DMG Blockchain Solutions Inc.

Thank you. Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the DMG Blockchain Solutions Q2 2023 Update Conference Call. My name is Jules Abraham from CoreIR, the company's investor relations firm. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A website replay of the call will be available on the company's website. Joining us today from DMG Blockchain Solutions is Sheldon Bennett, the company's Chief Executive Officer, and Stephen Oliskew, Chief Operating Officer. During this call, management will be making forward-looking statements, including statements that address DMG Blockchain Solutions' expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, Please refer to the risk factors described in DMG Blockchain Solutions' most recently filed periodic reports and the company's recent press releases, particularly the cautionary statements within. The content of this call contains time sensitive information that is accurate only as of today, May 31st, 2023. Except as required by law, DMG Blockchain Solutions disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It's now my pleasure to turn the call over to Sheldon and Steven. Gentlemen.

Thanks Jules, and thanks to everyone today who has joined the call. We have a lot to get through, including a large number of questions that have been submitted, which we will answer at the end of our presentation. As per our last quarters, I would like to start with a highlight of our recent achievements. On software, We realized our first Petra-based revenue for placing ordinals in the March quarter. Our initial revenue was small as we placed a few high-profile large ordinals, but we are building the foundational technology for this revenue to grow. We stated in our MD&A that we have built a new version of our Breeze wallet for ordinals, which we call Multi-Breeze. We are applying this branding to a project we disclosed in April, where we performed inscription of a large ordinal collection called Bitnips with per ordinal rights transfer. This is the holy grail for artists inscribing in a carbon neutral manner a collection sequentially within a block and enabling the artists to transfer each ordinal individually as the content is sold. We also stated in our MD&A that we were exploring other revenue opportunities related to ordinal inscriptions based on the type of satoshi, mainly creating an inventory of uncommon sats, which is the first satoshi in a block. These and other sats, which may be valuable to collectors, could expand DMG's revenue opportunity with respect to ordinal inscriptions. we may be able to sell these collectible SATs either individually or in combination with ordinals inscribed through TerraPool. We've also increased our marketing of TerraPool on a full paper share or FPPS basis, which is currently the industry's preferred method of compensating pool participants. On mining, DMG has realized a hash rate of 0.89 exahash and mined 255.8 BTC. We also announced that we purchased 350 Bitmain S19 Pros, 350 Bitmain S19 XPs, and 850 Bitmain S19J Pro Pluses, which totals an additional 1,550 units contributing 188 pet hash. The 350 Bitmain S Pros were a spot deal and have already been delivered and arrived. The remaining miners will be added in the coming months to DMG's Christina Lake Data Center. The company is discussing further purchases with Bitmain and other suppliers. We are particularly interested in new offerings of immersion technology specific miners and are considering this for future direction in mining. As we disclosed, we purchased the first set of long lead equipment that could provide up to 12 megawatts of immersion cooling capacity. Our goal is unchanged with respect to immersion to cost effectively leverage the technology to enable increased capital efficiency and deploy it with miners that will have a long useful life, especially as the Bitcoin happening where 3.215 Bitcoin will be the block subsidy amount instead of the current 6.25 is approximately 11 months away. We also announced that we have entered into a non-binding agreement that will result in development of a new data center site with access to low cost reliable renewable energy located in Canada and a province outside of British Columbia. We have begun the project planning process and may be able to disclose more details this summer based on project reaching some key initial milestones. Our overall goal is to ensure DMG has access to sufficient amounts of competitively priced power for years to come. Now, A review of our strategy. First, Core Plus, our software. With respect to our larger strategy to develop software to monetize Bitcoin transactions, what we call Core Plus, we encouraged by recent market developments. With nearly 10 million ordinal inscriptions to date and over 40 million of related on-chain transaction fees, the ordinals market has clearly established itself. Even as fees have significantly subsided from their recent peak, we believe 2023 represents an important milestone for the blockchain ecosystem, whereby the utility of the blockchain has significantly increased in a way that has been talked about for the last decade and is now only being realized. While some traditionalists may discount the value of placing art and other content on a blockchain that was intended to be the basis for a new decentralized financial system, free from control by central authorities, We are agnostic on these Bitcoin culture wars and believe anything that increases the utility of the blockchain is good for the ecosystem. New blockchain utility ultimately should result in sustained higher fees, which supports our business model. As DMG strategies focused on monetizing Bitcoin transactions, we believe we are well positioned to capitalize on this new opportunity that may be looked upon years from now as an inflection point for the industry. As a reminder, our key objectives for CorePlus remain. One, grow our TerraPool hash rate with the long-term goal of reaching 10% of the network share. Two, actively transact Bitcoin in a carbon-neutral manner for TerraPool using our Petra technology. And lastly, to create a carbon-neutral BTC marketplace. In the near term, Ordinals has risen as a short-term catalyst for Petra, and our goal is to build upon initial success. even as we are continuing to work towards our long-term goal of enabling carbon-neutral transactions for financial institutions. We believe achieving these goals will enable us to grow our core plus revenue to be significantly larger in the long term. For DMG's core mining strategy, we have completed installation of our initial 1x a hash of capacity and have disclosed purchasing of an additional 180 petahashes. and 40 megawatts of containers, which will exhaust our accumulated credits with Bitmain. Going forward for our next exahash capacity, we intend to focus on deploying emergent cooling technology in a way that should enable greater capacity efficiency versus air-cooled mining. Sorry, capital efficiency versus air-cooled mining. We will provide updates as we get closer towards our initial deployment. Even as we are focused on deploying Developing our core plus strategy, we remain committed to growing our hash rate in the most capital efficient way possible, as mining remains a foundational technology for everything else we do. I'll now hand over to Stephen to review the company's performance.

Thank you, Sheldon. I'm Stephen Elliskew, DMG COO. Now a few words about the company's overall position. We are encouraged that our cash plus crypto balance nearly doubled sequentially, which is giving us more room to spend on capital equipment so we can more rapidly deploy our recently purchased containers at our Christina Lake facility, as well as purchase the longest lead time items for our immersion cooling deployment. We expect to deploy immersion cooling technology in 12 megawatt tranches in our building. which can accommodate three tranches, each of which will provide half an exahash of mining based on current technology. We have not decided if we will deploy solely with new generation immersion miners or some combination of existing equipment retrofitted to work in immersion and new equipment. Outside of new miner purchases, we do not expect significant capital expenditures in the near term. When we decide to purchase immersion-specific miners, we do not expect the nameplate capital cost per hash to be materially different versus air-cooled miners. While Sheldon referenced that we have a non-binding agreement to develop a new data center site in Canada outside of British Columbia, it is too early to provide CAPEX guidance on development of that site. While we're still being very cautious regarding spending, we will be hiring more developers for our core plus business. As we see significant business opportunity that will require more resources. As discussed last quarter, we have been devoting resources mainly to our underlying software infrastructure. We're now transitioning from that to expand our capabilities to ensure we can properly support substantially more TerraPool members, Ordinals clients, as well as financial institutions. Finally, we continue to search for reasonable cost sources of debt to accelerate our hash rate growth plans. We are in active discussions with debt providers. Regarding revenue, in our March quarter, our revenue increased 6% sequentially to 7.6 million from 7.2 million in the prior quarter. Our self mining revenue increased 17% to 7.8 million from 6.7 million on a 26% increase on the average price of Bitcoin from recognized revenue, which was partly offset by a 7% decline in mine Bitcoin to 255.8, driven by a 13% lower network production of BTCs per exahash. You will also note in our financial disclosures a new line in our revenue breakout called net pool revenue, which was negative 0.7 million. This is the result of TerraPool members selling hashrate to TerraPool and being paid according to the full pay per share or FPPS payout formula, which was an amount greater than the amount of Bitcoin that TerraPool actually mined in the March quarter. As we discussed in our financial disclosures, we expect this net pool revenue line results to be either positive or negative depending on the quarter with the resulting fluctuations to some to zero over time. As TerraPool's hash rate increases, We would expect the volatility of net pool revenue to decline over time as well. On margins, our margin on our revenue less operating and maintenance costs was 40% in the March quarter, up from 39% the prior quarter. Excluding the net pool revenue line, it was 45%. As a proxy for cashflow from our business, assuming we're selling about 100% of our generated Bitcoin, our earnings before other items excluding depreciation, amortization and share based comp was 1.7 million or 22% on a percentage basis in the March quarter. It's up from 1.3 million and 18% in the prior quarter. On our earnings before other items, what was minus 4.6 million in the March quarter. This is a smaller versus minus 5.3 million in the prior quarter. Expenses excluding depreciation, amortization and share-based comp decreased to 1.3 million from 1.4 million as non-cash, I'm sorry, non-mining cash expenses remain relatively steady. Depreciation decreased 4% to $5.9 million. Future changes in depreciation will depend on the rate of capital equipment additions. Our net income loss narrowed to $3.8 million, which is an improvement from the $5.6 million loss in the prior quarter. Favorable Bitcoin pricing trends have provided a tailwind both for mining revenue as well as the realized digital currency gain losses that show up below the operating income line. On our balance sheet, our cash plus digital currency holdings increased 98% sequentially to 21.7 million from 10.9 million in the prior quarter, as the value of our Bitcoin held increased 65%. This asset increase was partly offset by a decrease and our property and equipment and long-term deposits to 61.5 million from 66.9 million in the prior quarter, as our depreciation exceeded the amount of new equipment deployed. Our total asset base increased 2% to 94.3 million from 92.1 million. Regarding our mine BTC, in the March quarter, we mined yearly 256 Bitcoin, a 7%, decreased sequentially as a realized hash rate of 0.89 exahash was incrementally up from the prior quarter, but this was more than offset by a 13% decrease in the network BTCs per exahash. In the current quarter, we expect a modest decline in hash rate due to unseasonably warm temperatures as a heat dome took hold in the Pacific Northwest. We have brought in additional cooling infrastructure to mitigate the ongoing warm temperatures for the remainder of the summer, but we still expect challenges. In the March quarter, DMG sold nearly 249 Bitcoin generating 7 million of cash and the average price of $28,270 Canadian. Thus DMG sold 97% of the Bitcoin amount in mind versus the prior quarter of selling 60% of the Bitcoin in mind. Our hosting revenue declined 21% sequentially in the March quarter to 0.4 million. We expect hosting revenue to remain near prior quarter levels, at least for the near term. And as discussed above, we're looking for opportunities to raise debt to help us accelerate our immersion cooling build out for our first 12 megawatts. I will now hand the call back to Sheldon to summarize her prepared comments and answer questions submitted prior to the call. Sheldon, you're muted.

Thank you, Stephen, for unmuting me. As Stephen described, the company is focused on tightly managing expenses and generating cash while still investing for future growth. DMG mined 256 Bitcoin in Q2, down 7% from the prior quarter, which was more than offset by 26% higher Bitcoin price. In the near term, with our 1X hash installed and new miner orders available, On their way, yet not delivered, we should have in place 1.2x a hash of installed mining capacity. Beyond that, we expect deployment of emergent cooling capacity to enable us to reach our 2x a hash long-term goal. Additionally, as a proxy for cash flow from our business, our earnings before other items, excluding depreciation, advertising, and share-based comp, was 1.7 million or 22% margin. Our cash BTC on hand at the end of the quarter was 21.7 million, nearly doubling sequentially with total assets of 94.3 million. We are pleased that we have made progress, but know that Bitcoin mining and software development are both challenging to do well. We know where we want to go and we're solely focused on execution. So now, as I introduced at the beginning, we have a long list of questions that came in for our Q&A. And I will read out the questions and answer them. I'll defer a few of them to Stephen, and Stephen may make a few comments along the way. Our first question is a timely question. I read that Foundry USA Pool is now charging fees. Do you see this benefiting Terra Pool? Yes, of course, we see an increased receptiveness towards Terra Pool now. We encouraged so far by the conversations we've had with like-minded carbon neutral miners. And we believe that the fact that TerraPool is now charging fees versus a no fee pool is allowing people that are fee conscious and carbon neutral to make the switch over to TerraPool. Next question. Software revenue has been very low this year. How are you going to turn this number around? Okay, our focus is on bolstering our core plus strategy with increased TerraPool share and hence pool fees, as well as capturing as much of the ordinals business as we can. We're finding that customers want ordinals to be inscribed using a carbon neutral pool and carbon neutral energy, although they may not understand all the mechanics of how this works. Our prior year numbers were lifted by licensing deal with a particular customer, which we're no longer recognizing on our books, as we don't expect recurring revenue from that deal. So we'll have a bit of a low in our SOFA revenue. However, with the bolstering of ordinals revenue and the signing of new agreements to bring on more ordinals, we believe that we can turn this number around in the next few quarters. Next question. I have heard in the past that DMG is trying to enable carbon neutral transactions with financial institutions. Is this progressing or not? Great question, and the answer is yes. So originally we were working with a couple of financial institutions to kick off our software called Petra. Petra is now reliably operating on the main net, continuously placing transactions. Right now it's placing ordinal transactions as that's the most demand we have, but we do see this as a long-term opportunity working with financial institutions to place their transactions in a carbon neutral way, especially as European regulation is moving in the direction to reduce carbon emissions associated with the use of cryptocurrency. So we expect financial institutions to perform extensive testing of our platform, and we see this as a long-term opportunity, which will have perhaps little impact in the current quarter or two finishing this financial year, but we see it uplifting in the next financial year. Stephen hasn't jumped in yet, so I'll keep going. Discuss DMG's relationship with NFT mentors and the opportunity that presents the company going forward. So DMG, we've currently placed many high profile ordinals or NFTs on the Bitcoin blockchain. Going forward, we are setting up partnership agreements with marketplace providers to ensure for its TerraPool and Petra to place. We recently signed our first partnership agreement. That's actually recently as in a few days ago. We have three others out being negotiated with other marketplaces. So we're hoping that we end up, you know, with four or more signed partnership agreements in the coming weeks.

Yeah, and I would just add that it would In fact, we have had direct discussions with artists as well. And they're excited about it, but they have really no idea how the Bitcoin ordinal inscription infrastructure works, especially for the large ordinals, which are larger than 400 kilobytes. And they are really excited to work with us. So we have both We have relationships with both artists directly as well as indirectly with partners who have access to lots of artists' content.

Yeah, there's a bit of a learning curve there that we're helping them overcome and figuring out the best way for them to use the Bitcoin blockchain. But there's definitely more to come for DMG placing large journals. next question with all your talk about immersion what money equipment do you plan to use or purchase so as most of you know bitmain has so far declined design equipment for immersion cooling so specifically for fluid immersion cooling um not a hydro equipment which is a water cooling MicroBT is the furthest ahead, and we have units of its first emerging immersion miners in-house that we run and test. Canon also has announced an immersion cooled miner. We've been following chain reaction, and we are always excited about the potential for a new mining company to enter the market, just as we were hoping Intel would stay in the market. We hope that at some point there will be additional immersion choices. However, of all the products on the market currently, from our research, MicroBT has one of the most competitive products, and we'll be following what they do closely along with others as they release more information.

And I just want to emphasize part of our key goal here is to have the highest capital efficiency. This is achieved by being able to overclock the miners. We're going to be doing extensive testing to ensure that We can sufficiently overclock the miners such that when you combine the use of the miners and the purchasing the miners and operating them in the immersion environment, that it's actually less expensive than an air-cooled solution. We still believe that's the case. And we're excited about new generation equipment potentially gives us a leg up, especially as we look at the happening coming up not too distant future.

Thank you, Steven. Next question. What power prices has DMG seen? How is the power contract structured and what guarantees does the company have on pricing and availability? So DMG, we use a fixed tariff price with our utility. That fixed price is for everyone in our territory that is a large commercial operating substation. which is usually us and lumber mills and pulp mills and places like that own their own infrastructure. So as such, using a utility tariff, we're not subject to swings in market prices for energy, so we're not on a wholesale price. So our price monthly is the same, whether or not the market price of power is extremely high or extremely low. We found over the last two years that this approach has been beneficial. We've not needed to curtail power when prices are high. We don't get to take advantage of prices being really low, but in our region, we haven't really had really low power prices in the past year or so. As well, for curtailment, We are on fixed power with our utility, so we're not really subject to curtailment without consent by DMG unless it's an emergency. So we have had calls from a utility where they were interested if we would curtail power. We have the ability to do it. We have the software that controls our unit subs and our substation that we can remotely turn power on and off. But to date, we haven't had to use it. And so right now, when you talk about pricing availability, I mean, availability power is available to us close to 100% of the time, depending on the transmission lines not being affected or shut down by any sort of storms or lightning. And on price, we believe we're getting the best price through our utility as we don't have to ride up and down the market prices and have to curtail and lose hash rate when market prices are too high. So very long answer to a very short question. Next question, where does DMG's mining control software stand in development? Does it include functionality that would allow overclocking or underclocking in a curtailed environment? So very similar to a little bit of my last answer. So our mining software is called Helm. It continues to work and it's evolved over the years. We've started building Helm I would say five years ago, something like that. It does allow overclocking and underclocking. The way the Helm works is that it actually goes in to every miner in our operations, has an API, it understands what miner it is, what firmware it is, understands how to talk to each miner. And we can write these scripts that automatically overclock and underclock as we see fit or our mining needs. So the Helm software works quite well. It also creates heat maps and efficiency maps. So basically we have a map of the mine and we can see hot and cold spots in the mine. As well, we can see where we're hitting 100% nameplate or under or over. We can see mines that are overclocked or in low power mode. So it really gives us a lot of versatility in how we manage our mine and our mine operations. How also interior connects with our power management, and so it pulls all the data from all of our unit subs and our substation, and this is how we have the ability to curtail. As I said in the previous question we've have not needed to curtail for utility yet we have the ability to do it. If we did need to curtail, we can do it in chunks of two megawatts at the unit sub or the entire substation if need be. But we can basically curtail in seconds just by hitting a button. It will open a breaker, and we can hit another button and close that breaker and be back up in seconds. So we or I in a previous company with Stephen designed this almost 10 years ago, this system, and we still use it today.

And I would just add with capability we have in Helm, this will work really well as we move to immersion to be able to dynamically update minor profiles and change the amount of overclocking or underclocking depending on the conditions. So this will become a key competitive advantage for us in our immersion deployment. Exactly. Did you want to take the next question, Stephen? Yeah, certainly. Thanks, Sheldon. The next question is, somebody is asking what's so unique about this multibreeze wallet. The thing is, everything about ordinals is new. And any specific implementation that we do is likely to be unique by definition. But I think we've put together something that's really interesting in terms of enabling this per ordinal rights transfer. This gives the artist full control of selling each piece of art on the Bitcoin blockchain and being able to parse that out as they're able to be able to have the art sold. We've also, Sheldon mentioned about having this, having the ordinals placed contiguously in the same block without adding carbon. So all of these pieces together create what is an amazing value proposition for these artists. And we're now just in the first ordinal. The first one we did, there was a lot of manual work. And what we're doing now is to make it so it's more automated and we can service a lot more customers. I'll take the next few questions as well. So why did our cash balance jump so much to 4.8 million? And do we expect our cash balance to grow from here? And the short answer is we got at the end of the March quarter a refund on our provincial sales tax of 3.4 million that was owed to us. This was on our amounts recoverable balance. So that you saw on our balance sheet dropped. We are still bullish on the price of Bitcoin. And in April, we reported that we had 534 Bitcoin in our balance sheet. And we're likely going forward to continue to sell as we need to fund operations and CapEx. So you probably shouldn't expect our cash balance, at least in the near term, to significantly grow. We got this, this is as a former equity research analyst got a really an interesting question asking about the revenue potential for Petra and how to model that and be able to provide some commentary as to how we're working to create volume for Petra. And at this time, it's just early to provide specific guidance. But let me give some idea of the mechanics, how you could model Petro revenue for the longer term. First of all, we plan to charge a premium versus the market rate for transactions and also have a built-in floor price. So at least it's what we've done to date and what our expectation is, is to be able to charge more for be able to have Bitcoin transaction fees that are higher than what are being realized on the network. And we've seen transaction fees grow from low single-digit percentage, the overall block reward, to a much higher percentage. And this recent rise, given the popularity of Ordinal, should give some indication of the potential for Petra fees. And think about our goal of Petra share of 10%. that translates to about 15 blocks a day. Think of that as the supply for placing Petra transactions. And on the demand side is, as Sheldon was talking about Wardnall's partners, to really work with them and with financial institutions to have that supply or have that demand to fill that supply of blocks that we're creating. So when you think about growing TerraPool and think about Petra, these are very closely related. And in our view, it's self-reinforcing because the benefits that we get from higher revenues in terms of Petra should benefit the miners who are on TerraPool and really create a self-reinforcing cycle. So that is, in a nutshell, how we expect it to grow. And over in the coming quarters, we could give you more specifics as to what we're achieving to help you update your model. Another question explaining this about TerraPool with this negative revenue and this idea of what happens if NetPool revenues continue to be negative. And this is theoretically possible, but statistically unlikely. We have experience being part of large pools and generally pool luck. Think about the ratio of blocks one to the ratio of expected blocks, which should be a hundred percent over time. And because it's based on the statistical nature of the Bitcoin protocol, we would expect net pool revenue to be zero over the longer run when all the quarters are summed up. And we're, as part of also what we're doing is just beefing up our infrastructure to make sure we don't have any disadvantage. So we're at least always at least a hundred percent. And just the fact that with the, if, when we can grow TerraPool that the volatility of TerraPool's luck should decline. In the near term, we have sufficient BTC balance to fund any of those negatives. And then the question we always get is just the raw cost to mine a Bitcoin in terms of utility costs under 12,000 U.S. And as we've stated in the past, for us, because as Sheldon was describing, our power cost is really steady. Our cost to mine a Bitcoin really ends up being a function of network difficulty. And Sheldon, did you have anything else you wanted to add here?

That was it for our questions. And we're coming up to the end of our call. I did want to note for everyone that DMG will have a booth again in minor disrupt in Miami on July 25th to 27th. So please feel free to come by and see us. Last year, myself and Stephen, we were both there. We'll be there again this year. Maybe a few others from DMG at the booth. A great way to come and talk to us in person. And we gave out a lot of T-shirts and hats and other things last time. So if you're looking for merchandise and you want to come to Miami, that's one way to get it. But that ends our call. And I thank everyone for attending. And our call will now disconnect.