HIVE Blockchain Technologies Ltd

XTSX:HIVE

Earnings Call Transcript 2022-Q3

[Holly Schoenfeldt]

Good morning, everyone. I would like to welcome you to today's webcast reviewing HIVE Blockchain Technologies Financial Results for the 3 months ended December 31, 2021.On Slide #2, disclosures. 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 of the date of this presentation. You can see the full Slide #2 on your screen for the full disclosures. On Slide #3, you will see our most popular visuals, the DNA of volatility.And I would like to hand the presentation over to Frank Holmes, Executive Chairman, at this point to explain more. Frank?

[Frank Edward Holmes, Interim CEO & Executive Chairman]

Thank you, Holly, and thank you, everyone, and all shareholders that are listening. Yes, this visual is an important one because volatility is a thing that always concerns a lot of people, especially if they're not traders. The traders love the volatility.But what's important here to recognize is this is nonevent for 70% of the time for the S&P to go up or down 1%; in over 10 days, plus or minus 2%. Gold is the same on a 1-day basis, but a little more volatile over 10 days. But then we start to go to technology stocks like Tesla, and we see all of a sudden it's 4x more volatile than the S&P 500. At one time, it used to be 6% daily volatility of Tesla until it became part of the S&P 500.But what you can see here is that Tesla and Bitcoin have very similar DNA volatility. And Ethereum is actually the most volatile when you compare it to the 1 day, it's 5%. And we see the 10-day is 17%, and MicroStrategy is plus or minus 6% on a daily basis and 10 days is 22%. But HIVE, it is even greater than all of them. It's 7x more volatile on a daily basis; in over 10-day period, it's 27%. So traders love that.What happens because of this for us, because we mine Ethereum and the volatility of Ethereum gets embedded. And we have seen this happen with gold stocks, and we have seen gold stocks move with their gold/silver ratio that they can have a greater volatility because silver is more volatile than gold. Silver stocks are more volatile than gold. So Ethereum is like silver. It's more volatile than Bitcoin. And it shows up in the overall stock price. So I think it's important for investors to respect the DNA of volatility.So today's presenters is myself. I want to thank everyone again; and Darcy Daubaras, our CFO; and Aydin Kilic, our President and COO. I want to give a macro overview before we get into the details and the granularity of our presentation and financials and operations by both Darcy and Aydin.So a big event that happened last year in '21 was in July, getting -- at the end of June, getting listed on NASDAQ. That was an important part, and we've seen a big increase in the daily volume picked up in the U.S. And this is also disclosure of some of our strategic investments, DeFi, NTE and COIN.Not all miners are created equal. And I think what's interesting at our conference Aydin and I attended in Austin last week, one of the other companies were speaking, and they're also mining Bitcoin, a green strategy. But what they said is that they're all moving together basically, and so there's no differentiation between them.So even HIVE, which has the strongest ESG strategy, gets lumped in with everyone else that can have a high coal source of energy. But over time, I think this will separate itself. But what's important is that crypto miners' profitability is based on energy prices, hardware prices, crypto prices, hashing difficulty and lease expenses. And Darcy and I moved into some of these more granularity on these and how they impact.But here's a simple number. We're taking a look at Bitcoin over the past year. The difficulty is called the network hashing jumped, a huge jump recently of more machines coming on. And basically, there's 900 coins a day that people go and compete to be able to mine. And we were up to about 1% of that mining 9 coins if you looked at exahash, et cetera.But this is going to become more difficult, and I look forward to -- for everyone learning about this difficulty part. That's why you have to have stronger, more powerful computers. But this is, no doubt, a headwind unless you're ramping up your production even with this taking place. And we've been able to do that so far this year.The 4 headline risks facing miners. It's the electricity. And where is the electricity coming from? Supply line logistics. We've commented on this many times over the past 18 months of shipments coming from China. China has had more severe lockdowns. So it's been even more of a challenge getting stuff over on a timely basis. And then the winter storms come along, and they impact sources of electricity, especially for green and clean hydroelectricity that we get of our Quebec and New Brunswick and geothermal of Iceland and Sweden, also hydro.So you can have -- this can have an impact. And even in Texas, when there was a big cold front that came in 10 days ago, a lot of the miners shut down for -- temporarily to allow the source of electricity to go and to warm up people's houses.And the other big headwind that takes place on a regular basis is regulatory and that debate between centralized versus decentralized. And I think these are just -- these 4 factors do impact the stock price as a group, as an entity.Now here is a young man, he is a co-creator of the -- 27-year-old billionaire. Vitalik Buterin is the founder basically of Ethereum. But a little bit of humor here is his ecosystem -- I don't think they really appreciate that because of the greater volatility than it attracts traders, which then actually facilitate liquidity. And then you have holders like HIVE has been.And then you have gamers. And gamers and computer designers that are using GPU chips, architects, et cetera, a lot of them turn on their machines, and they're -- like when I was a kid, I had a paper route for extra revenue and earnings. And these kids basically do gaming or crypto. They use their machines to mine at nighttime when they go to bed or they use their design computers to mine because they have GPU chips.So that means there's millions and millions of users and wallets all around the world that add to the Ethereum global ecosystem. And this lends itself that the risks are going to proof-of-stake from proof-of-work. And we have heard about it all along. It still hasn't happened. And humor we like to show, this is a picture of finally shipping, and not too long ago, he was mentioning that it's been pushed out, again, this proof-of-stake versus proof-of-work debate.And proof-of-stake has tremendous risk to it. And I just thought this was pretty clever that it's not going to happen, has it been our view. Because I think not only proof-of-stake has its own inherent risk is that you would shrink your ecosystem, that Ethereum would really hurt its global coin usage.Now this is a nice simple way of comparing proof-of-stake versus proof-of-work. Proof-of-stake is it allows for centralization, for validating. There's no real use of electricity. And there is a debate out there that under securities law, the proof-of-stake is really security, whereas proof-of-work is that you're using electricity to mine a digital asset. And Bitcoin and Ethereum are both at this stage, a proof-of-work, and that means they are a real true digital asset.A, you have to spend money to buy the equipment. And b, you have to use energy to create this digital asset and this validation process. So I think these are very simple visuals for people to relate to as shareholders. And I am of the opinion that proof-of-work for Ethereum is going to stay.So we're all over the world. Mining -- HIVE's mining facilities are in stable jurisdictions with key elements for optimized mining. They still can't get away from the sort of regulatory debate that takes place and Bitcoin is bad and sort of a gross generalization. But what we do see is that these are very stable compared to other jurisdictions around the world.And one of the last countries you would ever -- we wouldn't even consider it is going to Kazakhstan or to Russia, and they have hydroelectricity. We just wouldn't consider it because these are not stable jurisdictions. So we're focused on low energy costs, low temperatures, fast Internet.During COVID, the crisis, just as it really started to take off in March of 2020, we closed a transaction for 30 megawatts in Quebec. And then last year, we closed on a 50 megawatts capacity Bitcoin mining in New Brunswick. And we're expanding our footprint in Sweden, which went from 17. It's going to be adding another 10. You can see that, in Iceland, we have 5 megawatts.New Brunswick, on a regular basis, we post these visuals showing the activity every -- on a weekly basis that we're building even with the snow now, expanding our capacity, our ability to then finish these buildings, this construction, bring in new equipment and mining more coins, particularly Bitcoin.So in Boden, we're expanding right now by 10 megawatts, which is basically a 50% expansion. In New Brunswick, completed 20 megawatts here. And then down the road here in this year, it will be another 20 megawatts. So we are -- you're going to get much more detail on this expansion from Aydin.But these are the positive parts of where we're going, but what drives the stock prices? Well, the daily coin price is the biggest factor. It is the biggest factor that drives the DNA of volatility of these stocks. And we see that as a group of must be quant funds that trade all these crypto stocks up and down by the minute on the direction of Bitcoin and Ethereum, in particular the direction of Bitcoin.And now what creates value for underlying company is this current hashing power and current revenue and earning capacity and then what you've announced for future potential hashing power, that is when will you go from 1 exahash to 2 exahash to 5 exahash or 10 exahash. And if you have these incredible big numbers that some companies have put out there, then you run the difficulty of not having electricity and having your machines sit on the ground. Or you have the difficulty of equipment not showing up in time.And that's something that I believe that most crypto mining companies have had that challenge of seeing that it's perfectly synchronized that electricity and machines and the infrastructure all show up on a timely basis. And I think that we're going to have to all be wrestling this going forward for the next 12 months. But so far, we've been pretty close on aligning our electrical build-out along with equipment coming on.So this shows up in the revenue momentum. If you go and look at a year ago in the fourth quarter, the revenue, and it grew to $33 million, then $37 million, then $68 million. And that big increase that you've seen here in the Q3 is also because we increased our Bitcoin production. We increased our hashing power with the expansion in New Brunswick, which I think is important just to see its overall momentum.And year-over-year, the Bitcoin mining and HODL-ing, as you can see, we've substantially increased this production, but also, we've been HODL-ing coins, and that's really very exciting. It does add to the volatility on your balance sheet to income statement mark-to-market rules, but it does create a huge upside of these green and clean Bitcoins that we have on our balance sheet.Here's something that I'm very proud of that last year, in February, we launched $100 million ATM. We spent most of it, raised the money, and we upgraded all of our facilities. We expanded our footprint in New Brunswick. We bought more machines. We upgraded our memory and our GPU chips and the AMD chips. And then we bought a bunch of -- I mean a substantial amount of NVIDIA chips.But even with all of that, we still -- by mining and HODL-ing, we went from an asset base of liquidity at December 31 of last year of $15 million to this year or to '22, the end of -- going at the end of '21. I got all of things confused because of fiscal and calendar years, so -- but I apologize for this. But December 21, and Darcy can give you more of the details. But the asset grew to $161 million. This is 11x by HODL-ing, both Bitcoin and Ethereum.And interestingly enough, the Ethereum far -- or more than appreciated on a relative basis the Bitcoin production. And we have sold Ethereum and mined it back again. And we will continue to be much more active in using Ethereum as a way to expand our footprint.HIVE 2022 hash rate growth outlook is just so exciting. Aydin is going to give more detail along with Darcy on this, but 3 exahash of Bitcoin mining, 6 terahash of Ether mining, 4.5 exahash of BTC mining equivalent. And when you put that equivalent, it really goes to show how big our revenue is compared to our peers and where the relative ranking and where we're extremely undervalued. And I think a big part of that is a misunderstanding of the benefits of Ethereum mining for us to be so profitable and have very high efficiency.Now I want to turn it over to an operational update by Aydin Kilic.

[Aydin Kilic, President & COO]

Thank you, Frank, for that introduction. Indeed, it has been a very productive and active fiscal quarter. So I'm going to be providing an update on what the calendar year production looked like for HIVE amongst our peers as well.Recently, the January updates went out for the industry and the market. And so that's a more current snapshot of where things are. And of course, Darcy will follow up with the fiscal period results. So again, thanks for that excellent introduction, Frank. And yes, let's jump into the operational update.So as you can see here, we've got our infrastructure layout. So as of today, HIVE is operating 119 megawatts globally of green and clean energy. And so that's comprised of 50 megawatts at our flagship facility in New Brunswick. We actually had CBC News come out and do a video documentary in December, which was a great way to commemorate the completion of our third building, bringing the campus to 50 megawatts.Quebec, our long-standing facility in Lachute, holding steady at 30 megawatts. In Sweden, we've actually recently completed a 10-megawatt expansion. Originally, our building facility was 20 megawatts, so that brought it to 30. And we also have another facility in Northern Sweden that's additional 4. So that's -- we've got 34 megawatts in Sweden plus 5 in Iceland. So that's just today and always keeping busy, always expanding.So in spring -- and again, these are infrastructure projects. You could see here these -- our most recent building, miners were being installed. You could see the thermal isolation walls with the staff doing the cutouts for the miners. That's how part of our efficiency comes from whether it's our networking team, our coders, our staff at the mine remedying and repairing machines. We have people all over the world in all time zones. So 24/7, the HIVE team is making sure our hash rate is tipped up. And so anyway, it's just a beautiful photo there of the internals of one of our facilities.So New Brunswick is going to be expanded to 75 megawatts this spring. A building for us coming online, which is an extra 20 megawatts, and we've done an optimization yielding an extra 5 megawatts within the existing structures. As well further optimization at our Sweden facility, which will bring our total to 155 megawatts of operating capacity of green and clean energy in spring of this year in a couple of months.Next slide. So in terms of -- that's the infrastructure footprint. In terms of our hash rate, today, HIVE is at 1.9 exahash of Bitcoin mining capacity, 4.5 terahash of Ethereum, which puts us at an equivalency of 2.9x exahash of Bitcoin mining. In just a couple of weeks, as evidenced by the ongoing expansions we have, we'll be at 2.2x exahash of pure Bitcoin mining capacity.We've got a large delivery of NVIDIA GPUs coming. That will put us at 5.4 terahash of Ethereum hash rate. So just within a few weeks, we'll be at an equivalency of 3.4 exahash. So it's over a 10% increase in the weeks to come. So that's the near-term structure.Next slide. Okay. So January production, January was an interesting month. As Frank mentioned, we've seen all-time highs in the Bitcoin faculty. And so what we've got here, I just had our -- we hit our 2.9 exahash equivalent in January, and we produced an equivalent of 425 Bitcoin in the month of January. So that puts us near the top amongst our peers without much larger market caps and much larger footprints.What you'll notice is BTC per exahash, 147 Bitcoin per exahash is what HIVE produced. We're at the top of the class. And so again, this talks about having pound-for-pound the best efficiency. And so when you look at -- if you can take a step back from the capital markets, we also have the lowest multiple right now amongst all the bulge-bracket crypto miners. So at $383,000 per petahash market cap, HIVE is a great value proposition for investors right now.And so on to the 2021 production, taking a look at the entire year, what was accomplished. So I'll actually focus on the right-hand side of this table, HIVE was the only miner that was public. Hut 8 didn't release their annual figures. But from everybody that did, the big 4, we were the only ones that cracked 4,000. So we cracked over 4,000 Bitcoin produced in 2021. And so that was a huge accomplishment. Again, hyping the first crypto miner period, but our hash rate didn't just come online in July or October. HIVE has had a big footprint and continues to grow.The other part of this story is our HODL position. So we announced, as part of our January update, which we do monthly operational updates now at the beginning of each month. HIVE had a HODL of 2,043 Bitcoin. In addition to that, HIVE had 2,000 -- sorry, 25,400 Ethereum, which on an equivalency basis is about 3,800 Bitcoin. The HIVE's HODL position for the investors out there, just looking to an apples-to-apples, our BTC and Ethereum equivalent is 3,800 HODL position.So again, when you look at the annual production, highest amongst our peers for all of calendar 2021. We had the best Bitcoin per exahash efficiency production through the month of January and the lowest revenue multiple. We see that HIVE is at a great juncture for investors looking for exposure to the best pound-for-pound crypto miner, in my opinion.So next slide. So now let's take a step back and just understand where the industry is at large. This is actually the 3-year Bitcoin mining chart. So this goes back to early 2019. So what we've seen for Bitcoin is that there's been 3 bull rallies in the last year. So summer 2019. Of course 2021, 2 bull rallies, we had an all-time high in February in terms of Bitcoin price and then again in November. And so these are -- this chart that you're looking at is actually the cents per terahash per day that you get.So for example, right now, we're about $0.20 per terahash per day, which is actually better than where we were 3 years ago. 3 years ago, it was about $0.15 per terahash per day. So even though difficulty is at an all-time high, Bitcoin is showing support in the low $40,000 range. The health of the mining economics is still substantive, although we've cooled off a little bit.So again, it's having good efficiency, low operating costs and being very effective with deploying your capital to realize a good return on investments. But with HIVE, we also have a big Ethereum mining footprint. And so what's really interesting is when you look at Ethereum mining over the last period, you'll notice right now -- again, this is cents per megahash per day, right?So right now, Ethereum mining economics are about $0.04 to $0.06 per megahash per day. Well, you know what, 3 years ago, it was about $0.015 per -- day. So the point here is that Ethereum mining economics are actually 3 to 4x more profitable today than they were 3 years ago. And so how do you get exposure if you're like, well, that looks great. I mean I wish I was mining Ethereum.Yes. HIVE mines Ethereum we've got the biggest Ethereum mining footprint of all the publicly traded crypto mining companies. So again, it comes down to having that good value proposition for investors because as all these Layer 2 applications grow, we've just seen more and more of an underpinning for the need of a proof-of-stake Layer 1 Ethereum token to support all these -- sorry, proof-of-work Ethereum Layer 1 to support all the Layer 2s, which are proof-of-stake.So anyway, it's -- and as we pointed out before many times, the London hardfork was actually a good thing that happened in August, and mining economics for Ethereum are very healthy. Thereafter, the recent cooling is more [ a discipline ] of crypto prices overall. And so that's the snapshot of Ethereum.And I'll turn it off -- turn it over to Mr. Darcy Daubaras, our CFO of HIVE Blockchain.

[Darcy Daubaras, Chief Financial Officer]

Great. Thank you very much, Aydin. And again, as Frank had mentioned, thank you very much to all the investors and shareholders that are interested in listening to us today. We're going to run through the financial statements for the third quarter ended December 31, 2021.As we've had for many quarters, we have a very strong and healthy balance sheet. We have $63.7 million cash on hand, over $26 million in investments. And what we're really proud of is the total current assets we've got of $268 million.Largest part of that, with the benefit we've had, with the increased production that we've got through our Bitcoin mining operations from Quebec and New Brunswick, being able to build up that HODL position and have digital currencies of over $168 million at the end of December 31, 2021, puts us in a great position moving forward. And we can also use that to fund our operations if we need to through the sale of coins. But as I've mentioned, we're HODL-ing quite a bit.Just taking a look at our gross mining margin year-over-year, comparing Q3 of 2021 fiscal to the Q3 fiscal 2020 that we just completed. As you can see, we've got over -- close to a sixfold increase, moving from $10.1 million -- or $10.6 million up to $61.6 million. Just the increase in the production we've been able to get has just been astronomical, and we're so proud of being able to what we've got done. As Frank had mentioned, being able to close those transactions during the COVID period has just strengthened HIVE moving forward.Taking a look at our actively as with these new additions, buying new miners. We continuously increased our hash rate in the last 3 months since September 30. We've increased our Bitcoin mining hash rate by 35%. And the Ethereum, which has been our bread and butter and what HIVE started out as in 2017, we've increased that now over the last 3 months by 14%. As I had mentioned before, that well capitalization that we've got with a portfolio of crypto assets just puts us in a great stance moving forward through to calendar 2022.One of the challenges, as Frank and Aydin had mentioned, is just the difficulty rate. We've continuously seen the difficulty rate rising, but as a result, we do have a drop in the Ethereum mine. The great thing that we've been able to achieve, though, is being a very low-cost producer of Ethereum. We've been able to do it very low, as you had seen earlier slides with that gross margin. But the revenue we'd be able to get from that mining of the Ethereum has continued to increase. So even though we're mining less coins with the difficulty rate going up, as everyone in this market has seen, the price of Ethereum is going up, so we're getting more revenue.And you can see this trend over the last 5 quarters in terms of the number of Ethereum that we have been able to mine. But it's all mined productively, so that's the great thing. And this just demonstrates what I was talking about in terms of the mining revenue continuing to increase due to the higher prices, even though the difficulty that we've been experiencing in both the Ethereum and Bitcoin has been affecting the market moving from $13.7 million a year ago to $68.2 million and our gross mining margin from $10.6 million to $61.4 million.Taking a look quarter-over-quarter from the quarter ended September compared to the one that we're talking about right now in December 31, 2021, moved from $52.6 million up to $68.2 million. So continuing to increase quarter-over-quarter, has been shown in the earlier slides by Frank. And also, our gross mining margin is continuing to increase, moving from $45 million at the quarter ended September 30, 2021, to $61.6 million in the most recently finished quarter.And here, we've got a look at what the adjusted EBITDA has done year-over-year, $13.7 million up to $75.3 million; and our net income increasing, again, very largely from $17.2 million up to 66.2%. And I also want to mention to our listeners here that adjusted EBITDA is a non-GAAP measure. And I just always like to put that in there so that people don't get confused.Once again, we can visually see how the Ethereum margins are driving the growth within the company, taking a look at the change that's happened quarter-over-quarter. We talked about $52.3 million in our adjusted EBITDA moving up to $75.3 million in the most recently finished quarter. Net income increasing again by about $7 million and our gross profit margin moving from $45 million to $61.6 million in the most recently completed quarter ended December 31.Thank you very much, and I'll just...

[Frank Edward Holmes, Interim CEO & Executive Chairman]

Thank you Darcy, and thank you, Aydin. And we just want to show you here that we have lots of rich content on information that helps people make an informed decision.And one of the big part, which we noticed in the past quarter, there was a fair amount of [ fuzz ] there, as they call, the spreading up fear, uncertainty and doubt regarding crypto mining sources of energy. The big shift that took place last year, tectonic shifts. And when you think of it, is the move to North America, in particular the state of Texas, has been a recipient as China closed down everything in mining.And what we've also seen in other jurisdictions is sort of this information that's out there regarding how much energy has been consumed. So what we did is we put it -- took Michael Saylor's presentation, which is about 30 minutes, condense it to 3 minutes with visuals and slides and put it in French, in Swedish, as you can see, in Spanish and in English for investors around the world that the consumption of energy by the crypto industry, a, is substantially less than originally reported; and b, a much greater percentage now is from much cleaner sources of energy.And still the bad locations for is Kazakhstan and, I think, some other sort of rogue nations that are out there. It's -- I guess I would think it's their only source of cash flow. But as a whole, the crypto mining industry has excellent CEOs today than what took place when HIVE first went public. And it's ushered in a great respect for a less carbon footprint, and I think that's only going to continue to grow.So we're happy to be part of the Bitcoin Mining Council and being part of education. So I highly recommend that -- we have investors from all over the world that you take in these visuals and share them. And do follow us. And if you have questions, please e-mail them in to Darcy, Aydin and myself, and we'll sure answer those as we can.I want to thank everyone, especially all the loyal shareholders that have lived with us for this volatility, those have believed in our vision, that [ can tune ] to mine Ethereum tearing because they're so profitable and then our vision to expand our footprint. And hopefully, we can have, in a very short order, more exciting news in our profile for growth. We're always working 24/7 so -- for the shareholders.Thank you, ladies and gentlemen. And thank you very much, Darcy and Aydin, for a spectacular year.