DMG Blockchain Solutions Inc.

Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the DMG Blockchain Solutions second quarter 2024 update conference call. Participants on 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 webcast 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 Olisu, 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 23, 2024. Except as required by law, DMG Blockchain Solutions disclaimed any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Sheldon and Stephen. Sheldon?

Thank you, Louis. Good afternoon, and thanks to everyone who has joined the call today. My name is Sheldon Bennett, and I am the CEO and founder of DMT Blockchain Solutions. With a similar format as recent quarters, first I will provide an overview of the company's achievements in the past quarter. I will then pass the call to Stephen, who will review the company's performance. We will end the call with our Q&A based on questions submitted to us prior to the call. So now, to our highlights of recent achievements. First, regarding our core plus, which is our software strategy. As an update to systemic trust, we are committing significant resources to build a qualified digital asset custodian business by the end of this calendar year. We have made great progress both on the regulatory front as we have been in close contact with the Alberta regulators. as well on the software development. In particular, our team has executed most of what is needed for the trust to launch, just since the beginning of this calendar year. We are proud of our team's work, and we feel this will be the first of a number of new products in our pipeline, including a renewed version of Bloxy or Explorer, which is now expected later this year. Next, our investment to support Bosonic. As we discussed on our last earnings call, we invested $600,000 into Bosonic to support its continued development and help enable it to sustain cash flow positive operations. We remain encouraged with Bosonic's development as it has been able to progress without additional cash. And we are also working to integrate Bosonic's platform with Systemic Trust, which we believe can accelerate Systemic's market development and growth. We have not discussed much about TerraPool and hence ordinals in recent months. We have operated the pool in only limited capacity over the past couple of quarters and have focused our efforts on building a software for systemic trust. However, we are committed to build the software necessary to operate TerraPool at scale, achieve SOC2 type 2 compliance, and provide an upgrade path for pool members to leverage our mine management software. which we are in the process of rebuilding as largely a ground up effort that we believe will be best in class. Our goal is to enable TerraPool clients to not only have observability of potentially hundreds of thousands of miners, but also controllability, a capability that would be unique among mining pool operators. The goal of these efforts is to build an ecosystem for carbon neutral miners that is holistic and differentiated. TerraPool supplies the carbon neutral blocks, which in turn are to be filled by transactions from financial institutions and ordinal content providers. Offering miners not only a competitively priced SOC2 compliant pool, but also mine management software, digital asset custody, and exchange services through partners such as Bosonic, together with providing compelling patchwork. Leveraging efforts such as what our collaboration with PayPal could offer us in the future, where a fee premium for processing carbon neutral block transactions that can be shared among pool participants offers additional revenue opportunities that have the potential to make TerraPool even more compelling. In terms of our core strategy, which is our Bitcoin mining strategy, during the March quarter, we had a utilized hash rate of 0.96 exahash, sequentially flat with a fleet efficiency of 28.4 joules per terahash as measured from our substation. Also sequentially unchanged, and we mined 153 Bitcoins down 22% sequentially. As the network produced about 158 Bitcoins per exahash in the quarter, down 24% sequentially, our Bitcoin production was in line with expectations based on our realized hash rate. Note that last quarter we provided our estimate that our network Bitcoin production per exahash could be down in a range of 20%. We hope this guidance proved useful as it applied to all Bitcoin miners. We had guided hash rate to be slightly up, but we missed that as lean staffing resulted in our reduced ability to deal with miner maintenance. To address this, we are working to bring in new staff and improve miner reporting to optimize our miner uptime. Additionally, as we are now operating legacy miners in the low-power mode post-havening, we expect a significant reduction in our legacy fleet maintenance efforts, as these miners are generating far less heat, which is the enemy of all electronics longevity. We still expect to deploy in the June quarter our 4,550 Bitmain T21 miners. Combined with our current fleet, which we have optimized by a software post-habiting, we expect to have a total fleet hash rate of 1.7x a hash with a fleet efficiency of 23 joules per terahash. We believe this level of efficiency post-habiting is table stakes for any Bitcoin miner. As we grow our fleet with new generation sub-20 joule per terahash miners, we will continue fleet efficiency improvements, note that the number of miners that we actually retired post halvening was less than 10 units, which included older Bitmain S19s and micro VTM30s. Additionally, we are slowing our immersion cooling deployment. We have built our first tank and we'll be integrating that tank into our Christian Link facility later this quarter. However, we are not likely to fully test our first immersion tank until next quarter. The reason for this is twofold. One, we are focusing our resources on our T21 deployment and we are awaiting more details regarding the timing of new immersion miners being introduced into the market in the back half of this calendar year. We will be focused on deploying new immersion miners rather than utilizing legacy fleet for anything other than our initial tank testing. As we remain focused on maximizing our ROI, we are being cautious regarding spending large sums of capital for new miners until the economics of mining in the post-habiting environment are more clear. Regarding our prior announcement that we have entered into a non-binding agreement that would result in the development of a new data center site with access to low-cost, reliable, renewable energy located in Canada in a province outside of British Columbia, we are working to finalize our definitive agreement. after which we plan to disclose more details. The overarching goal of building out this site is to reduce our energy costs, which is just one of a number of initiatives that may help us realize this goal. Now, for a summary of our strategy. First, with Core Plus, our software strategy, we remain optimistic that with systemic trust and the renewed software for TerraPool and our mind manager, a product called helm we will have the critical mass of software to realize our core plus strategy in the coming months we expect to have announcements regarding the progress with systemic trust on the regulatory front as we have been working closely with the alberta regulators Our strategy remains to utilize TerraPool, the world's first carbon neutral pool, to create a supply of carbon neutral blocks that enables financial institutions to have a choice of sending Bitcoins without adding carbon and without commingling with bad actors. Now regarding DMG's core mining strategy. We have made significant progress to expand our hash rate with the development of containerized mining at a facility. including the addition of approximately 0.86 exahash of new T21 miners that we intend to deploy in the June quarter, as well as our production tests of immersion cooled capacity. We encourage that we can keep the momentum up. This will be in large part dependent on our access to capital, which avoids the mass shareholder dilution we have seen amongst our peers. We have demonstrated our ability to smartly utilize debt and we may utilize additional debt, liquidate Bitcoins, or raise equity capital for future expansion. However, as we have previously stated, we will do so as long as we can justify that we can earn more than our cost of capital. Now I'll hand it over to Stephen to review the company's performance.

Thank you, Sheldon. I'm Steve Eliskew, DMG COO. Now a few words about the company's overall position. In the March quarter, our cash plus Bitcoin balance was $43.6 million, an increase of 57% sequentially and up 101% year over year. This balance has been supporting our ability to make capital equipment purchases, including new mining equipment, immersion cooling infrastructure, and power distribution infrastructure. Relatedly, we have utilized about half of our Bitcoin balance as collateral for our Signum Bank credit facility, which we have utilized specifically for the purpose of purchasing our Bitmain T21 mining fleet. For our mining operations, our near-term focus has been to nearly double our hash rate, which should mitigate the recent halving of the block subsidy. This is especially important as we cannot count on transaction fees staying elevated. Additionally, to mitigate the increased power costs that we will be operating as we'll be operating much larger fleet, we expect to improve our fleet efficiency 23 joules terahash when we have our T21 fleet fully deployed. We have implemented low-power operation of our S19J Pro and ProPlus legacy fleet that will support us being able to achieve this goal. As low-power operation results in a reduction in hash rate, albeit greater efficiency, our hash rate reduction has been about 150 petahash, which is in line with prior guidance for a drop in the range of 1 to 200 petahash post-havening. We have expected other miners to implement these changes as well, and thus we expect at least a pause in the overall network hash rate growth post-havening, which has occurred so far. However, as our internal estimates for network hash rate growth over the past year has been vastly exceeded, We caution against making predictions, especially as three-fourths of the Bitcoin network is composed of miners, which are not publicly listed. So it is difficult to extrapolate how much network growth we should expect in the coming months. In our March quarter, our revenue increased 3% to 10 million, up from 9.7 million in the prior quarter, mainly due to self-mining revenues increasing 11%. 45% higher realized Bitcoin hash, Bitcoin price, more than offset the 22% drop in Bitcoin production. On a year-over-year basis, revenue increased 31% from $7.6 million, driven again by self-mining revenues, which increased 39%. Our hosting revenue decreased to $0.28 million in our March quarter, down from $0.37 the prior quarter. As we have previously guided, it is possible that hosting revenue could further decline this year, as we are not focused on bringing in new hosting clients, and our current clients may reduce their fleet. Net pool revenue was minus 1.3 million in the March quarter versus minus 1 million in the prior quarter. We are looking for ways to minimize this number as we continue to test TerraPool, and we are pleased with our progress. As you know, being a pool operator requires advanced capabilities that we want to ensure are fully in place before we more broadly increase our pool member base. Operating and maintenance costs increased 2% to $5.3 million from the prior quarter. Note that while we don't provide explicit guidance for operating and maintenance costs, the product of our hash rate and efficiency, which results in our average megawatts consumed in the quarter, is very highly correlated to operating and maintenance costs. As we indicated last quarter in our Q&A section, we encourage investors to utilize this relationship when they forecast our operating and maintenance costs going forward. Our margin percentage on revenue less operating and maintenance costs was 47% in the March quarter, flat on a percentage basis versus the prior quarter. Our fleet efficiency was also flat at 28.4 joules a terahash. However, as our utility costs rose 6% to 4.9 million versus the prior quarter, as our utility costs rose as our rate is adjusted on an annual basis. Accordingly, electricity cost to mine a Bitcoin was up more than one third from the prior quarter to about $23,000 U.S., As a proxy for cash from our business, which assumes we're selling about 100% of our generated Bitcoin, our earnings before other items, excluding depreciation, amortization, and stock-based comp was 2.4 million, or 24% on a percentage basis in the March quarter. down from 3.2 million 33% in the prior quarter. Our actual cash flow from operations was 4.5 million in the March quarter, up 19% from 3.7 million the prior quarter. Non-mine expenses, excluding depreciation, amortization, and stock-based comp, were $2.3 million in the March quarter, up from the prior quarter of $1.3 million. As previously guided, expenses will remain somewhat more elevated in the current year as we're making more substantial investments in our Core Plus strategy. The main driver of increased core plus expenses is the build out of systemic trust. Additionally, in the most recent quarter, there were executive compensation payouts for prior periods reflected in the wages category. Finally, as we began to incur interest on our Signum bank loan, which is reflected in the interest which is reflected in the interest and bank charges category. Regarding expense guidance, excluding interest expenses, we expect non-mining expenses to be in the range of $1.5 to $2 million per quarter. Depreciation expense of 3.8 million in the March quarter decreased 12% from the prior quarter. As we have begun to put in service our Bitmain T21 miners, we would expect depreciation to reverse its downward trend, at least when fully installed in the September quarter. Our earnings before other items was minus 1.8 million in the March quarter versus minus 1.5 the prior quarter. We realized 1.8 million below the operating income line, mainly on unrealized gains on our Bitcoin holding, and realized gains on the sale of Bitcoin, resulting in break-even net income and accordingly 0 cents earnings per share versus 7 million and 4 cents per share the prior quarter. This is the first time since the March quarter of 2022 that the company has posted two consecutive quarters of positive net income. Regarding further capital raising, we are still being very cautious regarding overall spending, especially as we have gone through the happening. But we know we have significant expenses ahead for the second half, calendar 2024 and beyond, as we position the company for future growth. More CapEx to build out infrastructure for our new mining site outside of BC. as well as CapEx for immersion, including the future purchase of up to 36 megawatts of immersion-ready miners, plus the step-up in non-mine expenses, including systemic trust to grow our CorePlus business. For sources of new capital, we have been approved by a financial institution for a dead instrument that is of material value. Given we have fully exercised the amount on our Signum Bank Bitcoin-backed loan facility for $9 million US, we're hesitant to lever up further in the current environment. We are exploring options to raise equity, But as we're focused on minimizing dilution, we're proceeding at a measured pace. Regarding our balance sheet, our cash plus digital currency holdings increased 57% to $43.6 million versus $27.7 million in the prior quarter, as the value of our Bitcoin held increased 65%. The value of our property and equipment and long-term deposits increased to $61.3 million from $49.1 million in the prior quarter, as our depreciation was exceeded by the amount of new equipment either prepaid or deployed. The last time this occurred was the June quarter of 2022. Accordingly, our total asset base increased 30% sequentially to 118.4 million from 91 million. In the March quarter, DMG sold nearly 140 Bitcoin, generating $10.7 million of cash. Thus, we sold 91% of the Bitcoin amount mined versus the prior quarter of selling 97% of the Bitcoin mined. As a treasury policy, investors should continue to expect us to sell most or all of the Bitcoin we mine. As stated prior, investors should not expect EMG to be a major hodler in the future, especially as investors now have access to a plethora of US spot Bitcoin ETFs that allow for direct exposure to Bitcoin. I will now hand the call back to Sheldon to summarize our prepared comments, and we'll answer questions submitted to us prior to the call. Sheldon?

Thank you, Stephen. To reiterate our key results and outlook, in summary, we are positioning the company for hash rate growth to offset the halvening, but our spending is also being directed to establish and grow our Core Plus business. DMG mined 153 Bitcoin in the March quarter on a hash rate of 0.96 exahash and a fleet efficiency of 28.4 Joules per tera hash. Cash and digital currency at core end was 43.6 million with total assets of 118 million. On a net income basis, we were profitable for the second quarter in a row. We expect to deploy our next generation of Bitmain T20 miners that should enable us to reach 1.7x a hash by the end of the June quarter. This positions us to grow to 2x a hash and beyond. We have stepped up our investment to enable our core plus software strategy with systemic trust as a key enabler that will provide financial institutions the option to send Bitcoin in a carbon neutral manner and without commingling with bad actors. As we have consistently stated, we are committed to our core plus strategy and are building the necessary infrastructure that will enable us to execute this strategy. While we are encouraged by our outlook, the environment is very challenging, especially as peers continue to build on capacity by raising equity that continues to dilute shareholders. We will continue to grow our hash rate and improve our efficiency along with initiatives to reduce our cost of energy, but not at the expense of shareholders. We are now more than ever investing into more core plus, including the systemic trust, along with TerraPool and Helm, as well as utilizing Petra as the key enabling technology to tie all of this together. So now onto our Q&A. We've got a few questions here. We don't really deliver in any particular order. I usually take a few and Stephen takes a few. And I'll start with the first question. How do you see the effect of AI impacting your business? That's a great question. Lots of Bitcoin miners are talking about it. In fact, I think all of North America is talking about AI. We didn't talk about AI above in our prepared comments on the quarter, as we still see AI in its early infancy for us. We see AI as both a friend and a foe for DMG. It's our friend because it presents a new revenue opportunity, which we have been investigating that levers our installed assets, i.e. our infrastructure that we have to date in Christine Lake. It potentially can leverage our development of immersion cooling, who in our province of BC, but in other parts of Canada, the US, want to regulate or change the cost structure of Bitcoin mining compared to other industry groups. And this is an issue whereby AI is seen differently than crypto mining and is more positive with governments. However, at the same time, given the potentially dwarfs what is needed in bitcoin mining for ai we are concerned that ai may crowd out bitcoin mining especially north america we're working to mitigate this issue in part with the new site that we've yet to announce specific details on as well as other new site opportunities that we're continuing to explore so we have a strategy where our Bitcoin mine. Next question I have with other miners claiming they will get their fleet efficiency to 16 joules per terahash. Do you feel that you're already falling behind? Well, no, I don't feel we're falling behind. You know, for us, I think we'll achieve these levels of efficiency, 16 joules, maybe better. remember we started with the very first s9s that were 11 terahash and phased them out and over the years have grown our fleet to be you know you know from the most efficient to becoming least efficient and phasing into new miners as as it makes economic sense to do that um also um you have to understand that the latest generations of sort of 15 16 joules per terahash miners normally costs, you know, 30, 35, 40% more than what we've just paid for our T21s, which are 19 joules a terahash. So there's a little bit of the economics of the cost of the latest chip versus one that's maybe not the latest, but the cost structure still makes it very profitable. So, you know, the point is there's always trade-offs between operational capital costs. We are quite pleased, however, with how we've made some changes to achieve 21, sorry, 23, I think we're aimed at, 23 joules per terahash in the near term. This is with changing how we're operating the J-Pros and the XPs, which are the majority of our legacy fleet, combined with the new T21s. And we think that this overall sort of 23-ish joules per terahash in the near to middle term of this happening cycle will be quite efficient. And looking at the price of hashing right now, we seem to be doing quite well. Another question, you stated that you have the right software staff in place to achieve your goals. As projects have slipped, why not hire more? That's a good question. We may do that. I think every company is always looking to hire great software people, different types of engineers. But in the recent past, our team has done a great job of picking up a new project, which is basically the entire software stack and integration needed for systemic trust, in a short period of time to build that. Obviously, as we stated earlier in our comments, we've taken resources off of other software that the EMG has been building to augment the team with systemic trust and really grow it out to meet their timelines. And like I say, that's been quite successful for us. The integration work and the software built is quite impressive. um and so we think that you know that piece of core plus putting the team or the bulk of the team on that is going to pay dividends for the company um and we think it's really important that the trust you know is able to really tie together the ecosystem which enables financial institutions to send bitcoins without adding with Petra and TerraPool. And this has been, you know, our strategy for quite some time. And we believe that we have the key components of an ecosystem that we can now realize this vision. You know, also enabling ordinals and the ordinal marketplace to inscribe ordinals through TerraPool falls right into this as part of the key components of our overall carbon-free ecosystem. system of using tarot pool and using systemic trust as a custody solution for the underlying parts of our strategy that you really do need a custody of you know technology to integrate with multiple different exchanges and partners um i probably said a lot there um you have de-emphasized of a new version of BlockSeer? Is it still on your roadmap? Maybe I'll let Steven take that one.

um steven i i mean i have my answer but let's even take a crack at a few questions thank you sheldon uh yeah we had this question come in just because we talked about blocks here explorer earlier and uh clearly we've had to move some things around in terms of ensuring we get our trust executed this year we have very ambitious schedule But we do very much want to bring out a new version of BlockSeer Explorer. This really goes back to the foundation of the company. And when we acquired BlockSeer in 2018, this was part of why we valued the company, was this was really a basis for providing a path to track bad actors. So we're a pioneer in this. And we want to modernize it and offer it in a way that's perhaps a bit more broadly compelling and not necessarily just for law enforcement. It's just another component of our ecosystem that we feel will make it more sticky. But as we've described, the key components we really need are that this is a lower priority and we're targeting initial version later this calendar year. So there are a couple more questions here. How are you managing non-mining OpEx as it's exceeded levels that we've seen historically? And as you know, we've continued to monitor expenses very closely. Building out a qualified digital asset custodian business will require hiring more staff. And the effort related to the regulatory approvals, building out the infrastructure, will result in additional professional services expenses, especially on the legal side. That being said, as we indicated before, from the R&D point of view, we're going to keep that stuff where it is now. And we evaluate as we need to make specific hires that are more strategic. And when we need to achieve targeted objectives, But we're actually very happy with the team, how they're executing, leveraging the latest tools, the latest infrastructure, the latest software techniques, really to build software that is state-of-the-art, that is scalable, and really sustainable. be able to get a leapfrog ahead of the competition in a number of ways. Also related to our non-mining OPEX is the interest on the debt. We will likely carry debt for some time. We'll look to pay it down, but we realize that having some amount of modest, some modest amount of leverage is good for in terms of lowering costs Our weighted average cost of capital, our interest is 7.8%. So it's a very attractive rate that effectively is good in terms of our capital structure. So we'll see how we utilize that going forward. We're very happy with having put that in place. But the interest related to that will generate some additional expenses on the non-mining OPEX line. And that's why we gave specific, we gave guidance that excluded those interest payments. This last question here is really about miners, just M&A and what we think is going to happen post-havening. As Sheldon alluded to before, that power is going to become a very important asset due to not just the, call it 10 gigawatts of energy, Bitcoin mining in North America, but the tens of gigawatts of AI that is going to be needed to be able to deploy AI infrastructure. So we think there's going to be some shakeout, but it's not necessarily what you think. It's not necessarily to get more hash rate. It's really access to more power. And those power assets are going to be a key driver. I think we think of what drives valuation in the Bitcoin mining space in terms of any M&A activity that may occur. So I think that's the end of our question, Sheldon, and I'll hand it back to you.

Yeah, that's the end of our questions. A couple of notes that I would like to just let everybody know for those listening. One, you know, DMG plans to participate in the upcoming World Digital Mining Summit, which is put on by Bitmain. It will be in Las Vegas on June 17th and 18th. So anybody that's going there, somebody will be there, whether it's me or Stephen or both of us. I haven't decided that yet, but we will be at that event. We also have another event. We do this every year, which is Mining Disrupt. It's in Miami. We've had a booth for many years there. We have one again this year. That's later in June, the 24th, the 26th. So if anybody's in Miami, come by our booth. We're always there to talk to anybody. And we do plan on attending Bitcoin 2022. um i think steve and i both got our tickets so we will be in there and around there so if anybody's looking for us uh we will be in the vicinity and at the conference outside of that uh we thank everyone for attending and our call is now over