HIVE Digital Technologies Ltd. (HIVE) Earnings Call Transcript & Summary

Good morning. I might have jumped the queue there. I'd like to welcome everyone to today's webcast for HIVE's fiscal 2020 financial results for the fiscal year ended March 31, 2020. I'm Darcy Daubaras, Chief Financial Officer for HIVE. I'm joined on today's call by Frank Holmes, Interim Executive Chairman. Before we begin, I'd like to remind you that during today's presentation, we will be making comments containing forward-looking information. I encourage you to read our financial disclosure for some of the risks and uncertainties that may affect HIVE's performance in the future. And as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult our most recent MD&A and filings on SEDAR. We will be referencing non-IFRS measures. Reconciliations of these measures are included in our MD&A. Unless otherwise indicated, please note all figures are in U.S. dollars. At this time, I'd like to turn the call over to Frank Holmes.

Thank you, Darcy, and good morning, everyone, and thank all those loyal shareholders that have been an incredible ride with us because of our high correlation to crypto. I'm going to start off the presentation with the normal DNA of volatility of Ethereum over any 20 days is pushing 30%. And when you look at 60 trading days, which is a quarter, it's pushing like 50%. So that's this normal volatility and HIVE moves around with that with a high correlation which we'll show you visuals in this presentation for the details. I think it's important for investors and traders that have stayed with us through this whole process of restructuring the company, reposition the company, at the same time, dealing with this, it is incredible volatility. And Darcy, is no doubt, has a black belt in dealing with all these sort of global issues and the volatility and run the operations. So I'd like to hop on to Slide #5. Over the past year, we completed a transformation of our mining operations in order to improve transparency, accountability, responsibilities and profitability and navigate through a very volatile industry. We assumed 100% control of our operations from our former partner, Genesis Mining and entered into a new direct agreement with local providers that has resulted in a lower cost operating structure. At our flagship Ethereum mining facility in Sweden, we assume control in July and hence a transition, basically, all the equipment operations by November. At our smaller Ethereum mining facility in Iceland, we took control of June of this year, and we are in that transition now. And I really want to thank Vlado Stanic and his team, which have really been important in doing the audits and then implementing their software. And what we've seen is a massive improvement in the efficiency of these data centers, which is so key for us, and we get the transparency and accountability that we need for running a public company that we were unable to get previously. And additionally, we've terminated our previous cloud mining Bitcoin operations, as they became unprofitable and acquired our own operation in April of 2020. We still have teething issues there as building it out as the industry itself, the crypto industry is on difficulty to getting equipment. There's been supply side issues as the world shut down. Just for a trivia for you, the busiest airport in the world became Anchorage and while the rest of the world has shut down in April. Today, other airports are opening up, and we're back to people flying again, but it was all health care and the supply lines were difficult getting equipment in. So we just have those teething issues, which we'll get through. Now Slide #6 is growth initiatives focused on maximizing the efficiency. With operations now in control, we've been focused on improving the efficiency and profitability of our mining operations, and this includes optimizing cryptocurrency mining output, including refurbishing some of our GPUs in Europe and investing next-generation Bitcoin miners for our operations in Québec; and two, is lowering our direct mining operation cost structure; and three, is maximizing our infrastructure capacity, including scaling equipment in existing facilities to leverage our fixed cost base and improve future mining margins. And now I'd like to turn it back over to Darcy to discuss the results of these efforts. Darcy?

Great. Thank you very much Frank. Turning to Slide 8. You can see we generated income from digital currency mining in fiscal 2020 of $29 million from coin production of approximately 72,000 Ethereum, 149,000 Ethereum Classic and 2,050 Bitcoin. The decrease in revenues versus fiscal 2019 was primarily due to a decline in the production of Ethereum, partially stemming from the shutdown of our Swedish mining operation in the first quarter of fiscal 2020 combined with the decline in the average price of Ethereum at the time it was mined. A gross mining margin, which equates to our revenues minus direct operating and maintenance costs, increased both in absolute dollars and as a percentage of revenues. The increase was primarily due to our assumption of control of our operations in Sweden, which has resulted in a lower cost of operations and under our previous service provider agreement, combined with the termination of Bitcoin cloud mining operations after they become unprofitable in the third quarter of fiscal 2020. Gross mining margin is also partially dependent on various external network factors, including mining difficulty, the amount of digital currency rewards miners receive and the market price of the digital currencies at the time of mining. Turning over to Slide 9. Our adjusted EBITDA increased significantly in fiscal 2020 to $7.8 million versus negative $5 million in the prior year, driven by the improvement in our gross mining margin, the gains realized on investments and the sale of digital currencies and reduction in general expenses net of foreign exchange. You may notice that we've reduced a lot of our overhead costs, which has been a big focus since I've joined the organization, including marketing. However, we're very lucky to have Frank Holmes as part of the team, and we've been able to leverage his conferences throughout the year, where we can get an overlap with the gold investors, and there's a lot of -- people that are investing in gold are very interested in the cryptocurrencies and his penetration within that industry and his attendance in conferences is very beneficial to HIVE. There's a great overlap that way where Frank is attending these conferences, the BMO Gold Conference, the Oxford Club, Park City, our associations with Kitco. And these conferences where he's able to attend one-on-one meetings, speaking on panels with table discussions, which doesn't happen too often at these gold conferences where someone is going to have an opportunity to get into those conferences, number one, be able to talk one-on-one and get these little panel discussions and also see the tie in with cryptocurrency and the advantages of HIVE within that market. I will highlight the gross mining margin and adjusted EBITDA are non-IFRS figures. The net loss for fiscal 2020 was $1.7 million versus a loss of $137 million in the prior year. The improvement was driven mostly by the improvement in adjusted EBITDA and impairment charge, as our investors that have been following us recall, a large investment -- sorry, impairment charge taken in fiscal 2019 and an overall decrease in depreciation expenses in fiscal 2020 stemming from those impairments taken in the prior fiscal year because we're working with a much lower adjusted cost base. The great thing...

Sorry, Darcy, to interrupt on that. It's just for everyone to be aware that if you're a new shareholder, is that the crypto winter not only did Bitcoin fall from $19,000 to under $3,000, Ethereum from 15 -- $1,400 down to under $100. The data center equipment for crypto mining in the cloud, this equipment also fell dramatically much faster than the normal depreciation rates. So we have taken that before Darcy had joined us, basically, a hard nose to say, look, we have to drop the value in these assets, so we took a charge against that. So that's a reflection that it's more of a what took place externally in the capital markets and how we adapt and adjusted to those changes. Thanks, Darcy.

Yes. No, that's a great point, Frank, because the cost of equipment that we buy from suppliers it's -- those cost prices go up and down with the movements in Bitcoin and Ethereum, just to -- so it's always a variable thing in terms of the best time to purchase equipment. And when you look at it and sort of go, maybe it doesn't make sense if the markets moving in the wrong direction. Turning to Slide 10, as we have. Our cash position stood at 1.5 -- sorry, $5.1 million at March 31, 2020, along with an additional $3.5 million in digital currencies, primarily Ethereum and Bitcoin. We also have $9.7 million in amounts receivable and prepaids, and we continue to maintain a strong net cash position and healthy working capital to fund our operations and growth. I'd like to now turn it back to Frank.

Thank you. So we're going to hop over to Slide 12. So here we provide an overview of our current mining operations and their power capacity in Iceland, Sweden and Québec, all of which have expansion capacity. It is important to note that all our facilities enjoy low-energy costs are situated in low-temperature zones, which helps us keep our data center equipment cool and have access to fast Internet connections. And it's also -- it's all green energy. I think that's the other part in this whole equation. Next one is as for the visual goes -- comments on this part of the green energy, our facilities are completely powered by green energy, either renewable, hydroelectricity or geothermal energy. This is not the case for much of our competition. We have recently begun participation in EU-funded project in Sweden to achieve the world's most efficient high-performance computing data center. The aim is to optimize power usage effectiveness significantly, reducing energy use as we hope to scale our learnings from our projects. And the other part was, to me, is interesting is software. Vlado and his team, that software that we've been using has improved the efficiency and the use of energy that is very, very significant. Next, please. In April subsequent to fiscal year-end, we completed the acquisition of our Bitcoin mining operation in Québec. That was an interesting experience because it was all during the lockdown, couldn't fly anywhere, couldn't even drive over the due diligence after the lockdown took place. But we have scaled up the next-generation mining equipment at this facility and now have approximately 3,000 miners generating 217 petahash per second of hashpower, while only utilizing about 9 megawatts of electricity. And that's what's really important for investors to recognize is that this new equipment is extremely efficient and you just don't use as much electricity. In fact, the amount of petahash that we're using -- or sorry, generating is greater than the thousands and thousands of S9s we had. So it's -- to me, it's interesting as we continue this process, we started with a strategy to buy each month. And then all I mentioned earlier, lots of delays took place because of the coronavirus lockdown around the world and supply lines, and then there was a disruption of the miners and management, so we've gone to another provider. And things are working out well for us. Inch-by-inch everything is essential as they like to say. As this facility has 30 megawatts of power capacity, there's still significant capacity for expansion. Slide #15, newly acquired Bitcoin mining operation. The combination of Bitcoin mining operation in Canada and Ethereum in Europe means we have the most diversified public miner, along with the only 1 that's currently mining Ethereum at an industrial scale. As you can see on Slide 15, we are also one of the largest publicly miners globally. And we find that we -- the volatility of Ethereum that our stock tracks with it by the hour. Slide #16. HIVE is the most liquid Canadian listed miner. And I think a lot of it has to do that our industry going through the winter as prices collapsed. And then this year, even as it rebounded, we've been very steady. Every week speaking, one-on-ones or at family offices or institutional. Earlier this year, I was in Zurich and in Switzerland at a conference put on by a group of YPOs or CEOs. And there's something else we've done this past year, we brought on 2 new directors that both have data experience -- data center experience and both in CEOs of their respective companies. And I think that adds to the overall Board for independent thinking, but also this unique experience that's necessary in this industry. So we maintain because of this speaking at conferences, doing video conferencing from Stockhouse to small-cap power to Kitco. Kitco is by far the largest platform for gold with 30 million unique viewers a month. And my gold comments, so they always like to ask about crypto because there's lots of coverage, which is interesting because the same thing that happens in Bloomberg reporter there tells me that whenever he puts gold and Bitcoin in his headlines, he gets an exponential increase in click-throughs. So there's sometimes this debate on the Internet between the Bitcoin audience and gold and -- but I find it as an alternative asset class. It's an important asset class and it continues to grow in interest. Hoping to Slide #17. I want to outline here the performance of our shares versus Ethereum and Bitcoin. As you can see, we had the big surge, and there was a heavy selling that took place last year. And Genesis Mining was selling some stock in the summer and then some of the institutions. They had market cap ratios that they had to sell, and it was absorbed by investors all over the world. And as soon as that sort of repression -- oppression of selling that took place between June and December was over. Then all of a sudden, HIVE started to move with Ethereum. In fact, we moved even more -- much more greater rate. And that to me is much more like a gold stock. The DNA volatility of $1 billion is plus or minus 20% over any 1 year, but gold stocks is 60%. So it's interesting for me to share with you is that here we are, Ethereum is up 187%, we're up 320%. So we have more leverage. And where that asset that's producing these virgin coins rather than just buying the coins when produced them. We hold them. We sell them to pay our electrical bills, and we still have basically a very tight ship of few employees. So our revenue per employee looks much more like a royalty company. On Slide #18, and I'm quick to #19. So the rapid activity of the largest blockchain network is Bitcoin and Ethereum in 2020. And so with that, we've seen this before as important background for the utilization of blockchain networks globally. And as you can see, the IDC estimates worldwide spending on blockchain technology will increase at a 60% CAGR from 2018 to 2023 to $16 billion. And we're witnessing that. And it actually accelerated after JPMorgan came out with their own stable coin and basically stop talking negatively about the digital money arena in cryptocurrencies because they have their own stable coin. That was basically the bottom. And interesting enough, we had the golden cross at that time in January of 2019. And then in February, we had the bottom in Bitcoin and then Ethereum. And so the way we're seeing this sort of golden cross, which is very important for defining a securable market in gold, the cryptocurrencies are so volatile. So you do get these much greater -- I guess because it's an emerging industry and always new players coming and going. But what's important for the listeners is that blockchain continues to attract a lot of spending, and I think that as more industries start using blockchain and the concept of blockchain, in particular, smart contracts, they are very important drivers. On Slide 21, one of the things that's Ethereum is a smart contract. And what's interesting regarding sort of this model is that when Ethereum ran to $1,500 and Bitcoin ran to $19,000, a big part of that drive is because of all these ICOs, there's over 400 ICOs. And every one of these new ICOs is basically using the Ethereum structure. And that was another catalyst for driving up Ethereum prices. So we witnessed that huge exponential move in the number of new ICOs, and that drove up Ethereum prices. Then the ICOs collapsed along with Ethereum, and we found a bottom. And it appears now that this year, this was called DeFi, decentralized finance, is like replacing these ICOs. And as you can see in the next visual, our rewards exploded in these short periods of time but they're immense. And to give you an idea, if you look at the end of March, our revenue as a run rate, say, of approximately $30 million, by this recent runway, Ethereum ran to $500. Our run rate, if it stayed there, which it hasn't because Ethereum fell, ran to $60 million plus. So our stock seems to correlate greatly on that revenue line that relates to the Ethereum. But as you can see here, there's a 6x increase in Ethereum miners' revenue year-to-date. On Slide #23. Bitcoin mining revenue have also been increasing since the halving of May 11, but as much as -- more modest pace than Ethereum of approximately 23%. And I think there's lots of fundamental problems that have taken place, like I'd mentioned earlier, the coronavirus, the supply lines, getting those miners in. And something else we've noticed is that there's just sort of a capitulation that we've been able to buy some miners for people that just said, even though they're profitable, they just don't want to deal with the volatility. And I find that most interesting is that we've had so many opportunities to explore for growth. Slide 24. Bitcoin is a digital asset, which can facilitate payments. And as you can see on this slide, the recent halving of newly minted bitcoin drew attention to the deflationary effect, such as the halving will occur, basically will occur every 210,000 blocks or approximately every 4 years. And so maximum number of Bitcoin outstanding is going to reach in 2140. And this is an important concept that there's basically models. There's a model called Metcalfe's law that explains how more people adopt, more people start using Bitcoin and Ethereum, then you get this exponential move as more users take place in the price of the particular Bitcoin or Ethereum, but we're also going to see other positive parts. But one of the things that's come out as a very strong narrative is this money printing. And I've mentioned that the G20 finance ministers in particular, bank of international settlements, which have been very anti-crypto. But now our probe blockchain and digital money, the IMF has just come out with -- that Europe is coming up with the digital money. But what happens, it doesn't matter what form of money is that paper money starts to lose its value quickly when there's excess of printing. And what's different is this coronavirus is like World War 3. And what we're -- and we're seeing is that the G20 finance ministers and central bankers collectively meet. They meet like an OPEC, and we're seeing synchronized global printing of money. And this money is showing up in stocks, stocks with growth in dividends, stocks that do not have the capacity to grow their dividends are being greatly punished, technology stocks that are hiring people. We're seeing huge valuations take place. But nothing compared to 1999 on price to revenue or price to cash flow or price to earnings. So the technology and the high blockchain is basically a technology company is experiencing a complete new sort of renaissance in this space. And for me, it's very exciting to see that this money printing is attracting money into crypto. And we're seeing this DeFi world exploding as other mechanisms for posting up your Ethereum, every time they create one of these decentralized financial groups that they have to basically buy more Ethereum from the outside market, so the supply ends up going to these funds. That's another factor we're driving the prices up and everyone's talking about this excessive money printing. So this visual just shows the U.S. What I share with you, it's a global phenomena. And still today, the negative real interest rates that you're experiencing in Europe are much greater in Switzerland and Germany than they are in North America. And then we just got CPI numbers come on at 1.3%. And I did a quick video and talked about another -- if you use the algorithm for inflation in 1980 when gold hit $850 and silver $50 an ounce. If you use that algorithm to define what CPI is that inflationary rate, we would be seeing that inflation today at 8%. And we're seeing real estate in the U.S. surge over 10% in the past last year. We're seeing the Federal Reserve come in and buying ETFs for getting corporate bonds down, the yields down, buying into munis. This is unprecedented. So as more money is going in by central banks, creating money out of nowhere, going into force down yields all over the world, we're seeing Swiss banks basically federal reserve of Switzerland float money, take this money and go buy Apple stock. 15% of the Japanese markets owned by the Central Bank. So these are very different times of experiment with monetary policies to try to drive economic growth. And I just see that asset classes like Bitcoin, like Ethereum are going to evolve and the direction is going to be still volatile, but I see it much higher. And I open it up for Q&A.

So actually, one of the questions is related to Darcy, Frank. How do you approach dealing with your Ethereum and Bitcoin holdings in terms of how much do you keep in its portfolio, et cetera? What's the overall strategy there?

I think it's [ HIVE ] to pay those electrical bills.

Yes. No, I think as to cryptocurrency miner, we think it's important to hold a certain amount of inventory. And internally, we're working towards what that appropriate level would be in terms of Bitcoin and Ethereum and sort of manage that. We, on a regular basis -- right now, we have quite a bit of inventory that's been built up over the years. But we're continuing to sell our production in essence. So as we're producing, we want to keep that cash flow coming in. So as Frank has said, we can pay our bills. But when we see some movements in the markets and making use of Frank's experience and some of the people behind, you talked about some of the 20-day moving average, 50-day moving average. We use those metrics because it takes the emotion out of it, and it comes down to facts and use that as opportunities to either hold or an opportunity to buy -- or sorry, opportunity to sell some of the holdings. So by using those metrics, it takes the emotion out because, as we all know, emotion, no matter what we do can send us down a dangerous path. So we tried to stick to the facts, stick to what the numbers are telling us in terms of what to do and when to maybe get rid of some of our external inventory rate in holdings.

We -- just to add to Darcy saying, Darcy, is we use an optimization system so that we're making sure we always have lots of liquidity to be able to acquire opportunity. Two, there are times when we mine, and we're not making any money. And we've done that a couple of times, bidding on the math of the volatility. And we've seen that. Earlier this year, we had a huge exponential move over 20 and 60 days where Ethereum basically goes from 100 to 280, and we would capitalize on that. We would -- we had a lot of Bitcoins. We were not selling all of our coins. When they were -- we just kept mining through it. Then all of a sudden, we capitalize on it. We talk over Iceland. And we just mine those coins and put them into -- in the cloud, and then it went to the wallet. And then when things went up a huge standard deviation move, we took profits from that. And so we're trying to optimize using a quant approach to what inventory. But at the same time, always have a position in these coins. So we always have an inventory of Bitcoins and Ethereum and Ethereum Classic so that we can capitalize on this volatility. And I would think from a year ago, looking at today, Darcy, our cash position and the value of our coins, they're up substantially from a year ago.

Yes, absolutely.

Okay. Next question kind of in the same line. Where has the main source of efficiency gains come from? Is it from overclocking existing hardware or lower software overheads? Frank, I think you discussed some optimization that Vlado had achieved in Europe?

Vlado and his team have done a phenomenal job. When you look at their efficiencies and use of energy, and they could look at the machines, and they can see that the previous caretaker that we partnered with, they weren't even close to for being efficient. I mean it wasn't a little bit. It's just -- this is material for us. And then we were also very fortunate. It was an external factor that hurt everyone in Sweden the previous year, energy prices had soared, cost of electricity had surged. And then we had all the taxes for using energy, the VAT tax issues that have to come up that -- what they pay you, et cetera. And so what we have found, we've been able to do with this efficiency is hedge. So electricity prices collapsed to, say, under $0.02 in Sweden, and you can put on a futures market trade that can hedge over 6 months, 9 months. You can hedge over 100%, 70%. So we locked in much cheaper electricity cost during this sort of winter prices, where they collapsed. And that's something that one of our directors has been very -- Tobias has done a great job in getting the relationships and setting that all up so that we could put up the capital, and it really wasn't outrageously expensive to lock in cheap electricity.

Okay. Next question, would HIVE consider any M&A transactions?

Absolutely.

Darcy, is HIVE considering mining other coins? Right now, it's Ethereum primarily and Bitcoin primarily, have you considered other coins?