DMG Blockchain Solutions Inc. (DMGI) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome come to the DMG Blockchain Solutions Q2 update conference call. [Operator Instructions] Participants of this call are advised that audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately 1 hour after the end of the call. I would now like to turn the conference over to Jules Abraham of CORE IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you very much, and good afternoon, everyone. Thank you for joining us for the DMG Blockchain Solutions Second Quarter Shareholder Update Conference Call. Joining us today from DMG Blockchain Solution, 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, June 3, 2022. 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. Gentlemen?

Thanks for the introduction, Jules. Today, we're happy to report our Q2. Normally, I do all of these calls by myself. However, as we released a few -- probably 6, 8 weeks ago, Steven Eliscu joined as our COO, and I've relinquished that title. And I'm very happy that Steven has joined us. Steven and I have worked previously in the company before together, and it's great to have him back in team management again. I'm going to change things a little bit and let Steven go through the general corporate overview and the financial performance. And I'm going to come back in at the end for the Q&A and go through the questions that we received. Steven, maybe you want to say a few words about yourself and move into our performance for Q2.

Yes. Thank you, Sheldon. And yes, Sheldon and I have worked together since the middle 2010s in the blockchain space, building out Bitcoin mining capacity. And Sheldon in my absence, has done a phenomenal job to build DMG Blockchain to where it is today. And I'm really pleased to be part of the company, not just as a Board member but as an active member of management. So now a few words about the company's overall position. In terms of the financial performance, DMG has posted its second profitable quarter with just over $1.5 million of operating income on $11.9 million of revenue. This gives DMG a 6-month revenue of $26.2 million with $6.8 million of operating income and $5.1 million of net income. The balance sheet remains healthy. Our cash plus BTC holding value increased to $28.1 million from $27 million in the prior quarter, and our total asset base has increased almost $125 million from $119 million. We have no debt, but we continue to consider opportunities for raising debt to expand our mining capacity that would modestly lever up our balance sheet to sustain growth during a time the equity markets are less favorable and thus avoiding diluting the shareholder base. Now let's review our business areas. Core, which is our mining business. Our miners are continuing to be delivered to our Christina Lake Facility each month, increasing our hash rate on average by about 45 petahashes a month. From last -- from Q1, this has resulted in a 40% increase in the average hash rate for our self-mining capacity and our guidance to reach an exahash by the end of the calendar year is unchanged. As we are transparent about our hash rate and post our real-time hash rate on our website, you can easily monitor our progress. We're continuing to build out our infrastructure in Christina Lake to accommodate these miner deliveries. We're continuing to make cooling and infrastructure improvements to optimize our hash rate. Right now, we're focused on using exahash airflow and evaporative cooling. And we still plan to convert to immersion cooling with a target to move to 100% immersion for our self-mining by the middle of calendar 2023. In addition to the operational gains that immersion provides, we also believe we can lower our overall capital costs on a per hash basis by moving to immersion cooling. On average, 2.2 BTC were mined per day in Q2, which is up from 2.0 in Q1. And for April and May combined, we were at an average of 2.3 per day. Next, our Core+ business, which is software. Mara Pool continues to generate revenue for Marathon's mining operations. Terra Pool is up and running with the recently added new charter client. Our goal is to expand Terra Pool beyond the current charter members announced the addition of new industrial mining groups in the second half of the calendar year. Additionally, Petra is a key development priority, and we expect to launch Petra by the end of the calendar year as well. Finally, a review of our investments. With [ Brain ], we continue our strong relationship and look to integrate its vault technology into our plan, Breeze and Freeze wallets later this calendar year. With Bosonic, as we previously announced, we've connected to Bosonic's Layer-2 exchange and looking forward to working with Bosonic make our first transactions in the current quarter. And with INX, we're happy with our investment and look forward to working with them more closely going forward. Now a discussion -- a more detailed discussion of the financial results. With respect to the balance sheet, we continue to build our asset base with a sequential increase in cash plus BTC to $28.1 million. And our property and equipment has increased to $53.6 million from $42.4 million. Long-term deposits have decreased to $22.2 million from $31 million as we've taken delivery of miners and have not ordered any additional machines. We continue to expect to reach in excess of 700 petahash by early next quarter and reach 1 exahash by the end of the year -- calendar year. In terms of the amounts recoverable that remains at $7.8 million. As a reminder, this was due to nondelivery of miners purchased early last year. We've received the partial refund and are still working with the party to reach a resolution. Finally, on long-term investments at $5.7 million. This represents primarily our investments in Brain and Bosonic, and the value of our investments is largely unchanged from the prior quarter. On the income statement, a revenue of $11.9 million was up 377% year-over-year and down 17% sequentially. This decline was mainly due to a Bitcoin coin quarterly average price decline of 26% combined with an increase in the quarterly average Bitcoin network hash rate of 20%. These headwinds were partly offset by a 40% increase in our hash rate. Our quarter ending rate was 595 petahashes. With our revenue categories, revenue from self-mining decreased 19% sequentially to $10.3 million. While hosting revenue declined 15% to just under $1 million, as the company deemphasizes its hosting business. Software revenue was flat at about $0.4 million. To set expectations, we are focusing much of this year on execution of our software platforms and expanding Terra Pool. We do not expect a significant increase in Core+ software revenue until next year. At a recent investor conference, we outlined our goals for Core+. We target to grow Terra Pool to become 10% of the Bitcoin network. To enable us to achieve this, our target, we'll utilize our industry relationships and compelling story that green mined, clean transacted Bitcoin, with providence may command the price premium and that DMG is the leader in this effort. The fees from cons mined minds on Terra Pool and use of our mine management software are really just the beginning. As Terra Pool created coins or traded among parties to maintain their green status, we can generate recurring revenue on each successive transaction by having them traded through Terra Pool. We believe we can realize as much as 1% net fees on each original transaction from coins created on Terra Pool as well as each recurring transactions that is directed again through Terra Pool. By building a compelling ecosystem that enables our customers to make more money, we believe we can make Terra Pool an attractive pool option in the future. On the expense side, overall expenses have increased 16% sequentially to $10.4 million as we grew our overall hash rate, which raised our operating and maintenance costs by 18% to $3.2 million and depreciation increased by 38% to $4.8 million. The increase in operating and maintenance costs in the quarter was mitigated by the partial exit of a major hosting customer. We continue to put a sharp focus on managing our expenses by seeking lower cost energy sources of electricity for new sites -- for potential new sites as well as keeping our software development effort highly focused on achieving our specific goals for Core+ rather than building general-purpose software. I will now hand the call back to Sheldon to summarize our prepared comments and answer questions submitted to us prior to the call. Thank you.

Thank you, Steven. So just to reiterate some of the bigger points here. One, cash, cash equivalent, which is BTC on hand at the end of the quarter, is just over $28 million, up over Q1. And our total assets are just over $125 million on our balance sheet, which is an increase as well. Two, we're still on track to have 1 exahash by the end of the year up and running. Right now, we're just over -- or just around 60%. We're hoping to have that up quite a bit during this month as new deliveries are on their way to Christina Lake. And three, we mined 89 coins at all of last financial year, whereas now we're at 379 coins in just the first half of this year. So we're pretty excited about our focus on self-mining over hosting. And four, we do believe that the work we're doing in Terra Pool and the software around that, and the products that we want to put out with Terra Pool are going to be very important to our software revenue, and we're looking forward to having a larger launch of Terra Pool in the near future. So right about now. We normally go into Q&A. Sometimes I do this myself. I've got Steven here. He might have a few words to say. To make it a bit easier on Jules, since Steven and I could both be answering questions, I'll read out the pre e-mailed in question, and I'll take a stab at answering it. And Steven, if you have any comments to add, feel free to add in.

So on the Q&A question number one that we have. Any updates on Petra? Is Petra ready for official launch? So Steven did touch on this on our financial review. As I've mentioned before, in my calls, once Terra Pool is fully launched, we'll be focusing all of our efforts on the full launch of Petra. And as Steven has said, we're estimating that to be by the end of this calendar year. Number two, how many clients/exahash are using the mine manager? The mine manager, as we call it now as helmed, we've rebranded the name. And right now, we have probably just over 10,000 miners running on mine manager, or Helm as we call it now, which is around an exahash. Any plans on increasing the hash rate? As I've said and as Steven has just said, we've ordered 1 exahash from Bitmain. We'll continue taking our deliveries to reach 1 exahash by the end of the year. I've said this publicly a few times that any kind of purchases of new miners need to fit into our 1-year ROI model. So we're definitely looking at opportunities to buy more miners, they have the capacity ability to add more. And it's really an interesting time right now as Bitcoin price has been a bit stagnant and is not doing what a lot of people thought it would be doing right now, with the global economy the way it is. Miner prices have been dropping as well. So there are some new interesting opportunities that we may take advantage of. And we do have the financial resources able to take advantage of some of these opportunities. So we're quite excited about the advantages of having some cash on hand to do a deal, not that excited about Bitcoin prices. Hopefully, that will turn itself around quickly.

And what I would add here is just regarding our longer-term goals, we've talked about 2 exahashes, targeting 2 exahashes by the end of 2023, that would be achieved in part through the additional efficiency advantages we could get through immersion cooling and in part by purchasing next-generation miners.

Exactly. I think it will not be 100% just buying terahashes. I think it will be trying to increase the amount of terahash we get out of the equipment we have by this conversion over to immersion cooling and pushing the service harder. Question number four, how much runway remains? It was just those 4 words. I assume they mean financial runway. So as we announced in Q1 and now in Q2, DMG is doing well. We are cash flow positive. So we believe that we have a lot of runway for the future. We can never tell what's going to happen in the world of crypto, but right now, we're quite positive about the company and the cash it has and cash reserve right now.

Yes. What I would also add to that is just that we were able to achieve last quarter, a 71% gross margin. Obviously, that's going to be under some pressure this quarter, but we still have on a cash -- essentially a BTC equivalent cash margin basis, we're still highly profitable.

Yes. And maybe just expand into that. For those of you that are watching the crypto companies and the situation the depressed price of Bitcoin will come out in what our Q3 revenue looks like. But overall, the margin that we need to be a profitable company hasn't really changed. So we're hoping that Q3 is good. It may not be as strong as Q1 and Q2. But right now, from a management point of view, we're not really too concerned that there'll be any kind of material impact on us as a company. Question 5. How does DMG intend to raise cash to continue to grow? And so I guess, as I've said before, right now, we're not looking to raise any cash. We're not looking at doing any kind of equity raise. If we did look to raise any cash, we'd be looking to debt first, some type of financing. I think financing is very doable. We talked to a lot of different groups, and that would be our first choice if we ever did need additional cash. Question number 6. Any plans for expansion to new locations? Do you plan a financial strategy other than dilution? Okay. So yes, the first part of the question, we do plan to expand to new locations. Steven and I have been doing a lot of work with a few different parties on a couple of different locations. I know that it sounds like a simple question, but nowadays, when you talk about expanding, people are looking at 250 to 500-megawatt sites. In the old days, we're looking at less than 5 megawatts, so we just [ willing ] to go back a few years ago. So when we look at expansion, these are huge sites with huge obligations that we would put the company into. So they don't happen fast, and we're being quite picky on where we would want to expand to and who our partners would be and how we would do this. So it's a bit hard to find the right site, but there definitely are some great sites out there that we're working on. And then on the other half of the question about how we would finance any growth. Again, as I just said before, we were looking at debt as part of any strategy to expand DMG's mining capacity further.

And I would just add, the sites on the scale of 0.5 gigawatt would likely involve partnerships or even some type of syndicate. So we're going to be very careful in terms of how we commit capital. And we really see these opportunities not only as an opportunity for our expansion, but as an opportunity to expand Terra Pool and really leverage our Core+ strategy to be able to monetize those new sites.

Question #7, we have. Any updates regarding the agreement with Ecopwrs announced in March 2021. So yes, we still work at Ecopwrs. They -- we did go into an agreement as a service provider to them. So as they need services, they have questions, they want to purchase things, they want to look at different ways that they can take advantage of the flare gas in Texas and other areas, we're there to help them out. We haven't made any type of investment in Ecopwrs, but we do talk to them regularly and are trying to supply them with one of the -- what we think could be one of the best products in that area for mitigating flare gas through cryptomining, which we do have some experience in doing before with other companies that we have been partnering with in the past. Question #8, which is a long one. The TSXV is typically viewed as a newer companies that do not yet meet or cannot meet the requirements for the TSX, the Toronto Stock Exchange. Does DMG have plans to uplift from the TSXV soon? So the short answer to that is yes. We do plan on uplifting to the TSX. We are working with our auditors and our lawyers on our application. So goal of ours would be to make it to the TSX full board before this year is out. Beyond the TSX uplisting this year, we do look at a U.S. exchange. It is one that there are many who would like us to do that first and maybe TSX second. But I think most likely, we will follow the path of uplifting full board TSX first. And then look at the time line of when we could move on to a U.S. exchange. But definitely, it's on our path of growth as a public company. So question 9. When DMG announced the closing of a $70 million private placement on March 5, 2021, the proceeds were going to be used among other things to achieve 2 exahash by year-end 2021 and 1 exahash by mid yearend. Could you provide an update on what DMG has done to date to achieve the target hash rate of 2 exahash? So on this question, just to be clear, DMG has announced a few times that the Christina Lake facility can accommodate 2 exahash, which is true. We can 2 exahash, which is approximately 60 megawatts of miners. But we've always said that we only purchased 1 exahash to date and that we've been looking for opportunities to purchase that second exahash, depending on market conditions. And as Steven has just said, part of that second exahash may not be buying all new miners to reach the second exahash, it could be the uptake of the more efficient and the higher hash rates of immersion cooling that could push us there. So instead of needing to buy 20,000 miners that are 100 terahash, we may end up with 16,000 [indiscernible] 140 or 160 terahash immersion cooling. So we're looking at how we can be a bit more aggressive on increasing the terahash and be vigilant on the CapEx to get there. Question #10. What is Core+? And what is Blockseer? Are they the same? If so, why are they addressed separately? So this is a question that I've actually taken on with our marketing people a few times. So Blockseer is a company, it's the operating name of a company called Datient that we bought back in 2018 when we went public. And it's a software company in data analytics that create Blockseer Explorer and Walletscore. And so what we've done with Blockseer is it still exists and it's technology we use every day. What we've done is we've taken the Blockseer name as the name that we're putting all of our software under, and we're driving this as DMG, it's what we call Core and Core+. So Core is just our core Bitcoin mining and that's what we are as a Core company right now. Core+ is all of our software and all of our softwares owned or falls into or the IP is under the legal entity of Blockseer, our U.S. subsidiary. So we don't mean to confuse people, but DMG -- its Core business is Bitcoin mining as DMG, and our Core+ or software business is Blockseer, or at least all the platforms fall under our Blockseer legal entity. So that's why we have these 2 different ways we talk about in our business.

Yes. The best way to think on Blockseer is, it's a brand. It's a brand for a software where Core+ is really talking about the business of monetizing Bitcoin transactions and the pool capability as well. The thing that's different from the original Blockseer is we're really focused on providing software for around the pool. It's really for our pool -- to enablement for our pool members as opposed to general-purpose software, not like the original Blockseer.

Exactly. Question 11, what are your 3 top objectives to reach by the end of the calendar year? So number one is to complete 1 exahash deployments. Number two, maybe I shouldn't -- I'm not actually doing it by priority, but just I'm giving 3 of them, increase our software license revenue, and this is really to get Terra Pool out, growing and to be able to finalize and release Petra, which we think will really help our software revenue compared to our crypto mining revenue from our core business. And then number three is the continued focus on trying to reach cash for positive quarters and ensure that the balance sheet and the P&L are strong. As I've said, Q3 is going to be a bit of a harder quarter, but we're trying to control costs while investing in continuing to grow hash rate and software. So we're working hard to balance those 2 things, but we really want to try and have as stronger quarters as we can. As I said, in Q1, it was a big milestone for us to turn around and have a positive quarter. And we're hoping to push that forward. Obviously, we don't know what the future will do to us, but Steven and I are very focused on this objective. So question #12, what partnerships are DMG working towards? As we listed our 3 main partnerships already, just to add to that, we're always looking at other partnerships. Definitely, we'll be looking right now, mainly at partnerships that will help us grow our Core+ or Blockseer software around compliance and regulatory issues to bring crypto to the masses, as I've said many times. So that's probably one of the bigger areas is what could we do on the software side to expedite and scale quicker. Secondary to that, if normally we own and control, we do own and control our Christina Lake site, if we are to expand out, we'll be looking at getting some strong partners on any kind of large new sites that we'll be looking at deploying on. And the last question I have, number 13. Are you still in Mara Pool or did it get shut down? So Mara Pool is active. It's the pool of Marathon. And it is running. Marathon more or less sold miners on it. We don't control who's on that tool. We just licensed the technology to them and they use the pool as they see fit. The bulk of our hash rate is on Terra Pool, which, as we've announced in the past is our partnership with Argo, a clean energy pool. So we used to have all of our hash rate on their pool when the pool was first starting out, Marathon was just getting up and going. Over time, we've moved over to Terra Pool to bring that hash rate over to Terra Pool and help grow the amount of people and the amount of hash rate on to Terra Pool. That's all the questions I have. I don't know if Steven has any other comments.

Yes. I would just say as a closing comment here, just Sheldon has really, to me, built the foundation of what is really a great strategy for really what is the future of Bitcoin-related companies, which is to monetize the transactions. And my goal is now to go and work with Sheldon to execute that. So really, it's just that simple. The focus now is on execution. We've given you -- told you a bunch of goals and really look forward to working meeting all of you in the coming quarters and working with the rest of the DMG team to make this happen.

Yes. On that final note. Normally, I announced any things that are coming up. So just for those of you who are interested, Steven and I will be in L.A. or outside of L.A. next week at an investor conference as well DMG, as last year, has a booth coming up in Mining Disrupt in Miami. So we'll be there as well. So anybody that wants to see Steven and I there from DMG, that's where we will be. And as other conferences and things come up where we can meet with investors and tell them our story, we're looking forward to attending them. Outside of that, I'll turn it back over to Jules.

Thank you for your participation on the call today. This concludes our prepared remarks. You can disconnect.