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 Q2 2023 Update Conference Call. My name is Jules Abraham from CORE IR, the company's Investor Relations firm. 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 website 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, 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. Gentlemen?

Thanks, Jules, and thanks to everyone today who's joined 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 quarter, I would like to start with a highlight of our recent achievements. On software, we realized our first Petra-based revenue for placing 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 are applying this branding to a project we disclosed in April, where we performed inscription of a large ordinal collection called [ Nippies ] with per ordinal rights transfer. This is the Holy Grail for artists, inscribing in a carbon-neutral manner a collection sequentially within a block and enabling the artist to transfer each ordinal 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 of satoshi, mainly creating an inventory of uncommon sats, which is the first satoshi in a block. These and other sats, 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 ordinals inscribed 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 pool participants. On mining, DMG has realized a hash rate of 0.89 exahash and mined 255.8 BTC. We also announced that we purchased 350 Bitmain S19 Pros, 350 Bitmain S19 XPs and 850 Bitmain S19j Pro+s, which totals an additional 1,550 units contributing 188 petahash. The 350 Bitmain S Pros were 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 halving, where 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 nonbinding 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. 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, Core+, our software. With respect to our larger strategy to develop software to monetize Bitcoin transactions, what we call Core+, we're encouraged by recent market developments with nearly 10 million ordinal inscriptions to date and over 40 million of related [ on chain ] transaction fees. The ordinals market has clearly established itself. Even as fees 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 free from 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's 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, to grow 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 manner for Terra Pool using our Petra technology; and lastly, to create a carbon-neutral BTC marketplace. In the near term, ordinals has risen as a short-term catalyst for Petra, 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 have completed installation of our initial 1 exahash of capacity and have disclosed purchasing of an additional 180 petahash 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 immersion 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.

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 could 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 3 tranches, each of which will provide 0.5 exahash of 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 minor purchases, we do not expect significant capital expenditures in the near term. When we decided to purchase immersion-specific miners, we do not expect the nameplate capital cost per hash to be materially different versus air-cooled miners. While Sheldon referenced that we have a nonbinding 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 members, ordinals clients as well as financial institutions. Finally, we continue 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 mined Bitcoin to 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 $0.7 million. This is the result of Terra Pool member 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 pool revenue line results to be either positive or negative depending on the quarter with the resulting fluctuations to sum to 0 over time. As Terra Pool's hash rate increases, we would expect the volatility of net pool 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 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 that was minus $4.6 million in the March quarter, this is 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 noncash -- I'm sorry, nonmining 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 the 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 and 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 mined BTC. In the March quarter, we mined nearly 256 Bitcoin, a 7% decrease sequentially as our realized hash 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 at an average price of CAD 28,270. Thus, DMG sold 90% -- 97% of the Bitcoin amount it mined versus the prior quarter of selling 60% of the Bitcoin it mined. Our hosting revenue declined 21% sequentially in the March quarter to $0.4 million. We expect hosting revenue to remain near prior quarter levels at least for the near term. And as discussed above, we're looking for opportunities to raise debt 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 our prepared comments and answer questions submitted prior to the call. Sheldon, you're muted.

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 and 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 immersion 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-based comp, was $1.7 million or a 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 are 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 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.

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 increased receptiveness towards Terra Pool now. We are encouraged 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. 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 in our books as we don't 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 ordinals, 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 their 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 a little impact in the current quarter or 2 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 minters and the opportunity that presents the company going forward. So DMG, we've currently placed many high-profile ordinals or NFTs 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 our first partnership agreement. That's actually recently as in a few days ago. We have 3 others out being negotiated with other marketplaces. So we're hoping that we end up with 4 or more signed partnership agreements in the coming weeks.

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. It's -- 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.

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 to 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 immersion miners in-house that we run and test. Canaan also has announced an immersion-cooled miner. We've been following chain reaction, and we are 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 they release more information.