HIVE Blockchain Technologies Ltd

XTSX:HIVE

Earnings Call Transcript 2022-Q1

[Holly Schoenfeldt]

[Audio Gap]Was reviewing the results for the 3 months ended June 30, 2021. On Slide 2, except for the statements of historical fact, this presentation contains forward-looking information within the meaning of the applicable Canadian securities legislation that is based on expectations, estimates and assumptions as the date of this presentation. And you can see the corresponding slide #2 up on your screen for the full disclosures.Moving on to Slide #3. You will see one of our most popular visuals, which is the DNA of volatility, and we're always sure to include this table in our earnings presentations, particularly following the disclosure slide because we just think it's a wonderful reminder to investors about just how much these various asset classes can move up or down over a 1 day and a 10-day time frame. And as you can see here, and I don't think it's a surprise to any of our shareholders that the volatility of Bitcoin and Ethereum is greater than, say, the S&P 500 or even gold stocks. And then if you look down at HIVE, it's even more volatile. And of course, that's because we mine both Bitcoin and Ethereum. So it's just something to keep in mind.So as we move on to Slide #4, I am pleased to welcome the presenters for today's program, Frank Holmes, Executive Chairman; Darcy Daubaras, Chief Financial Officer; and Aydin Kilic, President and Chief Operating Officer. And if we move to Slide 5, I would now like to hand the presentation over to Mr. Frank Holmes. Frank?

[Frank Edward Holmes, Interim CEO & Executive Chairman]

Thank you, Holly. And thank you all shareholders for being resilient as this management team has overcome so many challenges since taking control Darcy and myself, in particular, of Genesis mining and repositioned the company in the past couple of years. So there's been so many challenges we've overcome just like getting -- we apologize for your frustrations of getting financials out to you. But we've been able to say that we feel very safe and comfortable in our numbers and what we're doing. -- and we've been doing that. And here we are. We had record -- our year end in March numbers. And now we have the end of June. HIVE achieved record revenue for the year ended March 31 of $66 million and earnings of $43 million. And then, we turned around for the quarter. We turned around and show you that we have record quarter from May -- April, May and June year-end, -- And this is sort of a nice visual of showing you this is going up to June, those numbers. And when we compare them to our peers, you can see that we have the highest gross income for the June quarter in millions of dollars. So our numbers are bigger than Bitfarms. They're bigger than Riot, they're bigger than Marathon. One year marathon numbers came out today, but this is for the end of June. They're bigger than Hut 8 or Argo. And Argo's numbers are every 6 months.So what I'd like to point out to investors is that this difference is because we mine both Ethereum and Bitcoin and Aydin is going to walk through that if you did some back of the envelope conversions, et cetera, what our hashing power could be and what it looked like it was only Bitcoin. But Ethereum has allowed us to weather the down storms and also for the past year, be the most profitable company of all the cryptomining companies as of now June of 2021.Next, please. So the proposition for investors is who's the least expensive. And when you look at Marathon, they're trading here before the other numbers came up at the end of June at 70 revenue, market cap to revenue. Hut 8 is 47x, Riot is 38, Argo is 35, Bitfarms is 25 and HIVE is 15. We know that as machines come on stream for a particular Marathon and Riot that there is going to be compression. But there's a big disconnect between on a relative basis of the value proposition of revenue to market cap valuation metrics and going forward, what our growth rates are.Next, please. So we're thrilled to be able to share with you the cash on hand of $26 million, receivable paid $8.9 million, digital currency is $82 million. So the total core assets are $126 million. The liabilities are $9.6 million. Our Ethereum and Bitcoin, as you can see, the Bitcoin has been increasing rapidly as overall from the hodling.Next, please. So I'm a quant guy as a fund manager and quant discipline and I've always liked Matt Case's work. He's based in Toronto, and he has a model that's based on the cash flow return on invested capital model that came out of Chicago from Holt Advisory. It looks at the universe of all stocks. And it does a relative valuation where a company's intrinsic value is. So they believe that HIVE is worth default valuation improved to USD 510 per share. Trailing 4 quarters moved up to 35.6%. When these numbers are gone through his computation system, I'm sure that HIVE will look even more attractive.But I think what's interesting for me to share with all of you is that there are many quant funds and other sort of quasi quant discipline fundamentalists that are using HIVE because this methodology does not care what industry you're in. It just cares if you're generating high cash flow returns on invested capital.Next, please. HIVE's total assets on the balance sheet. I mean, Darcy can go into more details on this for everyone. But you can see that from the end of 2020, it was approximately $6.4 million. And now our Bitcoin Ethereum is $82 million at the end of June. And the idea of launching the ATM in the first quarter of this year has allowed us to be able to hodl most of our production at the same time is take that cash flow from our existing business and upgrade our GPUs on swaps from 4-gigabyte cards to 8-gigabyte cards, memory cards was very critical for the AMD 580 cards. But other things that we've made announcements on major Nvidia purchases, which is for the future. So we're continuously upgrading and that's -- we're in a great financial position to continue that.Next please. During the short period with Johanna joined us in the first half of the year as the Managing Director of Sweden has now taken on the role as the President of the Swedish operations, which we're happy with. We've made press releases regarding her credentials and her experiences, both explicit and task acknowledge.Next, please. So you can visit our website -- And the new addition to the team will be speaking today is Aydin. Aydin Kilic is the President and Chief Operating Officer. He has lots of experience in crypto mining data centers construction. And in particular, you need to have lots of experience in construction because of the site that we're building out in New Brunswick. I was just there last week, and I was so impressed, our whole team, we visited Lachute, which is 30-megawatt facility in Quebec, and then we all flew up to New Brunswick to visit the campus that we're building out and it's really quite impressive and thrilled and that's also helped with our Bitcoin mining print and then coming back on that only green energy is key to it, owning our own facilities and assets on the balance sheet. They are very, very valuable. So we're thrilled with Aydin coming along and helping execute and build out going to -- you can talk more from 50 to 70 megawatts and where the future potential is from this.Next, please. So we get this question quite often, and I ask regarding the difficulty rate and for those shareholders to recognize is that there is a fixed amount of the Ethereum mined each day. The algorithm just like in Bitcoin, every 10 minutes, there's a 6.25 coins [indiscernible] to 900 bitcoins a day, and if you can get your hockey stick on and get a piece of that action with the faster computers, then you're going to produce bitcoins every day. And the same thing happens with Ethereum. Ethereum just produces more coins and one thing because it's a fixed amount, there is more and more people competing, especially the gamers coming in and switching their machines. And what we've noticed is that this difficulty rate fell dramatically for Bitcoin, but it didn't fall that much for Ethereum. And Ethereum difficulty has basically been rising. So you can see that we produced a lot less in the quarter Ethereum. However, the price action of Ethereum has gone up 30-fold in the past couple of years. And in the past year, it's up more than 20-fold -- and the reason for that is not just the technology. We saw that problem with upgrading our memory cards, but the real issue is there's just more people turning on their Ethereum chips -- turning on their GPU chips that are gaming. And it's -- what we're seeing is that Ethereum is actually much more decentralized than Bitcoin mining. And I thought that was really an interesting dilemma that took place when China shut down everything in China that the difficulty did not fall very much for Ethereum mining, it fell substantially for Bitcoin. Ethereum difficulty has risen to a new level, but Bitcoin is far from that. So I think it's just for shareholders asking some people expect us to produce more for them to just recognize that the new GPU cards that are out there and many of these kids are switching over short-term mining and then going back and spending the money.Next, please. Important part at the end of June going into July, we got listed with the HIVE ticker on NASDAQ. So we're excited about that. As you can see, we had about 384 million shares outstanding. We've had the least amount of dilution against all the mining companies -- So we have the greatest revenue when you take a look on a per share basis, we have the greatest increase in revenue per share and cash flow per share relative to our peers.Next, please. We get great coverage of particular monthly falls out of Canada. And once again, they're very earnings driven and revenue driven on a per share basis. So here's an article last week by Andrew Button, recommending ETFs and high blockchain. Next, please. Now I'm going to turn it over to our new President and Chief Operating Officer, Aydin Kilic.

[Aydin Kilic, President & COO]

Thank you, Frank, for the introduction. And it's been a very active quarter with a lot of milestones. I'm happy to talk about them. And so let's get to it.Next slide, please. So Frank was talking about the increasing difficulty in Ethereum mining. And one thing to keep in mind is that we also have a great ascendance in the price. This slide here provides a great historical context of what Ethereum mining itself has looked like over the past couple of years. And so throughout fiscal 2020 and 2021, you could see that HIVE was mining 25,000, almost 30,000 Ethereum per quarter. But of course, Ethereum prices were hovering around $200, $300, $400 in fiscal 2021, so calendar year 2021 for HIVE, we saw that increase substantially. And so we saw Ethereum hit USD 4,000 several times. So a massive increase. And the quantity produced about 9,700 Ethereum, period end June 30 we had a solid Ethereum price between USD 3,000 and USD 4,000. So that's almost a 10x in price with production, roughly 1/3. So still on a revenue basis, I don't know if you have 10x the price, but difficulty has gone up three time, you're overall still tripling your revenue, right?So the Ethereum mining business is actually very lucrative and it's specialized. It requires more operational excellence when it comes to your data center management. And this is, again, HIVE have been the first in the area mining, industrial scale company as well as the first crypto miner. It's now got a very remarkable track record here. And so the reason why I actually wanted to focus on this is for most shareholders and investors who want to understand the value proposition of Ethereum mining as it relates to Bitcoin mining, we're going to unpack that a little bit here.And let's go to the next slide, please. So the -- if you convert Ethereum mining to Bitcoin hashing, how do you do that, right, as an investor? And so the Ethereum mining obviously, we're running GPUs. You look at things. What's your eth per giga hash. In Bitcoin mining, you're operating at the Petahash level, and you're wondering, well, how many Petahash per megawatt my data center will have. At the end of the day, we're in the hash rate business. We produce hash rate as a commodity. And then we exchanged that for our coins. So the common denominator, of course, is what we report our financials and that is the [bit power]. And so if you take any given day, -- And if you had a megawatt of Bitcoin mining, for example, or megawatt of Ethereum mining, you will know how much Bitcoins there that you've produced, and you'll know what the market price is on that base. And then you will know what your revenue will do on that day. And that's actually in North American accounting standards. That's how you evaluate, right? So you've either got IFRS, you've got GAAP, generally accepted accounting principles. But that's a good measuring stick for investors because at the end of the day, our cap rate, our enterprise value, these are valued in Canadian or U.S. dollars. So if you use this [indiscernible] posture it and you evaluate you find some really interesting numbers. Now I actually focused on September 2021. We're doing, obviously, the Q1, which was period end June 30. And -- But we get so many questions people are wondering about Ethereum mining post London Fork and you know where things are today. So just a little bit of an outlook section here.So in September 2021, HIVE mined 221 Bitcoin, okay? So that's about USD 10.2 million of revenue. In addition to that HIVE mined over 2,500 Ethereum, right, which is an additional $8.6 million in revenue. So as you could see right off the bat, between USD 10.2 million and USD 8.6 million, Ethereum mining actually makes a very substantive portion of this revenue basis. And so if you take that and you also convert into -- on a daily basis, so what is the amount of Bitcoin equivalent you would have mined per day based on the Bitcoin price that day. And you total it up, you actually get an equivalent of 407 Bitcoin equivalent mined for the month of September, which on a daily basis is about 13.6 coin mined per day. And other companies recently have come out and hit a milestone of 10 Bitcoin per day being mined. Well at over 13 Bitcoin equivalent being mined per day, that's over 30% what some of our peers are producing. And so it actually shows how strong the value proposition this is for shareholders.Another thing I'll want to point out -- and again, this is September. So this is recent. This is both fund and for which, by the way, we're still seeing very strong and healthy Ethereum mining economics. In the 2 months following London compared to the 2 months of preceding London, we've seen very consistent, very strong economics. The only change has been the exorbitantly high fees -- transaction fees in the Ethereum that we saw in May and April of 2021. Those are no longer -- Those have been designed out of the system because they want to make the Ethereum blockchain accessible, whether it's for DFI after people minting NFPs. And of course, for people using Ethereum as a form of a digital currency, right? So more adoption and consistent use of term has provided the bedrock for excellent enteral mining economics. So if you take all this and you just...

[Frank Edward Holmes, Interim CEO & Executive Chairman]

I'd just like to really add -- sorry to interrupt on that. But this is a wonderful hypothetical model. This is not for financial reporting directly, but this is what our ability is because it's public of what our hashing power is. And we're trying to inform investors that this is what it would look like if we were only mining Bitcoin. But what's interesting is that Ethereum actually outperformed Bitcoin. If you just look at the price action, so it's been an important part of our hodling as Ethereum continues to go through like a halving was for Bitcoin, Ethereum hasn't gone through a halving. Ethereum has gone through all these upgrades and people staking their Ethereum. So they're taking supply out of the system at a very rapid rate, which then affects the supply-demand equation, which has led to higher Ethereum price for us. So that strategy is down the road, we'll be able to do proof of stake. But we think that several years down the road, but this is an idea for some people. I know they've been able to do this conversion, and Aydin has just done a wonderful job creating this hypothetical for you. Thanks, Aydin, and keep going.

[Aydin Kilic, President & COO]

Yes. No, thanks for the color, Frank. Again, exactly, this is an outlook. This is an outlook slide. Darcy will, of course, cover the actual financials for the period. And just to kind of build on what Frank had mentioned, on an annualized basis, again, with this interpretation, it's about $284 million as for the month -- sorry, if you take the September revenue on a run rate basis. So again, that's a projection. But if you have a realized annualized run rate revenue of $284 million, that actually puts price -- HIVE's market cap to revenue ratio at a 6x multiple, which is an incredibly attractive for investors. And on the previous slide, looking at the earlier quarter compared against our indiscrete peers, we were at 15x. If you look at the September numbers on this outlook slide it's 6x, so it's incredible. So that's a great way for people to understand how you can compare. And really, if you think about it at this point in time on per megawatt basis, Ethereum mining actually yields more dollars per megawatt just because the economics are so favorable. It's had great price action. So we want to help the investing public, understand how you can realize the value proposition of each.Next slide, please. So some operational milestones in August realized 1x hash of active Bitcoin mining capacity, which was great. And this is, again, a global company with operations in Quebec and New Brunswick, Sweden and Iceland. We've got a little bit of Bitcoin mining everywhere, but primarily focused in Quebec and New Brunswick. And so having the latest machines, really high-efficiency micro BTs and tenants installed in our operations. And we got to an exahash, and it was great -- daily Bitcoin production recently has been as one can calculate on a bitcoin mining calculator online, that's about 7 to 8 Bitcoin per day produced with 1 exahash. In fact, we're beyond that now, constantly growing. And so we expect to be -- have another exahash plugged in over the next 3 months. And so we've got the infrastructure being developed in New Brunswick. As Frank mentioned, originally, it was a 50-megawatt campus. We've expanded it to become a 70-megawatt campus, 30 megawatts are operating today. And so of that 70, the remaining 40 megawatts will be coming online later this year and early next year. So it's a very exciting time. And our long-term fiscal 2022 is to have a coin mining capacity of 3x a hash. And then in addition to that, we have the Ethereum mining capacity, which you saw in the previous slide, how you could convert that into -- on a U.S. dollar basis to Bitcoin mining capacity. Again, we've kept a very strong pipeline of ASICs. We announced in just 45 days alone. 1,500 next-generation Bitcoin miners S19Js, M30Ss, M30S-Plus plusses uses really great hardware. Just those purchases alone, over 0.5 an exahash of Bitcoin mining capacity.So -- here we go. So next slide, Perfect. Thank you. So with all that Bitcoin mining capacity and having been operating for so long, you've got some great historical numbers here. So even far back during pre-halving HIVE mined 153 Bitcoin during that period. And difficulty was actually much, much higher back then the last -- both before and after the last halving compared to where it is today, you could see HIVE has consistently performed even in producing 80 -- it was -- Bitcoin mining difficulty was incredibly high during this period. And -- but nonetheless, HIVE has continued to steadily grow 226 Bitcoin in the fiscal year June 30 period end, which is our Q1. And again, this is the result of having constant and steady growth inch-by-inch new hardware coming online.It really, really just trying to master the capital allocation, understanding with your rack space, where you're going to plug in your most efficient ASIC miners on your watt per terahash basis if you have older S9s, which, again, are still profitable, but once you've deployed capital and you have much faster, more efficient ships, plugging those in. And so this is how you get the steady growth. And so it's a very exciting time. And so again, not a lot of the publicly traded companies have been mining Bitcoin for that long. And so with that operational overview, I will turn it over to Darcy Daubaras for the accounting and financial summary of the period end.

[Darcy Daubaras, Chief Financial Officer]

Great. Thank you very much, Aydin, and good morning to all of our investors and shareholders. Next slide, please. So on this Slide 26, in China, we generated revenue from digital currency mining in the first quarter of fiscal 2020 of $37.2 million from a claim production as we've gone over approximately 97 -- sorry, 9,700 Ethereum and 226 Bitcoin. The increase in the revenues versus the same quarter in fiscal 2021 was primarily due to the increase in the production of Bitcoin mining that Aydin had just shown in the previous slide and much higher coin prices than we were experiencing a year ago. Part of this, as we've talked about was offset by a decrease in the number of Ethereum mined driven by difficulty rate increase and fewer number of cars that we've got installed as part of our GPU card upgrade from the 4 to the 8-gigabyte cards. But as we've talked about and covered. This was all offset by the huge increase in the price of these coins year-over-year.The gross mining margin during the quarter was $31 million compared to $2.6 million in the prior year comparative quarter. Our production of Bitcoin, as we talked about, the increased month-over-month, and we are continuing to do this following our acquisition of our 2 data centers in Canada. So I'll point out the gross mining margin, which equates to our revenues minus our direct operating and maintenance cost, increased in absolute dollars and stayed strong as a percentage of revenues at 83%. The gross mining margin is also partially dependent on various external network factors. And we've all talked about this, including the mining difficulty, the amount of the digital currency rewards the miners are receiving before and after the halvening and the market price of the digital currencies at the time of mining.On this slide, we're looking at the quarter-over-quarter and you can see our revenue from digital currency mining has increased to $37.2 million from $33.4 million in the fourth quarter of fiscal 2021. Our gross mining margin has increased again to $31 million from $27.2 million in the prior quarter.Next slide, please. So our adjusted EBITDA increased massively here in the first quarter of fiscal 2022 to $29.6 million versus $2.6 million in the prior year comparative quarter. The Ethereum and Bitcoin mining margins that we have experienced through our efforts of reducing our costs having enabled us to continue to expand our business. This has to do with the 2 acquisitions we've made within Canada and the continuous upgrade of the GPU cards in Sweden, and the large number of orders that we've put in for miners that going to be coming in over the next 18 months. We've got orders of those ASIC miners coming in each and every month. It's a very scheduled way that we've got it coming in. So we don't have a big truck load or a container load sticking all at once. We've spread it out so that we can get our operations up and running and make it nice and smooth transition. The net income, $18.6 million this quarter versus the $1.8 million year-over-year.The Ethereum mining margins as we've talked about our adjusted EBITDA at $29.6 million versus $29.1 million in the prior quarter. Net income is doing incredible, 18.6% versus 14.3%. Just note here that it's not as big of a gap there. It is large, over $4 million, just the scale that we're using there. The gross profit margin, $31 million versus $27.7 million.I always like to highlight that the gross mining margins and the adjusted EBITDA are non-IFRS figures, which we try to remember to point out each and every quarter when we announce our results, just to remind our shareholders and investors. Next slide, please. And this is just looking at our continued gross mining margin. income per share, it's $0.05 for the 3 months just ended of June 30, 2021, and this is compared to the prior year of $2.6 million gross mining margin and we had an income per share of pretty much 0 for the comparative year-over-year at June 30, 2020. And I've flown by the financials pretty quickly. I know that we had a call just about 10 days ago. But now I'd like to turn it back over to Frank. But before I do that, I just want to thank all of our investors for all of your patients your ongoing support, and I look forward to seeing you guys and speaking to you when we do release our Q2 financial 2020 financial results in November. Frank?

[Frank Edward Holmes, Interim CEO & Executive Chairman]

Thank you, Darcy, and thank you, everyone. Please, if you have questions, you can send them in to HIVE, and we'll answer them all. Thank you, everyone, and this is a wrap.