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

Hey, guys. Welcome back to the Channel McNallie Money, home of all things stock investment and personal finance related. Now for today's video, we've got 2 of the key members from DMG Blockchain solutions back on the channel to give us an update on this Bitcoin Mining Company. Before we get into it, please take a second, hit the like button guys. It's a big help to myself in the channel. If you're not already subscribed, McNallie Money, feel free to join and let me know on the comment section below. If you're currently holding shares of DMG, what you think about their emerging cooling strategy coming up this fall and your outlook on some of these smaller cap miners moving into next year's having event. With that being said, let's get into today's interview. Okay, guys. So that's right. We've got the dynamic duo from DMG Blockchain back on the channel. This team has already been on to answer some questions a few months ago, but we wanted to invite them back both Sheldon Bennett, who's the CEO; and Steven Eliscu, who's the COO, to answer some questions and really give us an update on their business. So guys, thanks so much for being back. We really appreciate the time.

Thank you for inviting us.

You're most welcome anytime. So for first things first, for people who maybe missed that initial video, I know DMG is slightly less covered than some of the other miners. Can you give us a quick background on your company, your operations, where you're based out of? Just kind of a high-level summary.

Sure. DMG is a public company. We are traded on the Toronto Stock Exchange under the symbol DMGV -- DMGI, sorry, [ our stock exchange ] Venture. DMG started in 2016 as a private company. We went public in 2018. We own a facility in Christina Lake, British Columbia, which is just north of Spokane in the U.S. Our facility is a 30,000 square foot building. Inside that building, we run 36 megawatts of air cooled, which we're converting to emerging cooling this year. As well, we have 33 acres. On the 33 acres outside of the building, we are installing another 36 megawatts containerized on mining. That's not started yet, but it's well on the way of being installed. On top of our crypto mining business, which we call our core business, we have something called Core+. Core+ is based off of our Blockseer acquisition. Blockseer here is a technology company that we bought in 2018 in Silicon Valley. The Blockseer main product was Blockseer Explorer, which was a block explorer used heavily by law enforcement. We've taken that product and expanded it over time created Walletscore as well as we created multiple pools, Bitcoin mining pools. On those Bitcoin mining pools, we've also created technology called Petra as well as clean block mining. And we also have created Wallet technology. So we are considered a Bitcoin miner, but we also consider ourselves to be a software company, and we are fully integrated with the Bitcoin blockchain all the way up to the transactional side of approvals and exchanges operating with our software.

Yes, let me add to what Sheldon said. So for -- just to give some idea of our financials for the first part, our first 9 months of our fiscal year, which begins October 1. We had $22 million -- $22.3 million of revenue. And on that revenue, we had 23% operating margin less depreciation and stock-based comp. That's a good proxy for operating cash flow, we believe. We have on our balance sheet as of the end of the June quarter, we have 509 Bitcoin and a total of $22.4 million of cash on Bitcoin in value and $91 million total in assets. So also in terms of our hash rate, we have approximately an exahash of nameplate hash rate. We've reported less than that due to heat issues through the summer but we hope to recover here as we go into the fall.

Yes. I saw those numbers in your recent press release here, and I'm glad you added them in, Steven. We're going to talk about some of those heat issues in a second here. But my second question is kind of a nice segue actually. I know you guys have differentiated yourself both in terms of revenue opportunities and some of the verticals you participate in. You mentioned your Core+ business division. You alluded to some new software, you hired some new developers. What should we think about in terms of the business? How have you differentiated yourself from the pure-play miners in this space?

Yes. That's a great question. So mainly what we've done when we looked at crypto mining is as a Bitcoin miner you only make a Bitcoin once, and then you either put it on your balance sheet or you sell it for cash for operations. And we kind of looked at the rest of the market and said, why are we only interacting with a Bitcoin once when it's generated. It seems a bit silly when we have a lot of technology knowledge around the Bitcoin blockchain, especially with our acquisition of blocks here. And so started a few years ago on the strategy of how do we make transactional revenue from the Bitcoin blockchain. And that's really looking at how do we build a block at the pool level, how do you inject transactions, which, as you may know, we've done some of the largest transactions on the ordinal front as well. How do we continually get transactional revenue. So just like an exchange makes some percentage of every time you want to buy and sell Bitcoin and our change Bitcoin to other cryptos. We started looking at how can we get into that business as a miner? What's core technology that we know we can control, we can manage and we can monetize? And this is how we really started our Core+ software side.

Got you. So there are a lot more layers to this onion than the pure-play miner that you see with some of the others say.

Definitely.

And Bryce, I want to highlight last night, we did put out a press release that we brought in Lawrence Truong as a strategic adviser, and he was Chief Compliance Officer at TETRA, which is Canada's only qualified custodian and we're really looking forward to his expertise helping us in terms of building -- continuing to build out our Core+ strategy.

Yes. I saw that press release this morning actually right before the interview. So congrats on bringing him and I think that will be a strong addition to the team like you mentioned there. So next question here guys actually came from the viewers based on our last discussion. You've mentioned the NFT opportunities, Ordinals, Terra Pool, can you give us some details in terms of revenue mix and kind of your future growth plans? How should we think about these other components? Is it going to be a main part of the business? Or are these always going to be complementary?

So in the world of ordinals and NFTs, I mean it really shot up quickly. We did a lot of great NFT work or ordinal work. As we've quoted before, TGOD was the biggest one we did from viewership and people understanding who we are and what we're doing in this area. From just name recognition, we were approached by Bored Ape Yacht Club because of our clean energy was the only way that they could put an NFT onto the ordinal blockchain or Bitcoin Blockchain without the carbon that's associated with the Bitcoin blockchain. And so we're happy to work with them. It's still going on. There's a lot of ordinals going to the Bitcoin blockchain. We're not going after a lot of the small ones. Our focus has been more business-to-business. So we have multiple agreements with ordinal companies that want specifically clean energy ordinals or large ordinals up to 4 megabits. So that's kind of in our marketplace, and that's what we use Terra Pool for. And we have had some great revenue from that. We think that's going to continue. We think it will pick up, hopefully, a bit more in the new year. It really depends on what artists want to do, where the Bitcoin blockchain is going, what's happening in the other blockchains with Ethereum and the other chains that are associated with Ethereum. But we're seeing sort of return to what we saw on the summer with a lot of inquiries. We think that we're going to be putting out some more large ordinals soon. So stay tuned for that, and you'll see some more press releases about that. But we're excited about that piece of business, but you do have to remember that the ordinal business is a business that kind of happened by accident. We were actually preparing Petra, which is our business where we can inject transactions into our block that we're creating for the Bitcoin blockchain. We were preparing that for financial institutions to be able to put transactions into a known pool with known actors with KYC, with OFAC compliance and the ordinals came along. And just on the Petra side, we are getting very close to testing that live on main net with Canadian exchange, where we can actually prove out that there's a market for carbon-free OFAC compliant transactions happening on the Bitcoin blockchain. So we're excited about that. So whether it's ordinals or whether it's working with institutions that are interested in the technology, either way see this business growing over time.

So investors should really think about this as a spectrum of opportunities where we utilize the fact we have a carbon neutral pool and generating blocks, be able to fill those blocks with different types of transactions, whether they be 4-megabyte ordinals or maybe other types of digital artifacts or they be transactions from financial institutions. So that's the best way to look at it is essentially Terra Pool provides a supply of carbon-neutral blocks that provide this opportunity or I should say this option for those who have not had the option of ensuring that they can place whatever they're placing on the Bitcoin blockchain without adding carbon.

Yes, it's fascinating stuff, and you guys really are on the leading edge of that. I know as I read these press releases and stuff, it's just continually evolving. And you're definitely right. We've seen that kind of ditch-to-ditch mentality with the general public with NFTs, but I would agree that I think that's going to come back with time, and it is a huge opportunity to be prepared for. So next question kind of comes back to the core business, I suppose. I think in August, you said 46.7 Bitcoin mined, and that was limited or restricted because of some heat issues at your location in Christina Lake. My neighbor actually has a cabin there. He always says it's the warmest tree line lake in Canada. So I understand the heat issues, I guess. But can you give us an update on what that meant? And if going into the winter months or fall here, if heat wasn't an issue, what you think you could get from that location?

Yes. Unfortunately, there was a lot more heat than we expected. I think we had 2 heat domes over the summer, which an early one too that we didn't expect. I don't think we've ever had a heat dome before in Christina lake. Before the season started -- for the warmer season started, we did bring in a lot of extra fans and water walls sort of burning from year-to-year. How much cooling we need. Unfortunately, with the buyers, with the heat domes, just prolonged heat, it was a lot more than we expected. As well, we found the S19s, whether the XPs or j Pros just aren't as strong as previous models for dealing with heat. They just don't handle the heat as well as like the S9s and other models in the past. S9 is still one of my favorites, even though it's still inefficient now, but still a great workhorse. It's just too bad. It's no longer relevant for Bitcoin mining. But we do, as we said earlier, we do see that this heat issue not going to be around for us next year as we convert over to immersion cooling in our building. We will still have air cooled containers outside. Those containers will have water curtains and fans and just will be spaced out in a way that even when is 35C, 40C out, we don't think we're going to run into near to heat problems that we had in a building. So we're hoping, fingers crossed, that next year, we won't have as much of a change in our hash rate during the day. It does come back at night when things cool off, which is nice. So it gets really hot during the day and the cools right off. But we're hoping that next year is a good year from a heat point of view, especially with our immersion cooling installed.

We also have talked about our goal to get in excess of 2 exahash. And we are looking to decide what's the best way to acquire additional equipment and be able to do that most cost effectively, especially with a lot of uncertainty going into the halvening that we have to be best positioned from an efficiency point of view as well. Our efficiency just under 29 jewels terahash is competitive with others. We got to see -- we see a lot of our peers and they're in that same ballpark as far as numbers. But next -- post halvening it's going to have sub-25 tools per terahash and probably even a little bit less than that to be competitive. And we get that, and that's what we're looking as we build our fleet and leverage the fleet we have, that's where we expect to be in that ballpark as well.

That's a good point. When we're looking at capital spend. It's really a tough time right now to figure out what you should do, having the capacity to add another exahash, should you be buying XPs and J Pros? Should you be waiting for the new mines that are coming out there, sub 20 jewels per terahash. So we're really kind of looking at that, trying to make the right decision with halving. We don't know where price is going. We don't know where difficulty is going. We do know we're going to have to be more efficient. We do want to take advantage of our investment in immersion cooling to become more efficient. So it's tough. And we've always sort of told our investors that we've been good stewards of capital. We do have over $20 million on our -- in cash in Bitcoin. We have only $1 million debt, net debt is related to financing of building we have, not to cryptominers. And so we're kind of trying to keep a strong cash and a strong balance sheet going to halving because we really don't know what's going to happen and as with anybody having no cash going into the halving is a really scary thought. So we're being a bit cautious. At the same time, we are looking for opportunities because miners are at an all-time low in terms cost and looking for opportunities to find an exahash in most capital-effective way as well as just make sure that we're set up and ready to take on whatever the halving brings to us and other crypto miners.

Sure. Yes. I mean with a lot of the CEOs on this channel and everybody has kind of got that same uncertainty or trepidation with the halving next year, and it's super unique. There really aren't any other industries where your costs essentially double overnight for an arbitrary date like that. So super interesting time. I appreciate your comments about the heat dome there, obviously, better for wake boarding or boating and Bitcoin mining. Just out of curiosity, Steven or Sheldon, what is kind of the magic temperature? When does it really start impacting the gear in terms of Celsius?

So when we get above 15 degrees Celsius, we start to see a little bit of a change. When we get up over 20C is when we really start seeing changes. So -- and that's ambient normally, when we hit 15 degrees Celsius as we turn on the water curtains, that brings it down 10 degrees and brings us back down. So a 20-degree C outside is really a tendency inside. So it kind of works like that. And so we really feel the effects when we get up to the 25C, 30C, 35C is one we really feel the effects. And this is the way that our building sits around this mountain ranges. So we kind of sit in a ball. Second half of the day -- the morning is quite cool and the even is quite cool, it's the second half of the day that really hits us hard until the sun gets on the mountain. So that's one of the downsides of having a beautiful location. We're sitting in this ball that cooks away. It will be good, and we've said this before and we've done the work on it. It's just we've been a bit careful of capital, but it will be great for our planned expansion into solar and then having solar to power us. It will be great for that view that we'll have a lot of hours of solar. But right now, it's not the best. It's unfortunate that we have this for a few months.

You can't win them all. But the next question, it's very relevant to the discussion. The immersion cooling. I know this is a big catalyst for you guys. It's been on the road map all year. We talked about it in our last video. So can you tell us a little bit more about what Immersion enables? And I like that water curtain analogy of basically on water curtains 10 degrees. What should we think of immersion in terms of an impact on the temperature?

Well, immersion, the great thing about it is that we can control the temperature a lot better. So the way that we've designed our immersion is you basically take a heat input that goes into the fluid. It goes into a dry cooler and the dry cooler, you size it large enough that you can sort of dump that heat outside. So for us, what we see is something in the neighborhood of 15% drop in power consumption for the same amount of hash rate. And we did a study on this a little while ago with a third party that sort of proved it out. It wasn't just all excited about Immersion. We actually had somebody else that was a specialized entity conversation to do this study for us just to make sure it's sort of being biased to wanting immersion. But just that the power savings there as a large power user is immense. And then the control, I mean, we can just increase or decrease the speed of the fluid to take the heat away. We sort of oversized the dry cooler because of the heat issues at Christina lake. So what gives us the ability to do is sort of one of 2 things, and Steven's quite good explain this as well. But one thing it gives us the ability to do is to overclock. So if we want to overclock immersion miners, that is a great way to be conservative in our capital because we can use less miners to get the same hash rate. Overclocking does give the best efficiency. You don't get us -- it's more jewels per terahash. But depending on the price, the difficulty, sometimes it's quite more overclocking to get a higher hash rate to bring in more revenue, even though your power consumption will be a little bit higher. The other side of that is the immersion is also really good to underclock, where you actually put in more units and you have like more silicon working at a lower fish or a better efficiency, costing you lessen power for your hash rate. And so you need more units to do that. And so we've designed our tanks to expand to the maximum units and also to be able to shrink down to the minimal amount of units that were overclocking. And this gives us a lot of power on view that if Bitcoin prices low into the halving and it looks really rough, instead of being a fleet that's running at 29 jewels per terahash, we could bring it down to 25, maybe 24, so we can really squeeze down the amount of power needed to create hash. Or the opposite, if Bitcoin price shoots up to $60,000, $100,000 and you really want that hash rate on, we can overclock all of our units, and they won't be running at 29 watts of Terra hash on average, they'll be running at 32 or 33, but we'll get a lot more hash rate out of them and a lot more revenue.