Title

Presentation

Bitfarms Ltd. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.03.

Operator: Good morning, everyone, and welcome to the Bitfarms Limited First Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the floor over to David Barnard of LHA Investor Relations. Sir, please go ahead.

David Barnard: Thank you, Jamie. Good morning, everyone, and welcome to Bitfarms conference call for the first quarter of 2023. 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 on our website at www.bitfarms.com under the Investor Relations section under Presentation. 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 press release [announcing its] first quarter 2023 financial results. I’ll remind everyone, turning to Slide 2, that certain forward-looking statements will be made during the call and that future results could differ from those implied in this statement.

The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and 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 on our website again at bitfarms.com under the Investor Relations section. The company will also refer to certain measures not recognized under IFRS, and they 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 — excuse me, the first quarter 2023 MD&A for definitions of the aforementioned non-IFRS measures and the reconciliations to IFRS.

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] (ph) the quarter; CFO, Jeff Lucas, will follow with a detailed financial review; and Geoff Morphy will return for some closing remarks after the Q&A. And with that, turning to Slide 3, it’s my pleasure to turn the call over to Geoff Morphy.

Geoff Morphy: Thank you for joining us today. I trust you will take away why Bitfarms is well positioned to capitalize on the improving Bitcoin mining economics. To this end, I would like you to take away four points. First, we have established the financial and operating discipline that gives us the strength and flexibility to achieve our existing growth plan on an accelerated schedule, Second, we have also, and importantly, updated our end-of-year 6 exahash per second target to the end of the third quarter 2023. Third, with our foundation and momentum, we expect to seize upon opportunities both today and around the next Bitcoin halving, which is approaching in April of 2024. Fourth, during Q1 2023, we improved our balance sheet and, more recently, we resolved some significant hurdles in Argentina that unlocked the best economics in the industry.

As a low-cost producer with relatively stable energy costs and a fixed operating structure, Bitfarms achieves asymmetrical upside with financial performance that exceeds Bitcoin performance. Turning to Slide 4. I’ll review some of our accomplishments that took place in Q1 2023. We ended March 2023 with 4.8 exahash per second, up 7% from December 31, 2022, and up 78% from March 31, 2022. Subsequently, we have increased our hash rate another 4% to 5.0 exahash per second. During Q1 2023, we mined 1,297 Bitcoin, up 35% from Q1 2022. Then in April, we announced a major achievement of 21,000 Bitcoin mined using 100% renewable energy. With the finite supply of 21 million Bitcoin, to date, Bitfarms has mined over one one-thousandths of all bitcoin to be mined.

We believe we are the first publicly-traded miner in the industry to reach this milestone with renewable energy. Bitcoin prices are rising, and drove Q1 2023 revenue to over $30 million. With our low-cost operations, we delivered gross mining profit of $12 million, which represents a gross mining margin of 42%. Our direct cost of production of $12,500 and our all-in cash cost of production of $17,600 support high margins and remain a strategic advantage as we approach the next halving in less than a year. Adjusted EBITDA improved from $1 million in Q4 2022 to $6.3 million in Q1 2023. And looking ahead to the halving, we have continued to deleverage our balance sheet, and improved our financial flexibility. In a moment, Jeff will elaborate on our reduction of more than $140 million of debt in 10 months to just $19 million at April 30, 2023.

Slide 5 shows we have 10 farms located in four countries. In April, we reached 196 megawatts in operating capacity, 91% of which is powered by sustainable hydroelectricity. I will now review our operations and development plans. Please turn to Slide 6. In Q1, 2023, in Rio Cuarto Argentina, we are transitioning from our start-up phase. Now we have 18 megawatts currently online and an additional 32 megawatts of built capacity. In April, we made a lot of progress. First, our private power provider received its operating permit to power up to 100 megawatts, triggering our minor acquisition plan at our built 50-megawatt warehouse. Second, we energized 2,100 additional miners, bringing the total to 4,400, and expanded operating megawatts from 8 to 18.

Third, with our power permit approved and miners on site, we started drawing power under our power purchase agreement at prices approximately $0.03 per kilowatt hour. This is the lowest in our portfolio, and reduced our overall corporate cost of production. Fourth, we finished testing and brought online our substation, which has more than enough power — enough capacity to power the permitted 100 megawatts. Fifth, we purchased an additional 6,200 Bitmain and MicroBT miners, about half are in transit and the others will be shipped in the next couple of weeks. Upon their installation, the first warehouse will achieve over 75% capacity. As previously stated, we already received approval to import the MicroBT miners, and this morning, we received approval for the Bitmain miners.

In each case, the importation approval was given in about 10 days of us making the submission. Sixth, we are working expeditiously to ramp production at our first 50-megawatt warehouse to full capacity by the end of Q3 2023. To this end, we are in the process of procuring 3,000 additional miners. Seven, with this increased visibility in Argentina, we have accelerated our 6 exahash per second target from the end of the fourth quarter of 2023 to the end of the third quarter. Turning to Slide 7. In Paraguay, in January 2023, we installed 2,888 new, more efficient miners. That boosted the farm’s hash rate to 290 petahash per second. We are optimistic about future opportunities in the region, as it has abundant and underutilized hydro power. Also, we believe the country is on a verge of greater clarity about the industry, as the election concluded on April 30 and a new President will be inaugurated in August.

In North America, we have 178 megawatts with the option to tap another 10 megawatts in Quebec. In Washington State, we have planned ongoing modifications and cost improvements through 2023. Each facility continues to run smoothly, reflected by our minor uptime, defined as the actual production output versus the theoretical capacity of all our miners. Our proprietary MGMT miner and facilities monitoring system empowers our team to optimize our return on assets. Our repair facilities excel at promptly getting miners back in action. Uptime varies with weather conditions, curtailment programs and other factors such as parts availability. As we approach summer in North America, the winter curtailment programs have ended, and we are entering a period of peak power availability.

In April, our uptime reached 97.7%, demonstrating what is possible with moderate weather, good contracts and optimized operations. In fact, operating reliability from both miner uptime and our power sourcing is a hallmark of Bitfarms, and contributes to strong and consistent margins and cash flow. In Quebec, we are prudently executing our expansion strategy to accretively add megawatts and create operating synergies. In Baie-Comeau, we entered into an agreement for a new farm for up to 22 megawatts of hydropower capacity. Our two-phase plan slates 11 megawatts to come online in 2023 and another 11 megawatts in 2024. The transaction is expected to close by the end of Q2 2023, after which we will expect to increase our exahash projections. Please turn to Slide 8.

I will now hand the call over to Jeff Lucas for the financial review.

Jeff Lucas: Thank you, Geoff. I want to begin my comments emphasizing five key elements of our financial position and strategy: First, Bitfarms has stable low-cost power contracts that consistently place us among the lowest cost producers. Second, our financial liquidity creates flexibility. This is important as we are now less than a year away from the next halving event. Third, in March, with improving economics and lower debt, we started to [hold] (ph) a portion of our free cash flow, reflecting our surplus cash flow from operations after our debt service. Fourth, we’ve introduced a hedging program, furthering our flexibility and reducing some of the impact of the Bitcoin market conditions on our financial performance. And fifth, we had the balance sheet to finance our robust pipeline of opportunities and planned growth in 2023.

I’ll now review our mining economics and our performance in our balance sheet. Please turn to Slide 9. In the first quarter of 2023, we mined 1,297 Bitcoin compared to 1,434 Bitcoin in the fourth quarter of ’22 and 961 in the first quarter of ’22. The quarterly difference is primarily due to the 13% increase in average total network difficulty. Our first quarter revenue was $30 million, comprised of $29 million from our mining activities and $1 million from our Volta Electrical subsidiary. This compares to $27 million in the fourth quarter of ’22, reflecting a 24% increase in the average Bitcoin price quarter-over-quarter. This also reflects 10% fewer Bitcoin mined during the quarter due to the increase in network difficulty, partially offset by our higher hash rate.

Focusing on our mining economics, please turn to Slide 10. In the first quarter of 2023, Bitfarms’ direct cost of production for Bitcoin remained among the lowest reported in the industry, averaging about $12,500 per Bitcoin. That’s up from $11,100 per Bitcoin in the fourth quarter ’22. The change reflects the 30% increase in network difficulty and approximately 2% higher energy costs quarter-over-quarter. First quarter gross mining profit was $12 million or 42% of revenue compared to $8 million or 33% of revenue in the fourth quarter. This reflects an average Bitcoin price in the first quarter of 2023 of $22,500, which is 24% higher in the average price of $18,100 in the fourth quarter of last year. Our total cash cost of production, defined as direct mining costs plus the fixed cost of revenue, including rent and technician salaries, as well as overhead, such as cash, general and administrative expenses, were $17,600.

The majority of this $800 increase from the fourth quarter was due to the $1,400 increase in direct mining costs. On the other hand, we are controlling our cash G&A cost, which decreased by 25% from the fourth quarter. And on a recurring basis, removing a one-time expense in the fourth quarter of last year, our cash G&A decreased by $900,000 or 13% sequentially and 25% year-over-year. What’s impressive is that even though fewer Bitcoin were mined during the quarter, which typically increases the overhead per Bitcoin, we reduced mining costs even more, which is also positive in preparing for the halving. Turning now to Slide 11. For the first quarter, our operating loss improved to $15 million compared to the operating loss of $20 million in the fourth quarter of ’22.

Our net loss for the first quarter was $2 million or $0.01 per basic and fully diluted share compared to a net loss for the fourth quarter of ’22 of $17 million or $0.08 per basic and fully diluted share. The combination of our low-cost mining operations and higher Bitcoin prices delivered improved profitability, with adjusted EBITDA rebounding from $1 million in the fourth quarter to adjusted EBITDA of $6 million in the first quarter of 2023. Turning now to Slide 12, I’ll review the strength of our assets. We have 50 megawatts of built out and in-place capacity at Rio Cuarto. And as of today, we have $20 million available under vendor credits. Therefore, we have minimal funding requirements for our planned growth in Argentina and in Baie-Comeau.

At March 31, we had cash of $29 million and 435 Bitcoin valued at $12 million for total liquidity of $41 million compared to $38 million of liquidity at December 31, 2022. During the first quarter, as I mentioned, we mined 1,297 Bitcoin, deposited 30 Bitcoin into treasury and sold 1,267 Bitcoin, generating $29 million of proceeds. In March, we launched hedging activities with the objective of reducing the variability of future cash flows from sales of digital assets and bringing a greater financial stability to the company. In April, we deposited another 30 Bitcoin, increasing Bitcoin in custody on April 30, ’23 to 465 Bitcoin, representing a total value of approximately $13.6 million based on the Bitcoin price that day of $29,300. In the first quarter of ’23, we also raised $16 million in net proceeds from our ATM program.

For the second quarter of ’23 through May 14, we have raised additional net proceeds of $5 million. These funds raised through the ATM earmarked for our existing growth initiatives and future opportunities. We continue to deleverage our balance sheet and reduce total indebtedness to $21 million at March 31, and then to $19 million as of April 30. Turning now to Slide 13, I’ll return the call back over to Jeff.

Geoff Morphy: Thank you, Jeff. Bitfarms remains focused on expanding operations prudently, and we continue to evaluate options to accretively diversify geographically, acquire sites, develop farms and optimize miner utilization. We plan to allocate capital to reinforce our key differentiators, which include: our competitive low-cost structure, our stable and surplus sources of energy with attractive pricing, our proprietary mining and facility management software, our vertically-integrated electrical subsidiary, and our exceptional management team. With this powerful combination, we expect to continue to improve efficiencies and scale operations. As such, we are strategically positioned to grow this year with minimal capital outlay to achieve our near-term 6 exahash per second target and will be primed for the halving in 2024.

Importantly, we will continue to be well positioned to capitalize on opportunities that meet our criteria, both before and after the halving. Before I open the call for questions, I would like to invite you to meet us later this week at Bitcoin 2023 in Miami or virtually at the 18th Annual Needham Technology and Media Conference. Operator, we can now open the call for questions. Please go ahead.

Operator: Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Bill Papanastasiou from Stifel. Please go ahead with your question.

Operator: And our next question comes from Kevin Dede from H.C. Wainwright. Please go ahead with your question.

Operator: And ladies and gentlemen, I’m showing no additional questions. I’d like to turn the floor back over to the management team for any closing remarks.

Geoff Morphy: Thank you, Jamie. I would like to reiterate and leave you with three points about Bitfarms: First, evidenced by the fact we’ve mined over 21,000 Bitcoin with 100% renewable energy, we’ve proven our capability to scale the business. Second, we’ve maintained profitable mining operations each quarter as a result of our determination to maintain stable, low energy and operating costs. Third, with little capital outlay, we expect to reach 6 exahash per second by the end of Q3 from our existing portfolio with upside from the pending close of planned 22-megawatt farm in Baie-Comeau and one or more acquisitions will bring even further value to shareholders. Thank you all for attending today’s conference call. We look forward to updating you with our monthly production reports as well as other developments and on our Q2 conference call in August. Thank you, and have a good day.

Jeff Lucas: Thank you. Take care.

Operator: Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.