Bitfarms Ltd (BITF) 2021 Q2 法說會逐字稿

Good day, and welcome to the Bitfarms's second-quarter 2021 financial results and corporate update conference call. All participants will be in the listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jules Abraham with CORE IR. Please go ahead.

Thank you, Chuck, and good afternoon, everyone. Prior to proceeding with Bitfarms's Q2 2021 results conference call, I'd like to remind you that certain statements that we made during the conference call may constitute forward-looking information. Bitfarms cautions listeners that forward-looking information is based on certain assumptions and risk factors that could cause actual results to differ materially from the expectations of the company.

Listeners should not place undue reliance on forward-looking information. Please refer to those risks set out in the Bitfarms public documents filed on www.sedar.com and www.sec.gov/edgar, as well the company undertakes no obligation to revise or update any forward-looking information or statements other than as expressly required by applicable securities laws.

During this call, the company will refer to certain measures not recognized under IFRS, and that do not have a standardized meaning prescribed by IFRS, and therefore may not be comparable to similar measures presented by other companies.

The company uses the following non-IFRS measures: gross mining profit, gross mining margin, adjusted EBITDA, adjusted EBITDA margin, EBITDA, and EBITDA margin as additional information to complement IFRS measures to provide a further understanding of the company's results of operations from management's perspective.

We invite listeners to refer to the company's Q2 2021 management's discussion and analysis for definitions of the aforementioned non-IFRS measures, and the reconciliations to IFRS measures. Please note that all financial references are denominated in US dollars, unless otherwise noted.

Joining me today from Bitfarms's leadership are, Emiliano Grodsky, Bitfarms's Chief Executive Officer; and Jeffrey Lucas, Chief Financial Officer. Geoff Morphy, Bitfarms's President will also be available for the question-and-answer session.

It's now my pleasure to turn the call over to Emiliano. Emiliano, over to you.

Thank you, Charles, and welcome, everyone, to Bitfarms's second-quarter 2021 results conference call. I'm extremely pleased to be speaking to you as the CEO of a NASDAQ trading company. As you know, [as shown in 20 years], we begin trading on the NASDAQ Global Market, which is a key piece of our overall strategy to become one of the largest and most profitable Bitcoin miners in the world.

As we note in our earnings release, this has been a pivotal quarter for us as we made important strides towards our growth objectives. We are committed to our previously communicated goals of achieving 8.0 Exahash by year-end 2022. Despite the challenges associated with COVID, including procurement disruption that affect the build out of our infrastructure, we are continuing to make solid headway and anticipate surpassing the 3.0 Exahash mark during the first quarter of 2022.

Overall, we are making excellent progress on expanding operation at our five Quebec location to utilize our full 160-megawatt capability in Canada, up from 69 megawatts currently deployed, and enabling us to take full advantage of our power purchase agreement, and source our renewable energy at less than $0.04 per kilowatt hour. Our Argentina initiative to capitalize on our power agreement for 210 megawatt is moving forward and should position us to begin mining there in early 2022.

In April, we hired Mr. Damian Polla as the Chief of the Corporate Development and Structured Finance professional to direct our Latin American operations. Under his direction, we have established the corporate structure and began the buildout of our Argentinian operation. Damian has also begun charting other South American opportunities to source green, low-cost energy, and computing capacity.

And at brother level, our management team is exploring a number of other initiatives elsewhere in the world, including the United States and Europe that could take us beyond 8.0 Exahash. These projects are currently at various early stage. I look forward to updating you on this in the near future.

Strategically, our Bitcoin retention programs remain in place and continues to grow at an increasing rate. At June 30, 2021, we've hold 1,293 Bitcoin, what we mined since the beginning of the year. As of June 30, our Bitcoin was valued at $45.3 million.

As of this past Friday, August 13, we have mined for the year to date 1,902 Bitcoin and hold 1,840 Bitcoin, valued as of this past Friday, at USD87.9 million. These represent over 95% of the Bitcoin we have mined since the year began.

As for the current environment, the ban on crypto-mining in China and the associated shutdown of almost one-half of the network hashrate has benefited our expansion activities and our bottom line as well, with only modest increase in our direct mining costs, which paralleled the increase in the number of miners we have deployed.

We have been able to increase the number of BTC we mine each day to the current level of 12.5 to 13.5. This is up from eight to 90 per day at the beginning of the quarter. Furthermore, under this new [patterning], we are able to procure state-of-the-art miners to support our expansion at pricing on a per Terahash basis, lower than we originally budgeted, and we (inaudible) prior commitment at more favorable terms.

Financially speaking, with our NASDAQ listing and the growing participation among lenders, we believe we are better positioned to fund our targeted XX increasing hashrate at a more optimal cost of capital, and to continue our practice of retaining the low-cost BTC that we mine as we build our Digital Asset Holdings.

Now, moving on to operational metrics, in the second quarter 2021, our average hashrate was 1.3 Exahash per second, compared to 694 Terahash per second for the same period in 2020, an increase of 89%. Towards the end of the most recent fiscal quarter, our hashrate exceeds 1.4 at the hash per second. While miners acquire and schedule for their [BTC] over the next two quarters, we anticipate reaching 2.5 Exahash per second in the fall of 2021 and achieving 3.0 Exahash per second in the first quarter of 2022, all in line with our target of reaching 8.0 Exahash per second by 2022 year end.

In terms of Bitcoin production, during the second-quarter 2021, we mined 759 Bitcoin, with an average cost of approximately USD9,000 per Bitcoin, and retaining 1,293 Bitcoin. In addition, we received and installed 3,461 miners during the quarter, including replacement of certain old-generation miners, resulting in a net increase of approximately 240 Petahash per second over the previous quarter.

Overall, I am very excited about the progress we have made, and the foundation we are laying to achieve our goals. Since the fourth quarter of last year, we have transformed the company, we have strengthened the balance sheet, improve the liquidity, develop a new asset class, establish an aggressive growth plan, and ensures our management team with seasoned professionals. We now have the piece in place to expand our geographic presence throughout North America, while continuing to pursue potential opportunities in Europe and elsewhere.

In summary, we are building a global organization and leadership team capable of achieving the aggressive goals we have set out for our company.

I will now turn the call to Jeff Lucas, our CFO, to walk us through the key second-quarter 2021 financial metrics.

Thank you, Emiliano. In the second quarter of 2021, Bitfarms generated record quarterly revenues of $36.7 million up $29.3 million or 400%, compared to $7.4 million in the prior year period, as we increased our average hashrate by approximately 89% and benefit from higher average Bitcoin pricing of approximately $46,500 in comparison to about $8,600 in the prior year period.

Third-party revenues from Volta, our in-house electrical services operation, which also services commercial and maintenance of customers increased by $706,000 from $500,000 in the second quarter of 2020 to $1.2 million in the recently completed quarter.

Second-quarter 2021 gross mining profit and gross mining margins stood at $28.1 million and 79%, respectively, both quarterly records for the company, compared to $2.5 million and 36% in the second quarter of 2020. This significant improvement was driven primarily by higher Bitcoin pricing and increase on our hashrate negating the impact of the Bitcoin having in May 11, 2020.

The average cost of each bitcoin mined at $9,000 for the slight increase over the first quarter's average cost of $8,400. This reflects the impact of higher operating cost of Bitcoin mined at our third-party host in the third quarter, offset by the benefits from greater operating efficiencies.

General and administrative expenses, or G&A, were $10.6 million in the second quarter of 2021, compared to $1.4 million in the prior year quarter. The increase was due primarily to an approximate $6.1 million non-cash charge for share-based compensation and higher professional fees, mainly associated with our NASDAQ listing. In building on Emiliano's points earlier, the higher G&A expense also includes the costs of building out a management team and a leadership team to execute our growth strategy over the next 16 months and beyond.

For the quarter, adjusted EBITDA and adjusted EBITDA margins stood at $23.8 million and 65%, respectively, compared to $1.4 million and 19% in the second quarter of 2020. The increase in adjusted EBITDA and adjusted EBITDA margins were mainly attributable to the same factors as for the increase in gross mining profit and gross mining margins just explained.

Adjusted EBITDA, by the way, is EBITDA excluding non-cash compensation expense, the revaluation of digital assets, and financial income and expense. The company's second-quarter 2021 EBITDA was $2.7 million resulting in EBITDA margin of 7%, compared to an EBITDA of $416,000 and EBITDA margin of 6% in the second quarter of 2020. EBITDA includes a $14.9 million loss in the revaluation of the company's Bitcoin holdings during the period, resulting from the lower Bitcoin price at the end of the second quarter of 2021.

Net loss for the quarter was $3.7 million at $0.02 per share, compared to a net loss similarly of $3.7 million or $0.04 per share in the year-ago quarter. As noted, the higher revenues and mining profits were offset largely by higher G&A expense and a loss on the revaluation of the company's Bitcoin holdings, as a result of the lower bitcoin price in June 20 -- June 30, 2021, and the higher non-cash compensation charge in professional fees previously noted.

The company ended the quarter with cash of approximately $36.2 million and total liquidity, defined as cash and our Bitcoin holdings of approximately $81.5 million. The cash position reflects approximately $57 million raised from the private placement in May, and prepayments made for miners totaling $73.4 million in support of our extension plans in achieving our 8.0 Exahash target.

Overall the 2021 year to date through June 30, we raised about $158 million from private placements in the exercise of warrants and options, which were predominantly used to invest in miners and infrastructure, as we work towards our 8.0 Exahash goal to reduce corporate indebtedness, and to fund our ongoing operations while we continue to build a Bitcoin holdings.

This completes our prepared remarks for the quarter. I will now turn the call back to the operator to check for questions.

(Operator Instructions) Kevin Dede, HCW.

Good afternoon, gentlemen, thank you for taking my call.

Hello, Kevin.

Hi, Kevin.

Could you just elaborate a little bit on the international growth plan? I apologize, I didn't quite catch it.

Sure. I'll start, and if Jeff Lucas wants to join, he can. It's Geoff Morphy speaking.

Yes. The whole situation with the with China has just opened the doors to tremendous opportunity, not just us but all North American miners, and we changed our strategy. The type of profitability and cash flow that is possible, because of the increased market share and the economics right now is phenomenal.

And so we turned ourselves more into a marketing and business development machine, so that we could look for newer opportunities with renewable energy in Canada, primarily in Quebec. We're looking for opportunities in the United States. As you know, we already have the power purchase agreement that we're developing in Argentina. We're looking at other countries in South America, and we started looking at opportunities in Europe as well.

The focus beyond Argentina is primarily on renewable energy sources because we think that's where the long-term value is. And we are, as any comments said in various early-stage discussions, in a number of places, the discussions are encouraging.

Okay. Thanks, Geoff. Just digging a little deeper on Argentina, where does that PPA stand? I mean, is that fully signed now? And then I understand -- Emiliano mentioned, hiring a new gentleman to help, I guess, accelerate development in Latin America. Could you just sort of add a little more color on those topics, please?

Sure. (technical difficulties) purchasing has been signed now for a few months. It's a wonderful contract, and we only pay for what we use. So there's no significant deposits or down payments that we have to do on that contract. So we've put our focus in on the development work to make this a success.

And like -- we're far afield from Argentina here in Canada, so we need to start bringing and building our team in Argentina, and Damian Polla was the first hire.

He's a native of Argentina, but he went to school in United States, I think in England as well, and worked in New York in project finance doing a number of electrical power generation projects around the world. I think he did that for last 10, 12 years, working for one of the biggest project finance banks in New York City. And so he's got extensive experience and he's building our team down there.

We are on the hunt for a controller down there, and other staff. We are just in the final stages of negotiating the final terms to an EPC contract for the construction. We fully expect that we are going to be signed off on that in the very near future and shovel in the ground.

We've got owner's engineer that is making sure that everything is being done right for us. We have plugged in our operational experts as part of the Quebec team to assist technology transfer or information transfer to those type of people there, so that we can employ our best practices that we've done in the evolution of our mining operations.

So it's evolving. And Kevin, a part of -- we expect that to be a bit further along with our development, but what we needed to do is get it at a subsidiary incorporated down in Argentina, which is now done. We needed to get tax IDs approved by the government, they were slow in coming, but now they're done. We're able to set up bank accounts, fund those bank accounts, and start making payments, which, really, is opening the door to the type of progress that we're expecting.

So we are still fully expecting to build out 210 megawatts in Argentina next year, with the first production starting at some point, probably in March or April of next year.

Okay. And congratulations on the progress. When do you suppose you'd be able to break ground on the construction phase?

We don't have a definitive date yet, but I'm hoping that's somewhere 30, 60 days away tops.

Okay. Then, can we just talk a little bit about some of the other developments that you see, given the change, obviously, in a Bitcoin mining economic environment [down there]? Where do you see inexpensive power, and how do you expect to leverage it? I mean, you mentioned Europe, North America. Can you offer anything more specific, or is it something you need to develop as you have in Argentina? Or you're maybe hosting arrangement?

No, we're not -- we are looking at developing. Hosting arrangements are convenient, they're fast, but you give away a fair bit of margin and they're not good over the long term, in our view.

We're a self-mining company. We like building our own infrastructure and plugging our own miners in, and that represents the best control you can of your operations plus the best margins. So that's what we're looking to do in our endeavors elsewhere in the globe.

So our discussions, as I said, were early stage, but are in various stages. Some, there's a little bit in infrastructure and some are greenfield opportunities. And we're very hopeful those move ahead nicely, but we're still far too early to pinpoint where those opportunities are.

But they are with renewable power, primarily hydro, and it's not just sort of in other countries, but we're also in various discussions in the province, Quebec as well where we have a strong home base. And I think our connections are opening up some opportunities. But they take a while to develop infrastructure's not -- particularly with renewable sources, it's not quick to develop.

But when you have it, it's long term and it's generally very economic.

Right. Now, Emiliano referenced 160 megawatts in Quebec. That's what you have control over now or access to now, correct?

Correct. That's through eight power purchase agreements that are already signed and approved. We're drawing 69 megawatts, and we fully expect over the next 18 months to try to fully develop the remainder of those contracts.

Like, for example, in Sherbrooke, we have 96-ish megawatts. We are approximately 30 megawatts deployed now, and that's a major area of expansion for us. And we have a new facility that hopefully will get approved right around the corner. We've got all our plants done. We're ready to go, materials ordered.

We're just waiting for the building permit to come in and we'll be breaking ground there pretty shortly. At least I'm expecting to be.

Okay. Okay, Geoff, I'll turn the floor over. Thanks very much.

Okay. Thanks, Kevin.

(Operator Instructions) [Luke Walsh], Investor.

Hello, I was just wondering -- Hello, good afternoon. I hope everyone is doing well. I was just wondering, with rising average cost in Bitcoin with relation to the current operating costs, I was wondering, would that be sustainable to achieve growing profitability within the company?

I think this is a good financial question for Jeff Lucas to handle. Jeff?

And to answer your question, Lucas, absolutely. As a matter of fact, first of all, as I think that Geoff and Emiliano have alluded to is that, a lot of these opportunities that we're pursuing are actually very, very attractive energy costs, even lower than what we're experiencing now in Canada, and the [$0.022] that we've spoken about in the past in Argentina.

So we feel actually very strong into these opportunities for us, really, to safely affect our cost structure going forward. In addition, another point to make here is that one of the great strengths that this [farm springs], is we get a really solid team when it comes to building out infrastructure and running the operations.

And these are guys who know very effectively how to build, in a very constructive and economical level, our operations. So really, we are very, very optimistic in terms of our cost structure and not only in terms of our mining costs, which I just spoke to.

But the fact is, of course, that as our hashrate increases, as our revenues increase, we're going to have a relatively modestly growing G&A structure and operating structure in place here. So we're going to have a lot of operational leverage that's going to work in our favor certainly over the next 12, 16 months several years.

Thank you. That was a great answer. And additionally, one further question is, it's stated on the financial results page that over -- that the company uses over 99% of environmentally friendly hydroelectricity. And I was wondering -- and it said that it was secured through long-term contracts. And I was just wondering for an emphasis on what the long-term contracts provide to the company?

Thanks, Luke. Yeah. As I mentioned to Kevin Dede, we have eight power purchase agreements in the province of Quebec. The province of Quebec is blessed with -- like, just so much hydrology that they have significant power dams and hydroelectricity and a surplus of it. And we have these power purchase agreements.

And unlike other places in the world where they have definitive terms, in Quebec it's a little bit the other way around. Hydro-Québec is a agency of the government and produce power for businesses and residents in the province, Quebec. And when you signed an agreement with them, they have an obligation to continue to provide power to you. So they literally do not have a term to them.

And what's also beneficial is the fact that our average cost per kilowatt hours is just under $0.04 per kilowatt hour, expressed in US dollar terms in the province. And they have mechanisms to protect consumers in the province and in these industrial consumers, so that if they decided to get greedy and try to increase the rates, there's a mechanism in there called IRG that protects consumers.

So that there's an active appeal process, and it would become very political. So they've been able to hold the line on rates for a considerable period of time. They still have a surplus of power in the province. So we do not expect the increase of power to really be in place for the foreseeable future.

So we're confident that that rate structure is going to be there for us for a long time. And certainly, for us to be able to take advantage of growing our drawdown capacity from the 69 megawatts that is there now, up to 160 megawatts that is the cap of our contracts. And we fully plan on taking advantage of that, and hopefully, finding some additional contracts in the province as well.

Thank you. Thank yoy. You have answered all my questions, and I look forward to the growth of this company. Appreciate your time.

Thank you.

Thank you, Luke.

Raymond Rondeau, AGI Envirotank Ltd.

Just -- my family, as well as myself, have been investing for some time. I just have one question with respect to the June results. Could the share-based payments -- I realize is non-cash, have been deferred to a period when the big revaluation wasn't so negative? So that there wouldn't be a problem.

I understand your question, that's a good technical accounting question. So over to Jeff Lucas.

(laughter) Thank you, Geoff. So to answer your question, could it be deferred? It could, but I think it's important for a couple of things. First of all, we're very bullish, very optimistic about the Bitcoin pricing, but really can't say where it's going to be in the short term.

But even more important, Raymond, is the fact that we have got some very, very ambitious goals for the company ahead. We've got a terrific, committed team. We want to make sure that team appreciates -- that we appreciate the work they're doing, they're rewarded for their efforts, and we felt strongly that, given the opportunities and the challenges that we have ahead of us, it is critically important that we put this plan in place and not wait a while to do so.

In recognizing the fact, very importantly, as you pointed out, that is a non-cash charge. We really felt given the goals that we are aggressively pursuing here that it made sense to put it in place now.

And just adding to what Jeff mentioned, like the adjusted EBITDA, we had just under USD20 million and adjusted EBITDA in Q1 just under $24 million. Adjusted EBITDA this quarter with the margins that we're bringing out of this business right now given our operating program, are very strong indeed.

And the growth objectives that we've outlined are aggressive, and strong, and are requiring to draw on all of us and all of our talents. And in fact, we're looking for additional talent to join the team because of the opportunity here. So we're very excited about it. We've got a very committed team and we're really counting on delivering results to all of our shareholders.

Thank you.

(Operator Instructions) This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Thank you very much. We would like to, once again, to thank both our loyal shareholders for your continued confidence in us and all the new shareholders from around the world who have chosen to invest in our company.

We are very proud of the work we have achieved this quarter, and the progress we are making towards our growth and profitability goals for 2021, 2022, and beyond. We are looking forward to continue to provide you updates on our progress. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.