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

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the DMG Blockchain Solutions Q3 update conference call. [Operator Instructions] Participants of this call are advised that the 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 call over to Jules Abraham of Core IR, the company's Investor Relations firm. Please go ahead, sir.

Thank you, Sarah. Good afternoon, everyone, and thank you for joining the DMG Blockchain Solutions shareholder update conference call. 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, 2022. And 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 Bennett and Steven. Sheldon?

Thanks, Jules. Hi. Thanks to everyone who's joining us today. We've got a lot to get through. But first, I wanted to touch on a few recent items, namely the past changes to DMG's Board of Directors. As many of you may know, I'm an original founder of DMG and I've been growing this company year after year. And with me, I've had Nick Seto and Justin Rasekh on the Board as independent Board Directors for many years: Nick Seto was 3 years, Justin Rasekh came originally when we went public with Canaccord back in 2018. However, as the company has grown over time, Nick and Justin have decided to resign and make some room for some new Board of Directors. We've been lucky to be able to have Kelly Allin and J.D. Abouchar join us. For those of you that didn't read our press releases, are not familiar, Kelly is a retired Deloitte & Touche partner with 16 years of experience in audit and governance, and he brings a lot of great insight and expertise in the area of financial statements and compliance and governance. And J.D. is a seasoned investor and previous chairman of a U.S. company that went public on the New York Stock Exchange. And J.D. has got a lot of great experience on Investor Relations and how we should be looking at our company as we try and grow to a higher -- or greater investor base. So now we have a planned Board at the next AGM. That would be 4 people, 3 independent directors, myself as the founder, which has really changed the company from a start-up it used to be, where it was all sort of insiders until we went public, and then we slowly moved the Board from management control to independent directors to a point where it's a strong independent director Board. The governance has changed quite a bit. It's now -- the independent directors have their committees, their budgets. They have a lot of control of what's happening. It's not a private co/public co company of Sheldon Bennett. That's -- those days are over. I wouldn't say it was ever that way, but I would say that people have questioned the Board's independence. We've made a lot of strides in the independence. And we're looking at continuing to add to the Board. We are a Board of 4. We're looking to go up to a Board of 5 in the future. And so I think that's been sort of the biggest change over the last few months. And if there's any questions on that, feel free to reach out to Investor Relations. So that being said, I'll send it over to Steven to go through the company's performance.

Great. Thank you, Sheldon. Now for a few words about the company's overall position. DMG continues to work towards this goal for building out 1 exahash of self-mining capacity as we increased our hash rate 18% sequentially in the June quarter, and we continue to build the foundation to execute upon our Core+ software strategy. Our balance sheet remains sound despite challenging market conditions. Our revenue declined 12% sequentially to $10.5 million from $11.9 million in the prior quarter mainly as revenue from self-mining declined a similar percentage to $9 million from $10.3 million. The average price of a mined Bitcoin declined 19% sequentially to CAD 42,288. Our gross margin was 66%, down from 73% in the prior quarter. As a proxy for cash flow from operations, our operating margin less depreciation and amortization and stock-based comp was 52%, down from 58% in the prior quarter. And our operating margin was minus 6%, down from 13% in the prior quarter. With increased depreciation, operating margin fell into negative territory. OpEx excluding depreciation, amortization and stock-based comp decreased 11% sequentially to $1.5 million as we maintain tight control of cash expenses. Due largely to losses on digital currency, DMG swung to a net loss for the quarter of $12.2 million, and for the year, a net loss of $7.1 million. We expect depreciation to continue to rise as we deploy additional miners through the end of the calendar year even as we expect operating margin less depreciation, amortization and stock-based comp to stay in strong positive territory through the crypto downturn and hence allow us to continue to invest in our business. On the income statement, this result is likely to be more than offset on the operating margin line by rising depreciation in the near term, assuming the current Bitcoin pricing environment does not materially improve. Our cash plus Bitcoin holdings value decreased to $11.9 million from $28.1 million in the prior quarter as the price used to value our Bitcoin on the balance sheet decreased 56% sequentially. Our total asset base accordingly decreased to $106.6 million from $124.8 million in the prior quarter. Now some statistics on our mining. DMG mined 212 Bitcoin, an 8% increase sequentially from 195 Bitcoin as our 18% increase in realized hash rate to an average of 0.55 exahash was partly offset by a 9% reduction of the network BTCs per hash. In the June quarter, DMG operated approximately 10% below its install mining capacity as we dealt with reliability and heat issues with Bitmain's S19j Pro miner even as we plan to mitigate the summer heat with additional evaporative cooling capacity. Year-to-date, DMG has mined 591 Bitcoin. In the current quarter, this situation with heat has worsened with summer temperatures, and as such, we expect only a very modest change in realized hash rate in the September quarter. However, we expect the situation to markedly improve in the December quarter as temperatures rapidly cool and we approach our expected calendar year-end target of 1 exahash of installed mining capacity, assuming Bitmain deliveries remain on track. In the June quarter, DMG sold 171 Bitcoin at an average price of CAD 38,934, generating $6.7 million of cash. Thus, DMG sold 81% of the Bitcoin amount it generated, down from the prior quarter of selling 133% of the Bitcoin amount generated. Year-to-date, DMG has sold 508 Bitcoin, 86% of what it has mined. DMG hosting revenue declined 3% sequentially to $0.9 million, and we expect a more significant decline in the back half of calendar 2022 as we focus on expanding our self-mining capacity. That being said, we are eyeing specific strategic opportunities to provide hosting services for the purpose of expanding Terra Pool's network share. DMG has no debt, but we consider -- we continue to consider opportunities for raising debt, mainly to accelerate deployment in our Christina Lake mining facility of our immersion cooling technology, which we expect to cost in the range of $10 million to $15 million. Based on the benefits provided by immersion cooling, we expect the deployment to expand our hash rate to 1.4 exahashes from 1x. We believe immersion cooling provides a very capital-efficient way of growing our hash rate and, accordingly, Terra Pool's hash rate. Now for an update on our Core business. While we are developing immersion cooling technology that is proprietary, we're also leveraging developments that have already been field tested over the past 2 years. No project is easy to deploy at scale, but we believe we are mitigating technology risks through a combination of overengineering key components and minimizing system complexity. Also, as we have disclosed in our MD&A, DMG has selected a favored global manufacturing company for the immersion fluid to be used. As an update, our initial Christina Lake mining deployment is expected to occur before the end of this calendar year, at which time we'll provide more details regarding our technology implementation and scale-up time line. Regarding the expansion of our ASIC miner fleet, we will be very cautious to make capital commitments to expand our self-mining capacity until we have begun to scale up our immersion cooling capability. And thus, our CapEx through the first half of calendar 2023 should remain constrained, especially as the deposits for the remaining portion of our mining fleet not yet delivered should largely cover the final purchase price. As an update on our miner deliveries, we remain on track for installing 1 exahash of mining capacity by calendar year-end, and we have installed our first shipment of Bitmain's 140-terahash S19 XP in the past week. We have not changed our goal to exit calendar 2023 with 2 exahashes, but we believe this goal will be dependent on market conditions. Our expectation would be to utilize the newest available generation of mining silicon in immersion in the second half of calendar 2023 to achieve our goal. We expect to fit most or all of these 2 exahashes within our Christina Lake mining facilities' electrical capacity, although we continue to explore developing additional mining sites. Now for an update on Core+. Regarding our software business, we look to this as being our biggest long-term value generator. As we previously announced, we continue to recruit Terra Pool members to add to the announced charter members, DMG and Argo Blockchain. As an update from user feedback, DMG software team has been implementing upgrades to functionality of Terra Pool, which has led to a temporary pause in activity on Terra Pool. As these upgrades are planned to be completed in the near future, we expect to soon resume full mining operations on Terra Pool. While these changes may seem like a temporary setback, the pool's functionality will have improved and our target remains to grow Terra Pool to be 10% of the Bitcoin network. With Terra Pool, we seek to partner with the financial services industry to enable institutional funds interested in acquiring Bitcoin mined exclusively using carbon-neutral energy. We believe this development will be a primary catalyst to provide the appropriate rewards to miners creating Bitcoin using carbon-neutral energy. DMG is in discussion with multiple potential fund partners. We continue to invest in our core pool technology with Petra as a linchpin. As a reminder, Petra provides the capability for Terra Pool to filter in transactions from known good actors to build on top of our clean block mining. We continue to expect this effort to be complete by the end of calendar 2022. As forecasted on the last earnings call, we have begun to trade Bitcoin on the Bosonic network, which offers both a lower-cost and a lower-risk method for trading Bitcoin. As DMG invested $2 million into Bosonic over a year ago, we believed then in the promise of the Bosonic network and now even more so as we see the advantages in conducting our business. DMG plans to make it easy for other Terra Pool members to utilize the Bosonic network as well. We continue to utilize the Brane Vault technology. Currently, we are planning to utilize Brane's technology as a preferred partner in execution of our planned Breeze and Freeze wallets, which will be offered to Terra Pool members. With a compelling suite of mining-related and transactional technology offerings around Terra Pool, our goal remains to realize 1% net fees on each block mined through Terra Pool. By building an ecosystem that enables Terra Pool members to make more money, we believe we can make Terra Pool an attractive pool option in the future. I will now hand the call back to Sheldon to summarize our prepared comments and answer questions submitted to us prior to the call.

Great. Thank you, Steven. I just want to reiterate a few things that Steven said. There's a couple of points in the results we have. First, as a proxy for operating cash flow, operating margin less depreciation, stock-based compensation was 53% last quarter and it's expected to stay that way. So this is a strong number. A lot of people get turned off by the depreciation number and wonder if the company is actually making any money. But if you look at an operating cash flow basis, DMG is doing very well even at these depressed Bitcoin mining prices right now. Cash and BCC (sic) [ BTC ] on hand at the end of the quarter was $11.9 million with total assets of $106 million. So again, we're still in a very strong position as a company. Our order of 1 exahash is being delivered on -- mainly on time. We've had a couple of difficult months with Bitmain, but we've got over 70% of our 1 exahash up and running as of this call right now. We did mine 592 Bitcoins the first 3 quarters of the year, whereas last year, we only mined 89 Bitcoins in the whole year. So revenues from our Core+, including the mining pool revenue, we believe will start to increase with the growth of Terra Pool in the coming quarters. So those are some of the big points that I wanted to make clear on the results side, that DMG is in a strong position. We are not having really any significant issues with the low Bitcoin price. I see today, it was struggling to hit $20,000. For us -- nobody is happy with a Bitcoin price like that, but we do make enough margin on our mining costs and our operating costs that we are still in a very strong position.