this about Terra Pool with this negative revenue and this idea of what happens if net pool revenues continue to be negative?

And this is theoretically possible, but statistically unlikely, we have experienced being part of large pools and generally a pool luck, think about the ratio of blocks one to the ratio of expected blocks, which should be 100%. Over time, and because it's based on the statistical nature of the Bitcoin protocol, we would expect net pool revenue to be zero over the longer run when all the quarters are summed up.

And we're - as part of also what we're doing, is just beefing up our infrastructure to make sure we don't have any disadvantage, or at least always at least 100% and just the fact that with the, if when we can grow Terra Pool that the volatility of Terra Pool's luck should decline. In the near term, we have sufficient BTC balance to fund any of those negatives.

And then the question, we always get is just the raw cost mine a Bitcoin in terms of utility costs under 12,000 U.S. and as we stated in the past its for us, because as Sheldon was describing our power costs is really steady. Our cost to mine a bitcoin is really ends up being a function of network difficulty. And Sheldon, did you have anything else you wanted to add here?

Sheldon Bennett

No, that was it for our questions, and we're coming up to the end of our call. I did want to note for everyone that DMG will have a booth again in [Mining Disrupt] in Miami on July 25 to 27th. So please feel free to come by and see us. Last year myself and Steven, we were both there will be there again this year, maybe few others from DMG at the booth.

Great way to come and talk to us in person and we gave out a lot of T-Shirts and hats and other things last time. So if you're looking for merchandise and you want to come to Miami, that's one way to get it. But that ends our call and I thank everyone for attending and our call will no disconnect. Thank you.

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