Keel Infrastructure Corp. (BITF) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our Q4 and full year 2020 financial results of Bitfarms Ltd. webcast. Presenting today will be Emiliano Grodzki, our Chief Executive Officer; and myself, Mauro Ferrara, the Interim CFO and Corporate Secretary of Bitfarms. Geoff Morphy, our President, is also present and will be available to answer questions at the end of the presentation. I'd like to advise everyone that certain information discussed on this call and presented in this presentation may constitute forward-looking information and therefore, point you to the cautionary statement found on Slide 2. In addition, on Slide 3, we note the use of non-IFRS performance measures that will be referred to in this presentation. These measures are not recognized under IFRS and do not have a standardized meaning prescribed by IFRS and include EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, gross mining profit and gross mining margin. Finally, note that all financial figures are presented in U.S. dollars, unless otherwise noted, and references to Bitfarms include all of its consolidated entities, unless otherwise stated. I will now turn the call over to Emiliano.

Thank you, Mauro. On Slide 6, we summarized our Bitcoin mining production in Q4 and for the 2020 fiscal year. We mined 477 BTC in Q4 2020 compared to 1,219 Bitcoin in Q4 2019. This represents a reduction by 53%. For the full year, we mined 3,014 BTC during 2020 compared to 3,865 in 2019, a decrease of 22%. The decrease in production were preliminary due to the BTC halving event in May 2020, resulting in block reward to miner dropping from 12.5 to 6.25 per block as well as a substantial increase in network difficulty. The Bitcoin halving event is prescribed by the BTC protocols and take place after every 210,000 blocks or every 4 years around. The tiered halving in the history of BTC took place in May 2020. When halving take place, the block reward decrease by half, which means the revenue generated from mining activities of Bitcoin and all of other miners decrease by 1/2. As was the case following the previous halving, mining economics normalizes over the following 6 to 8 months with higher price of Bitcoin. This trend has continued in Q1 2021, and we continue to enjoy the benefit of higher Bitcoin price. On the right of the slide, we summarize the period and hash rate for the company for the past 5 quarters. The company's hash rate at the end of 2020 stood at 965 peta hash, a 23.7% increase, compared to 780 peta hash at the end of 2019. The significant increase in hash rate was primarily the result of Bitcoin -- Bitfarms adding a significant number of best-in-class miners to our mining operation. Moving to Slide 7, approximately 97% of all the electricity consumed by the company was used for crypto mining computing power. The charts of the right of the slide show the power use efficiency of each of the company farms as well as the total company. When compared to an external benchmark study on data center power efficiency, it can be seen that each of the company farm continues to operate well above the benchmark efficiency for top tier data center, which is approximately 91%. Our power use proficiency is driven by the efficient design of our facility, and it's one of the reasons we remain a leader in terms of breakeven cost of production per BTC amongst all publicly traded miners. We'll now turn the call back to Mauro.

Thank you, Emiliano. On Slide 8, we see that the company generated revenues of $11.3 million in Q4 2020 compared to $10.5 million in Q4 2019. The increase in revenues was primarily due to the significant upswing in Bitcoin price, partially offset by the impact of the aforementioned 2020 Bitcoin halving event and an increase in excess of average network difficulty. For context, the average price of Bitcoin in Q4 2020 was approximately $16,800 compared to approximately $8,200 in Q4 of 2019. The company's Q4 2020 EBITDA was negative $0.5 million, resulting in a negative EBITDA margin of 4% compared to an EBITDA of $2.3 million and EBITDA margin of 22% in Q4 2019. The company's adjusted EBITDA in Q4 2020 stood at $3.6 million with an adjusted EBITDA margin of 31% compared to an adjusted EBITDA of $3 million with an adjusted EBITDA margin of 28% in Q4 2019. The company attained a gross mining margin of 53% in Q4 2020 compared to 56% in Q4 2019. The slight decrease was mainly as a result of an increase in network difficulty in Q4 of 2020 versus Q4 of 2019. As described in our note on non-IFRS measures, gross mining margin is calculated as mining revenues less mining energy and infrastructure costs divided by mining revenues. Despite the challenges presented by the halving, our competitive hydroelectricity rate and operating efficiency enabled us to attain an average breakeven cost of production per Bitcoin of approximately $7,500 for the most recent fiscal quarter. This compares to the average realized sales price per Bitcoin obtained by the company of approximately $16,800. On Slide 9, we summarized the financial results for 2020 compared to 2019. The company generated revenues of $34.7 million in 2020 compared to $32.4 million in 2019, an increase of $2.3 million or 7%. The company's EBITDA stood at $1.5 million or an EBITDA margin of 4% compared to an EBITDA of $9.6 million or 30% EBITDA margin for 2019. Adjusted EBITDA and adjusted EBITDA margin were $8 million or 23% in 2020 compared to $10.6 million or 33%, respectively, in 2019. Finally, the company's average breakeven cost of production per Bitcoin for the year ended 2020 was approximately $5,600. This compares to the average realized price per Bitcoin obtained by the company of approximately 11,000 during the same period. Overall, despite the difficult market conditions as a result of the COVID-19 pandemic and the Bitcoin halving event, Bitfarms continue to generate positive cash flow from operations. We're pleased with our 53% gross mining margin achieved by the company in Q4. And with the significant 2021 run-up in Bitcoin price to date, this metric should prove even better in Q1 2021. Slide 10 summarizes the financial position and ownership structure of the company as of the end of 2020. The company ended the year with $5.9 million in cash and total assets of approximately $52 million. Significant notable events have taken place since the end of 2020 as summarized on Slide 11. From a liquidity aspect, we raised CAD 80 million via private placements with U.S. institutional investors, which allowed us to institute several transformative changes to our company. Operationally, during the first quarter of 2021, we have increased our hash rate to approximately 1.2 exa hash and started executing on infrastructure expansion plans at a number of locations. The proceeds from the private placements provided us the flexibility to put into place a Bitcoin pilot retention program to repay and retire all of our term indebtedness, to purchase and install 4,500 miners so far during Q1 2021 and placed orders for 48,000 miners with our supplier of choice MicroBT in order to secure a reliable supply of new miners and to keep growing the business well into 2022. I'll now turn the presentation back to Emiliano.

Thanks, Mauro. Moving to our growth strategy on Slide 13, we have summarized our infrastructure expansion in 2020 as well as our infrastructure expansion plan for 2021, some of which are already underway. Our 2021 infrastructure expansion plans, when completed, will provide for enough power to attain our 2021 hash target. With access to a skilled workforce, along with abundant and environmentally friendly hydroelectric power, Quebec remains one of the leading jurisdictions for ongoing investment by Bitfarms in 2021 and beyond. We are excited to continue our collaboration with Hydro-Quebec and municipal energy distributors. We also continue to evaluate opportunities for expansion which satisfy our criteria and poses competitively priced electricity. 2020 was an eventful year with many challenges. Post halving event, we took delivery and installed thousands of new miners. These new miners not only generated higher output and consumed that at less electricity, but were also acquired at price substantially less than the price currently prevailing in 2021. Bitfarms made great progress during the year, and we remain excited and optimistic about the future as we carry out our growth plans. This concludes today's webcast. I will now open the line for questions. Thank you.

Yes. Good morning to all. This is Mauro Ferrara here, the interim CFO. We have received a list of questions, which I will read out and then ask -- either my colleagues or myself will provide an answer. So first question we have here is, "How is Bitfarms thinking about continuing to scale as new ASIC production has largely already been accounted for through 2022?" Emiliano, would you like to take that question?

Yes, why not. Thank you, Mauro. Well, all we know about the short of production of chips, this matter impacting all the industry involved in the technology, especially in the production of miners in this case. And we deal the situation so far, and we anticipate these matters. And we were in the industry and space since almost 5 years and we reached an agreement with MicroBT to feed the inventory 48,000 miners, around 5 exa hash for 2022. This is a very interesting thing. We believe that it will be very difficult to reach a huge quantity of miners the next year, and we are happy to foresee all the situation in advance and addressing the proper way with Bitfarms management.

It's Geoff Morphy, I'm the President of Bitfarms and maybe I can add a little more to that. The chip shortage is severe and acute. And it's not just in our industry, it's happening in all industries. It's a global problem. And we're fortunate in that we made the big order for next year with the 48,000 miners, as Emiliano had mentioned. That helps safeguard our supply and our growth plans for 2022. But this year, we've already taken deliveries, and we are taking more deliveries this year. Because of our size and because of our history, our suppliers have comfort with us, and that comfort has allowed us when new machines become available because other people have not been able to take them because of their infrastructure builds. We're able -- they offer them up to us first. So we're able to opportunistically take them. They know that we have the capital and the balance sheet to be able to execute on those miners quickly and that because of our past performance record, they know when we say yes to those miners, we execute on them. So we are getting a supply of miners this year, and we have safeguarded next year. So we're feeling quite comfortable about it, even though the situation is very acute.

Okay. Thank you, Geoff. Next question -- actually, 2 questions that pertain to the same topic here, basically asking about how much Bitcoin are we planning to hold? And also, if we are planning to acquire any Bitcoin. Geoff, do you want to start us off on that one?

Sure. Let me start with the second part of that question first. We have no plans to acquire Bitcoin. Frankly, our capital is best deployed to our growth strategy. And the fact that right now, we are effectively taking all the Bitcoin that we mine and add them to our balance sheet. And the cost of our mining a Bitcoin is far less than what's available at market prices. So it makes a lot more sense for us to use our capital to mining our Bitcoin and then putting them on the balance sheet. There is so much more margin associated with that than in any other format. We have considerable expansion plans for this year. Moving our production capacity up to 3x a hash is the plan, and then 8x a hash by the end of the following year. So our capital, and you have to treat capital as precious, is only going to the areas in which we can drive the best returns from.

Okay. And sorry, Geoff, in terms of how much Bitcoin we're planning to hold this year?

Sure. We've disclosed in the press releases today and yesterday that for the first quarter, we will end the quarter with 500 -- over 500 Bitcoin. And we started adding them to our balance sheet about the end of the first week of January. And so that pretty much tells you our run rate at the current time. We expect that run rate to continue. We're going to be adding more production capacity, but we also expect as the year goes on, the difficulty factor to increase, which will put pressure on us. So I think if you take the run rate now and you monitor our press releases in terms of the new miners coming on stream and our production capacity, you'll be able to make estimates going forward. But we don't offer full guidance on our forecast or on our Bitcoin for the full year.

All right. Thanks, Geoff. Next question is, "Can you share pro forma forecast for 2021?" I'll start us off on this one. There is a reason why we're -- at this point, we're still not providing pro forma financial. And one of the big elements here is -- has to do with the price of Bitcoin. It does drive our top line in terms of revenue, and there could be some significant swings there as we saw in Q1 of this year going from $20,000 to $60,000 in the first quarter. However, as I just mentioned, as we progress during the year, we'll be putting up press releases to explain additions to our peta hash. And with the data that is out there, I believe some estimates could be made by individual investors by themselves. But as of right now, our plan for this year at least is not to provide any guidance more than what we provide toward -- during our -- during the year in our press releases. I'm not sure if Geoff or Emiliano want to add anything else to that.

That's a good answer. Thanks, Mauro.

Next question. Do you have any news on your uplisting to Nasdaq? Geoff, do you want to start us off on that one?

Sure. That's probably the most popular question that we've been getting over the last 3 months, 4 months, 5 months. Actually, we've been hearing from shareholders about that, encouraging us to move to the Nasdaq for months now. And we've listened, we agree. It's an exciting project. We embarked on it, listing in the United States in January. It's one of the reasons why we did the private placements to start our exposure into the United States and developing our relationships in the U.S. And as we reported yesterday, we have made application to the Nasdaq in February. It's a costly and laborious effort to get listed on the Nasdaq, but because we have such a strong foundation in that, we already are public. We already have a prospectus approved by the Ontario Securities Commission 1.5 years ago. Because we are audited by PwC, we have an incredible foundation to work from because our governance and our controls and just our whole operating philosophy is already in place. So we are proceeding forward. You -- in the press release yesterday, we mentioned that we filed for the first time our annual information form, which is a substantial document. We will be updating that document with the full year results shortly. A prospectus is required as part of this. We are working on that. And we are pursuing the listing with the Nasdaq as quickly as we possibly can. I can't tell you the exact timing because there is multiple approval processes that are going on, and -- but we're involved in each of those right now. So stay tuned. We'll provide more updates in the short little while as to how we are succeeding.

Thanks, Geoff. Next question, "Would you be able to provide guidance on margin for 2021 and at the same time provide your view on where BTC may stand price-wise?" Well, again, in terms of margin, we've indicated what our gross mining margin was in Q4 with the prices that you see right now. And we've indicated also in the presentation that we do anticipate Q1 to be better simply from a Bitcoin price that will definitely help drive us there. With regards for the rest of the year, there is too many factors to point to here. Obviously, how much coins we'll be able to mine. Yes, we do have new machines coming in, but we also have the difficulty to contend with. So that will be -- it's very difficult to speak to that for the rest of the year. Technically, our cost of electricity and our main cost for producing Bitcoin should remain relatively stable. Again, depending on the difficulty in mining the Bitcoin for the rest of the year, but hopefully, that should remain stable. So that is as much as we can actually provide in terms of the margin. Then in terms of where do we see the BTC price going? Again, it's very difficult to tell, but I'll let maybe Emiliano speak to this because I know this is one of his great passions, BTC. So Emiliano, I'm not sure if you want to maybe just briefly chime in on what do you think BTC...

Yes. Sure, Mauro. Thank you. We really believe in this industry in the BTC structure, and it's very important to understand what's happening right now in the market, the ramp on the institution start to invest in our industry. And I believe that the scarcity of the design of the protocol will allow to increase the price along the time. And I believe that we will see higher price of BTC during this year. But it's more important for investors and explain that we are professional in this industry. We created the standards of this large scale data centers, and our industry is all about scale and efficiency. And we are working on a daily basis with our professional team for improved efficiency, the quality of the energy because our core consumes green electricity and take care of the environment. And I believe that Bitfarms is the best company on America -- on all the American market. We saw this industry potential 5 years ago, and we are fully committed for the long term and the future.

Thank you, Emiliano. We have a whole bunch of questions here, which I'll try to group into one. So basically indicating, what are our, I guess, expansion plans outside of Quebec. As we mentioned during the presentation, we do have -- we already implemented plans to grow in Quebec in 2021, but in terms of growing to areas outside of, I guess, Canada and possibly North America, whether it's South America or even, I get some questions here about growing in Asia. Geoff, do you want to get us started on that one, please?

Sure. Sure. First and foremost, we're very much committed to the province Quebec. We have 5 facilities in operation there. We have a skilled workforce that's been with us for years. There is abundant supply of hydroelectricity. So as Mauro mentioned, we are taking advantage of our existing contracts and building them out, but we're not stopping there. We are in discussions with Hydro-Quebec, with La Régie, which is the regulatory body in the province. We're in discussions with the province themselves, and we are looking for additional sites in Quebec. We might as well take advantage of the green power and our human resources to fully take advantage of what's there. But with that said, we're also looking for other opportunities. There is some splendid opportunities in Western Canada. There is some splendid opportunities in the Northeastern U.S. And as we previously press released, we are researching and endeavoring to see whether a situation in South America is going to work for us. And we're dealing with all of these situations very carefully, we're putting them through our matrix to make sure that they fit, and we can assure shareholders and prospective shareholders that these -- our expansion is important to us, but we don't want to overstep or do something prematurely. So the operating metrics and discipline that we've employed in the past, we're going to do in the future. So I'll leave it there.

Okay. Thanks, Geoff. Next question. We've gotten a few of these questions as in the last couple of quarters indicating, "Is there anything that you can do as a company to avoid your stocks being shorted so much?" I'll just -- I guess I'll start us off. I mean as far as the market is concerned, there's only so much that we can do. What we're focused on is executing on our plan. And if we're able to do that, we think that our financial results will speak for themselves and show what this company is worth and where it's going in the future. I said, if there's market players there that want to short us or do whatever they want to do, we cannot really comment or focus on those things. It's not something that's in our purview. The best thing we can do is just keep -- as they say, put your head down and execute on your plan. And if you believe in your plan, and we do, the results will show. The thing is, it takes time. This year is a year where we'll be mostly building out infrastructure to accommodate new miners. It takes time. I would like to get these new miners tomorrow morning, but it doesn't work that way. So we're focused on executing our plans to get us to where we think we should get to. And as far as the market is concerned, we'll have to let that play itself. Now again, if we do end up on an additional exchange, hopefully, that will help stabilize things. But again, these are things that are out of our control. I'm not sure, Geoff, if you want to add anything.

Yes. The one thing I might add is, we think our company is undervalued. So I'm not sure why people are feeling compelled to short us. But as Mauro mentioned, we're going to just keep focusing on what we're doing best with an operation and growing this company and making it as valuable as possible. And I guess the only way to really combat shorts is by growing your share price and their valuation. So that's what we're going to do.

Okay. Thank you very much, Geoff. So next question here. "Are there any plans to integrate chip production?" And also more to this, are we planning to mine anything else but Bitcoin? Whether it's Ethereum or Litecoin or anything else? Emiliano, would you like to start us off on that one, please?

Yes, why not. We started the company 5 years ago, mining Ethereum, and we feel pretty well for this technology. For the moment, we only mine BTC and build our pipeline on behalf of BTC mining. But we have -- are very interesting laboratory inside our company, we test and try all the technologies at the same time. Maybe in the future, we'll add Ethereum mining, too.

Okay. Thank you, Emiliano. A few -- I guess there are a few financial questions that I'll take on. "Can you explain the $5 million in net financial expenses in Q4 of this year?" Actually, that is a relatively easy one. Most of that charge of $4 million -- or $3.9 million, I believe, to be exact, had to do with the revaluation of certain warrants. It is a noncash expense, but something that needs to be revaluated. Reason being for the revaluation is the price of the warrants versus the significant increase in our stock price at the end of the year and going forward. So that explains why we had that large expense on our -- in our financial expenses. "Can you touch up on the Dominion loan situation?" Again, yes, this one is a simple one. Obviously, with the funds that we received in early January and February from our equity raises, we fully repaid the Dominion loan. And hence, mid-February, we've been basically debt free. Obviously, those will be more apparent when we issue our Q1 numbers. "Has the team made any considerations to scaling it through M&A.?" Geoff, maybe I'll let you start on that one?

Okay. Thank you, Mauro. We're not averse to growing through acquisition as well. We've got substantial organic plans to grow as we've let the market know. But over the last little while, we have looked at 3 situations. At this point, discussions continue. We do not want to be distracted by an acquisition and get away from our organic growth plans or our plans to get to Nasdaq. But if an opportunity arises with the right price and the right components to it and the right additional management type of personnel, we think it could be a tremendous addition for us. So we're not averse to it, we're looking at them, but we're not feeling obligated to do anything.

Okay. Next question, "How would a mining ban in China affect the company?" Emiliano, I think I'll let you start on that one.

I let these questions to Geoffrey, please.

Would you mind asking the question again? I just missed this.