Earnings Call Transcript - HIVE Q1 2022

Operator, Operator

Slide number two is up on your screen for the full disclosures. Moving on to slide number three, 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 think it's a wonderful reminder to investors about just how much these various asset classes can move up or down over a one-day and a ten-day time frame. 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, S&P 500 or even gold stocks. And 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 number four, 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. If we move to slide five, I would now like to hand the presentation over to Mr. Frank Holmes. Frank?

Frank Holmes, 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... 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 a record year-end in March numbers and now we have the end of June. HIVE achieved record revenue for the year ended March thirty-first of sixty-six million in earnings of forty-three million, and then we turn around for the quarter. We turn around and show you that we have record quarter from 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 are bigger than Riot, they are bigger than Marathon. Marathon’s numbers came out today, but this is for the end of June. They are bigger than Argo, and Argo’s numbers are reported every six 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, etcetera, what our hashing power could be and what it would look like if it was only Bitcoin, but Ethereum has allowed us to weather down storms and also for the past year, be the most profitable company of all the crypto mining companies as of now June of twenty twenty-one. Next, please. So, the proposition for investors is, who's the least expensive? When you look at Marathon, they are trading here before their other numbers at the end of June at seventy times revenue, market cap to revenue is forty-seven times, Riot is thirty-eight, Argo is thirty-five, Bitfarm is twenty-five, and HIVE is fifteen. We know that as machines come on stream for particular Marathon and Riot, there will be compression, but there's a big disconnect 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 twenty-six million, receivable paid eight point nine, digital currencies eighty-two million. So the total current assets are one hundred and twenty-six million; the liabilities are nine point six. Our Ethereum and Bitcoin, as you can see, the Bitcoin has been increasing rapidly overall. Next please. So I am a fund manager, and quant discipline always like to work based on 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, of the universe of all stocks and it does a relative valuation where our company's intrinsic value is. They believe that HIVE is worth a default valuation improved to five to ten U.S. dollars per share, trailing four quarters moved up to thirty-five percent zero point six. 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 others sort of quasi, quant discipline fundamentalists that are using HIVE because this methodology does not care what industry you are in; it just cares if you're generating high cash flow returns on invested capital. Next please. HIVE’s total assets from the balance sheet, Darcy can go into more details on this for everyone, but you can see that from the end of twenty twenty it was approximately six point four million, and now our Bitcoin Ethereum is eighty-two million at the end of June. The idea of launching the ATM in the first quarter of this year has allowed us to be able to huddle most of our production, at the same time take that cash flow from our existing business and upgrade our CPUs on swaps from four-gigabyte cards to eight-gigabyte cards. Memory cards were very critical for the AMD five-eighty cards, but other things that we've made announcements on, major Nvidia purchases, which is for the future. So, we're continuously upgrading, and we're in a great financial position to continue that. Next please. During this period – with Johanna has joined us in the first half of the year, as a Managing Director of Sweden who has now taken on the role of President of the Swedish operations, which we're happy with. We've made press releases regarding her credentials and her experiences both explicit and asset knowledge. Next please. So you can visit our website. And the new addition to the team we'll be speaking today is Aydin Kilic, he’s 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 a thirty-megawatt facility in Quebec. And then we also visited New Brunswick to see the campus that we're building out, and it is really quite impressive, and I’m thrilled. 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're very, very valuable. So, we’re thrilled with the addition of Aydin coming along and helping execute and build out going to, you can talk more from fifty to seventy megawatts and where the future potential is from this. Next please. So, we get this question quite often, and I asked regarding the difficulty rate, and for those shareholders to recognize that it's a fixed amount of Ethereum mined each day. The algorithms, just like in Bitcoin, every ten minutes there are six point two five coins mined, so nine hundred 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 of a fixed amount, there are more and more people competing, especially the gamers coming in and switching their machines. What we've noticed is that the 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 the Ethereum has gone up thirty-fold in the past couple of years, and in the past year, it's up a little more than twenty-four. And the reason for that is not just the technology; we've solved that problem with upgrading our memory cards, but the real issue is there's just more people turning on their Ethereum chips, maturing on their GPU chips that are gaming. What we're seeing is that, Ethereum is actually much more decentralized than Bitcoin mining. I thought that was really an interesting dilemma that took place when China shut down everything in China. 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 to recognize that the new GPU cards that are out there and many of these cases are switching over short-term, mining and then going back and spending the money. Next, please. An 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 three hundred eighty-four million shares outstanding. We've had the least amount of dilution against all the mining companies. So, we had 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 from particular monthly outlets out of Canada. And once again, they’re very earnings-driven, revenue-driven on a per-share basis. Last week, there was an article by Andrew Button recommending ETFs in HIVE Blockchain. Next, please. Now, I’m going to turn over to our new President and Chief Operating Officer, Aydin Kilic.

Aydin Kilic, President and Chief Operating Officer

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. So let's get to it. Next slide, please. So, Frank was talking about increasing difficulty in Ethereum mining, and one thing to keep in mind is that we also have a great demand in the price. So, 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 twenty twenty and twenty twenty-one, you could see that HIVE was mining twenty-five, almost thirty thousand Ethereum per quarter, but of course, Ethereum prices were hovering around two, three, four hundred dollars in fiscal twenty twenty-one. So, in calendar year twenty twenty-one for HIVE, we saw that increase substantially. We saw Ethereum hit four thousand dollars several times. So you know, a massive increase, and the quantity produced about nine thousand seven hundred Ethereum period and June 30th. We had a solid Ethereum price between three thousand and four thousand U.S. So that's almost a tenfold increase in price with production roughly one-third. So still on a revenue basis, and if you have a tenfold increase in price, but difficulty is going up three times, 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. This is again, HIVE being the first industrial-scale mining company as well as the first crypto miner, you know, 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 little bit here. And let's go to the next slide, please. So, if you convert Ethereum mining to Bitcoin hashing, how do you do that, right, as an investor? And so, Ethereum mining, obviously, you know, we're running GPUs. You look at things like what's your dollar per gigahash in Bitcoin mining, you know you're operating at the Petahash level, and you're wondering how many Petahash per megawatt is my data center. You know, at the end of the day, we're in the hash rate business. We produce hash rate as a commodity and then exchange that for our coins. So the common denominator, of course, is what we report in our financials. So, if you take any given day, and if you had a megawatt of Bitcoin mining, for example, or a megawatt of Ethereum mining, you will know how much Bitcoin or Ethereum that you've produced, and you'll know what the market price is on that day. Then you will know what your revenue will do on that day. And that's actually, you know, in North American accounting standards. That's how you evaluate, right? So, you’ve got IFRS, you've got GAAP, generally accepted accounting principles. 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 and U.S. dollars. So, if you use this postulate and evaluate, you find some really interesting numbers. I actually focused on September twenty twenty-one. We're doing obviously the Q1, which was peered in June thirty, but we get so many questions. People are wondering about Ethereum mining post London Fork and where things are today. So just a little outlook here. In September twenty twenty-one, HIVE mined two hundred and twenty-one Bitcoin. So that's about ten point two million USD of revenue. In addition to that, HIVE mined over two thousand five hundred Ethereum, right, which is an additional eight point six million dollars in revenue. So, as you can see right off the bat between ten point two million and eight point six million USD, Ethereum mining actually makes a very substantive portion of this revenue basis. And so, if you take that and also convert into – on a daily basis, what is the amount of Bitcoin equivalent you would have mined per day based on the Bitcoin price that day. You total that up you actually get an equivalent of four hundred and seven Bitcoin equivalent mined for the month of September, which on a daily basis is about thirteen point six Bitcoin per day. Other companies have recently come out and hit a milestone of ten Bitcoin per day being mined. Well, over thirteen Bitcoins mined per day that’s over thirty percent what some of our peers are producing, and so it shows how strong of a value proposition this is for shareholders. Another thing I’m going to point out. This is September, so this is recent; this is post London Fork, which by the way, we still see very strong and healthy economics in the two months following London compared to the three months preceding London. We've seen very consistent, very strong economics. The only change has been the high transaction fees in Ethereum that we saw in May and April of twenty twenty-one. Those are no longer; those have been designed out of this system because they want to make the Ethereum Blockchain accessible, whether it's for DeFi, for people maintaining it, and of course, for people using Ethereum as a form of digital currency, right? More adoption and consistent use of Ethereum has provided the bedrock for excellent Ethereum mining economics.

Frank Holmes, Executive Chairman

I 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 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 actions, it’s been an important part of our HODL as Ethereum continues to go through like having for Bitcoin; Ethereum hasn't gone through a having, but Ethereum has gone through all these upgrades and people escaping their Ethereum. They're taking supply out of the system at a very rapid rate, which then affects the supply-demand equation that has led to a high 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. Aydin, you've done a wonderful job creating this hypothetical for everyone. Thanks, Aydin. Keep going.

Aydin Kilic, President and Chief Operating Officer

Yeah, no, thanks for the color, Frank. And again, this is an outlook. This is an outlook slide. Darcy will of course cover the actual financials for the period. Just to build on what Frank had mentioned, on an annualized basis again with this interpretation, it’s about two eighty-four million dollars maybe, just for the month, sorry, if you take the September revenue on a run-rate basis. Again, that’s a projection, but if you have a realized annualized run-rate revenue of two eighty-four million, that actually puts HIVE’s market cap to revenue ratio at a six-times multiple, which is incredibly attractive for investors, and on the previous slide looking at the earlier quarter, we were at a fifteen-times. If you look at the September numbers on this outlook slide, it’s incredible. That’s a great way for people to understand how you can compare. And really, if you think about at this point in time, on a per-megawatt basis, Ethereum mining actually yields more dollars per megawatt just because the economics are so favorable; it’s had great price action. We want to help the investing public understand how you can realize the value proposition of each next slide. Some operational milestones, five in August realized one Exahash of active Bitcoin mining capacity, which was great, and this is again a global company with operations in Quebec, New Brunswick, Sweden, and Iceland. We've got a little bit of Bitcoin mining everywhere, but primarily focused in Quebec and New Brunswick. Having the latest machines, you know, really high efficiency, MicroBT’s installed in our operations, and we bought two Exahash and it was great. You know, clearly Bitcoin production recently has been, as you can know, one can calculate on a Bitcoin mining calculator online, that’s about seven to eight Bitcoin per day produced with one Exahash, and in fact, we’re beyond that now, constantly growing. We expect to have another Exahash plugged in over the next three months. We’ve got the infrastructure being developed in New Brunswick. As Frank mentioned, originally it was a fifty megawatt campus. We’ve expanded it to become a seventy-megawatt campus; thirty megawatts are operating today. Of that seventy, the remaining forty megawatts will be coming online later this year and early next year. So, it's a very exciting time and our long-term fiscal twenty twenty-two is to have a Bitcoin mining capacity of 3 Exahash and then in addition to that we have the Ethereum mining capacity, which we saw in the previous slide, how you could convert that into U.S. dollar basis to Bitcoin mining capacity. Again, we’ve kept a very strong pipeline of A6; we announced in just forty-five days alone, fifteen-hundred next-generation Bitcoin miners, you know S19J’s, M30S’s, M30S+’s, really great hardware. Those purchases alone will add over half an Exahash of Bitcoin mining capacity. So, here we go.

Frank Holmes, Executive Chairman

Yes. 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 during pre-having, HIVE mined one hundred and fifty-three Bitcoin during that period, and difficulty was actually much, much higher back than the last; both before and after the last having compared to where it is today. You can see HIVE had consistently performed even producing eighty-eight. It was, you know, Bitcoin mining difficulty was incredibly high during this period, but nonetheless, HIVE just continued to steadily grow. Two hundred twenty-six Bitcoin in the fiscal year June thirty period end, which is our Q1. Again, this is the result of having constant and steady growth, inch by inch, you know, new hardware coming online. It really just plays into our capital allocation understanding with the hardware space where you're going to plug in your most efficient A6 miners on your watt per kilohash basis if you have older S9s, which again are so profitable, but once you've deployed capital and you have much faster, more efficient chips plugging those in. This is how you get the steady growth. It’s a very exciting time. And so, again, not a lot of the publicly traded companies have been mining Bitcoin for that long. So with that operational overview, I will turn it over to Darcy Daubaras for the accounting and financial summary of the period. Thank you.

Darcy Daubaras, Chief Financial Officer

Great. Thank you very much Aydin, and good morning to all of our investors and shareholders. Next slide please. On this slide, slide twenty-six, it’s showing we generated revenue from digital currency mining in the first quarter of fiscal twenty twenty-two of thirty-seven point two million from our coin production; as we've gone over approximately nine thousand seven hundred Ethereum and two hundred twenty-six Bitcoin. The increase in the revenues versus the same quarter in fiscal twenty twenty-one 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, was offset by a decrease in the number of Ethereum mined driven by difficulty rate increase and the fewer number of cards we've got installed as part of our GPU card upgrade from the four to the eight-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 thirty-one million, compared to two point six million in the prior year comparative quarter. Our production of Bitcoin, as you talked, was increased month over month, and we are continuing to do this following our acquisition of our two data centers in Canada. To our point of the gross mining margin, which equates to our revenues minus our direct operating and maintenance costs increased in absolute dollars and stayed strong as a percentage of revenues at eighty-three percent. The gross mining margin is also partially dependent on various external network factors, and we've all talked about this including mining difficulty, the amount of the digital currency rewards the miners are receiving before and after the cuts, 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 can see our revenue from digital currency mining has increased to thirty-seven point two million dollars from thirty-three point four million in the fourth quarter of fiscal twenty twenty-one. Our gross mining margin has increased again to thirty-one million from twenty-seven point two million in the prior quarter. Next slide, please. So our adjusted EBITDA increased massively here in the first quarter of fiscal twenty twenty-two to twenty-nine point six million versus two point six million in the prior year comparative quarter. The Ethereum and Bitcoin mining margins that we have experienced through our efforts of reducing our costs have enabled us to continue to expand our business. This has to do with the two 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 are going to be coming in over the next eighteen months. We’ve got orders of those A6 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 truckload 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 a nice and smooth transition. Other net income eighteen point six million this quarter versus one point eight million dollars year over year. Ethereum mining margins, as we've talked, our adjusted EBITDA at twenty-nine point six million dollars versus twenty-nine point one million dollars in the prior quarter. Net income is doing incredibly well, eighteen point six versus fourteen point three. Just note here that it’s not a big gap there; it is large over four million just the scale that we're using there. The gross profit margin, thirty-one million dollars versus twenty-seven point seven 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 zero point zero five dollars for the three months just ended of June thirty, twenty twenty-one. This is compared to the prior year of two point six million dollars gross mining margin and we had an income per share of pretty much zero for the comparative year over year at June thirty, twenty twenty. And I've flown by the financials pretty quickly. I know that we had a call just about ten 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 patience, your ongoing support, and I look forward to seeing you guys and speaking to you when we do release our Q2 financial twenty twenty financial results in November. Frank?

Frank Holmes, 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.