HIVE Blockchain Technologies Ltd. (OTCQX:HVBTF) Q4 2018 Results Earnings Conference Call July 19, 2018 8:30 AM ET
Jessica Van Den Akker - CFO
Harry Pokrandt - CEO
Deepak Kaushal - GMP
David Kwan - PI Financial
Jessica Van Den Akker
All right, hi everyone. It’s about half past, so we’d like to get started. So just here on slide 2, before we begin, I’d like to remind you that during today’s presentation we will be making comments containing forward-looking information and financial outlook. I invite you to read our financial disclosure that identifies the forward-looking information, financial outlook, the assumptions used and the risks and uncertainties that may affect our performance in the future.
As such, our actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult our most recent MD&A and our filings on SEDAR.
Just as another note, as we go through this presentation, all of our figures presented are in U.S. dollars. So thank you everyone and good morning for being on the line joining us for 2018 earnings call.
I’m Jessica Van Den Akker, the CFO here at HIVE and I’m joined by Harry Pokrandt, our CEO.
Moving to slide four, our 2018 fiscal year ended March 31, saw we have been in a blackout period for quite some time. We’d like to start the call with a recap of what we should we do and what we have accomplished.
As promised, we continue to add mining capacity. In Q4, we added 13.6 megawatts in Sweden for a total capacity of 17.4 megawatts. We delivered the project on on-time and on budget, and since the end of the quarter, we have added phase 3 of Sweden, in Sweden bringing on an additional 6.8 megawatts of capacity online increasing capacity to 24.2 megawatts, a 39% increase over Q4.
This has led to continuous increases in the number of points held. We have already announced that we have mined over 17,000 Ethereum and 54,000 Ethereum Classic between September 2017 and March 31, 2018.
We said we expect delivery of 200 petahashes of additional capacity with consumption of 20 megawatts for ASIC miners. We expect delivery for the end of September. Importantly, the management remains aligned with investors, management directors of more than 9 million shares, and this number has increased since December 31. It does not include the 10 million shares that continue to be held by U.S. global.
Moving to slide five, we continue to successfully execute our growth strategy, 6.8 megawatts Sweden Phase 1 came online in January 15, on March 28 we added an additional 6.8 megawatts completion of Sweden Phase 2. This resulted in 17.4 megawatts in operation at the end of Q4, that’s quarter-over-quarter growth of 350%. We also announced the acquisition of Kolos in Norway, which provides significant opportunity for expansion.
Moving to slide six, I’d like to focus on Kolos; this is our acquisition in Norway. For – minutes [Indiscernible] tremendous opportunities to grow. The scale of the property is terrific; it’s in a great location with all the characteristics we look for, access to green power, reliable high-speed Internet and a very supportive community.
On the right side of the screen you see the front page article from local newspaper that wrote about highest [Indiscernible] of the property with the local mayor and local officials. We were flattered that reported the Kolos amongst the best in the world. What we like about Kolos is access to a substantial amount of power at competitive rates, which is highly scalable. This allows us to quickly respond to changes in the crypto currency ecosystem.
It provides us with an impressive amount of potential capacity which we can build out at a pace that we choose. Currently, we are in discussions with local parties which will help design and construct the site as well as the local utility with regard to timelines and CapEx requirements.
Slide seven shows events since the end of the quarter, since March 31 at year end, we continued to add capacity with Sweden Phase 3 bringing our total capacity upto 24.2 megawatts. We also successfully closed the acquisition of Kolos in May, which was discussed in the previous slides.
We also added some new faces in the HIVE team. Marcus New joined our Board of Directors in March. As an independent director he brings 20 years of leadership and experience in capital markets building disruptive businesses in the financial and technology sectors.
We also are excited to announce the addition of Stephan Metz joining our team as Country Manager for HIVE Switzerland which is really a hub of our European operations. Stephan is a lawyer and tax expert. He brings invaluable expertise in digital currency markets including working with crypto mining companies, digital currency funds and ICOs. Jessica?
Jessica Van Den Akker
Thanks, Harry. So moving here to slide nine, as of March 31, the company had 17.4 megawatts of capacity, which included 75 days of contribution from the 6.8 megawatts of Phase 1 as well as well as related to the contribution from Phase 2 in Sweden.
For the year ended March 2018, we generated revenue of $13.1 million and the mining margin of $10.1 million giving us a gross mining margin of 78%.
Our operating and maintenance cost for fiscal 2018 were $2.9 million and this consisted of direct cost of running our computing hardware which is currently paid to Genesis under our Master Services Agreement. These direct costs include electricity, day-to-day monitoring and the staffing, the facility cost and all the other costs related to running the equipments and it also includes a guarantee from Genesis for 93% of time on our mining rings.
So looking at the graph presented on this slide, we can see that we have continued to increase both our revenues and the gross mining margin per average megawatt quarter over quarter.
For the year ended March, we had revenue per average megawatt of over $2 million. So we’ve not only increased the revenues on an absolute basis, but also in a per average megawatt basis, which means that we’ve shown improved efficiency.
I just like to quickly highlight that the gross mining margin is a non-GAAP figure, non-IFRS figure which is calculated in the value of coins received at the time of mining, less the operating and maintenance cash cost paid to operate the machine.
For the year ended March 2018, our loss from continuing operations was $25.8 million. I’d like to note that it included a number of non-cash items, such as share based compensation and the revaluation of our currencies.
In addition, our loss also included a charge, a significant charge of $17.7 million which was related to the consideration performing a strategic relationship with Genesis. Our loss also included 4.8 million for share based compensation.
The strategic relationship with Genesis was a onetime cost associated with the change of business, and share based compensation was unusually high due to the initial grant of options at our launch as well. When you add these two figures together, the $17.7 million and the $4.8 million yielded non-recurring cost that will not occur in the future and make up over 86% of our loss for the year.
Touching on the remainder of our G&A expenses, while our revenue had increased significantly, our G&A had stayed relatively flat and will remain so going forward. This evidence emphasizes the operating leverage evident in our business and will become even more apparent as we continue to add capacity to the rest of the calendar 2018.
Included in this G&A for the year ended March 31, is a lot of one-off and start up cost. This includes higher start up cost associated with our intense growth and business development. I’ll remind you that we have four financings raising over Canadian 200 million and numerous – as acquisitions for Genesis during the period.
It also includes cost with building our structure across the municipal jurisdiction. We now have a footprint in Canada, Iceland, Sweden, Norway and Switzerland.
We consider this strategically and financially important because it’s a [Indiscernible] and advantageous structure, particularly in regards to tax, we believe the benefits of this structure will become evident as the revenue wraps up and these benefits will accrue to shareholders in this run of superior cash flows.
So here on slide 10, we have a look at our financial position at year end. We ended the quarter with $14.7 million of cash on hand and total current assets of $48 million as of March 31. The biggest figure is the amounts receivable and prepaid of $25.6 million. This is largely related to our refundable sales tax that we paid on our computing equipment. To date, over 22 million of this has been refunded to HIVE and the remainder of the sales tax receivable is expected within this quarter. As such our financial position remains strong and these figures represented net of funding our current expansion for the next six months.
Looking at our mining operations we announced that we mined over 17,000 of Ethereum coins and 54,000 Ethereum Classic. We also began to sell coins in Q4 and we have ramped up the sales subsequent to year end.
To frame this for investors going forward with the sale of our portion of our coins, we intend to both cover our operating cost and build our cash reserves, while maintaining exposure to the underlying crypto-currencies, through holding the remainder of coins and inventory, this gives us the option due to our maintenance of cash reserves and growing inventory of coins.
Looking at our coin inventory, here we can see that at March 31, our digital currencies had a value of $7.8 million, the majority of which was described to Ethereum and a portion to Ethereum Classic representing the over 17,000 Ethereum coins and 54,000 Ethereum Classic that remind by year end.
On the right, we have the coin holdings at July 16, which has grown to $17.7 million as of earlier this week. As Harry described, our full GPU Expansion in Sweden within operation underway as of April 30, 2018 the majority of the growth in our holding is due to our increased mining capacity.
And looking at our production a bit more in current holding, this slide shows the quantity of our coin holdings and since March 31, we’ve managed to double our coin holdings. This means we’ve mined more coins in the past quarter than we did for the year ended March 31 and we continue to accelerate our growth.
I will also note that these holdings are net of our sales. We’ve increased our coin sales significantly since year end, receiving over a $1 million of proceeds from the sale of digital currency this year.
So looking ahead, on this next slide we have our annualized run rate revenue. This increased delivery of the 200 petahashes of Bitcoin money finally to September 2018.
Under coin production is growing, we believe that HIVE is poised for significant revenue growth as the contribution of the Sweden GPU expansion being 20.4 megawatt is fully realized and our 200 petahashes of the Bitcoin money comes online.
As I tried to indicate the annualized run rate revenue is $79 million and the annualized growth mining margin is 37 million incorporating a funded expansion. I’d like to highlight one of our exciting elements to our business. Despite a significant increase in revenue from Q3, our G&A has remained the same. This is highlighting our operating leverage in our business model and will become more important as we continue to add capacity.
Of note that this chart is based on the assumptions and the footnote that despite and it’s subject to change given the volatility of the underlying crypto-currency. This next slide also has the sensitivity type table which you are going to find in our MD&A filed on SEDAR. This analysis is being provided to illustrate the sensitivity our operations has to changes in the underlying cryptomarkets.
Give it back to Harry.
On Slide 15 we believe it’s prudent to highlight the volatility of the crypto-currencies the chart on slide 15 shows the comparison of the 10-day standard deviation during periods ended March 31, 2018. As you can see the S&P effects and TSXV constant index shows single digit volatility which is significantly lower than that of Bitcoin and Ethereum.
Now we believe that blockchain our patient [ph] significant run rate, but it’s impossible to ignore the volatility of the underlying crypto-currencies. Clearly this volatility has impact on the company’s revenues and gross margins.
Now marketing for HIVE’s first year of operations is centered around sector awareness and blockchain and crypto currency educations through multi channel marketing. As one of the first publicly listed blockchain miners the company has created and maintained awareness in this space as well as creating content which is educational and provides insight into a new high growth industry.
Capital markets require a patient tool engine resources to help their understanding and acceptance of a new industry with an emerging revenue model. The company’s media relationships branding in our activities have been oriented to provide this education for both retail and institutional investors. As you can see we were featured in dozens of media outlets and publications.
Investor presentations, you can see we’ve been busy with investor meetings. As CEO, I’ve been active with the investment communities talking about the unique potential we see in our company, in our stock as a pioneer in the blockchain ecosystem and one of the few publicly traded listed companies, we’ve been called upon to educate potential investors on power and application of blockchain.
In addition to our presence online, HIVE management and it’s share in HIVE comps as presented to investors and attended conferences in over six countries across three continents. We also have two financial analysts who have initiated research coverage to date from the Canadian investment banks of GMP and PR financial.
On the next slide, I’d like to outline what we believe are some of the key investment strengths of HIVE blockchain. We are the first and largest list of publicly listed blockchain miner globally. We have partnered with Genesis, the world’s leading hash power provider. We have a deep pipeline of growth projects underway and we continue to seek accretive M&A opportunities while being sensitive to shareholder dilution. Management is well aligned with shareholders, management directors owe more than 9 million shares as well as 10 million shares which is held by U.S. Global and 77 million shares by Genesis.
Jessica Van Den Akker
So, to conclude here, we've made a lot of progress as going public in September 27 and I expect the coming year will be another catalyst rich periods for HIVE with the completion of our pipeline projects.
We've been aggressively investing our capital. We are in a great position with their balance sheet. Our investments in Ethereum in Sweden are starting to show significant financial benefits and we look forward to reporting positive cash flows in the future.
On September 2018, we'll have at least 44 megawatts deploys which on an annual run rate basis would contribute to 97 million to revenues. We continue to assess new expansion opportunities, which includes the build-out of our site in Norway and evaluate potential M&A which present significant opportunities for accretive growth.
Our HIVE team, Harry and myself are really excited to build on our recent successes with the blockchain ecosystem and to present numerous opportunities as blockchain technology evolves it trust.
So with that, we'd like to thanks our investors for your ongoing support. We're going to turn it over to the Q&A portion of our call where we're going to be please to take your question. As a reminder you may submit your questions through our webinar portal. We're just going to take a brief pause where we compel the Q&A and leave you with our website to sign-up for news for the latest updates and follow us on social media.
Q - Deepak Kaushal
All right Harry, to get started I think we're going kick-off with a question from Deepak Kaushal at GMP, one of our analyst. Deepak is asking, what can we expect in terms of corporate overhead annually going forward?
Jessica Van Den Akker
All right. Thank you for your question, Deepak. We've invested heavily in our corporate structure to ready ourselves for growth and to establish advantage of corporate structure. We'll continue to add talented people to the HIVE team like Stephan Metz in Switzerland, but our operating cost and our G&A should remain reasonably flat going forward as the startup cost and business activity stabilize. G&A should remain consistent as the revenues grow from increased mining capacity.
To go into a bit more detail on our G&A such as our professional fees, these were unusually high during the period due to the startup of our business in five countries, a high volume of transaction with the financing and acquisitions of Genesis and as well being the first mover in this industry from a regulatory and compliance perspective, going forward these activities and the related cost are not expected to continue, so these costs should come down significantly.
Overall, we've had a tremendous return on our deployment of capital and we expect to see the benefit of the operating leverage in our revenues. Other revenues grow and our G&A remains stable.
Deepak here has a follow-on question. What is the current status of the Bitcoin facilities?
Jessica Van Den Akker
Well, Deepak, as we mentioned, 200 petahashes have been paid for as of March 31, and its included in audit at our year-end financials. As far as we understand the 200 petahashes are for 20 megawatt is on track and for delivery at the end of September 2018. This capacity is going to increase our total capacity by over 83%, and our revenues will then be diversified with 45% of our capacity will be coming from Bitcoin mining.
Harry, David Kwan of PI Financial. What funding options are you contemplating for Norway?
Hi, David, thanks for the question. Kolos is the tremendous opportunity for us. This is a project that we can scale at a pace that we want to, so we can – as I said previously that we can respond quickly to changes in market conditions. We are right now in discussions with local groups which will help us design and construct the site, then have the part [ph] utilities is going to be providing us an idea, some timelines and equipment requirements. Once we have that we can form a more definitive plan.
So as far as funding goes, we're highly sensitive to shareholder dilution, so potentially we'll look at the funding this out of cash flow or perhaps funding it out of some non-dilutive or less dilutive means. Our cash flow has ramped up this quarter significantly and more to come when Bitcoin is up and running.
But until we're at the point of construction decision we'll have to assess the funding options at that point in time. But again the beauty of Norway as we can scale it and choose the pace of development which makes more sense for shareholders; so unfortunately we don’t have a definitive answer at this point, but we'll do whatever creates a best value for shareholders when we're at decision point.
Harry, David, have a follow-on question which I think is echoed by number of people's other questions. Can you talk about the potential to sell computing power to third parties for other application such as artificial intelligence, video rendering and what not? Have you determined whether it is feasible and if so, just a realistic options for HIVE?
Thanks, David. I think both you and I have quoted in Bloomberg article in last few days about this topic. GPUs are well-suited to activities such as image rendering and artificial intelligence. So I think I mentioned that. Genesis has invested money both in rendering and AI. These also look at companies like [Indiscernible] both of these are network -- and posted GPU capacity for rendering and AI. So yes, yes it's feasible and in facts it's being done.
Whether it’s a realistic option for HIVE? At this point in time it is an option for GPUs. Right now mining is quite profitable. We may at some point direct some of our older and less efficient GPUs toward this activity. I expect you are asking this question because you try to assess the risk you're moving to Proof-of-Stake and the value of GPU mining. One thing, the GPUs have flexibility to shift charter to different Proof-of-Work currencies, as well there is a market for GPU capacity.
One of the exciting and perhaps it’s one of the unintended consequences of this rush for mining capacity is, there's been a huge infrastructure that's been built as a result of this rush for mining. But what it's created is, it may computing capacity much cheaper and it's a perfect platform to develop distributed cloud, cloud computing different applications. There will be cloud-based computing application we have been thought of and we have been meeting with some of these groups. This is an exciting technology. So I think there's lot of options that we've been assessing and we continue to assess. But yes, certainly artificial intelligence and rendering are couple of things that we have looked at and continue to look at.
Thank you, Harry. To give him a little break, here's one, the company holds a lot of digital currency, does the company intent to continue holding coins? Or is there a level where you consider to sell it?
Jessica Van Den Akker
So the answer to that one, we have historically help the majority of our coin mines. This quarter we methodically sold the small number of coins to begin testing or making relationship in the regulatory ecosystem around the process. As that proved to be successful, we have ramped up the sale of our coin since March 31, just paying for operating cost and increase cash on hand. But we continue to maintain an inventory coin so that we can have exposure to the upside of the cryptocurrency market.
Just to pick on Harry somewhat, you kind of touched on Proof-of-Stake. Harry, can you speak to the potential impact of a shift to Proof-of-Stake by Ethereum?
For those of you who don't know Proof-of-Stake is an alternative consensus mechanism which requires less hardware than Proof-of-Work currencies. Ethereum has announced their intension to move the Proof-of-Stake. Currently most of our GPU capacity is dedicated or directed towards mining Ethereum. First of all, there is a lot of uncertainty as to if and when Ethereum does switch to Proof-of-Stake. This change has been postponed many times already. There are some indications that the complete switch over to Proof-of-Stake won't happen till the end of 2019. For the time being we're going to continue to profitably mine Ethereum.
Remember, in September we're going to add 20 Megawatts of SHA-256 ASIC mining, so roughly 45% of our capacity will be expose to Bitcoin production. We are continuing to look at adding capacity to mine other non GPU-based currencies. The move to Proof-of-Stake is also an opportunity for HIVE because we do have a large inventory of Ethereum, so with Proof-of-Stake of course we can stake [ph] that Ethereum and earn a return on it. I think I personally address this question with my response to David Kwan's question earlier. There are other high-value uses for GPU such as AI and rendering. We are also looking at mining other blockchains which would include other Proof-of-Work currencies but also private blockchain as well. We've talked to number of parties on that.
So our Proof-of-Stake is a risk to GPU mining, the timing of – sorry, while Proof-of-Stake is rather risk to GPU mining, the time of Proof-of-Stake is still somewhat uncertain and still weighs out. Our revenue stream is becoming more diverse and we're enthusiastic about some of the opportunities for other uses for our GPUs as well. And we're looking at opportunistically mining other private blockchain.
Thanks Harry. Then there is a good follow-on one, I think that goes with that going, are the ASIC rigs to mine Ethereum. Are they considered threat to HIVE?
Yes. For those of you don't know Bitmain [ph] has started preselling some Ethereum ASIC miners which are schedule to be ship later this summer and also later this fall. These ASIC Ethereum miners are more efficient than existing GPUs. However they're not an order of magnitude more efficient like what you see in ASIC for other currencies. On a side note there is something what we suspect Bitcoin has already been secretly mining with these ASICs which might explain some of the ramp of both of the network hash rate over the last six months. However these ASICs appear to be available only in limited numbers this summer with more -- with a larger run available this fall. But the numbers are limited what they're selling. It's interesting because Ethereum moving to Proof-of-Stake represents bigger risk to these ASIC minors than they do to GPUs. Clearly the ASIC have no flexibility in what else they might produce.
Right. Thank you, Harry. So we're running a little bit short in time. I think we're only going to take two more questions which to what Harry also and I'll take. Certainly we’ve asked that can you expand on the corporate structure and the tax benefits of HIVE?
Jessica Van Den Akker
Yes. So as we mentioned in our presentation we've invested in locations around the globe and we believe we're only publicly listed blockchain infrastructure with entities in Canada, Switzerland, Iceland, Norway and Sweden, establishing in each of these places has come with the cost, but as we're seeing our revenue increase we believe the benefits will become quickly apparent. Operationally, this structure gives us a benefit because we have seen on the ground in Europe and it helps us to manage our assets and they have to find new opportunity such as Kolos.
And one of the other operational benefit on the basic level is also the fact that crypto market trade 24/7 and by having offices in multiple jurisdictions and staff around the world we're able to operate multiple time zone which is actually quite helpful. I'd also like to stress that financially this structure is quite efficient from a tax perspective especially when compared to entities with operations solely in North America like U.S. and Canada.
Just one of the other questions that sort of come up. What has happen to mining ZCash?
Jessica Van Den Akker
Yes. So we haven't talked about ZCash. We are still holding it as a part of our holding. You'll notice on the slide there is a very tiny sliver [ph] that is allocated to ZCash, but it just been more profitable for us to mine Ethereum at the moment, so ZCash has become a very small portion of our operation. Yes. I think that basically we did up. Harry, is there anything like to ask?
I want to thanks everybody for joining the call this morning. Thanks for your support.
Jessica Van Den Akker