Bitfarms Ltd. (NASDAQ:BITF) Q4 2022 Earnings Call Transcript

Bitfarms Ltd. (NASDAQ:BITF) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Good morning, and welcome to the Bitfarms Fourth Quarter and Full-Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded today. I would now like to turn the conference over to David Barnard, with LHA Investor Relations. Please go ahead, sir.

David Barnard: Thank you, Joe. Good morning, everyone. Welcome to Bitfarms’ conference call for the fourth quarter of 2022. With me on the call today is Geoff Morphy, President and Chief Executive Officer; and Jeff Lucas, Chief Financial Officer. Before we begin, please note, this call is being webcast live with an accompanying presentation. To watch along with the slides, you can log onto our Web site at www.bitfarms.com under the Investors Presentations section. If you prefer to listen to the call on your smartphone, you can download the presentation from there as well. I would like to remind you that this morning, Bitfarms issued a press release announcing its fourth quarter 2022 financial results. Turning to slide two, I’ll remind everyone that certain forward-looking statements will be made during the call and future results could differ materially from those implied in these statements.

The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult Bitfarms’ MD&A for a complete list of these. Also during the call, reference will be made to supporting slides, and you can find the presentation again on our Web site, at bitfarms.com, under the Investor Relations section. The company will also 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. We invite listeners to refer to today’s earnings release and the company’s fourth quarter 2022 MD&A for definitions of the aforementioned non-IFRS measures and their reconciliations to IFR measures.

Please note that all financial references are denominated in U.S. dollars unless otherwise noted. During today’s call, CEO, Geoff Morphy, will review our operations for the quarter; CFO, Jeff Lucas will follow with a detailed financial review, and Geoff Murphy will return for some closing remarks after the Q&A. We’ve requested investors to send questions in advance, which I may read to management, time permitting, after the call to analysts interested in the live Q&A. Now, turning to slide three, it’s my pleasure to turn the call over to Geoff Morphy.

Geoff Morphy: Thank you for joining us today as we are excited to talk to you about our recent successes and why Bitfarms is well-positioned in the current environment to take advantage of improving market conditions. As a leading publicly traded international Bitcoin mining company, we continue to carefully assess strategic decisions regarding geographic diversification, farm expansion, miner utilization, public and private company acquisitions, and capital allocation. We have created the following key differentiators. We ensure our competitive low-cost structure by maintaining strict discipline when evaluating expansion opportunities. We seek out and source stable and surplus sources of energy with attractive pricing to continue to expand with a view to reducing our production costs.

We utilize and continue to enhance our proprietary mining management software and vertically integrated electrical subsidiary to yield and improve fleet and operational efficiencies. We set the standard for KPI reporting transparency, maintain the highest standards in financial controls in reporting, and have been audited by a Big 4 accounting firm since going public in 2017. During the past year and one-half, we have built an exceptional management team. Our international team has significant experience and enables us to scale our operations without additional resources. And for the past nine months, we have and continue to improve on our highly disciplined approach to growth and capital preservation, including debt reduction. We will continue these efforts in 2023 by continuing to seek out accretive and cost-effective acquisition opportunities to bring further expansion, increase cash flow from operations, diversify our international footprint, and leverage capabilities of our management team, and using our proprietary software to add immediate value.

Industry consolidation will continue in Bitfarms as we have mentioned numerous times in the past, has a superior platform for this type of growth. Completing and integrating acquisitions prior to the next halving in Q2, 2024, is strategically important. Also, in Rio Cuarto, Argentina, we plan to soon overcome recent impediments and execute on a plan to fully activate our new farm with 50 megawatts of low-cost electricity, and adding well over one exahash of new production. Most importantly, this will be accomplished with very little capital outlay. On the development front, the pipeline is robust, and there are emerging opportunities that may meet our fundamental criteria for transaction growth, which we are working to realize. Now, I’ll review our accomplishments since the beginning of 2022.

Please turn to slide four, which shows some highlights. We more than doubled our hashrate in 2022, and increased it further so far in 2023, reaching 4.7 exahash per second at the end of February. We mined 5,167 Bitcoin in 2022, and in February, 2023, surpassed the 20,000 milestone for Bitcoins mined by Bitfarms since its inception over five years ago. We generated $142 million in revenue and $52 million in adjusted EBITDA in 2022. Our costs remain amongst the lowest in the industry. With our all-in quarterly cash cost to production lower than the quarterly average Bitcoin price, we again posted positive cash flow from operations in Q4 of 2022, which is an accomplishment as the industry struggles. We also significantly increased our flexibility and liquidity by reducing debt by over $140 million during the last nine months, and lowering CapEx commitments by almost $70 million.

Slide five summarizes the status of our farms. We ended 2022 with 10 farms in four countries. We have 188 megawatts in operating capacity, 95% of which is powered by sustainable hydroelectricity, and an additional 40 megawatts of built capacity, in Argentina, is awaiting impending approvals which will allow for substantially and timely expansion, with electricity costs that we fully expect will bring down our overall corporate Bitcoin production costs. Turning to slide six, we show some of our particularly noteworthy achievements at our farms. Ahead of schedule, we successfully completed our ambitious Canadian expansion plan, increasing our hydro-powered megawatts. Specifically at our three new farms located in Sherbrooke, Quebec, we achieved full capacity of 96 megawatts under our power purchase agreement.

During Q4 of 2022, at our Garlock farm, we energized 18 megawatts. At The Bunker, we energized the remaining 12 megawatts capacity, bringing it to 48 megawatts. And as planned, we decommissioned and sold the De la Pointe facility for net proceeds of $3.6 million. In Paraguay, at our Villarrica farm, we imported and installed 2,888 MicroBT M30s, which added a net 168 petahash per second at the farm, bringing the total hashrate in Paraguay to 288 petahash per second, at January 31, 2023, and improved our overall efficiency to 39 watts per terahash. The previous miners have been sold. In Washington State, we are operating 20 megawatts, and generating approximately 600 petahash per second. Farm highlights are continued by turning to slide seven.

In Rio Cuarto, Argentina, there are approximately 10 megawatts currently online, and additional 40 megawatts of capacity built and awaiting approvals. We expect approval of our power permit very soon. Once we receive this approval, we can draw power under our power purchase agreement from our private power producer. Once activated, we expect this farm to benefit from the lowest-cost power across our operations. Then, when the importation of new equipment has been approved, using some of our $22 million of hardware credits, we will purchase and import 8,000 to 9,000 miners. Based on current prices of miners, we expect the credit to more than cover our capital expenditure requirements to bring this 50 megawatt warehouse into full production during 2023.

Photo by bitcoin executium on Unsplash

When complete, this will increase our corporate hashrate to 6 exahash per second for our existing portfolio. After the first 50 megawatts are deployed, we can then ascertain the timing of the construction and bailout of the second 50 megawatts on the same property with the same beneficial attributes. For a glimpse of our operations in Rio Cuarto, I encourage you to refer to the two-minute video that was recently posted to our Web site. Please turn to slide eight, which summarizes and highlights our operations and positions as we proceed in 2023. With that, I will now hand the call over to Jeff Lucas for the financial review.

Jeff Lucas: Thank you, Geoff. Network difficulty increases are raising the cost of production for everyone as new miners continue to be added to the global network and complete for a fixed number of Bitcoin block rewards, only the most efficient players will succeed. Bitfarms continues to execute tactics to maintain an efficient cost structure and strong balance sheet. This positions us for intelligent growth consistent with our strategy of carefully pursuing accretive growth opportunities. And our operational capabilities enable us to achieve the superior financial performance with efficient capital investment. I will review our mining economics, our performance, and our financial strategy. Please turn to slide nine. In the fourth quarter of 2022, we mined 1,434 Bitcoin compared to 1,515 Bitcoin in the third quarter.

The difference is primarily due to the 20% increase in average total network difficulty from the third quarter to the fourth quarter. That said, over the full-year, our hashrate expansion delivered mining growth from $3,453 Bitcoin in 2021 to 5,167 Bitcoin mined in 2022, an increase of 50%. Our fourth quarter revenue was $27 million, comprised of $26 million from our mining activity and about $1 million from our Volta Electrical subsidiary. This compared to $33 million in the third quarter, reflecting a 15% decline in the average Bitcoin price quarter-over-quarter. And about 5% fewer Bitcoin mined during the quarter as the network difficulty increase offset our average cash rate increase of 13%. These factors also impacted the full-year in 2022 revenue worth $142 million compared to $169 million in 2021.

Focusing on our mining economic, please now turn to slide 10. In the fourth quarter of 2022, Bitfarms direct cost of production per Bitcoin remained among the lowest reported in the industry. Averaging just under $11,100 albeit up from $9600 per Bitcoin in the third quarter of 2022. The change reflects the increase in network difficulty partially offset by greater efficiencies from our miners and a modest decrease in our total cost of electricity per kilowatt hour primarily attributable to stable U.S. Canadian dollar exchange rate. While direct mining cost did increase this quarter, our hydropower electricity costs are not impacted by volatility in fossil fuel prices. And thus we continue to benefit from stable electricity cost. As a result, our direct cost of production per Bitcoin has remained relatively steady in the ten quarters since the last having.

Fourth quarter gross mining profit was $8 million or 33% of revenue compared to $70 million or 52% of revenue in the third quarter. This reflects an average Bitcoin price in the fourth quarter of $80,100 which is 15% lower than the average price of $21,300 in the third quarter. Our total cash cost of production including the direct mining cost plus the fixed cost of revenue including rent, technician salaries, and cash, general, and administrative expenses, otherwise, referred to as G&A or overhead, was $16,800. This increase of $2,300 or 16% from the third quarter was again due primarily to the impact of the higher network difficulty on the direct mining cost. Importantly, our cash cost of production in the fourth quarter remained below the average Bitcoin price of $18,100.

That’s delivering positive cash flow from our mining activities. From an IFRS reporting standpoint for the fourth quarter, we reported an operating loss of $20 million which included a $29 million realized loss on the disposition of digital asset. A $23 million change in unrealized gain on revaluation of digital assets, and a net impairment charge — excuse me, a net impairment reversal of $9 million. This compares to the third quarter operating loss of $98 million which include a $44 million of realized loss from disposition of digital assets. A $46 million unrealized gain on the revaluation of digital asset. And $84 million impairment charge to our property, plant, and equipment, and $14 million foreign exchange gain associated with funding our Argentinean operation.

Our net loss for the quarter was $70 million or $0.08 per basic and fully diluted share. This compares to a third quarter 2022 net loss of $85 million or $0.40 per basic and fully diluted share. Importantly, we continue to generate cash from our operations during the quarter, and achieved adjusted EBITDA of positive $1.1 million even with low average Bitcoin prices, the industry experienced in the fourth quarter 2022. Turning now to slide 11, our balance sheet strength and flexibility continued to be our highest priority. Our financial strategy is predicated on our principles of operational excellence, financial stability, and intelligent accretive growth. This supports our key goals of prudently funding finance commitments, plan growth, and selective opportunities at a relatively low cost of capital.

Our approach to financial management is straightforward. We look to utilize the proceeds from the sale of our daily Bitcoin production to fund our operating expenses, contribute to our debt service requirements, and reduce our leverage while affording us the financial flexibility to continue our growth activities. Even amidst the current period of Bitcoin price volatility, we use our ATM or at-the-market program judiciously to fund our growth investment so as to minimize shareholder dilution. Through our efforts to de-leverage the balance sheet, we lowered total indebtedness from $165 million at its peak in early June, 2022 to $47 million at December 31 and a further reduction to $23 million as of February 28. We also reduced our CapEx commitments from over $100 million for $2023 to $32 million at the end of the year.

During the fourth quarter, we renegotiated minor purchasing agreements, extinguishing without penalty payment obligations of $45 million and establishing a $22.4 million credit that’s available for future purchases. Combined with our completed 40 MW have built out an in place capacity at Rio Cuarto, we have dramatically reduced our CapEx financing needs, creating financial flexibility to fund further growth. At December 31, we had cash of $31 million and 405 Bitcoin valued at $6.7 million for total liquidity of $38 million. During the fourth quarter, we generated $54 million of proceeds by selling a total of 3,093 Bitcoin, 1,434 from production, and 1,659 from treasury. We received $3.6 million net cash proceeds from the sale of our de la Point farm in December, and we raised $6 million in net proceeds from our ATM program.

For the first quarter of 2023 through March 20, we have raised additional net proceeds of $14 million. In the fourth quarter, we also continued to lower our outstanding debtedness. We retired our three oldest and most expensive equipment debt financing facilities for $8 million. To fully extinguish our revolving Bitcoin backed credit facility, we paid $23 million, which freed up over $8 million of Bitcoin that was otherwise collateralizing the loan and encumbered. We restructured our equipment financing with BlockFi, paying off the outstanding balance of $21 million for a settlement of $7.8 million in February of 2023. In addition to settling the BlockFi loan subsequent to quarter-end, we paid-off in full about $380,000 due to Reliz Technology Group for about $118,000.

As a result, we ended February 2023 with just $23 million of total indebtedness, which is scheduled to mature by February of 2024 well in advance of the expected having date as planned when we entered into the facilities. As a result, we successfully eliminated debt obligations of over $21 million reducing principal and interest payments by $1.6 million per month or about $20 million in total. Turning to slide 12, I’ll now turn the call back over to Geoff.

Geoff Morphy: Thank you, Jeff. We manage our business with 2024 having clearly in our sights. While no one can predict or control the price of Bitcoin, only the most efficient mining companies will succeed. Our performance metrics are consistently industry leading. We have maintained low direct cost of production, and we are working diligently to reduce our corporate overhead costs. Even at Q4 2022 Bitcoin price levels, we continue to generate positive cash from mining operations. We substantially reduced our debt, CapEx and monthly cash obligations. Also importantly, our debt obligations are scheduled to be fully repaid in February 2024, over two months ahead of the next having. With our existing infrastructure and $22.4 million in available credits for mining purchases, we expect to substantially cover our CapEx requirements to achieve 6 exahash per second by the end of 2023 from our current portfolio of farms.

In addition, we expect a cash tax recovery in mid-2023, which will further improve our liquidity and ability to quickly execute on rising opportunities. Our experienced global management team is highly capable of finding, negotiating and integrating new international opportunities and then to design and build new farms in a cost effective manner. Having vertically integrated operations developed over the past five years continues to be a key competitive strength. We are following a path of growth with absolute discipline, and as evidenced by our track record of operating excellence, we remain well-positioned to take advantage of emerging opportunities and be a respected consolidator in the industry. Before the Q&A session, I would like to mention that we will present at the Sidoti Small-Cap Conference, being held virtually, on March 22, and 23, and the Ladenburg Thalmann Technology Expo, in New York, on April 27.

Operator, we can now open the call for questions. Please go ahead.

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Q&A Session

Operator: We will now begin the question-and-answer session. And our first question here will come from Kevin Dede with H.C. Wainwright. Please go ahead.

Kevin Dede: Good morning, Mr. Morphy and Mr. Lucas, thanks for having me on.

Geoff Morphy: Hello, Kevin.

Jeff Lucas: Morning, Kevin.

Kevin Dede: Maybe a little more granularity on the Argentina situation, you talked a lot about, I guess, power authority. I’m just wondering where the miners are, because I know about getting through customs was an issue in the past. Maybe get us sort of caught up on timing there. And maybe also while you’re talking to that point, address the $22 million in credit and the opportunity that affords you in shipping more miners there.

Geoff Morphy: Sure, let me start. I’ll tell you about the current climate environment in Argentina. And then Jeff Lucas can talk to you about the miner credits and the CapEx anticipated for Argentina. But Kevin, we’re very excited about where we stand in Argentina right now. It came with some impediments and some slowdowns last year as a result of the government and some of their fiscal challenges. But they made adjustments, and we are moving with them. So, the first situation was the power permit. The power permit, once the high voltage lines and the facility was made, they had six months to review the situation and provide approval to our private power contractor to be able to turn on and provide power to us. In the meantime, we’ve had to take and pay for power from the power grid at higher prices.

We believe we are very soon going to approval from the government to allow our private power producer to turn on the power. And as soon as that happens, we will start benefiting from lower-cost power. As we get more miners into the facility, the costs will even get lower because, right now, with the power contractor being utility scale, they need to produce at least 26 megawatts of power, we’re currently closer to 10 megawatts, before we can start getting the full benefit out of the power being taken from that facility. So, we are excited that that seems to be around the corner, and that lower costs are going to be coming into us. We expect that the second challenge was importing miners into the country, which was stalled as a result of the country’s balance sheet.

And they have made changes as I mentioned. And now, we are expect that probably within the next 30 to 45 days, that it will be open to us to start bringing miners into the country. And initially, that will be a few thousand, but then that will move up to 8,000 to 9,000 miners. And, fingers crossed, it looks like we should be in full production during the third quarter of this year, and that facility will be at full production, and then depending on the markets, and the prices, and the hash price, and all the other factors that will come into it. Along the way we will make a decision about implementing the second 50 megawatt warehouse that we can put on the same site with all the same favorable attributes.

Kevin Dede: Okay. So, you’re hashing there now. About what level are you hashing now, and you’re running completely off the grid?

Geoff Morphy: We are pulling power exclusively from the grid right now because the private power producer doesn’t have the green light to turn the power on for us. So, the cost is higher because we’re taking grid power. That will substantially reduce based on energy prices right now and our contract with the private power producer. So, that should be around the corner.

Kevin Dede: Okay.