CA - DMG Blockchain Solutions Inc. (DMGGF) Q3 2023 Earnings Call Transcript

2023-08-30 21:46:03 ET

DMG Blockchain Solutions Inc. (DMGGF)

Q3 2023 Earnings Conference Call

August 30, 2023 4:30 PM ET

Company Participants

Sheldon Bennett - CEO

Steven Eliscu - COO

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the DMG Blockchain Solutions Q3 2023 Update Conference Call. 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 content of this call contains time sensitive information that is accurate only as of today, August 30, 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 is now my pleasure to turn the call over to Sheldon and Steve. Sheldon?

Sheldon Bennett

Good afternoon and thanks to everyone who joined -- who has joined the call today. My name is Sheldon Bennett, I am the Founder and CEO of DMG Blockchain Solutions. With the similar format as recent quarters, first, I will provide an overview of the company's achievements in the past quarter. I will then pass the call to Steven who will review the company's performance. We'll end the call with our Q&A, based on questions submitted to us prior to the call.

So now to our highlights of the quarter. Regarding software, we have largely focused the June quarter on internal improvements to our software. A key effort has been to enable scalability for Terra Pool, which should allow us to bring on more Terra Pool members than the limited number we have had to date. Over the past year, we have embraced both programming languages and development methodologies that should enable us to bring new products to market faster. While none of these are revolutionary, they do represent a shift at DMG that we hope to more visibly demonstrate with results in the near future. We expect the effort to improve Terra Pool's scalability to be largely completed in the current quarter. We are now transitioning to new efforts, including work to build up our Blockseer Freeze cold wallet technology, as well as to modernize and relaunch Blockseer Explorer. These are two products that we have not discussed for quite some time, but are integral to making our Blockseer platform more institutionally ready. So we are better poised to capture the spot Bitcoin ETF market once approved.

Regarding mining, DMG had realized hash rate of 0.8 exahash with a fleet efficiency of 28.7 joules per terahash as measured from our substation and mined 196 Bitcoin.

As the network produced about 251 Bitcoins per exahash in the quarter, our Bitcoin production was in line with expectations for our realized hash rate. Of the 350 Bitmain S19 XP's and 850 Bitmain S19j Pro Pluses that we had previously reported having been purchased and not yet delivered, we have still yet to take delivery of the miners at our data center due to logistics delays with Bitmain. We are currently expecting the delivery installation early in the December quarter.

Last quarter, we disclosed, we purchased the first set of long lead up items that could provide up to 12 megawatts of immersion cooling capacity. We have subsequently been ordering additional equipment and refining our design. Part of the delay to not having all components on order is that we expect the equipment to have a useful life of at least five to 10 years, and we continue to evaluate the trade-offs so we can realize such. Our goal is unchanged with respect to utilizing immersion to enable both increased capital and operational efficiency based on deploying new generation miners that would have a longer useful life than if they were air cooled. We are renting our yard for up to 40 megawatts of air cooled containerized mining with some long lead time equipment having been ordered. We expect to have some of the capacity running in the December quarter and have the project completed in the March quarter. This capacity gives us flexibility to deploy our existing assets very cost effectively, while we either purchase new capacity for immersion in our building or tactically we take advantage of deals on air cooled equipment, while possibly converting at least some of our existing equipment to immersion cooling.

With respect to miners, we encouraged that the industry is viewing immersion cooling as an important step forward. We have been evaluating solutions for MicroBT and Canaan for deployment and we have observed that an immersion-ready miner with competitive specs from Silicon Valley based or a dime has been announced. We believe others will be announcing similar solutions in the future.

We've also said that we will be evaluating using our already existing mining equipment for deployment in immersion, as this equipment is partially depreciated and in low power mode is competitive on efficiency with newer generation miners. We have yet to make a final decision regarding how we will roll out immersion and we'll be very careful in how we deploy additional capital of given mining dollar revenue per exahash is currently at about the lowest level it has been all this calendar year.

We do not have any updates on our announcement 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, in a province outside of British Columbia. The blocking issue continues to be related to longer than expected regulatory approvals.

And now for review of our strategy. First, let's discuss Core+ strategy. With respect to our larger strategy to develop software to monetize Bitcoin transactions, our near-term goal is to grow Terra Pool and focus on monetizing Bitcoin transactions by enabling Ordinal providers and financial institutions to move Bitcoin without adding carbon and without commingling with bad actors. While we have been quiet this summer on announcements, we hope to demonstrate more substantial progress in the coming months.

As a reminder, our key objectives from our Core+ remain as: one, grow our Terra Pool hash rate with a long-term goal of reaching 10% of the network; two, actively transact Bitcoin in carbon neutral manner through Terra Pool using our Petra technology; and finally, three, create a carbon-neutral Bitcoin marketplace as well as demonstrate a premium for the sale of green hash rate.

In the near-term, Ordinals have been a short-term catalyst for Petra, and our goal is to build upon our initial success by building automation to ingest Ordinal content, even if as we continue to work towards our longer 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.

Regarding DMG's core mining strategy, we have completed installation of our initial 1 exahash of capacity and have still yet to receive our miners to get us to our 1.2 exahash. Going forward for our next exahash of capacity, we intend to both diversify with whom we purchase from and to focus on deploying immersion cooling technology in a way that should enable greater capital efficiency versus air cooled mining. However, air cooled mining will still have a place in our operations to enable highly capital efficient growth.

Deployment of immersion cooling should also help us to avoid the summertime dips in hash rate we have had the past two summers resulting from excess heat. We know the hash rate we have reported since May has been disappointing but expected and our scheduled immersion cooling deployment to happen ahead of next year's summer heat should enable us to largely mitigate these heat issues. 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 miner remains a foundational technology for everything we do. Specifically having our own mining capacity enables us to deliver software that meets the requirements of other Terra Pool members, enabling us to deliver improvements to what current pool of providers have in terms of both fee structure and services provided.

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

Steven Eliscu

Thank you, Sheldon. I'm Steven Eliscu, DMG's Chief Operating Officer. Now for a few words about the company's overall position. Our cash plus crypto balance inched up 3% sequentially and 88% year-on-year, which is giving us more room to spend on capital equipment, so that we can more rapidly deploy our mine infrastructure to be able to increase our hash rate to 2 exahash or more. For our recently purchased containers at our Christina Lake facility, we still need to purchase some power distribution equipment as well as purchase the rest of the equipment and materials for our first 12 megawatt tranche of immersion cooling infrastructure. As we have previously discussed, we expect to deploy immersion cooling in 12 megawatt tranches in our building, which can accommodate 3 tranches, each of which should provide about a 0.5 exahash of mining based on current technology. We will likely facilitate our immersion capacity based on accommodation of existing miners retrofitted to work in immersion and new immersion-ready miners.

Regarding the cost to deploy immersion, commercial single phase immersion cooling equipment has been announced with pricing of approximately a US$100,000 per megawatt, excluding the cost of the fluid and transformers. What we deploy will be cost competitive with those solutions and will be specifically tailored to the needs of our site. Additionally, with Bitmain announcing its S21 miner, expected to have an efficiency of 15 joules per terahash and other new generation miners likely to be announced in the coming months, we will move carefully before we commit to a new generation miner, especially as the market pricing for equipment could drop a lot post-halvening if Bitcoin pricing doesn't dramatically increase from current levels. 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 cost per hash to be materially different versus air cooled miners.

We are still very cautious regarding overall spending, but we have hired developers for our Core+ business, specifically those with the skills who can accelerate our development of new products. As discussed last quarter, we have been devoting resources mainly to our underlying software and infrastructure. We are now transitioning from that to expand our product offerings to ensure we can properly support substantially more Terra Pool members, Ordinals clients, as well as in the future, financial institutions.

Finally, we continue to search for reasonable cost sources of debt to accelerate our capital expansion plans. We are in active discussions with debt providers with material progress having been made in the past quarter.

Regarding revenue, in the June quarter, our revenue decreased 2% to $7.5 million from $7.6 million in the prior quarter, mainly as revenue from self-mining decreased 4% to $7.5 million, as the company's Bitcoin production declined 26%. This was offset by a 29% sequential increase in the average price of the Bitcoin based on our revenue recognition. Our hosting revenue declined 23% sequentially in the June quarter to $0.3 million. We expect hosting revenue to remain near prior quarter levels, at least for the near-term.

Net pool revenue is minus $0.3 million versus minus $0.7 million in the prior quarter. 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 June quarter. As we discuss in our financial disclosures, we expect net pool revenue 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 pool revenue to decline over time as well.

Our margin on revenue less operating and maintenance costs was 45% in the June quarter, up from 40% in the prior quarter, as Bitcoin pricing sequentially rose. Note that when we lose hash rate due to heat issues, we also spend less money on utilities, which dropped 9% sequentially. Our fleet efficiency actually improved slightly to 28.7 joules per terahash from 28.9 in the prior quarter, which also provided a tailwind to margins.

As a proxy for cash flow from our business, which assumes we are selling about 100% of our generated Bitcoin, our earnings before other items, excluding depreciation and amortization and stock-based comp was $2 million or 27% on a percentage basis, is up from $1.7 million and 22% in the prior quarter. Our earnings before other items was minus $3.9 million in the June quarter versus minus $4.6 million in the prior quarter. Expenses excluding depreciation, amortization and stock-based comp were $1.3 million. This is flat from the prior quarter as non-mining cash expenses have remained relatively steady.

Depreciation expense decreased 9% to $5.3 million, sequentially the lowest level since the March quarter of 2022. Future changes in depreciation will depend on the rate of capital equipment additions, which we expect to be modest in the near-term, excluding miner purchases. Our net loss increased to $4.3 million versus the $3.8 million net loss in the prior quarter. This swing to a larger loss was mainly on a modification made to an amount recoverable detailed in our financial statements.

On our balance sheet, our cash plus digital currency holdings increased 3% to $22.4 million from $21.7 million in the prior quarter as the value of our Bitcoin held increased 22%. The asset increase was more than offset by a decrease in our property and equipment and long-term deposits to $57.4 million from $61.5 million in the prior quarter, as our depreciation exceeded the amount of new equipment deployed. Our total asset base accordingly decreased 3% to $91.2 million from $94.3 million in the prior quarter.

In the June quarter, DMG mined nearly 196 Bitcoin, a 26% decrease sequentially as the realized hash rate of 0.8 exahash was down 10% from the prior quarter, which was in line for guidance for a modest decrease. Our production was also negatively impacted by a 13% decrease in the network BTCs for exahash. In the current quarter we expect another modest sequential decline in our hash rate as we realize the full brunt of summer temperatures in Eastern British Columbia. While we did add cooling infrastructure this year to mitigate warm temperatures, it did not provide enough expected relief and we are focused going forward on deploying immersion cooling as the appropriate longer term solution ahead of next summer.

In the December quarter, we expect a rebound for our hash rate to be in excess of an exahash, assuming we run our miners in standard power mode as we'll benefit from cooler temperatures which we should see by the end of September. And we also expect to be receiving the ordered miners from Bitmain.

Note that given the current economics of Bitcoin mining, we may choose to run the older portion of our fleet in low power mode. This would result in approximately a 20% or 150 petahash reduction for that portion of the fleet, but it would also lower the operations costs for that equipment by about 1/3.

In the June quarter, DMG sold 131 Bitcoin generating $4.8 million of cash. Thus, we sold 67% of the amount -- of the Bitcoin amount mined versus the prior quarter of selling 94% of the Bitcoin mined.

As discussed above, given our strong unlevered balance sheet, we are looking for opportunities to raise debt to help us accelerate our deployment of new mining capacity, while avoiding shareholder dilution.

I will now hand the call back to Sheldon to summarize our prepared comments and we will answer questions submitted to us prior to the call. Sheldon?

Sheldon Bennett

Thank you, Steven. Just to reiterate our key results and outlook. As Steven described, the company is focused on tightly managing both capital and operational expenses and generating cash, while still investing for future growth. DMG mined 196 Bitcoin in Q3, down 26% from the prior quarter, which was offset by a 29% higher realized Bitcoin price. We'll be fully facilitated with 1.2 exahash of nameplate capacity in the near-term and have the infrastructure to double that capacity in the next year.

Additionally, as a proxy for cash flow from our business, our earnings before other items excluding depreciation, amortization, and stock-based compensation was $2 million or a 27% margin. Cash and digital currency on hand at the end of the quarter was $22.4 million, up slightly versus the prior quarter, with total assets of $91.4 million. We are optimistic about our future, as we continue to prove that we can grow margins in a very difficult environment, will advance our software development to be in better position from which to generate revenue.

Question-And-Answer Session

A - Sheldon Bennett

So now let's move to the Q&A. We have a number of questions in our Q&A. We have split them up between Steven and I, answering them for who's the most appropriate. And I will read the question and give the answer.

So our first question. How do you expect your hash rate to get back to your 1 exahash, let alone the additional hash rate from previously ordered equipment?

So a good question. We know the nameplate hash rate of our equipment. And aim to achieve that hash rate even as we have struggled with heat. We have continued to develop our mine management software to pinpoint issues and have been making adjustments. Similar to what we saw last September, we expect a similar jump by month end back to the miner's full nameplate hash rate, positioning us much better than the December quarter, during which we expect the delivery of our new miners, which we have had on order for some time now.

Two. When do you plan to purchase additional miners to get beyond 1.2 exahash and reach at 2 exahash goal?

Well, as we discussed in our prepared remarks, we are actively investigating the purchase of new generation miners. We will certainly take a look at Bitmain's new 15 joule per terahash S21, as well as new generation immersion-specific miners. We are also looking at purchasing older generation miners, where we could leverage their ability to run in low power mode and provide competitive efficiencies. Obviously, we will make some updates as we make purchases, but this is sort of our planned approach to grow beyond our 1.2 exahash.

Another question. What is your strategy to add hash rate to Terra Pool?

So, DMG, we have had a longstanding relationship with our industry peers, especially those focused on carbon-neutral mining. Many of them know about Terra Pool and are willing to move some hash rate. As we know how hard it is to run a pool, we have taken a go-slow approach until we felt our technology was in place where we could more aggressively invite others in the coming quarters. As such, our plan is to more aggressively be inviting and adding new hash rate to Terra Pool in the coming quarters.

Next question. In your recent announcements, you mentioned very little on Ordinals. Did they die?

I hope not here. So, the Ordinals have not died. But we have been busy developing an API that will automate processing of Ordinals through Terra Pool. However, until we show the expansion of Terra Pool, there is little new activity to report. Even as the Ordinals hype has died down, we still look at Ordinals as a precursor to patch our working with financial institutions in the future. And we do believe that both Ordinals and financial institutions will be the key part of our Terra Pool and our Petra strategy.

What updates do you have regarding enabling carbon-neutral transactions with financial institutions, which would seem to be especially attractive to those who may get approved for spot ETFs?

Great question. There is lots of discussion on ETFs in the market right now. We've taken a step back in pursuing multiple routes to demonstrate pieces of infrastructure to enable carbon-neutral Bitcoin transactions. And one area we focus on is selling green hash rate, where ultimately there's a premium to be had for generating Bitcoin from carbon-neutral energy sources. We also continue to see an opportunity for financial institutions to send Terra Pool to their transactions using Petra technology. To realize this, we know we need additional technology pieces, which we are planning to discuss in the coming quarter as we progress in developing Petra and Terra Pool with financial institutions.

Another question. Others are talking about repurposing Bitcoin mining facilities to AI. What are your plans?

Great question. Get it asked me many times. Well, some believe that repurposing of GPU mining equipment could provide a quick entry into the AI training market. However, we're not convinced that this would be the right approach for DMG. NVIDIA's H100 GPUs, the current state-of-art in AI technology are hard to come by unless your name is Google or Meta. Equally in short supply is the high bandwidth memory that pairs with the GPUs. Additionally, selling GPU services to the cloud is a relatively low margin business. We've spent some time on this and calculated that our capital costs would be approximately 5 million per megawatt. We know that if we want to enter AI training space, we'll need close relationships with GPU vendors, system vendors, and end customers. We are doing research, paying close attention to space and see this as a potential longer term opportunity for DMG.

Those are the questions that I've picked out for myself to answer. Steven has picked a few himself and I'll let Steven go ahead.

Steven Eliscu

Yes, I'll pick it up from here. We have one question in the chat that also is about uplisting. One of the things we are looking at uplisting opportunities both in the short-term as well as in the longer term within the U.S. markets. We are taking a look at uplisting within the OTC and -- but longer term the NASDAQ or NYSC is something on the table and we continue to look in the future for what is the most appropriate timeframe. The path is probably, if we achieve everything we want to achieve to be able to sell to a larger base of investors, it would certainly be something desirable.

There's also a question regarding about reaching 2 exahash before the Bitcoin halvening. We -- right now it’s too early to say when we would actually deploy -- to buy and deploy new capacity. I think in the prepared comments, we said that we will be very cautious, especially if Bitcoin pricing doesn't necessarily go to where people may expect.

Some of the other questions. Your cash flow from operations was negative in Q3 despite improving margins and what was the major driver?

So if we sell less than 100% of the Bitcoin mined, the difference in proceeds from Bitcoin sold less Bitcoin mining revenue is a drag on cash flow from operations. As we sold only 67% of what we mined, this indeed which was the case in the June quarter and largely drove the resulting negative cash flow from ops for the quarter, were still positive for the overall for the year. And this is specifically why we discuss we use the metric operating margin less depreciation, stock-based comp as this mitigates this issue.

Another question here related was about our cash balance and why did it decline so much in Q3 after growing in the prior quarter. And so in the prior quarter, as a reminder, the company received $3.4 million provincial sales tax it was owed. And we got that just at the end of the quarter, at the end of March. So this gave us cash to support operations in Q3 and we decreased the amount of Bitcoin we needed to sell in the June quarter, which helped us increase our Bitcoin balance. So we continue to evaluate the most optimal treasury policies, but we're bullish on Bitcoin. And I think this also answers one of the questions in the chat as well is, I think right now management and with our Board's backing is encouraging us to maximize our Bitcoin balance for at least the near-term and that would be into -- at least into the halvening.

Another question. If next generation equipment costs $20 million to $25 million exahash and post halvening will generate about a Bitcoin a day, given current trends, this suggests we're going to need a really steep increase in Bitcoin pricing to get a decent ROI and how do you expect this to play out?

And yes, we're doing exactly the same math. So even as we had expected miners to be more cautious purchasing new equipment going into the halvening, we've seen a record amount of new hash rate added this year. And in retrospect, this is not surprising given the amount of hype as to where Bitcoin pricing could go, especially post-halvening and which is expected in April 2024 timeframe. And as a reminder, that's when the block subsidy decreases by 50% to 3.125 Bitcoin. And nobody wants to be caught flatfooted not having their hash rate in place ahead of this event. But of course, Bitcoin pricing may not strongly appreciate. So even as we're installing the infrastructure for 2 exahash or more, we're going to be very careful as to what additional miners we purchase.

The next question is about why did Terra Pool see net pool revenue again in the June quarter?

And over the long run, we expect the ratio of blocks one versus -- the expected blocks one to converge on a 100%. This is also referred to as your luck percentage. And as winning blocks is almost completely based on the statistical nature of the Bitcoin network, we would expect that net pool revenue to be zero over the longer run. And we know that we need to grow Terra Pool from here to greatly reduce this uncertainty and volatility around this net pool revenue, so it does converge on zero.

Another question. Can we shed some light on the 49 Bitcoin and 45 Ether HELD at Prime Trust, when will you receive them, and when will there be -- or when would we recognize a loss on those assets?

And I can tell you, the bankruptcy process is proceeding. But we can't report anything more at this time.

And then finally, the question that we always get in the June quarter, what is our cost to mine a Bitcoin in the June quarter?

And based on our utility costs, it was under US$14,500. And as we have stated in the past, given our consistent electricity pricing, this is really a function of increasing network difficulty. And if -- as the network difficulty rises, our cost to mine a Bitcoin is going to rise commensurately.

And with the amount of questions, I'm going to hand it back to Sheldon.

Sheldon Bennett

Thank you, Steven. I would also like to note that, Steven and I will be attending the H.C. Wainwright Investor Conference in New York City on September 12th and 13th. So we hope to see you there for anyone that is attending.

See if there is anything else. If no other questions, then this is the end of our questions and our statements.

We thank everybody for attending, and our call is now over.

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