HIVE Blockchain Technologies Ltd.
Fiscal 2018 Q3 Financial Results
Management Webinar Transcript
Main Presentation
Jessica Van Den Akker: Hi, good morning everyone. Thank you to all of you for joining us on the line for HIVE’s first quarterly earnings call. To introduce myself, I’m Jessica Van Den Akker and I’m the CFO here at HIVE. I’m also joined here today by Harry Pokrandt, our CEO.
Jessica (cont.): Before we begin, I’d like to remind you that during today’s presentation, we’ll be making comments containing forward-looking information and financial outlook. Please read our financial disclosure for the risks and uncertainties that may affect HIVE's performance in the future, as well as the assumptions underlying our forward looking statements and financial outlook disclosed. As such, the actual results may differ materially from the views expressed today. For further information on these risks, uncertainties and assumptions, please consult our most recent MD&A and our filings on SEDAR.
Jessica (cont.): So moving on, Harry and I are going to walk you through this presentation today and at the end we will reserve some time for questions you may have going forward. I’d like to note that unless otherwise indicated, all the figures in this presentation are in US Dollars.
As a reminder you can send in a question anytime by entering it through the webinar portal. And I’ll also note that a copy of this webcast will be archived on our website which is www.hiveblockchain.com. Remember to go to our website to sign up for updates. Over to you Harry.
Harry Pokrandt: To kick things off on slide 4 - and by way of introduction to those who are new to the story, HIVE was created as an investment vehicle for those looking for exposure to the growing blockchain and cryptocurrency space, predominately through mining infrastructure.
We are the first and largest publicly-traded blockchain miner globally.
What differentiates us from a lot of other miners who are going public is that we mine as a principal. We mine for our own account as opposed to mining as an agent for someone else and collecting a fee.
Many of the new miners you see coming to market do co-location, mining as a service or cloud mining. They mine as an agent and contract away exposure to mining margins.
We first came to market in September 2017. The reception by the market has been outstanding thus far and has allowed us to accelerate our growth strategy.
We have partnered with Genesis Mining, the world's leading hashpower provider and HIVE's largest shareholder with 26% ownership. Our partnership with Genesis brings significant value to the company because of their extensive operating experience, their custom hardware and software technology, along with their strategic relationships.
We have a deep pipeline of growth projects underway — I will address this a bit later — and we continue to aggressively seek further accretive M&A opportunities.
Finally, we have a very healthy balance sheet and large working capital position.
To date we have hoarded all the new coins we have produced. As a miner, these coins are AML compliant as they have never exchanged hands or been involved in any previous transactions. We expect these coins to demand a premium as industry regulations continue to evolve.
Harry (cont.): The next slide shows me mining at home with my son. For some reason i’m only able to get 7 out of 13 GPUs up and running, so that is a strong testament to getting a good partner.
Harry (cont.): Moving on to slide 6. Q3 was a very important quarter for the company with a number of milestones being reached. We raised almost C$200mm, across three financings during the quarter. This funds our medium-term growth objectives. Genesis has also participated in each one of these financings.
We have also expanded our relationship with Genesis during the quarter with plans to build out an additional 40 MW of capacity across four different acquisitions.
Q3 was our first full quarter of operations with 3.8 MW of capacity in Iceland fully operational by the end of the quarter. In January of this year [2018], we commenced operations in Sweden by bringing online an additional 6.8 MW of capacity.
At present, we are exclusively operating GPU-based facilities, which are capable of producing currencies like Ethereum, Ethereum Classic and ZCash. However, we are committed to diversifying our production and our expansion in Sweden will include construction of a 20 MW ASIC facility, which is dedicated to mining currencies such as Bitcoin and Bitcoin Cash.
Going forward, we are cash flow positive. We are fully funded to develop our existing pipeline projects. And we continue to look for further growth opportunities and ways to deploy capital.
Harry (cont.): Slide 7 shows our development schedule and our annualized run-rate revenues at each point. Each bar represents a new facility coming online and the run-rate revenue associated with that capacity. The assumptions for Bitcoin and Ethereum prices and network hashrate are at the bottom of the page.
The green boxes are our Iceland facilities which we had in operation during fiscal Q3. Our first Iceland facility has been operating since September [2017], and the addition of our second facility in October [2017] brings our capacity at quarter end to 3.8 MW at a cost of US$16mm. Given that our annual run-rate revenue is US$14mm for those facilities, you can see just how high our return on investment has been so far.
Our first Swedish facility commenced production post quarter end, in January, and at an incremental cost of US$22mm. As highlighted in yellow, this brings our total capacity up to 10.6 MW. Our run-rate revenue is US$40mm which is even a higher return on investment. We expect another 6.8 MW to come online in March, followed by another 6.8 MW in April. At this point, we are on time and on budget with that. And finally, we have another 20 MW of ASIC capacity coming online in September of this year [2018].
When all facilities are up and running, and again using the assumptions at the bottom of the page, we expect annualized run-rate revenues of US$150mm.
This slide speaks to how quickly we are able to deploy capital and generate a return. We closed our C$115mm equity financing on December 29th, and we’ve been able to make commitments and have everything up and running in less than a year.
In my career, I have not seen another business where you can deploy this amount of capital as efficiently, and with these kinds of returns. So we are very excited to continue to build and to grow moving forward.
Harry (cont.): Moving to slide 8 — we felt it’s important to illustrate how volatile the crypto markets currently are and that they have a material affect on our revenues, both on the upside and downside.
On the table here we show the difference between the 10-day standard deviations for the S&P 500 at 1%, and Bitcoin which is calculated at 20%. So to no one's surprise —the crypto market is incredibly volatile when compared to other traditional asset classes. Given this is the environment we operate in, to protect the downside risk, it is important to be in the lowest cost jurisdiction and be the most efficient miner.
Jessica, back to you.
Jessica: Thanks Harry. So moving on to the next slide — here we’re to have a look at the quarterly operational highlights. As mentioned, Q3 was our first full quarter of operations. It included the initial 2.05 MW of mining rigs that started running in Iceland in September, plus the addition of our operations of 1.75 MW expansion that commenced on October 13, 2017. This resulted in combined revenues of US$3.3mm and then a net gross mining margin of $2.4mm.
The mining margin is the revenues less our direct costs, which were the operating and maintenance costs for the three months ended December 31, that were $890k. Those consisted of fees paid to Genesis under the master services agreement between us and them. And this includes electricity, daily monitoring and maintenance, facility costs and all the other costs related to the maintenance and operations of our mining rigs.
Under this master services agreement, we also note that Genesis has provided a guaranteed uptime of 93% of our mining rigs. We think this is going to become an increasingly important metric as more of our competitors come online.
I’ll also note that for the three months ended December, our revenue per weighted average MW was just over $900k, which is a 32% increase over the previous quarter and our grossd mining margin was just over over $700k per MW, which is a 46% increase over the previous quarter. These are adjusted by weighted average MW in order to show the 1.75 [MW] that came on part way through the quarter.
I’d also like to remind you that our gross mining margin is based on the value of coins received at the time of mining less the operating and maintenance costs we pay to Genesis. For the quarter ended December 31, we chose not to sell any coins, and as the price appreciated from when we earned the coins at mining to the rate at December 31, we ended up recording a revaluation gain of US$2.4mm for the quarter.
Jessica (cont.): So looking at the coin inventory, here you can see the growth in our inventory from September 30th to December 31, and more recently to today. At December 31, you can see our inventory was valued at ~US$5.8mm, and you can see the allocation between what it was earned on mining and what the price appreciation is over the course of the quarter.
On the right, you can see that as of February 26th, the value of our coin inventory has increased to ~US$13.6mm. This represents a greater than 130% increase in value over the first two months of this year, which is largely due to our growing production base as the price of Ethereum remained relatively flat at December 31 compared to February 26th.
Jessica (cont.): So then looking at our coin inventory breakdown on the next slide, our GPU facilities — we have the ability to mine a variety of coins and we can switch between those currencies that we believe to be most profitable. As illustrated by this slide, predominately we have been mining Ethereum to this point. But we have also been mining a little bit of Ethereum Classic and Zcash. This mix will continue to evolve over time and especially post September 2018 when we bring the final phase of our Swedish expansion online and this will have 20 MW of capacity dedicated to mining ASIC-based digital currencies such as Bitcoin and Bitcoin Cash.
Jessica (cont.): So, looking ahead, as Harry mentioned, subsequent to our quarter end we completed the first phase of our expansion in Sweden. This means we are currently operating at a capacity of 6.8 MW in Sweden, which will be expanded to 20.4MW in GPU capacity by April 2018.
As Harry also pointed out on Slide 7, with this 6.8MW now operation — I just want to stress that the Company has an expected annualized run-rate revenue of ~US$40mm based on only ~US$38mm of capex spent today. The other thing to note about this facility is that it is powered completely by hydroelectricity and it is comprised completely of custom A2 mining rigs from Genesis.
With that — I'll pass it back over to Harry to discuss the final slides and provide some concluding remarks.
Harry: Thanks Jessica. So when we think about HIVE and our partnership with Genesis, what we really have is three key elements that are necessary to remain competitive in the blockchain industry as it matures.
1. Our first advantage is in hardware and procurement. Genesis and its partners manufacture some of the world's most efficient mining rigs and our relationship with them allows for immediate access to this equipment.
2. Next is our access and ability to use the Genesis HIVE software. This enables our operations to be setup quickly and be managed on a real time basis.
3. Finally, we operate in regions of cheap and renewable energy. This is increasingly important given the desire of the industry to reduce its carbon footprint. Across China and other regions, we have seen a large push for miners to use renewable energy and I believe HIVE is ahead of the curve in this regard.
Harry (cont.): So finally, to conclude on slide 14, we have made a lot of progress in Q3. We expect 2018 is going to be a very catalyst rich year for HIVE with the completion of our pipeline projects. We are aggressively investing capital that is fully funded. We are in a great position with our balance sheet and expected future cash flows.
Within a year from our start date we will deploy 44 MW of capacity and have an annualized run rate revenue of over US$150mm. We operated at an amazing pace in Q3 and we expect to continue this going forward as we look for more accretive M&A opportunities.
The HIVE team and myself are excited to continue to build on our recent successes in blockchain industry.
With that, I'll turn it over to the Q&A portion of our call and we would be pleased to take your questions.
Q & A Session
Jessica: Let’s take a look at the questions. As a reminder, you can submit them through the webinar portal and I will note that if we don’t get to your question today, we do get a copy of all the questions and we’ll endeavour to answer it in the future through FAQs or other communications.
Harry: Jessica, what is the cost of mining each token?
Jessica: Right. So, we have a fixed master services agreement with Genesis and that has a sort of fixed cost per month which was about $316k for our Iceland facilities. Using the term fixed, but obviously this figure is fixed regardless of the coin production, so when the digital currencies increase in value and we’re able to produce the same amount of coins at a higher value (depending on the network hashrate), the value of our gross mining margin will increase because there is no corresponding increase in costs, so more like we have a fixed monthly cost than a fixed cost per token.
Harry: What is the expected life of the equipment and sustaining capital?
Jessica: To date we’ve actually spent $nil on sustaining CAPEX, We’re currently depreciating our GPUs over 4 years, but the true expected life will depend on the rate of technological change. Genesis has mining equipment that is over 5 years old and still mining profitably, so we’re optimistic that the GPUs will have a life of at least 4 years.
Harry: How will minted coin assets be valued? The market value at the time it is mined?
Jessica: We recognize revenue from mining at the time it is mined — at the spot rate. So on the day we mine it, whatever the rate is that day, that’s what we record as revenue. And then at period end, our inventory is revalued to the period end spot rate, so those are the gains and losses from holding the coins and we record that as revaluation of digital currencies in our profit and loss.
There’s another question sort of along the same — same vein here on the accounting/recording side. Will we see separate entries on the balance sheet for each variety of coin?
No. We currently group all our coins as digital currencies on our balance sheet, but we do provide footnote disclosure of the breakdown between different coins held at quarter end.
And then there’s another one on — will the gain or loss be reflected on the Income Statement at the time of sale?
And yes, we will record a corresponding gain or loss in our profit and loss at the time of sale. We do think that gain or loss will occur either on the sale of mined digital currency into another digital currency or when we sell it for fiat currency. I will note, though that we haven’t sold any coins to date.
So, on the coin sales then — maybe Harry, do you — we have some questions on the coin sale strategy. Did you want to speak to that?
Harry: Sure — to date we have not sold any of our production. However, going forward, we will sell coins to cover our operating costs and we will be strategically — or we will be selling opportunistically to maximize those sale prices, but we will be selling enough to cover our operating costs.
Jessica: Alright — Harry, what about — someone’s asking what competitive advantages exist in the land grab? Purchasing power and low cost electricity may not be enough. Is there software that makes your facilities more efficient with the processing of crypto?
Harry: A significant advantage really is with our strategic partnership with Genesis. It is access to hardware. It’s being able to build out these facilities in a fast and efficient manner. Also, again, Genesis with its operating experience and its proprietary software is able to optimize our production on a real time basis.
Additionally, the equipment that Genesis is providing — for example the equipment we have in our Swedish facility — these are custom Genesis-built rigs and they’re somewhere in the neighbourhood of 15-30% more efficient than what you could buy off the shelf. So, that is certainly a competitive advantage that the Genesis relationship brings as well.
The other thing, of course, as mentioned — being in the lowest cost jurisdiction is key in this industry, absolutely. And just having a culture of constantly being worried about costs.
Jessica: Ok — someone’s also asked a question on — can you talk about the process on how you decide when to switch mining capacity between various cryptocurrencies? How often and when do you plan on switching?
Harry: Ok, we’ve developed some internal tools — a dashboard which monitors current prices, network hashrates, and essentially margins on various difference currencies. So, we can selectively switch mining capacity to other currencies. We will also switch capacity if we have a view on a certain currency going forward. An example of that is we switched a portion of our mining capacity in the third quarter to mine Ethereum Classic and that was ahead of the first developer conference that happened in Hong Kong and that worked out well for us.
We can switch. It’s something that does require a bit of downtime. So, it’s not something we want to — not something you can switch on the fly — it’s something that you don’t want to do too often — but you can certainly switch part of your capacity to mine some of these other various coins based on margin and our view of the currency.
Jessica: So there’s a question here that I think is interesting and it’s just sort of what type of return or return on investment can we see? And I can speak to that — I mean we — at December 31, we’re looking at a return on our capital invested of about 36%, and that’s calculated because we have a coin inventory of about $5.8mm that we’ve earned in the year-to-date — from September to December [2017]. And that’s only n CAPEX of about $16mm, so that’s about a 36% return in our view. So, that’s our return on investment.
So Harry, I’m going to lob you the fun one. There’s a lot of questions about Proof-of-Stake — so just picking one. Ethereum could eventually move to a Proof-of-Stake model and no longer being mineable. Can you discuss the effects of this on HIVE going forward? And is this a risk for our broader mining business model?
Harry: I guess, let me start by saying there is still a lot of uncertainty as to when and if Ethereum moves to Proof-of-Stake, and the other sort of uncertainty is the market acceptance of that move. But if Ethereum does move to Proof-of-Stake, you know, right now the underlying economics and revenue model that Proof-of-Stake brings is uncertain at this point, so we’ll continue to monitor that. There will always be other Proof-of-Work consensus based algorithms for us to mine.
But if Ethereum does move to Proof-of-Stake, we have and are accumulating a large position to stake, so it is an opportunity for us to use our balance of Ethereum to stake as well. So, anyway, there is certainly a lot of uncertainty. There are always going to be Proof-of-Work algorithms for us to mine. So, we’ll continue to monitor the situation going forward.
Jessica: There’s another one here that speaks to one of the earlier slides. It’s — the question is — you mentioned you mine as principal; however Genesis provides mining contracts to the general public. How does that affect your service agreement with Genesis?
Harry: Well, ok, Genesis is a cloud — part of their business is cloud mining, so essentially they do contract out the mining margins to their clients. We do not do that, we mine as principal, so we are completely exposed to the mining margins and our shareholders get the benefit of being exposed to the entire mining margin. So that differentiates our business with that of Genesis. We do mine as principal.
Jessica: So basically we’re not in competition with Genesis.
Harry: Correct, we do not compete with Genesis on the cloud mining basis.
Jessica: There’s also a number of questions on the security of coins, how we store our coins, and are they secure. So, just to speak to that I will note that we currently keep all our coins in cold storage, which means they are not connected to the internet and cannot be hacked. Moving forward, as we being selling more coins, we will have a strategy by which we will limit our exposure to how many coins are in hot wallets and/or connected to the internet, on exchanges and whatnot, such that any potential for hacking will be limited and will keep profits protected.
So maybe just one more question before we wrap up here. Harry, one of the questions we have is — we have seen a lot of miners come to the capital markets in recent months. Can you discuss the general landscape and how you are differentiated?
Harry: Yes, there are quite a number of other miners coming to market. I think what differentiates us from a lot of these other miners is first our partnership with Genesis allows us to really leverage on their expertise, their ability to build and deploy these facilities very quickly as we’ve demonstrated with how quickly we’ve been able to deploy the facilities in Sweden.
Also, what differentiates ourselves from some of the other miners is many of the other miners are raising money to build out their first facilities. There is substantial expertise in building these facilities out, certainly Genesis has had four or five years of building these facilities to fine-tune the process, certainly, so that helps as well.
The other thing is a lot of these miners also coming to market — they’re mining as agents, again, so co-location, mining as a service or cloud mining, or using mining to morph into other businesses. Essentially, many of these miners are taking a flat fee for mining and essentially contracting away the mining margin. Again, we mine as principal so our shareholders are exposed to the full mining margin and not just a portion of it.
Jessica: Alright, well I think that sort of wraps it up. As I noted, we do get a copy of all the questions, so we will work to ensure that there is communication — those questions are addressed in the future — either in our FAQs on our website or in another mode.
Harry and I both really want to thank you all for attending the call today. We hope you enjoyed it as much as we did and we look forward to where HIVE is going in the future.
Harry: Thank you!
About HIVE Blockchain Technologies Ltd.
HIVE Blockchain Technologies Ltd. is a growth oriented, TSX.V-listed company building a bridge from the blockchain sector to traditional capital markets. HIVE is strategically partnered with Genesis Mining Ltd. to build the next generation of blockchain infrastructure. HIVE owns state-of-the-art GPU-based digital currency mining facilities in Iceland and Sweden, which produce newly minted digital currencies like Ethereum continuously, and provides shareholders with exposure to the operating margins of digital currency mining as well as a growing portfolio of crypto-coins.
For more information and to register to HIVE's mailing list, please visit www.HIVEblockchain.com.
