Digi Power X Inc. (DGXX) Q4 2021 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Digihost Technology Inc. 2021 Earnings Conference Call. [Operator Instructions] Also note that the call is being recorded on March 28, 2022. And now I would like to turn the conference over to Mr. Donald Christie. Please go ahead sir.

Thanks very much. Just before we begin, I'd like to read a safe harbor statement with respect to some forward-looking information that will come up during the course of this meeting. Digihost cautions listeners that forward-looking information and statements are 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 or statements. Please see today's press release and refer to those risks set out in Digihost's public documents filed on SEDAR. The company undertakes no obligation to revise or update any forward-looking information or statements other than as required by applicable securities laws. During this call, the company will refer to certain measures not recognized by 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. EBITDA, Earnings Before Interest Taxes, Depreciation and amortization and adjusted EBITDA as additional information to complement IFRS measures to provide a further understanding of the company's results of operations from management's perspective. EBITDA as I mentioned is Earnings Before Interest Taxes, Depreciation and Amortization and adjusted EBITDA less changes in the value of our Bitcoin holdings and non-cash G&A charges including equity compensation expense. I mean, the major add back to our EBITDA to arrive at adjusted EBITDA is stock-based compensation as you can see clearly in the income statement. These alternative IFRS measures have limitations as analytical tools. And you should not consider such measures in isolation or as substitutes for analyzing the company's results, as reported under IFRS. At this point, I'd like to turn the meeting over to Michel Amar who is the Chairman and Chief Executive Officer of Digihost, Michel?

Good afternoon and thank you everybody. This is Michel Amar, I'm pleased to be able to share with you our full-year 2021 financial results along with the outlook for 2022. So I'd like to start with the purpose of that conference call, I'd like to reiterate the key highlights of our performances for 2021. And of course, the purpose of the call is to clarify what had been disclosed in our MD&A or statements or PR and make sure everyone is in sync with what we meant if it was confusing to certain investors. So I'll start with the highlights and key financial for 2021. A little bit of background, we got public in 2020 February, we had our first year 2020 with a $3.5 million top revenues and a negative income of $5.9 million and a negative adjusted EBITDA of $900,000. We jumped in 2021 to $24.95 million to an increase of 602% and a net income of about $300,000 and an adjusted EBITDA of $14.01 million, an increase of 1,600% over 2020. Cash and cash equivalents by December 31 was around $34.4 million and we had a working capital of $30 million, an increase of 17.60% over 2020. So 2021 had been a very transformative year for us as we have crazy EPS ratios, as you can see. Our net book value per share $3.13, an increase of 251% compared to 2020. So, before I move to all the different events that occur in 2021 and accomplishments, I would like to start to take questions on the first financial highlight that I just mentioned that were PR this morning, pre-market. Is there any questions on the financial results?

[Operator Instructions] And your question will be from Parker Sikora at H.C. Wainwright. Please go ahead.

Hi, this is Kevin Dede. Hi, Michel, long time.

Thank you.

Thank you.

How are you?

I'm great, I'm great. Congratulations on getting your financials done. And thank you very much for having me on the call. I was hoping you wouldn't mind taking a little time sort of laying out how your hashrate developed last year, and where you think it goes this year. And give us some insight on revenue between self mining and hosting last year versus where you think it's going to go this year?

Okay, so, Kevin, thank you for the questions. So as stated in the PR, last year, we had an average of around 275PH. So let me define and clarify what I mean by an average, we started around 200PH, we ended up at the end of the year, as we started to receive new miners we acquired, we ended up the year with around 400 or 416PH and the average weighted calculation was around 275PH. Now, compared to 2022, we disclosed today, but our target is to be around 1.5EH average. So as of this morning, we were at 720PH and that has been over the last few days and we tend to ramp it up above 1.5EH, so we can average 1.5EH or 720PH equivalent today at the metrics of today of digital is about 3.35 Bitcoin per day. That's where we are today. And we intend to have done at 6.70 Bitcoin per day. So for that to happen, we need not only to cross the 1.5, we need to go above that, so we can average and end up at 1.5EH for the year. In terms of revenue, what does it translate to? You take 6,.70 Bitcoin at around let's call it today 47,000, 6.7 times 47,000, 314K 900 times 365 days, $114 million a year targets revenues if we accomplish that goal. In terms of now to respond to your last question, in terms of JV versus text mining, I have a very simple answer for you Kevin is in the adjusted EBITDA, we get you the answer. And the reason why we never disclosed precisely what is the share revenue, we've got two Venture Partners one being open-data and the other one be digital is that in the contracts we sign with both companies, we are not allowed to disclose it unless we have a written authorization from both companies to do so. But if you look at the EBITDA adjusted of 2021, we were at $14.01 million. I just deleted out. And we plan to be around 5x, 4.5x to 5x that number in adjusted EBITDA. And the reason we should be there is that the ventures we have on. The first one with an open data, we own 100% of the miners that we're paid last year. And there's a very important fact that all listeners should pay attention to. We bought this M30 and M30 plus, plus hashrate 88PH and hashrate 100PH. So an average that sale of 95 or so, an IP4 or so. We paid prepaid last February, we were capital raises what we did last year, approximately 17 liquidity financing last year. We paid cash $23 million for audit percent ownership of these miners, but we got delivered until the last spot what few weeks ago. So we got delivered a total of 10,600 to be precise. And this 10,600 miners as a market value today, if I wanted to replace because of this brand new M30 from MicroBT. Most likely will be around $0.5 million to be able to get and replace the 10,600 minus. So we invested $23 million, the accounting grand total, which were under the top accounting firm depreciated these assets like -- we depreciate every asset. And really, if you really want to think about it, we should appreciate it 4x. So only in the miners that we just acquire if they attributed the log value, market value, replacement value. Now, this forward EBITDA for 2022 on the 1.5EH average, we're going to leverage volume or top-line with more or less very small increase in SG&A. We think that our SG&A to do the top-line should not be more than 5%, 6% of sales. So that will increase our margins and offset the share of services or profits we get from the JVs that should offset a part of it. And we believe that we should be able to reiterate the same or close to the same ratio of adjusted EBITDA for the year. So we are looking at the 5x adjusted EBITDA, that's our goal for 2022. And of course, as everybody knows, it all depends on the execution. The good news is that all the miners are in -- all the CapEx infrastructure has been down in the last six months. We got some delayed, my first quarter should have been really the last quarter of 2021. But we've got the minus came a little bit slightly late. But they came and the infrastructure, we got all the permits back in September, it took us about three, four months to get the permits from the city and the planning board. And it took us about four months to four, five months to finalize the setup. Today, we're ready to deploy and ramp up the PH. So that's where we stand. I think we have a very good 2022 target, very achievable. We disclose today in terms of our cash on end or cash equivalent, that we have close to $50 million in order to sustain our operation, and even grow, and even make further investments, that should prevent us to unnecessary dilute the company. So we feel that we're in a great stage. Kevin did any other question? Did I answer your question? So you're likely.

Yes, Michel. Thank you very much. I'm still curious. So the targets and average 1.5EH for the year? How much of that do you have paid for right now? How much does Digihost own? And how much more do you need to install?

So everything, most of it is paid for. Because we had to order all these transformers, equipment, miners, and that type of business, everything is prepaid. So most of these have been already addressed. And that's how we use most of the forms that we read of here. We got very lucky, very smart, I don't know what you want to call it, but by buying this 10,600 miners for that price of $23 million, that was a great investment for us. And that allowed us to use further capital for the CapEx of transformers and containers and all the equipment that is necessary to complete the setup and be able to run. So we don't see a dig for the accomplishments for the 1.5EH. We don't see a big CapEx expansion in order to realize the 1.5. Now, if we plan to grow towards end of the year, and towards first quarter of next year, we're going to have to, of course, invest and open up a budget for CapEx in order to grow.

Can you -- would you mind reviewing your -- sir, your facility strategy? If I understand correctly, you're operating in two facilities now? And I'm curious to as part of, what you might consider and potentially growing, what your facility strategy would be. Would you be able to expand the ones you're in? Or would you have to add something new?

So we do a good question, we do have the capacity to expand within the two facilities that we are currently running. However, as a company's strategy, we want to diversify ourselves in different states that are a little bit more friendly with crypto. I'm sure you're heard about New York aggressive on crypto, and of course, we are grandfathered. And we are good to go. But the sentiment of the vibe in New York is not very welcoming. Even though we disclose today, and I think it's a very important matter that we are over 90% zero carbon emission and one of the leading mining company that can bring and we did it today officially, but we are over 90% zero carbon emission. And the reason why that we use a lot of hydropower and we are in a zone, Zone A New York State that is close to 100% green. However, we want to mitigate the risk for political risk and expand in other state like Texas, two weeks ago, I had lunch with our dear Texas Governor, Greg Abbott. And I spent an hour with him in Miami and he had a lot of welcoming ideas for us to come and expand in Texas. So we opened enough piece and the small way up in Houston, and starting to develop opportunities there. That's one of the states we are running and we are open for all the opportunities in all the states, which we will disclose when or if it happens.

Have you, Michel, have you experimented at all with immersion, if you're thinking about or considering operating other states, I understand Upper New York State is a wonderful mining environment. But other places in the U.S. aren't as hospitable environmentally for mining machines. And I'm just wondering if you've explored any of that on one hand, on the other hand, have you looked at miners outside of MicroBT?

So good question, Kevin. We always and it's part of our ESG goal, we always look for ways to improve the efficiency and the environment concern, so talking about miners, we don't only have MicroBT, we also have Bitmain miners. And we do have low silicon miners and we all know that, Bitmain came up with a hydro miner it's called the s19 Hydro and this Hydro miner have one good quality, they are some less and they are much more efficient per PH than the older miners. So we are getting into the 3.5 meter from where we started. It's a huge, huge improvement in efficiency and the miners are getting more efficient and are consuming less power. And we feel that as an industry, the crypto industry, the mining industry as a whole is really working hard in complying or advancing the agenda of the climate change, really, we are constantly worry about how to make ourselves greener, less carbon emission and move forward and we become the leader, we became the leader in creating these steps. I don't see other industries where they have this type of zero carbon emission ratio. I've seen that in the U.S., we are at 58% as a sector, 58% combination on average, which is a great average and much higher than any other conventional businesses or sector of businesses. So I think we are an engine and maybe because of the political pressure or the environment, we have the engine to help convert faster to zero carbon emission. And another factor, if you look at the grid was supposed to convert their transmission line to green in a regular time, they are having a very huge challenge and their way to convert unsustainable source of power like solar or wind and miners who have this constant base load 24/7 with this on demand program of very good partner of solar expansion. So yes, this companies to name one because it's one of the biggest in the U.S. like NextEra that has the huge program of solar expansion. But they are limited, because they need a 24/7 base load and no one has a better 24/7 base load than a crypto mining company. So I think we are very instrumental in converting to green faster than any other industries.

Yes, Michel, I have a hard time arguing with that. I agree with you, 100%. Thank you, thank you so much for entertaining my questions, Michel. I look forward to talking to you again soon.

You're welcome, Kevin. Thank you.

[Operator Instructions] And at this time, we have a question from [Burk Barke], an Investor. Please go ahead.

Hey, Michel, this is [indiscernible] from Buckeye Capital. How are you doing?

Good, good. What about you?

Good, thanks. Congratulations on the quarter and the year. So just looking at your guidance, I want to make sure I understand it correctly. I think you disclosed currently at 3.35 Bitcoin production going to 6.7 and in today's run rates, that's about $170 million of revenues with 48,000 Bitcoin price assuming that you get to 1.5x hash average for the year and assuming the current network difficulty, correct?

That's correct, that was at 114, because I used 47K but you're using 48. So but it's a good.

So let us take that. So then I was looking at your again, your guidance on the G&A piece, you expressed that there will be leverage as a percentage of revenues because G&A wouldn't grow as much. And even if it did, and we kept your adjusted EBITDA margins constant at 56%, like you had in 2021, that's about $65 million of adjusted EBITDA. So what I'm trying to understand is, can you confirm the capital structure of the company? I want to make sure I understand it correctly. It's about $100 million market cap correct right now with $3.85 stock and 27 or so million shares outstanding?

Well, we went up to 105 today I think we believe, $108 million capital rates.

Okay, so and then you disclosed about $50 million in cash, and Bitcoin and Ethereum balance, and you also disclosed that you paid for 10,600 MicroBTs which based on some of your competition, other companies that we own and follow, the street price for these machines are more in the $9,000, $10,000 range. So you have 100 million machine value, you got electrical infrastructure, you got $50 million in cash and Bitcoin. So you are below trading below if you were to try to replace this company, correct today?

Much below, much below because we have more than 10,200 miners, we have also done, more than today we have about 14,000 or 15,000 miners but you are right.

Yes, you also do have hosting contracts that doesn't, if it's your partners, if you host them, obviously, that's a very capital efficient model, you can further increase your EBITDA. But what I'm trying to understand is from an enterprise value when you back your cash out, I mean you're talking about a $55 million enterprise value for potentially $65 million adjusted EBITDA this year, which will be less than one times, I mean there is a major disconnect between your competition that is trading multiple times those numbers with not as good execution as you or not as much growth. So the two questions, what is the reason of this disconnect? And what can you do so the disconnect goes away in the future?

Great question, Burke and I think I got an idea, we started in 2020 COVID year, we did our first reporting. And quite frankly, to see a $3.5 million and a loss of $5.9 million net was not very exciting for people to say, it's a very immature company we have very small revenue. I think that this is our second audited statements from a major accounting firm, I think but now the investors as of today are starting to see that we report on time. We update mostly our production accounts and I believe that the investors wanted to see the execution level. So now when I announced today, I'm at 3.35 times a day, now you start to realize some execution. And soon, we'll see our update in April of March. And see where we stand this, we start to get credit on our execution level. The original companies like [indiscernible] not to name them, but they are the first company that came into the race. Okay, they were paid on future expectation. We did not get paid on future expectation as the competition started to pile out in the U.S., I think that now while the investors are looking at the numbers, and looking at as you just mentioned, incredible value. I mean, if you go with my assets into cash, which is a very easy task to do, this minus you can sell it overnight, prepay, there's no terms nothing. Okay, it's easy to see that we are undervalued dramatically, as far as my opinion is. And I believe that now that we are reaching more maturity, I think that we'll get more recognition in the capital market and we'll get more coverage, you have to also understand that we haven't been covered by analysts this year, because they all want to see where it is. So it's our first really comparative statements, what is the growth rate, they went from 3.5 to 25 but say, almost a 8, 7.5x to 8x in revenue, okay, they went to minus 8 to 14 in the adjusted EBITDA, but 15x EBITDA increase are very capable of sustaining the growth this year 2022. And I'm saying that we are on the run rate to sustain a 5x growth. And then the investors take the calculator and count and see, okay, if he exited the 5x growth, how does he compare to his peers. And when I look at peers, like let's say RIOT, for instance, that came up with a, let's call it EBITDA of $19 million, or adjusted EBITDA of let's say $88 million or so, we have a $200 billion market cap, a much behind a RIOT, a much beyond in valuation and the RIOT. But I can go to other companies and come up with the same type of ratio. The good news, I would say, we are one of the rare company, but have a net positive income and net EBITDA and the net adjusted EBITDA. Okay, other companies that negative net income, they have adjusted EBITDA that are good, true. So, I think that investors will see the value in our company. Understand, that we are diversifying and expanding nationally, okay. And we are executing. Now, our execution was a little bit delayed as everybody else, I think we are a little bit behind 60 to 90 days behind what our goal was. And hopefully, the investors will understand the delay considering, but we are catching up. And I think we are well managed very tight SG&A. Our SG&A is now founded for our growth. So we should get an improvement in the percentage wise SG&A versus the sales. We are accumulating Bitcoins. So I think we're in a very good position to perform this year, and I believe we will get rewarded for it.

Thank you. I have one final question. It looks like your --as you went from 215 in September 30 to 415, almost double Petahash wise, on December 31. And now you're at 720. And given that you disclose you receive the 10,600 MicroBT and your infrastructure is ready. Could we expect that 720 to increase rapidly in coming weeks? Or is it going to take multiple months or quarters for rapid increase?

So Burke, the -- our intention is always to deploy safely at the testing as fast and as safe as possible. You will have an update shortly because next week is our first week of April and we intend to disclose our March output and therefore we will get you answers next week. But this is our intention to deploy as available and as safe as possible all the miners that we received.

Thank you. Appreciate it. And best of luck.

Thank you, Burke. Thank you so much for your support. Thank you.

[Operator Instructions]. And currently Mr. Amar, it appears we have no questions registered.

Okay, so I'll move on with the accomplishment of 2021. So as you know, we raised about CAD$70 million. And as I explained earlier, the use of the other funds, we're to acquire miners and infrastructure. It took us a while to be uplifted to the NASDAQ. But we got adjusted in November. And now we are trading on the NASDAQ under the same symbol, but on the TSXV. We acquired this M30s 10,600 from mentioned 900. We bought -- we got 10,600 actually, and we received 7,200 of these miners by December 31. And I disclose today that we received the total balance of these miners as during January, February and early March. So we received a total of 10,200 miners. What is that a little bit of the accomplishment of the 2021. A few weeks ago we acquire 100 bitcoins at 39,300 to increase our bitcoin balance and what else we had -- we closed a revolving line of $10 million with some collateral of coins. And on this credit line of 10 million, I think we are the one of the best rate interest rates compared to our peers. We paid 7.5% which is very fair. I see a lot of our peers paid double-digit 10%, 11% on this type of loan, which seems to be high, but we paid 7.5%. So with no penalty on prepayment. And we secure a site in Houston, Texas, which we'll start to work from as early as April. So this is the highlight on the accomplishment of 2021. The outlook we talk about it financially as a general outlook. We are shifting from a race at any price to grow to a race on the -- a high quality, structure and ESG concerns. So we want to be carbon emission free, and we're very concerned about that. I think it's very important for us to be a leader in this transformation, and conversion of your company mission. We want to be diversified in other states, and we want to make sure we build up an infrastructure that's usable, not only for mining, let's call it a hybrid high level data center, but can be used for in the future, not only for mining, even though this is our goal and our focus, but can be qualified as high standard data center, the same type but an Amazon or Google data or Microsoft data center that are very sophisticated now. We want a little bit to reach this type of level and secure, efficient, safe, and environment focused. So this is so -- we might not rush into putting a lot of miners anywhere, as long as they bring rewards. We are trying to be strategic and ESG responsible. So that's our goal. But we plan to repeat this exponential growth year-over-year as we get a better market cap, of course. Shelby, any questions on the outlook or our goals?

[Operator Instructions]. At this time, so we have no questions, please proceed.

So I will conclude. I want to thank you guys for coming up, it was our first Q&A. And we will make sure to have a Q&A for sure every year, but I'd like to make it every quarter. So we can update everyone on the progress and the execution of our company. I will conclude by saying that, we have a great team. We have a great board. Earlier you have the Don Christie our COO. And we are great team and I think that our team is solid. Our goal is not to add a crazy amount of people and start to be true corporates, because when you're true corporates, reliable indications start to go down. So we want to keep our eye level management team close and start to accomplish and execute. It's really about execution in this business. Today my son Alec is very, very creative and he's one of the leader in every new technology in terms of what's happening at the all value system. Burke mentioned the immersion-cooling system. It was the Burke or Kevin, I'm not sure. But of course, we are always testing any new technology to make it more efficient, nose less, and greener, and immersion is happens to be a great future way to operate more efficiently. So, thank you guys for your time and let's look forward the next week for the update of March results. Shelby?

Thank you, Michel Amar. Ladies and gentlemen, this concludes Digihost Technology Inc. 2021 earnings conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a good evening.