Earnings Call Transcript - HIVE Q1 2023

Operator, Operator

Hello everyone and welcome to today's webcast reviewing HIVE Blockchain Technologies Financial Results for the quarter ended June 30, 2022. On Slide #2, I would like to briefly note disclosures. Except for statements of historical fact, this presentation contains forward-looking information within the meaning of the applicable Canadian and U.S. securities regulations. These forward-looking statements are based on expectations, estimates and assumptions as of the date of this presentation. Moving on to Slide #3. And on the next slide that before we jump into the full presentation, this is a visual that we like to include in all of our presentations called the DNA of volatility which just basically makes investors aware of the volatility of various asset classes. And as you can see here, HIVE and the cryptocurrency markets in general are historically more volatile than, say, the S&P 500 or the gold market. I would like to introduce today's presenters. Frank Holmes, Executive Chairman; Darcy Daubaras, Chief Financial Officer; and Aydin Kilic, President and COO. Moving on to Slide #4. I would like to hand the presentation over to CFO, Darcy Daubaras for a snapshot of growth. Darcy?

Darcy Daubaras, CFO

Thank you, Holly, and welcome to all our shareholders and investors. This has been a challenging quarter for the entire industry, and we want to update you on our performance, which we believe has been relatively strong compared to others in the sector. We will review our earnings and financial statements, focusing on our operational earnings, representing our cash flow operations, and our investment earnings, which include both realized and unrealized cash flows that can significantly impact a company’s earnings depending on quarterly performance. As we move forward, it’s important to note two factors that can heavily influence our earnings: non-cash charges and mark-to-market adjustments. The mark-to-market accounting practice reflects the value of assets based on current market conditions, which, as we've seen, have not been favorable in this recent quarter. This method assesses what a company could fetch for an asset at a given time, relying on current market prices for cryptocurrencies or other assets, such as miners. Non-cash charges are related to write-downs or accounting expenses that do not involve cash transactions, including items like depreciation, amortization, stock-based compensation, and asset impairments. These charges can reduce our earnings figures without impacting cash flows. Typically, we exclude these from our earnings analysis to allow for better comparisons between companies. As of June 30, 2022, our cash position was $4 million, complemented by $71.4 million in digital currencies, primarily Bitcoin and Ethereum. Additionally, we hold $7.7 million in amounts receivable and prepaids. Despite a drop in the market value of our strategic investments due to overarching market instability, we still maintain a solid position at $7.9 million, ensuring we have a strong net cash position and adequate working capital to support our operations and growth. Moving on, our gross mining margin, which is our revenue minus direct operating and maintenance costs, decreased to $27 million this past quarter, down from $32.8 million in the same period last year. The gross mining margin is influenced by various external factors, including mining difficulty, digital currency rewards for miners, and market prices during the mining process. In this most recent quarter ending June 30, 2022, we reported a loss of $1.16 per share, contrasted with a net income of $0.30 per share from the previous year. Looking at HIVE's performance metrics, we note a 13% increase in our active Bitcoin hashrate and a 3% increase in our Ethereum hashrate from March 2022, reflecting our ongoing growth as we optimize our facilities in Europe and Canada. Examining Ethereum mining year-over-year, we mined 9,701 Ethereum in Q1 of last year, which has decreased to 7,675 in the latest quarter due to continued escalation in mining difficulty within the Ethereum ecosystem. Finally, analyzing the last four quarters reveals some fluctuations but a general downward trend in Ethereum mining, although we've observed a slight uptick in the latest quarter, highlighting the impact of difficulty rates over the year. Next slide, please. In our year-over-year revenue comparison, we reported revenue from digital currency mining of $44.2 million in the first quarter of fiscal 2023, up from $39.0 million in the same quarter last year. This growth was primarily driven by an increase in Bitcoin production, rising from 226 to 821, facilitated by our acquisition of two Bitcoin mining data centers in Canada. Additionally, revenue from Ethereum mining in the recent quarter also contributed, although the number of coins mined saw a slight decline. Our gross mining margin, which is our revenue minus direct operating and maintenance costs, fell to $27 million in the latest quarter compared to $32.8 million in the same period last year. Next slide, please. When comparing our current fiscal Q1 to the previous Q4 ending March 31, we generated $44.2 million in revenue from digital currency mining, down from $49.8 million in the prior quarter. This revenue decrease was significantly influenced by the very low prices of Bitcoin and Ethereum during this quarter, as we, like others in the industry, face this challenging bear market. Our gross mining margin rose in absolute terms to $27 million, compared to $22.9 million in the prior year's quarter. Turning to Slide 14. Our adjusted EBITDA fell to $11.2 million in the first quarter of fiscal 2023, down from $25.8 million in the same quarter last year. As the CFO, I want to emphasize that the gross mining margin and adjusted EBITDA discussed are non-IFRS figures. In the first quarter of fiscal 2023, we recorded a loss of $95.3 million, compared to a net income of $23.5 million in the previous year. This decline was primarily caused by non-cash mark-to-market charges, including a significant revaluation of digital currencies totaling $72.2 million, negatively impacting our net income. Additionally, we incurred an impairment of $11 million on minor equipment and deposits, primarily due to delays in equipment shipments from China and the mark-to-market assessment of what those miners would fetch in the current market. This decision was based on recent information that emerged since we reported our year-end figures. Next slide, please. Looking at the financial metrics, our adjusted EBITDA was $11.2 million this quarter compared to $11.8 million in the previous quarter. Again, I want to highlight that the gross mining margin and adjusted EBITDA are non-IFRS figures. In this recent quarter, we experienced a loss of $95.3 million compared to a $34 million loss in the last quarter. However, our gross mining margin increased to $27 million from $22.9 million in the prior quarter. Now I will turn it over to our President and Chief Operating Officer, Aydin Kilic, for an operational update.

Aydin Kilic, President and COO

Thank you, Darcy, for the introduction, and it has been quite a quarter. I think that HIVE has done an exceptional job navigating what some may call a crypto storm. And so I'm going to jump right into the numbers. So looking at our performance through an operational lens, here's a recap of our monthly production for Q1 2023, our fiscal period. And so you could actually see here, we've got our production amongst all of our industry peers for April, May and June. And so what we've done is we report this on a monthly basis, and it is all based on public disclosure of monthly production reports from every crypto miner, you could see the total hashrate, the total Bitcoin produced and then Bitcoin for Exahash. And you can see every month this quarter, HIVE has emerged as the most efficient in terms of Bitcoin per Exahash crypto miner. And getting into that 130 range when none of our peers were doing that, and this is because we have the best uptime. This is because we have the best uptime in the sector. And I've mentioned this before, it's really important to emphasize, as this industry scales to industrial and civic grades of infrastructure. People have to monitor their own substations, maybe they're behind the grid. There's a big part of this is energy management, and there's a lot of feet that's produced and you've got thousands and thousands of miners tens of thousands even. And so it's very different managing a 2 or a 10-megawatt operation versus a globally diversified 130-megawatt operation like a company like HIVE. So when we're talking about getting $27 million of gross mining margin or $44 million, either all U.S. figures, of course, of revenue given the hashrate that we have, it's because of our incredible uptime, which is really the unsung heroes of HIVE, all of our technical staff at our data centers globally and of course, the executives that are so close to them on a daily basis. Next slide, please. Now I'm going to provide you with a more current update for July. In this month, we produced 465 Bitcoin, which consists of about 280 Bitcoin and nearly 3,000 Ethereum. This equates to an average of 15 Bitcoin produced per day in July. Looking back at the last quarter, we achieved an equivalent of 1,338 Bitcoin over 91 days, averaging 14.7 Bitcoin per day during Q1, and we've maintained that strong momentum, now averaging 15 Bitcoin daily. This success is due to our excellent uptime. In July, we reached a peak Exahash equivalent of 3.77, which included almost 2.3 Exahash for Bitcoin and about 6.5 terahash for Ethereum mining. During summer, with extreme heat affecting operations regardless of location, including Texas, Sweden, Canada, and specifically HIVE in Canada, Iceland, and Sweden, we typically can’t run as many miners during peak summer temperatures. For the entire month, our average hashrate was 3.36 Exahash, though we did achieve some peaks. To optimize our profits, especially with variable pricing in New Brunswick, we strategically managed our operations to mine as profitably as possible. This effective strategy is reflected in our impressive 61% gross mining margin during a quarter when Bitcoin prices fell to around $20,000, which accounts for the differences between peak and average hashrates throughout the month. Let's move on to the next slide. This summarizes the entire sector for July and how everyone else performed. We used our average hashrate along with those of our peers. Anthony Power does an excellent job with similar analyses, and I encourage you to check him out. We calculated the average monthly hashrate for all because everyone has been purchasing variable hashrate during these hot summer months. We achieved 138 Bitcoin per Exahash. Additional financial details are provided on the right side of the table, where you can see that HIVE is a strong investment. We maintain a robust total position, averaging 15 Bitcoin per day, which reflects our consistent uptime and steady growth. Now, let’s look at the next slide. We've discussed hashrate, but now I want to focus on the infrastructure side of the business. Currently, we are operating at 130 megawatts worldwide. New Brunswick accounts for 60 megawatts, and Quebec has 26 megawatts, as shown on the left. However, we have completed 144 megawatts, including 4 additional megawatts in Quebec and 10 in New Brunswick. This means HIVE has 14 megawatts of available infrastructure capacity for incoming ASIC shipments, which we have already contracted, and we will provide further details later. We also have optimizations and expansions planned for our current sites, which will bring us to about 150 megawatts by fall. HIVE is focused on measured growth and does not intend to overpromise or underdeliver. We are committed to achieving our targets with optimal efficiency and best-in-class uptime. As it stands, we are operating at 130 megawatts of capacity today. Let's move on to the next slide. This sets the stage since we were among the first wave of major crypto miners that went public in 2017. HIVE has achieved impressive returns with our legacy NVIDIA RX580 machines, which have paid for themselves four times over. Additionally, we have upgraded our ASIC hardware and acquired newer NVIDIA data center cards. This means that with more efficient machines, measured in Joules per Terahash, the amount of megawatts we use as a company will decrease, leading to increased hashrate. We are aware of power costs in cents per kilowatt hour, so if we operate with fewer megawatts per hashrate, or more petahash per megawatt, we will reduce energy costs for each hashrate produced. Analysts can gauge the modernization of legacy companies by examining the petahash per megawatt metric, as most firms have a mix of miners acquired over the years. By calculating the total hashrate divided by the total megawatts, it becomes clear that HIVE outperforms our Canadian competitors at 29 petahash per megawatt. Let's look at the next slide. We have great news, as we've completed 70 megawatts at New Brunswick, and our fourth building is now finished. Here are some construction photos from a few weeks ago showing the final wall being installed. This project is a civic-grade infrastructure initiative, featuring a massive retaining wall, making it a stunning site. We've had analysts and the CBC visit, as well as the mayor, which highlights its importance. The facility is now functionally complete at 70 megawatts, which is fantastic news. On the next slide, you will see a photo of our stronghold in Quebec, the Lachute campus. I often discuss Joules per terahash as we operate in the hashrate business, converting energy into hashrate efficiently. HIVE aims for high uptime in this energy conversion process, resulting in strong operating margins. We are also aware of the excess heat produced and, as an ESG-conscious crypto miner, we make it a point to repurpose that heat. Given Canada’s cold winters, we use the heat from our facility to warm our industrial neighbor, a large warehouse. We channel the hot air from our data center into their space, where they manufacture swimming pools, effectively recycling heat. And on the next slide, you can see our concept in Sweden where we aim to become the leading cucumber producers in Boden. We're focused on establishing greenhouses in Northern Europe to grow vegetables year-round. We're very pleased and excited about the progress we're making, as it's all about food sustainability. As an environmentally conscious crypto miner, we're committed to using all green energy and finding ways to give back to the community whenever possible. Now let's look at the next slide for a market overview. This past quarter, we saw prices hit lows not experienced since 2020. This chart shows that hash prices have dropped to about $0.10 per terahash per day, close to two-year lows. It's important to recognize that we've navigated a challenging market. During our fiscal Q1 from April to June, hash prices were between $0.10 and $0.20. Despite this, we achieved a 62% gross mining margin, which is an impressive feat. Looking ahead, as hashrate increases, difficulty tends to drop, which we've observed a few times in recent months. We also understand how this impacts ASIC prices. Savvy crypto miners aim for a return on investment of under a year for their ASIC purchases. When hash prices drop, cash flow from mining operations decreases, requiring a re-evaluation of prices. The capital expenditure per terahash when purchasing ASICs significantly influences ROI, alongside energy costs and machine efficiency. This chart illustrates three classes of machines based on their efficiency in joules per terahash. We've seen prices drop by approximately 60% to 70% from the highs of December. Timing is crucial for repurchases; typically, it's best not to buy during high price periods. HIVE strategically refrained from purchasing machines during the highs in December and November, while many peers rushed in. This cautious approach allows us to seize advantageous buying opportunities. HIVE is focused on growing strategically to ensure our cash flow returns on invested capital, as we prioritize delivering value to our shareholders and earning their trust. And so on the next slide, just a quick reminder. Our Intel project is progressing nicely. Our second version of the prototype actually just shipping today. We've been testing our Gen 1 prototype and had some great results. We expect commercial quantities to arrive in September of this year. This is a photograph of a physical unit as well. So a very exciting time. HIVE strives to be first to market of all the proponents are participating in the Intel deal. Again, it's about being first to market, getting your machines hashing as soon as possible, you're earning that cash flow return on invested capital. On to the next slide. And so this is our hashrate growth outlook. And again, this is measured growth, measured growth where we are focusing on working within the infrastructure that we have. Now again, we have that 14 extra megawatts ready for our monthly shipments to come in and methodically and growing with strong groups. So we're going to hit about a target of 4.6 Exahash by this December, and we're well on track to do that. We just received shipment recently some more micro BTs. So based on our allocations from last year. So everything is steady as she goes. And so on that note, I will now turn it over to our Commander and Chief Executive Chairman, Frank Holmes, who is going to provide a macro overview of the market at large as well as some very interesting insights into how crypto is performing amongst other asset classes.

Frank Holmes, Executive Chairman

Thank you, Darcy and Aydin, for those presentations. I want to give a recap of how we have navigated challenges and are prepared for future headwinds. It is crucial for our leadership team. There is a focus on our people and how they manage a diverse portfolio of data centers located in Sweden, Iceland, Quebec, and New Brunswick. While many companies centralize their data centers within one country or state, we face a greater challenge in managing operations across different countries. However, we have achieved very attractive performance relative to our peers. We were the first to go public, the first to mine Bitcoin and Ethereum, the first to acquire data centers, and we maintain a 100% green ESG strategy while being interlisted in Canada, the U.S., and Germany. This is why I am currently visiting our facilities in Sweden and just spoke with investors in Switzerland. Next, please. HIVE uses 100% green energy in Canada, Iceland and Sweden. We have low electricity costs. We have low temperatures and fast Internet connections wherever we are. But what's really sort of interesting to me is that all of the crypto mining stocks fell on average last year, 71%. And they seem to cluster day in, day out on a relative basis that having a green footprint like we have doesn't really get much traction. In fact, there was a Wall Street Journal story out that people are sort of fed up with ESG. And for us, we're going to continue to have the sort of green thesis, but the value of that still has not shown up that I would expect that HIVE have a higher relative valuation to our peers. And let's see if this basket of securities, which trade by the hour off of Bitcoin price as we break out from that basket that whatever the hedge funds are using sort of a quant approach. Next, please. So that's our capital structure. We rolled back the stock, and now we have 82 million shares outstanding. Some important numbers indicate that we had the most shares previously, and now we're closer to the average. More importantly, when your stock price is over $5 in the U.S., it becomes marginable. Given the recent downturn in the crypto market, being a penny stock trading below $2 or $1 can put you at risk of being delisted from NASDAQ. Thus, I believe it was a significant decision we made before the significant market drop that I'm about to discuss. I'm really proud of our team, including Bill Gray, our CTO, Aydin, Johanna, Darcy, Ian Mann, and Gabriel, our in-house counsel, all managing various aspects across different jurisdictions. We experienced a severe decline in crypto valuations from the highs of 2021. It's hard to fathom, but as interest rates in the U.S. began to rise and the U.S. dollar strengthened, the crypto market fell apart, resulting in a total drop of $2 trillion. Despite this, we managed to grow our revenue by 13% year-over-year since our listing last year. Our digital assets are valued at $71 million, which decreased due to the drop in crypto prices. Darcy explained how that impacts our portfolio through mark-to-market assessments. Even with rising revenue and declining overall coin values, we faced a net loss of $95 million. However, our mining margins remained strong, and we still generated $11 million in EBITDA, which is notable compared to our peers, especially other Canadian mining companies that did not achieve such robust cash flow relative to us. I believe our team's efforts are key to our success. We are fortunate to have implemented several strategies, which we continuously update each quarter. The total amount of Bitcoin and Ethereum mined was 1,338, which is crucial for maintaining our cash flow and supporting our growth. In light of the current crypto downturn, the collapse of the algorithmic stable coins Terra and Luna has had a significant impact, especially following the liquidation of the $10 billion Three Arrows Capital hedge fund. This situation highlighted the interconnected nature of various business strategies and their growth. I've witnessed similar patterns in what is referred to as shadow banking, which has been a major issue in China for over 15 years. These entities operate without regulation, offering high yields without adequate capital discipline. This has led to significant losses for companies like Celsius, and Voyager, which falsely claimed FDIC insurance. The rapid sequence of these events led to a major downturn in June, affecting us particularly through mark-to-market accounting. Companies holding more Bitcoin than we do experienced a lesser mark-to-market impact, while those holding less were even more affected. The mark-to-market implementation from a couple of years ago has introduced considerable volatility. For example, Warren Buffett's Berkshire Hathaway reported a $44 billion net loss, yet noted $7 billion in operating profits, even as their overall investments declined by $51 billion. This mirrors our own situation, where, unlike Berkshire, our focus is primarily on digital assets like Bitcoin and Ethereum rather than a broadly diversified public company portfolio. I believe the entire contagion is behind us now. I've noticed that margin debt for stocks has dropped significantly as many investors were forced to exit, resulting in a decline in stock prices. Interestingly, crypto mining stocks, which are comparable to gold stocks, tend to follow the price of gold. The key difference is that high-quality gold royalty companies tend to have more traction, while crypto mining stocks generally trade similarly. This behavior may not seem entirely rational, considering the ongoing crypto winter, which I don't think we have fully overcome. I anticipate more regulatory announcements, especially with the United Nations getting involved. I'm pleased to report that we have consistently generated profits day by day from our operations, which is within our control. While we saw our daily earnings drop to $150,000, that figure has since increased. We faced numerous challenges, particularly with energy price volatility in New Brunswick, but we were fortunate that our Swedish operations are hedged, allowing for attractive pricing. Many regions globally experienced shutdowns and heat waves, leading to setbacks in production. However, the next slide shows that we delivered strong performance in BTC production and Exahash, where we excelled. Aydin has highlighted the importance of following Anthony Power, whom I met in London a few months back. He is a retired expert in crypto mining, and we've started sharing data that is unbiased. It's crucial for investors to recognize how we compare to other companies based on market capitalization and production metrics. Next, please. You can see that the revenue over the last four quarters has been significantly affected by Bitcoin pricing. Even though prices have decreased, we have managed to maintain strong performance in our overall production and operating production, as Aydin explained. Next, please. The amount of Bitcoin mined by HIVE increased fourfold, which is important for investors to note. Last year, we executed an ATM for $100 million in a Bought Deal at more than $30 a share, and that capital proved to be very beneficial. We added a substantial amount of Bitcoin and Ethereum to our balance sheet, and we also sold a considerable quantity of Ethereum in the last quarter to support our Intel project and the ongoing expansion of our Bitcoin operations. Next, please. I'm showing you how the assets have grown compared to the same quarter last year. While the prices of Bitcoin and Ethereum have significantly declined, we've added many more coins to the balance sheet. As you can see, Bitcoin has a much greater impact. However, it can affect us negatively during downturns, while a significant increase in Bitcoin can greatly enhance our overall earnings in any quarter. Next, please. The next challenge we faced was the end of the contagion crisis, which I hope is behind us. The team managed to remain cash flow positive every day during this difficult period. Now, we're facing a major change with the Ethereum merge. It's important to note that Ethereum has undergone similar transformations before. The transition to proof of stake presents its own challenges, including ongoing litigation against Ripple and numerous regulatory concerns worldwide regarding the classification of proof of stake as a security. Therefore, transitioning to proof of stake carries inherent risks. We continue to mine daily, and we have sold off some Ethereum, benefiting from a significant surge of 100% over the past few months, which has supported our growth profile. However, a new coin related to the Ethereum fork has emerged. We are also mining Ethereum Classic, which started in July 2016, but it is not as large of an ecosystem. We cannot instantly convert 30 megawatts into mining this without affecting the overall ecosystem, but we maintain a strong position and believe it will benefit if the merger occurs as anticipated in mid-September, just 32 days away. From discussions with contacts in Europe, it seems that this transition won't happen overnight and may take several months to affect our mining operations. Thus, we have contingency plans in place to manage this risk, similar to how we've handled previous challenges. Next, please. Thank you all for listening to the presentation. Please stay connected with us through social media and our videos. Thank you, Darcy and Aydin, for your outstanding presentations. On behalf of the management, our 20 employees, and our consultants, I appreciate everyone's efforts in helping us thrive and grow, and I look forward to further advancements in this industry. Thank you.