HIVE Earnings Call Transcriptbeta

Darcy Daubaras: I’d like to welcome you to today's webcast following HIVE's Third Quarter 2019 Financial Results. My name is Darcy Daubaras, the Chief Financial Officer for HIVE. I'm joined on today's call by Frank Holmes, Interim Executive Chairman; and Olivier Roussy Newton, our Interim President. Before we begin I would like to remind you that during today's presentation we will be making comments containing forward-looking statements information. I invite you to read our financial disclosure for some of the risks and uncertainties that may effect HIVE's performance in the future and as such actual results may differ materially from the views presented today. For further information on these risks and uncertainties please consult our most recent MD&A and filings on SEDAR unless otherwise indicated please note all figures are in U.S. dollars. I will now turn the call over to Frank Holmes

Frank Holmes: Thank you, Darcy, and thanks to everyone online for joining us for our third quarter earnings call. It's quite interesting for me to think that Darcy is in Vancouver 5:30 AM and Olivier is in Zug and I'm in Toronto so a true global snapshot communicating with each other. I'm the Executive Chairman of HIVE, excuse me one second, I've a bit of cough, I got this terrible cold so please bear with me my team here will join in and take over. But I'm joined with Darcy, HIVE CFO and Olivier Roussy, HIVE's Interim President and I'm pleased to report there has been some developments in the company against the backdrop of crypto volatility especially when we look back at 2018. Slide 4, I'll reiterate the why HIVE went public. We've been in the long term viability a cryptocurrencies and blockchain technology, however to point significant mining infrastructure is capital intensive. Now our goal was to raise capital aggressively deployed that capital to reach sufficient scale that we knew was required to be competitive in the cryptocurrency ecosystem and mining space. We released more than $200 million in the markets and one of the small number of companies they had a vision early and quickly and since then we've deployed more than 24 megawatts of GPU capacity, graphics processing cards and then the third quarter we added another 300 petahashes of ASIC capacity which has been mining bitcoin. Initial my pickling initial 200 petahashes in operating under improved financial terms when we negotiate with Genesis and the next 100 petahashes deployed at favorable financial terms. I will get to the details later in the presentation. We have also entered into a strategic partnership with Amber AI to optimize coin sales and we're on the lean operating [indiscernible]. I'm extremely proud of the work we've done so far in a really of almost a violent market I have never seen in my life in my 40 years every four years there is a major cycle I mean I've seen 10 of them I have never seen a faster bull and bear market take place and still so much enthusiasm all over the globe with this industry. On Slide 5, I will try to point out to investors which is important is that we become a derivative of bitcoin and when I take a look at it's important to put this in concept that there are so many investors who are either going to trade under an exchange or go to Coinbase, have basically using us as a proxy. Next slide please, can you take this, can you take this Darcy, please.

Darcy Daubaras: Absolutely as you can see on slide 6 so the volatility remains high for cryptocurrency but it's volatility has come down meaningfully since Q2, 2019 which is a very positive trend so that's what we're up against but we remain bullish on the long term value in function of cryptocurrency than blockchain technology.

Frank Holmes: Next one, Darcy.

Darcy Daubaras: Yes. So this is the -- we can see here that on the HIVE stock has a tremendous liquidity advantage over our peers and more than 8.5% of the shares outstanding are traded monthly on the TSX, more than 11% on all other exchanges as shown in table here this compares to much lower volumes that we're seeing that are being traded by our peers.

Frank Holmes: Thank you, Darcy. I think it's really important for investors to recognize that a couple weeks ago bitcoin jumped 17% and so do we jump 20% and trade millions of shares and that's become very important in the overall branding as the go-to company in the space. I mean on the next visual slide 9 there, slide 9 please. So what I'm trying to -- I apologize for my coughing but what's really important for investor recognize is that the peak happened to be when futures market took place and all of a sudden bitcoin started seeing heavy net selling into it and we saw a slew of coordinated government regulatory G20 countries coming up with policies and you know what there's so many sweet bad characters in this space and it's good to have some referee in regulations in this industry but I think that during this whole process one of the biggest entities that were knocking bitcoin it was JPMorgan and then Facebook stopped it advertising and Google stop allowing advertising by the crypto world and even with all that negative news we saw this incredible fair market, the enthusiasm [ph] were made remarkable, conferences big turnouts all over the world. I can share with you this would never happen in the Gold arena, their goal is to follow between 70% and 90% that people would come out to conference to learn about latest new gold opportunity, it just wouldn't happen. But in the blockchain of the world it continues to evolve and in the next slide it's really significant to see that last year as the price of bitcoin and ethereum fell the number of wallets went up dramatically that meant there were more users, more people diversifying, more people coming into the industry. There's many articles written regarding I've League schools, diversifying coming in and owing bitcoin. The mix is good is I think is one of those classics of looking at how long does it take for adoption and this also comes from Amber and how long does it take for people to use vacuums television, TV, colored TV's etcetera, water heaters and here we are, we're still very young in that stage. So I don't think we believe eSports, everything was, whole digital world and it's all interrelated and so with that I think it's really important for investors to recognize it is a treacherous bear market, a lot of people will be pushed over the space, already have and those who survive will definitely thrive mass of the this next uptick and it looks like they were pretty close to a bottom. So when we take a look at the next visual, JPMorgan, the [indiscernible] do nothing but knocking bitcoin from one moment saying it's fraud, next moment saying he wish he hadn't said that and next moment, I don’t want to talk about it anymore. There is a whole lot of people following and tracking what he's had to say but during this whole process they are [indiscernible] JPMorgan and that coin is almost like a tether which was a lot of concern that on the crypto world they can refer to U.S. dollars and you had a coin that was representative of one coin for every world but that’s with the JPMorgan coin is allowed is basically backed by the dollar it's another form of a dollar but they went through the processes, it's very smart to get all the compliance side and pushing their way in, pulling their way in into this stage of the crypto world. So I think the other part of Facebook is now, New York Times, there is an article regarding your New York Times going around canvasing and looking at coming up with their own coin. So I think it's important to recognize that yes we've had a treacherous bear market but big players like Facebook and JPMorgan are entering this space at the same time many more new investors are coming with wallets. Now let me turn over to the Co-Founder, the actual person who was the creator of this is company, Olivier.

Olivier Roussy Newton: Thanks, Frank. Moving to slide 13, historically we have had a 100% of our mining capacity committed to ethereum and ethereum classic for our GPUs, we recently also began mining Grin, a new cryptocurrency and continue to explore new GPU based coins to mine. As Frank highlighted the cryptospace has been extremely volatile and over the course of 2018 ethereum was under significant pressure from different variables such as ICO suppressed sales and other events. This quarter we successfully diversified our mining assets by adding 300 petahashes of basic capacity which is committed to mining bitcoin and potentially other Bitcoin fork currencies. Slide 14, we talked about it last quarter a bit, but I do believe it's worth revisiting. We announced that 200 petahash based ASIC deployment which delivered its first coins on October 1, 2018. So this was our first quarter with the coin contribution to our top line. Importantly we announced that we had negotiated improved financial terms for the bitcoin mining contract with Genesis mining. This reduces the operating costs by 30% and was retroactive to October 1st. Additionally we have an option to extend the contract to two years from one providing us increased flexibility. Finally, we continue to accumulate coins even as we sold some in quarter to fund operations. Slide 15, on the next slide here some details of the additional 100 petahashes at ASICs that we added to our mining asses. In terms of the contract we are 6 million in cash with 3.5 million shares issued at $0.55. At the time of the issuance our shares were trading well below $0.30 so I see this as a really big vote of confidence and support from our largest business partner Genesis mining. The remaining 2.5 million was payable in cash and ether. I'll turn it over to Darcy for the financial performance slides.

Darcy Daubaras::

. : I'd like to highlight that gross mining margin is a non-GAAP figure which is calculated as the value of coins received at the time of mining less operating and maintenance cost paid to Genesis. Due to continued weakness in cryptocurrency including a ethereum we announced an impairment of 16 million related to our assets in Iceland and Sweden under the accounting standards something that management does quarterly, takes a look at their assets, looks at what the future is for those and we are obligated based on those calculations and assessments to determine if a further impairment is needed to quarter and with this I want to be clear that this is a non-cash charge with no payment being made or cash spent as a result. They mentioned it strictly in accounting treatment that reflects the assessed value of the assets. In this quarter we had a number of large non-cash line items which include revaluation of [indiscernible] concerns, loss on the sale of digital currencies and impairments. These totaled 21.5 million and depreciation was 9.4 million, our loss for the quarter was 36.4 million which includes the negative impact of previously noted items. I would like to point out that our attention to cash preservation meant that our cash use in operations for the nine months ended December 31, 2018 was a use of 1.6 million and we have ample current assets which I will go over shortly. Overall in the third quarter we were held back by week cryptocurrency but we continue to assess and streamline our cost base and continue to seek ways to lower our cost base like working with our partners. We've already lowered our cost on the 200 petahash of ASIC mining and look forward to making progress on reductions of cost on our GPUs. On the slide 17 we highlight what I consider to be a solid financial position. Our cash on hand at December 31, 2018 was 6.3 million and digital currencies were 10.4 million resulting in total current assets of 17.5 million with a low cash burn. While price pressure is a headwind in the near term we remain bullish on the long term value of cryptocurrency and we believe that deploying the 300 petahash of ASIC miners to diversify the business into Bitcoin is a very prudent use of capital that reflects the aggressive capital deployment towards higher ROI investments. Moving on to the next slide, these charts illustrate the impact that crypto prices have had on the value of our coin inventories. As of December 31, 2018 we held 10.4 million in inventory, the majority of which remains held in ethereum however as you can see with less than a quarter of contribution somewhere 300 petahashes of capacity we already hold nearly $2 million of bitcoin and inventory. You'll see on the next slide that despite growing numbers of coin the total value has declined which gives us excellent potential upside should cryptocurrency rebound in 2019. I would also like to highlight that in the first nine months of the fiscal year we sold 6.4 million of coins so we continue to sell inventory to cover operating costs while maintaining a healthy cash balance. Looking at more detail at our coin production in the quarter you will see from the chart that we have continued to grow our coin inventory since September 30th our last quarter outing 16000 ethereum, 26000 ethereum classic and 500 bitcoins net of sales. We remain bullish on the long term value of crypto currencies which is why we maintain exposure to the asset class by holding coins. I'd like to turn it back over to Frank Holmes.

Frank Holmes: Thank you, Darcy. I think when we move to next visual it is ASIC chips fell something like close to 90% the value of that and that was another reason for the thought process of these assets have a return on capital and we go back to 2017 where it was over $2000 - $2200 put together these chips and they fall [indiscernible] but they still have fallen and it took $20 billion off of [indiscernible] market cap sort of meltdown that took place and so I think it's a non-cash charge as Darcy highlighted but it's just prudent based on the decline something which is a big part of our CapEx spend to continue to find coins we need GPU cards and we ASIC chips and today is probably the best time to have capital to go by because the cost of the chips is so much cheaper. And the next key factor is electricity costs, electricity cost is a make-up or break when you look at pictures around the world and we will talk a little bit more of that in the presentation. So I wanted to go over slide 21 and we've had a great coverage by media outlets, investment letters, we continue to drive awareness, we trade actively on the OTC board in U.S. and Germany, and Canada. So we're very liquid go to stock and 70% of all stock trading here [indiscernible] and clearly then appears that we've become the go to stock trade because we move in perfect tandem with bitcoin and ethereum. Now I would like to turn it over to AI and turn Mr. AI as Olivier in our team because he has put a lot of work and effort into this space and ask him to give comment on this slide.

Olivier Roussy Newton: Thanks, Frank. We continue to make progress on a strategic plan to remain at the forefront of the blockchain infrastructure industry and blockchain technology broadly. We have continued to assess investing capital and we are in a good position with our balance sheet. The assets we own position us very well as leaders in blockchain infrastructure space. We continue to add to our inventory even as we draw down coins to fund operations. The HIVE team since inception decided to go with the GPU approach to the majority of our rakes due to the fact of the crypto currency volatility and if there is a huge drawdown in the currencies like we've experienced we do have a large portion of the GPUs to use for other applications such as AI. We are part of the ever changing blockchain ecosystem which presents numerous opportunities as this technology evolves and we continue to evaluate potential M&A which presents significant opportunities for accretive growth but assessing in getting deals over the line takes time. With that I would like to thank our investors for their ongoing support and I will turn it over to the Q&A portion of our call where we would be pleased to take your questions. As a reminder you may submit your questions to the webinar portal, we will take a brief pause while we can follow the Q&A.

A - Darcy Daubaras: Okay, so we have got some questions in here, the first question is from Deepak from GMP and probably this question is for you Frank. The question is what is the status of the search for a permanent CEO and on what color can you provide on that process?

Frank Holmes: Well we continue to look at qualified candidates with expertise in technology in particular data centers and understanding all the issues that go with them. So the search is ongoing, we will find the right candidate for the role takes time especially when you have a bear cycle. People [indiscernible] to think they're going to leave it a data center expertise and then jump into the crypto world and I think that we will continue that search. As soon as we can get someone we will announce it. Thank you for the question.

Darcy Daubaras: Got another follow up question from Deepak and he's asking can you comment on the Genesis filing that they did regarding the sale of shares that was filed on SEDAR.

Frank Holmes: I think what's really important Deepak for our investors is to recognize which was comment earlier that when the decline was in the trough our shares were in a trough in the $0.30 range, they did a transaction and they took back shares at $0.55. That was just great faith, in good faith on what they did and they took some of the coins and we were able to keep our cash and be able to expand our petahash at the bottom of that bitcoin trough and I think that the stock is well back up level and they like anyone running a business especially in a bear market needs liquidity so if they wish to sell then they wish to sell I don't think it's any material, the control blocks of the major positions [indiscernible] they're all they're basically locked up and their maintain is long term investors in welfare and the success of HIVE and I think something else is recently that Marco did was remarkable that our guaranteed rate went from [indiscernible] to 96%. So 96% uptime so I think that's a really that's very positive for us as a company and shows up a good faith on their behalf working with us. Next question.

Darcy Daubaras: That's great. The next question comes from David Kwan at PI Financial [ph]. David asking can you provide an update on your plans for Kolos Norway, given the unfavorable government ruling on tax relief on power consumption for crypto miners and are you looking at building an operating traditional data center for Kolo location and hosting?

Frank Holmes: Olivier, could you comment on that and I will add anything to it.

Olivier Roussy Newton: Yes, as you know or as I believe we have updated, spent in Sweden as well the region parliament recently made a decision to take away power subsidies. We're still consulting with legal counsel as to how and if it effects the crypto currency and if it's a really specific for bitcoin miners as opposed to GPU miners so there's definitely some discrepancies in the legislation that was put in last minute and before they filed that in late December the industry was not consulted which came as a surprise to everyone broadly continue to assess opportunities there. We have access to more than a gigawatt of power and property which makes it a very unique opportunity but certainly changes and impacted our potential future plans. We had our team up there last week to assess various construction opportunities in the form of containerized units and also build out usually that's ultimately as the market rebounds we can exercise quick deployments with some of the cheapest power still in Northern Europe.

Frank Holmes: I will just add to that, I was up there probably about seven weeks ago with one of the Director, Tobias and then last week Toby was up basically close to the Arctic Circle and he had an audience of 100 people of the community came out. I think the costs are very attractive compared to Sweden but there are still several issues that we have to get resolved and help us to get a give us electricity and build that out. We believe we've been building but we need to make sure the transformer, electrical grids there. So we are going back and forth and it seems to be its progressive, it's positive and it is a lot less expensive than Sweden. Sweden has been a major disappointment, price surge is there, are just in those meeting at $0.15 a kilowatt and because of that we're assessing our strategies with Sweden with Genesis because electricity costs have soared and ethereum prices remain weak and introduction of [indiscernible] means less rewards one of these options is Norway which we've been busy striving to get enough details and I think we're getting there we're making progress with it to build a data center and move our equipment there and it's like a five hour truck drive, but this isn't happening as quickly as you would like but we are concerned about margin compression, we are in negotiations regarding our MSA with Genesis and what we do in Sweden and would have further developments here in a very short period of time. So stay with us where we are also looking at North America for options if we cannot get it back at this, if Norway is going to be attractive then we will have to pivot and look to North America. Next question.

Darcy Daubaras: Perfect. That's great Frank. And it flows in a little bit with what you had mentioned there Frank, a question follow up from David is what do you expect the impact on HIVE the business is going to be from the recent ethereum upgrades so this is including Constantinople that you had mentioned Frank and St. Petersburg, particularly the decrease in rewards from 3 ethereum to 2 per block. Olivier?

Olivier Roussy Newton: Yes, clearly it impacts our mining reward one thing we're looking forward to is in the coming months of potential fork two progressive proof of work which will eliminate ASIC miners that were brought into the market sometime during the bull cycle towards the summer months by Bitmain last year which are a large amounts of the hash power on the ethereum network, so if that were to happen it would allow the GPUs to be ideally a lot more efficient obviously it's somewhat impossible to predict how efficient it would be right now but it would definitely eliminate a lot of the hash power on the market and make those mining rewards more profitable for HIVE.

Frank Holmes: And just to add AI is growing rapidly and we're signing -- we're in heavy discussions with different entities to use our system but our GPUs that is but still the pivot part is electricity cost. So we have the hardcore equipment but we need to have access to payables, inexpensive electricity for the AI industry or the gaming industry so that’s what we are looking at is options. Would you like to add to that Olivier?

Olivier Roussy Newton: Yes, no absolutely I think once we look at reevaluating other GPU opportunities we will be able to act quickly on those as we get with the likes of the Grin coin which we see potential in and another application.

Frank Holmes: Great. Thank you. Well I would like to thank Darcy and thank Olivier for helping me out today and if you have any additional questions just e-mail them in and we will get responses to you. Thank you all for listening to us and being loyal, supporting shareholders in this incredible volatile market. Thank you. And that's a wrap Darcy.

Darcy Daubaras: Yes, we are done.

Frank Holmes: Great.