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

Good day, and welcome to the DMG Blockchain Solutions, Inc. Full Year 2022 Financial Results and Corporate Update Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jules Abraham of Core IR. Please go ahead.

Thank you, Chuck. Good afternoon, everyone, and thank you for joining us for the DMG Blockchain Solutions shareholder update conference call. Joining us today from DMG Blockchain Solution 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, January 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. Gentleman?

Thank you, Jules, and thanks to everyone who's joined the call today. I'm Sheldon Bennett, the CEO of DMG Blockchain Solutions. I would first like to review the past year's performance and give an update to where we are in our outlook for the future. We recently issued a press release reviewing calendar 2022, which was an important transition year as DMG transitioned towards becoming a full-fledged self-miner and is now in a much better position for the long term. So to start with DMG's core strategy. We nearly reached our goal of 1 exahash this year. While we entered our financial year at about 15 petahash, we exited at about 700 petahash at the end of September and the calendar year just over 900 petahash. As we have received almost all of our miner deliveries from Bitmain. We still have to receive our final 42 petahash delivery of S19 XPs. We plan to purchase additional miners from Bitmain using our accumulated credits. To accommodate space for these new miners as our Christina Lake building is full, we are setting up containerized mining on the property next to our substation, which will require a very modest amount of capital for interconnection to our existing distribution line as well as for the purchase of mining containers. As an update on our long-term mining goals, we still plan to implement immersion cooling for which we expect to achieve a 40% hash rate increase. However, our time frame for deployment will likely extend beyond our prior guidance of mid-calendar 2023. This is for two reasons. First, we are slowly -- sorry, first, we're slowing down our spending given the current environment; and second, we're performing more extensive testing on the immersion cooling at a large scale as we've observed suboptimal performance from other miners in the industry. Our objective is to lower our capital cost per hash, implementing immersion by optimizing trade-offs among overclocking gains available actual infrastructure and operational efficiency in a variety of ambient conditions. In addition, we have deferred our goal of 2x exahash of self-mine capacity to a time beyond the end of calendar 2023, given current market conditions. Given our expectation of modest network hash rate growth in the coming months, assuming Bitcoin prices remain at current levels. We may still be able to grow our hash rate fast in the Bitcoin network over the next 12 months with very limited and highly targeted capital investments. Unlike other miners that have taken on extensive debt and our restructuring, DMG has only recently added $1 million of debt. The company may consider raising modest amounts of additional debt, which would be focused solely on accelerating the deployment of immersion cooling infrastructure and mining. We believe immersion will become the essential for Bitcoin mining as the industry evolves. As for our Core+ strategy, in 2022, it achieved $2.2 million of revenue, approximately 5% of our total revenue. In our Core+ software, we have slowed our development pace due to market conditions. Our key objective for Core+ going forward are to : one, grow our Terra Pool hash rate with a long-term goal of reaching [ 10% of ] network; two, create a carbon-neutral Bitcoin marketplace; and three, actively transact Bitcoin in a carbon-neutral manner through the use of Terra Pool and our Petro technology. We remain committed to these goals as we believe achieving them will enable us to grow Core+ revenue to be significantly larger in the long term. We also plan to make our first Petra main net between transaction soon. Petra enables financial institutions to transact Bitcoin using carbon-neutral energy sources. Well, DMG's Walletscore technology ensures they are not combined to Bitcoin with transaction to the wallet and that have been blacklisted by the department -- U.S. Department Treasuries OFAC Blacklist. We believe the Bosonic exchange could potentially become a platform for transacting Bitcoin--sorry, for transacting Bitcoin using Petra technology and are in discussions with Bosonic to integrate this? Regarding a carbon-neutral Bitcoin marketplace, we are focused on enabling custodians to transact Bitcoin created from Terra Pool. For this, we need integration with custodial wallets or software. We remain positive as we believe carbon-neutral Bitcoin can sell at a premium, has a potential estimate of what that premium may be -- the CEO of sustainable [ Bitcoin Pro ] recently told CoinDesk that he expects the token that represents the value of decarbonized Bitcoin would be worth about 5% of the price of the Bitcoin. We expect more regulation and oversight in North America post-FDX, assuming miners are not incorrectly classified as money services business are forced to perform KYC checks on broadcasted transactions, we believe DMG should be a net beneficiary from increased regulation. I'd also like to speak about our investments in Brane and Bosonic. This year, we have made a decision to write down -- or sorry, right off our investments on our balance sheet. As I sit on the board of both companies, we still believe these investments could bolster our Core+ strategy as they each bring the efforts of tremendous talent in each company that would have been very difficult for DMG to develop internally. Our investment focus on licensed digital asset custodian through Brane and a platform to move and settle digital asset transactions amongst custodians without the need for an exchange to hold any assets through Bosonic was central to our plans when we -- investments were made. Unfortunately, for both companies, the venture capital environment for pre-IPO companies has been very challenging. And even if the company is ultimately succeeded given limited visibility, we felt it was appropriate to write down those investments at this time. Additionally, throughout the year, we've built a new independent Board as Steven stepped down from the Board and into management and we added 3 new directors, John Place, who brings a wealth of legal and government expertise; Kelly Allin, who brings a wealth of accounting and audit experience; and J. D. Abouchar, who is an investor like many of you, and has a keen understanding as to how the right management team and strategy can deliver returns to shareholders. We are happy to have such a spectrum of experience being brought together to bear as we weather the current environment. Another announcement I'd like to make is that DMG has now had 5 years as a public company. I would like to thank the employees of DMG for their hard work as our 5-year company anniversary is on February 9th. It is because of their hard work that we have built a company that is well positioned for the future. In the near term, we will stay focused on building up our foundation of Bitcoin Mining along with our software, which we continue to believe offers great long-term potential. I'll now hand over to Steven to go through the company's performance.

Thank you, Sheldon. I'm Steven Eliscu, DMG's COO. Now a few words about the company's overall position. As you remember, the last time we spoke to you about our Bitcoin mining hash rate, it was 0.55x hashes in the June quarter and we guided it to be about the same in the September quarter. We're now very close to achieving near-term 1x hash, which is up substantially from the back half of financial year 2022. Additionally, we continue to develop the software needed to execute upon our Core+ strategy. Our balance sheet remains sound despite challenging market conditions with a modest $1 million of debt added in the December quarter. While we continue to search for low-cost sources of debt to accelerate our immersion cooling plants, we are focused on maximizing cash flow. In our September quarter, our revenue declined 38% sequentially to $6.5 million from $10.5 million in the prior quarter, mainly as revenue from self-mining declined a similar percentage to $5.5 million from $9 million on a 35% decline in the average price of Bitcoin from recognized revenue to CAD 27,425. As we have reported preliminary December quarter mining results of 275 mine Bitcoin, a sequential increase of 38%, we would expect an increase in self-mining revenue as this increase more than offset the 11% sequential decline in the average Canadian dollar price of Bitcoin to [ CAD 24,553 ]. Our margin on our revenue less operating and maintenance costs was 47% in the September quarter, down from 66% in the prior quarter. As a proxy for cash flow from our business, our earnings before other items, excluding depreciation, amortization and share-based comp was $1.8 million or 27% on a percentage basis in the September quarter, down from $5.5 million and 52% in the prior quarter. For the full year, DMG earned $24.4 million or 56% on a percentage basis on income before other items, excluding depreciation, amortization and share-based comp. Our earnings before other items was minus $4.7 million in the September quarter, down from minus [ 0.6% ] in the prior quarter. Expenses, excluding depreciation, amortization and share-based comp decreased 12% sequentially to $1.3 million as we continue to maintain tight control of cash expenses. On a full year basis, DMG had $1.5 million of earnings before other items but losses on digital currency and impairment of investments were the primary contributors to a $17 million full year net loss. Even as we expect earnings before other items, excluding depreciation, amortization and share-based comp to stay positive through this crypto downturn and hence allow us to continue to sustain our business. On the income statement, this result is likely to be more than offset on the earnings before other items by depreciation in the near term, assuming the current environment does not materially improve. Our cash plus digital currency holdings value decreased to $10.6 million from $11.9 million in the prior quarter as the amount of Bitcoin held decreased 17% to [ 3.44% ] on a 5% price increase. Additionally, our property and equipment and long-term deposits decreased to $72.6 million from $76.4 million in the prior quarter as our depreciation exceeded the amount of new equipment deployed. Finally, our long-term investments decreased to just [ $75,000 ] from $5.8 million as we recognized a decline in fair value to nil from our Brane and Bosonic investments. Our total asset base accordingly decreased to $96.9 million from $106.6 million. Now some stats on our last 6 months of mining. I did preliminary mining results for our December quarter as well. In the September quarter, DMG mined nearly 200 Bitcoin, 6% decreased sequentially from 212 the prior quarter as a realized hash rate of 0.56 exahashes was up barely from the June quarter, in line with our prior guidance. In September quarter, DMG operated approximately 25% below its installed mining capacity as we dealt with reliability and heat issues of -- with Bitmain's S19j Pro miner even as we had planned to mitigate the summer heat with additional evaporative cooling capacity. For the full year, 2022, DMG mined 791 Bitcoin. For the December quarter, in line with what we previously guided, we showed a significant improvement in realized hash rate to 0.84 exahashes, and we mined nearly 275 Bitcoin. As we disclosed in our recent press release, we ended the calendar year with installation of all but our last 42 petahash, miner shipments, and we realized approximately 0.91 exahash on average in December -- in the month of December. We expect our hash rate to rise modestly in the first part of this calendar year as we add more mining equipment mainly from new miners from Bitmain as we use our credit. In the September quarter, DMG sold 267 Bitcoin at an average price of CAD 27,564 generating $7.4 million of cash. Thus, DMG sold 134% the amount of Bitcoin at mined in the September quarter versus the prior quarter selling 81% of the Bitcoin amount mined. For the full year, DMG sold 775 Bitcoin, 98% of what it mined. Our hosting revenue declined 37% sequentially in the September quarter to $0.6 million, in line with prior guidance for an expected decline in the back half of calendar 2022. We expect to host other miners for the foreseeable future and at least in the near term, we do not expect material changes in hosting revenue. We recently announced raising $1 million of debt secured by one of our fully paid real estate holdings, and we continue to consider additional opportunities for raising debt in a similar manner, mainly to accelerate the deployment in our Christina Lake mining facility of our immersion cooling technology, which we believe provides a very capital-efficient way of growing our hash rate. Now I'll provide some specific updates on our Core and Core+ plus. First, Core. As discussed prior, we are slowing the pace at which we roll out our immersion cooling deployment, both to spread out spending as well as provide an opportunity for more testing. We have delayed our initial deployment as well, which will likely be in the range of 1 to 6 megawatts. We are reconsidering options for all components related to immersion. We believe immersion cooling will become table stakes for miners in the future, and we're committed to making this transition. DMG believes single-phase immersion cooling offers the best combination of capital efficiency and design simplicity even though it is not as elegant as 2-phase immersion cooling for which Sheldon and I have significant experience at a prior company. Regarding expansion of our ASIC miner fleet, we plan to expand utilizing our credit with Bitmain and potentially to make other opportunistic purchases. In addition, as Bitmain's recent firmware update that offers a low power mode applies to much of our mining fleet, we may choose to utilize this mode in warmer weather or if a network difficulty continues to surge. Use of this mode would result in a lower hash rate, but we would only do so if it resulted in greater profitability. At the current time, we are running our miners using Bitmain's standard power configuration, which is less efficient, but for DMG generates overall more revenue and profit. As we have stated in the past, our goal is to exit [Technical Difficulty] would be dependent on market conditions. And given the current environment, we have reset this to be a longer-term goal, likely beyond the end of calendar 2023, whereby we would utilize the newest available generation of mining silicon in immersion to achieve that goal. We expect to fit most or all of 2 exahash within our Christina Lake mining facilities, electrical capacity, although we continue to explore developing additional sites. Now for an update on Core+. Regarding our software business in financial year 2022, we had revenue of $2.2 million, 5% of total revenue. We continue to look to software as being our biggest long-term value generator. As discussed on our prior earnings call, DMG's software team has been implementing upgrades to the functionality of Terra Pool, which has led to a temporary pause in activity. We plan to turn on Terra Pool in the near future and we also have other prospective miners of scale that may join Terra Pool. Our long-term target remains to grow Terra pool to become 10% of the Bitcoin network. With Terra Pool, we seek to partner with the financial services industry to enable institutions interested in acquiring Bitcoin mine exclusively using carbon-neutral energy. We believe this development will be a primary catalyst to provide appropriate awards to miners creating Bitcoin using carbon-neutral energy. We continue to invest in our Core pool technology with Petra as a key capability that builds on our Terra Pool software. As a reminder, Petra provides the capability for Terra Pool to filter in transactions from known good actors to build on our clean block mining. We expect to perform our first main net Petra transaction this quarter. Our focus is to enable users to send Petra transactions through Terra Pool. We believe the Bosonic platform can be utilized to move Bitcoin via Petra, whether it be carbon-neutral Bitcoin mined on Terra Pool or already existing Bitcoin for which financial institutions who want to transact in a green regulatory compliant way going forward. 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 mine through Terra Pool and additional revenue on Bitcoin moved through Terra Pool using Petra. 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. Thank you.

Thank you for that summary, Steven. Just to reiterate some of the key results and outlook for DMG. If you look at DMG's $1.5 million operating profit and add back depreciation, amortization and share-based compensation, we had $24.4 million as a proxy for cash flow from our business on $43.2 million of revenue or 56% on a percentage base. We think that's a really important number for our shareholders to understand that the company has been performing very well over the last year and especially coming into the crypto winter, we've done very well. Additionally, as an indicator of our cash flow, our margin percentage on earnings before other items, excluding depreciation and amortization of stock-based compensation, was 27% last quarter and is expected to remain positive. Cash and BTC on hand at the end of the quarter was $10.6 million, with total assets of $96.9 million. Again, these are great numbers when we look at some of our peers in the industry, although they may be much larger than us in an overall size, our numbers are actually very strong for our operations. Of the 1x hashes miners ordered, almost all have been delivered as of this call. We mined 791 Bitcoin in 2022, whereas in 2021, we mined just 89 Bitcoins. So we think that's a great sign of our changeover to focusing on self-mining.

Now I wanted to go into some of the Q&A questions that we've had submitted. The first question, and there's no real order. We just sort of randomly put them together. So First question is how does the British Columbia moratorium on new power infrastructure for Bitcoin miners affect you? So we've had this question come to us in various different ways, individual investors, journalists, different people. So the moratorium specifically applies to BC Hydro. So BC Hydro is the largest utility in the province of British Columbia. We are in FortisBC territory. So this moratorium has no impact on DMG. I would like -- I have not spoken directly to BC Hydro or the BCUC, but my understanding is that BC Hydro has been inundated with requests for power at various different locations across BC and its ability to keep up with those requests and fulfill them that's become very typical. And the only way as a regulated utility to stop answering this request and working on this request would be to get the permission of the BCUC. And I think that was sort of the impetus behind why BC Hydro asked for moratorium. I don't think it's because the problems of British Columbia or BC Hydro against crypto mining. If you were to back up to 2.5 years ago, BC Hydro had a person in business development with a list of sites across the province that they were trying to attract cryptominers too. So I wouldn't read too much into the moratorium as anti-Bitcoin so much as a lot of work that needs to be done every time somebody makes a request for a site. And there's only so many resources in the Crown corporation that to answer those requests. That's a very long answer to a very short question, so I'll move on to the next one. The CEO and COO weekly purchase shares in your company. That's true. What is the -- you see in the market that we may be missing? Well, I don't have a crystal ball, and there's always risk in the market. However, Steve and I are big believers in Bitcoin, and we are believers in the strategy we've put ahead. And so we believe the market will turn and team DMG is well positioned in the new market as it turns. And we're going to stay focused on our strategy of Core and Core+. But at the same time, we both wanted to own more of the company. And hopefully, we'll buy some more and others in our company will buy some more along with other shareholders that I believe we have the right strategy. So we don't have a crystal ball, but we think that our strategy will work. Next question, where are we at on immersion? So both Steve and I gave some information on that earlier in the call. I mean the main issues around immersion -- it's really just capital spend. And so we want to be a bit slower on our capital spend until things have turned and Bitcoin really starts to take off again. We don't want to be running short on cash and have a lot of equipment and that's suboptimal because we haven't put it all together yet. So we are being -- I don't know the word we're being a bit slower at spending to ensure that the market does turn the way we think it will. As well, we have a lot of friends in the industry that have put immersion in, and we've learned a lot from what's going right and what's going wrong with them. And so we are ensuring that the testing that we do at our facility just gain the results we're looking for. We're not under sizing things. We're not oversizing things. We're really working on getting our immersion correctly done. As Steven alluded to in a previous company we both worked in. We had a lot of experience with 2-phase immersion, a little less with single phase, but we believe it is a better choice for our operations. Next question...

Sheldon, I would just add to that, that we are doing pilot work right now as we speak. So this is something even before we deploy at our Christina Lake facility. We're doing local work, a lot of engineering right now.