Q1 2024 Gryphon Digital Mining Inc Earnings Call

Participants

Robby Chang; Chief Executive Officer, Director; Gryphon Digital Mining Inc

Simeon Salzman; Chief Financial Officer, Corporate Secretary; Gryphon Digital Mining Inc

Martin Toner; Analyst; ATB Capital Markets

Jon Hickman; Analyst; Ladenburg Thalmann & Co. Inc.

Kevin Dede; Analyst; H.C. Wainwright & Co.

Presentation

Operator

Greetings, and welcome to the Gryphon Digital Mining first quarter 2024 earnings call. On the call are Rob Chang, Chief Executive Officer of the company, and Sam Salzman, Chief Financial Officer of the company.
Before I turn the call over to Mr. Chang, please note that statements made on this call that are not historical facts may be forward-looking statements from the company's management made within the meaning of Section 27(A) of the Securities Act of 1933 as amended, and Section 21E of the Securities and Exchange Act of 1934 as amended concerning future events. Words such as may, should, projects, expects, intends, plans, believes, anticipates, hopes, estimates, and variations of such words and similar expressions are intended to identify forward-looking statements.
These statements are subject to numerous conditions, many of which are beyond the control of the company, including those set forth in the Risk Factors section of the company's Form 10-Q for the quarter ended March 31, 2024, filed with the SEC. Copies of these documents are available on the SEC's website at www.sec.gov. Actual results may differ materially from those expressed or implied by such forward-looking statements. Any forward-looking statements made on this call are made only as of today's date, and the company does not undertake any obligation to update or supplement any such statements to reflect subsequent developments.
Now I would like to turn the call over to Rob Chang, CEO of Gryphon Digital Mining. Rob, please proceed.

Robby Chang

Thank you, operator, and thank you, everyone, for joining us today to discuss Gryphon Digital Mining's first quarter 2024 results. In Q1, we continued to execute our mission of creating a financially nimble, highly profitable and environmentally responsible Bitcoin mining operation. I am pleased to highlight that we have successfully completed our minor upgrade program ahead of schedule. This strategic initiative is expected to significantly enhance our operational efficiency and strengthen our competitive position in the market.
As part of this program, we have deployed the previously announced batch of Bitmain S21 200 terahash per second miners, which were procured to replace a portion of our older fleet. The integration of these cutting-edge machines is projected to contribute an additional 23 petahashes per second to our hashing power, while simultaneously improving our average fleet efficiency to an impressive 28.5 Joules per terahash.
As a result of these upgrades, Gryphon's self-mining hash rate has now reached a capacity of approximately 0.94 extra hashes per second, showcasing our unwavering commitment to maintaining a robust and efficient mining operation. We are confident that these enhancements will position us for continued success and growth in a dynamic Bitcoin mining industry.
This upgrade is also a notable first step towards our aspirational target of achieving 10 exahash in an accretive manner as we look to transition from a smaller player to a significant industry presence through accretive growth. Moreover, our focus on operational efficiency resulted in a Q1 breakeven cost for Bitcoin of approximately 34,000 compared to 23,800 in Q4 2023.
Over the last 12 months, our average cost per Bitcoin was about 22,500 per Bitcoin. As a reminder, we define breakeven as the cost of revenues excluding depreciation divided by the total Bitcoin generated. We believe this industry leading cost structure positions us to weather Bitcoin price volatility and maintain profitability even in challenging environments.
During the quarter, we remain focused on opportunities to grow our hash rate in a highly accretive manner. We actively focused on private Bitcoin mining companies that are struggling post-halving due to lack of capital and scale. These carbon neutral miners in safe jurisdictions are prime M&A targets for us. By merging into our public vehicle, they can access the capital markets while any equity we issue would be highly accretive given our relative valuations. I want to emphasize that any growth we pursue will be done in an accretive manner. We will not issue equity simply for the sake of increasing hash rate without accounting for the cost to do so.
At this time, we have not entered into any binding LOIs with potential targets. Additionally, I'm pleased to highlight that our Board of Directors recently authorized a share buyback program, allowing for the repurchase of up to 5 million of Gryphon's common stock. This strategic move underscores our ongoing commitment to enhancing shareholder value and demonstrate to the Board and management team's confidence in Gryphon's strategy.
In an industry where share sales are common, Gryphon is showing that share capital management goes both ways. The Bitcoin halving of it has been a key theme impacting the industry and our business. With mining rewards cut in half as of mid-April, mining operations that were ill-prepared are now at a crossroads. We expect this reckoning events to lead to further industry consolidation that rational operators like Gryphon can take advantage of. We believe our low-cost structure positions us to be a consolidator and emerge stronger on the other side of this industry shakeout.
I'll now turn it over to Sim to review our financial results before closing, with some additional remarks. Sim?

Simeon Salzman

Thank you, Rob. I will now highlight our financial results for the quarter ended March 31, 2024. Gryphon mined approximately 142 Bitcoin, generating mining revenues of $7.5 million in Q1 2024 compared to $4.8 million in the same period in the prior year. Breakeven costs in Q1 2024 were approximately $34,000 compared to $23,800 in Q4 2023. The increase in breakeven costs quarter over quarter reflects the direct correlation in the increases in pass through electrical rates, mining difficulty, and global hash rate over that same period. For the three-month period ending March 31, 2024, and March 31, 2023, the company incurred pass through variable energy costs of $0.046 per kilowatt hour and $0.031 per kilowatt hour, respectively, an increase of 46%.
In addition, the daily average global hash rate increased 88% over that same period. On a per kilowatt basis, this translates into a cost of approximately $0.08 for Q1 2024. Please note that over that same period, Bitcoin's price increased from $22,830 to $52,746 or 131%, resulting in increased profitability for each Bitcoin mined. We believe breakeven costs and total cash costs at the mine level are the most relevant metrics for assessing Bitcoin mining operations. Highlighting these metrics gives investors and analysts better transparency for comparative analysis across mining companies.
Turning to our results of our consolidated statements of operations, our net loss incurred during Q1 2024 of $11.7 million included net non-cash expenses of $11.6 million, inclusive of depreciation expense of $3.2 million, stock-based compensation expense of $208,000, unrealized losses on marketable securities of $216,000, changes in fair value of the Bitcoin denominated note payable of $9.6 million, offset by unrealized gains on digital assets of $1.7 million.
This compares to a net loss of $6.9 million in the quarter ended March 31, 2023, which included net non-cash expenses of $11 million, inclusive of depreciation expense of $4 million, changes in fair value of the Bitcoin denominated note payable of $8.2 million, offset by unrealized gains on marketable securities of $63,000, and stock-based compensation benefit of $1.2 million.
Our adjusted EBITDA, a critical gauge of our operational effectiveness and financial well-being stood at approximately $1.9 million for the quarter ended March 31, 2024, compared to $4.2 million for the quarter ended March 31, 2023. This metric signifies not only our profitability, but also our capacity to produce substantial cash flow while dedicating resources to fuel future expansion.
Net loss per basic and diluted share for Q1 2024 was $0.36 based on basic and diluted weighted average shares outstanding of approximately $32.4 million. This compares to net loss per basic share of Q1 2023 of $0.28. Weighted average shares outstanding of approximately $24.9 million. Our average efficiency for our active fleet of approximately 8,700 Bitcoin mining machines was 28.9 joules per terahash as of March 31, 2024. Since then, we have deployed a batch of newer generation mining machines and have improved fleet efficiency to 28.5 joules per terahash.
As of March 31, 2024, our balance sheet reports approximately $1.7 million of cash and cash equivalents, $4.2 million in Bitcoin, and approximately $23 million due for the note denominated in Bitcoin. As of December 31, 2023, our balance sheet reported approximately $0.9 million in cash and cash equivalents, $2.1 million in Bitcoin and $14.9 million due for the loan payable.
We would like to note that the increase in the debt presented as of March 31, 2024 is due to its structure being denominated in Bitcoin and as such reflects a direct correlation to the price of Bitcoin as the period end. And we have not increased our position of Bitcoin due and we remain fully hedged to our production. To reiterate Rob's comments, we remain laser focused on pursuing growth in a financially disciplined, accretive manner.
With that, I'll turn it back to Rob to discuss Gryphon's 2024 strategy.

Robby Chang

Thanks, Sim. In conclusion, Q1 marked another solid quarter of execution for Gryphon as we delivered strong revenue and profitability, while expanding our hash rate. The halving event is separating the wheat from the chaff in our industry, and we believe we are well positioned to emerge stronger. Our experienced management team, low-cost operations, and accretive growth strategy differentiate us from the pack.
Looking ahead, our priorities for the remainder of 2024 are: one, to continue expanding our hash rate in an accretive manner towards our 10 exahash target through a combination of organic growth and accretive M&A. Two, maintain our industry-leading cost structure and drive further efficiencies across our operations.
Three, be opportunistic in pursuing distressed asset acquisitions to accelerate our accretive growth at attractive valuations. Four, continue our focus on environmental stewardship by keeping our operations 100% carbon neutral. With that operator, let's open the line for any analyst questions.

Question and Answer Session

Operator

(Operator Instructions)
Martin Toner, ATB Capital Markets.

Martin Toner

Good morning, gentlemen. Thanks for taking the call.

Robby Chang

Good morning, Martin.

Martin Toner

Can you maybe talk to your strategy utilizing both the ATM and the buyback? What's your strategy behind when either would be appropriate?

Robby Chang

Yeah. So the ATM and the buyback we view as both tools for a good capital management strategy of our shareholders' equity. The way we look at it is when we viewed that the share price is unreasonably low, let's call it, we would certainly look to buying back the shares because we believe it will be the best deployment of our cash at the time. Coincidentally also if we find that there are good opportunities and when the time is right, we would also pull some money out of the ATM.
Would note that the ATM has been around for about a month now, and we've only tapped a small amount, just really to test it out of around $45,000 or I think 0.08% of our products. So we certainly have exercised restraint and we're not going to hammer on the ATM as many are worried about. But we do see it as a tool to, at the right time, take in some capital if we think it's the right time and whereas opportunities. As well, on the flip side in the buyback, we would like to buy back some shares when we think the market has unreasonably pricing us too low.

Martin Toner

That's super. Can you talk to the investigation around the PPP loan related to the previous business before the RTO?

Robby Chang

Yeah. Sim, I think you might be better positioned to answer that.

Simeon Salzman

Sure. So at this time, we received a letter for an inquiry on how the PPP was classified. So essentially occurring it to being a tech company is no different than a energy company providing electricity to a software or non-direct facing company that is servicing the marijuana industry. And so we are currently pulling up information to provide you support that and (technical difficulty) of which occurred as prior management relied on in -- and then obtaining the forgiveness of the PPP [loans]

Martin Toner

How much risk do you view there is? Like, can you quantify the risk of this?

Simeon Salzman

At this time, I can't quantify that risk. I do know the note was for about $2.2 million, but as I said before, it's equivalent, again, we can't really speak on having any certainties, but I believe there is a remote probability given the fact pattern that we have been made aware of and have seen. So still very preliminary at this point.

Martin Toner

Got it. Okay, perfect. Thank you for that. Appreciate it. Last one for me. Maybe you can just talk through what you're seeing out there in terms of opportunities for M&A. You mentioned distress. I mean, what type of shape are some of these players in and maybe give any thoughts you can offer in terms of like timeframe?

Robby Chang

Yeah, certainly. And so we may classify distress, but certainly I don't necessarily think they're going to walk around saying that they are distressed. And not to say that they necessarily are. Let me rephrase the meaning we've presented as a less than ideal scenarios. And so what we have seen post-halving is that there have been a few more companies have started exploration of scenarios where they may be engaged investment bankers to look for opportunities.
And so they see the situation in that with the halving, they're not making as much or maybe they're breakeven or slightly below, and they're now looking for opportunities. So there are quite a few of those. I would say with our M&A team we probably looked at a dozen to maybe for 16 different opportunities as well, actively scouring through them. And so hopefully one of those will land were in pretty detailed conversations with a few. And we're looking to talk on several, simultaneously, ideally.

Martin Toner

That's great color. Thank you very much. I'll hop back in the queue.

Robby Chang

Thanks very much, Martin.

Operator

(Operator Instructions)
Jon Hickman, Ladenburg and Thalmann.

Jon Hickman

Hi. Could you maybe walk us through briefly if we were to speak next year at this time, what are your organic growth opportunities? And well, what kind of exahash could you reach organically?

Robby Chang

Great question. That's a tough one to answer because we are looking at M&A and we believe the M&A will trigger the organic, the reason being is this we don't really want to raise significant amounts of capital around here, if we need to sure, at least we have an accretive opportunity. But if we were to grow organically right now out of the gate that wouldn't necessarily imply a large capital raise here. And so instead what we're trying to do is we're trying to do M&A first where we believe there's a lot more accretive and better discounts out there to grow.
Using that announcement, we believe our share price will start reflecting a higher valuation to what we think is more appropriate for what we believe we're worth. At that point, we might look at doing some capital raising then because it will be less dilutive or less shares we need to issue and then be able to acquire organically through -- grow organically through machine purchases and the acquisition of facilities directly.
So it's tough to say because we are trying to do one thing first before the second, but our -- as we've stated before, we do have an aspirational target of hitting 10 exahash, which is going to be difficult, but it shows the aggressiveness that we're trying to move forward with in that we're not going to declare victory if we only get 50% bigger or 100% bigger. We want to get multiple times bigger, and that's we're looking to do.

Jon Hickman

So on the on the M&A side, these companies that are in less than ideal situation, are you mostly focused on the opportunity we get the power and then you would put in the appropriate machines? Or is that kind of the goal here?

Robby Chang

Yes. It's really primarily an acquisition of power, either, let's say, they already own it or if they have very attractive hosting contracts, that's what we want. If they happen to have machines, certainly, we'll pay for those, assuming that they are still economic, and we will give proper fair value for that. Our goal is always to make sure that everyone does well, not just ourselves because that's how you get more deals.
That being said, our ideal situation is as empty as possible so that we could throw in our own machines that are brand spanking new, but rarely will you see a large capacity facility that has nothing inside of it. Usually somebody would have some machines running because otherwise, it wouldn't make sense. If the expected unicorn exists, we will absolutely take that.

Jon Hickman

So what -- not to be rude or anything, but if I was one of those companies why would I pick you versus somebody else?

Robby Chang

That's probably a fair question. So most of the groups that we talk to, the reason why they're going this particular route is because they still believe in the Bitcoin mining space, they believe we're at the cusp of a very big bull run as they what they want to maintain our equity position. And so they're definitely looking to get exposure to a Bitcoin mining company through equity. And the only reason why they're really doing this is because there's a lack of available capital to them because there are 20-some odd Bitcoin mining machine -- mining companies ahead of them that are public that would take in capital more likely given that investors in those companies could sell their stock and be liquid.
So that being said, their view is how can they get maximum exposure to the upside. So they can either pick one of the large giants and disappear into the ether after they get their shares or cash or whoever, or they can join the Gryphon, who has that 1 exahash, their operations being anywhere between half an exahash to maybe 2 exahash or 3 exahash would be more significant so they would get a bigger piece of a low-cost company.
Just as a reminder, we are the former Executives of Miner Marathon. So we are familiar with building companies from nascent companies into what became very large companies. And we like to say -- we'd like to think that we are giving people another chance to do that all over again today. And so those companies looking to sell, see what we have to offer so that they can be a bigger portion as opposed to being lost in the ether with someone larger, and that's fairly attractive for them. And so we generally actually seeing a lot of interest as opposed to less because of that.

Jon Hickman

Okay. Thank you.

Robby Chang

Pleasure.

Operator

Kevin Dede, HC. Wainwright.

Kevin Dede

Thanks.
Good morning, Rob. Hi, Sim. Thanks for having me on again.

Robby Chang

Hi, Kev.

Kevin Dede

Congrats. Nice quarter. I am kind of curious maybe going back to Martin's line of questioning, ATM versus stock. I was also looking at the debt level. Can you kind of fill me in on what happened? I don't know if that's a result of the spec process?

Robby Chang

No. It's a piece of debt that we've had from the beginning. And frankly, we love it because it was Bitcoin denominated and we've had it for a couple of years now. It's 6% interest, so challenge anyone to find something got great in terms of interest rate. But it is Bitcoin denominated, which means that we were fully hedged the whole way. So as everyone can recall, things were not 60,000-some-odd about a year and a half ago, it was much, much lower. And quite a few companies -- quite a few of our peers struggle because they were not making enough US dollar revenue to cover their costs and their loans were in US dollars.
We were fine the whole way because our debt is denominated in Bitcoin. So we are 100% hedged. As our production goes, we just turn around and hand over the Bitcoin. So although it looks larger on our balance sheets in terms of the growth because we do have to market to US dollar terms, the actual Bitcoin denominated debt that we have hasn't changed and doesn't really affect us outside of the reporting. And so we are fully hedged, and the only change is really the US dollar valuation difference.

Kevin Dede

Okay. Thanks for that explanation because it -- just looking at it sequentially, looks like it went up about $8 million, but you're saying that's -- how many Bitcoin is it.

Simeon Salzman

Sorry to jump in, it's about 303 Bitcoin as of this point. And essentially, Kevin went from [1,230,123] Bitcoin's price was $42,213 and as of [331] because of this spot, it's $70,456. So you're basically taking your outstanding balance of 303 times, basically the $70,456 to get to that 22 versus when it was 323, let's say, at $42,213. So that's the biggest change. It's all just saying where we are.

Kevin Dede

Thank you so much. Appreciate it. Rob, why did you decide to buy stock back? Or would you decide to buy back stock versus invest in more machines. Are you maxed out at Coin Man or -- how are you thinking about that cash as you generate it?

Robby Chang

It's not a what situation, what the situation currently is now, it's more of having the right tools in our tool belt, the having an ATM, for example, which is on the other side of this, allows companies to raise capital. I believe good management for the capital structure of our company also should include having a buyback program available should we see situations where the stock is significant undervalued in our view.
And so it's this is not necessarily a reflection on our current cost structure or the growth ability, and there certainly still is growth ability at our current location. It is really more a matter of having it in place so that when we do believe there's a situation where it makes sense to buy back, we don't have to start the process from zero. It is they're ready to go. And it really does, in my opinion, underscore management's focus on managing capital, both ways. We're not just issuing equity. We will buy it back if it's too low. And I think that's what's necessary for good management of the capital structure.

Kevin Dede

I don't disagree at all. I'm just curious as I guess, how you look at the priorities. I understand you want all doors open. Just curious why would you choose to use your capital in that fashion?

Robby Chang

Yeah. I think that's going to be a decision at the moment where we want to pull that trigger because, yes, our default will always be buy more machines get bigger and that will certainly be the case. But there may be a time, and I don't want to guess when because I think we're going to have to be at that moment to know for that, for sure. But there will be moments where we think the stock price is too low. We have the capital, and we think it just makes more sense for us to buyback, then.
There is no set rules in place. It is more a matter of having it there and having that discussion with the Board and with our advisors as well. But the key thing is for us to make sure that it's there so that we can make that decision and that's on the table as opposed to never thinking about it at all.

Kevin Dede

What sort of operating flexibility do you have with your host partner in view of hash price at sub $0.05 at this point? Can you throttle down your machines? I mean, obviously, with the 21s, you've got great efficiency, but the balance of your fleet you might want to optimize should hash price slide lower. I'm just sort of give us a clue on how much flexibility you have.

Robby Chang

A lot. It's funny, we have a weekly scheduled meetings and whenever we need to we have more, and I just had a meeting last week specifically on this topic. So very flexible, we can go up and down if we need to. Right now, it's a push in terms of slowing down or keeping it. So we are moving forward, just understanding that and maybe taking advantage of that at the right time. But that is certainly something that is available to us and we're constantly monitoring.

Kevin Dede

And how about the agreement that you have with the host, how does that play into your calculus? And just in terms of rev share. I think most of the people host their end up with sort of a rev share agreement. I'm just kind of curious about how that's calculated in.

Robby Chang

Yeah. Well, it's a simple math equation at that point, right? It's in our model. So we play around with low-power mode versus high-power or just normal. And that's part of the calculus and figuring what the best pathway forward is. So it's not necessarily anything new, it's just really another cost to build into the model.

Kevin Dede

Okay. I know you were asked already, but maybe you could give us a little more insight on the timeline. I appreciate the lofty target and the aggressive stance. But when do you think we might see you pull a trigger on wrestling something to the ground?

Robby Chang

Well, I can't give specific targets, as you can probably appreciate, but let me say this, we are aggressively looking at doing something and it is not a matter of it not being available. We have actually turned down everything that we've seen so far. There hasn't really been -- there has not been a situation where someone said no to us. At most, it's been a delay, but not necessarily no to us. Its more Gryphon being too picky, let's say.
If I wanted to add two to three exahash right now, I could, but I would do so at a situation where I don't think the economics are as good as I think we can get. So it's really not a matter of availability or can we, it's matter of is it good enough based on what we like to put into the company. So -- answer to you is I want to do it yesterday and we're certainly aggressively looking at any given time. I think there are four or five active files we've looked at. I'm calling it 12 to 16 so far, and yet we're trying to announce something as soon as possible. And hopefully we will.

Kevin Dede

You had a $0.048 hash price, I think time becomes your friend. Can you give us any idea on how you think about geographic positioning? Are you are you thinking that you want to be US-centric, or Quebec, Alberta or BC offer opportunities for you?

Robby Chang

Yeah. We are open minded. As long as you know, I'm coming from traditional mining background, so I'm very familiar with going through less than ideal countries, and I don't want to do that. So for us, the first thing that we look at anywhere is a good rule of law, a situation where if I deploy my machines there, they're not going to be taken away because the government doesn't like it, or that they're so poor rule of law that someone can come in and steal my machines and I can't do anything about it.
So that crosses a bunch of countries off. But for the remaining ones that passed that, the other things that we're looking at that point are the economics really, it's in terms of do we have low enough cost and generally, that's the go-forward. So doesn't have to be US-centric. But obviously, if it's US-centric, it's a little easier because we're based here. But we have been looking all over Asia, South America, Europe all over.

Kevin Dede

Very good.
Thanks so much for taking my questions and thanks. I appreciate it.

Robby Chang

Anytime. My pleasure, thank you.

Operator

[Carlos Siwalski, Two Wheel Adventures]

Yeah, hi, guys. Thank you for taking my call.

Robby Chang

Pleasure. Thank you.

I was listening to interview, and I think I kind of picked up on a little nugget, and I don't know if you guys can maybe expand on it. Are you guys planning or thinking about expanding to Wyoming?

Robby Chang

It's certainly on the table. I love Wyoming as a state, very friendly. And I am not sure if you're familiar with my uranium background. I sat in the Board of a uranium company that has assets in Wyoming. So definitely a fan. And so if there are good opportunities in Wyoming, we would absolutely look at it.

Right. I'm also a big uranium fan myself. Could you maybe elaborate on if you guys ever plan to in maybe more nuclear? Is that one of the Wyoming targets or how does that working?

Robby Chang

I can't speak specifically to any targets, but nuclear, we certainly view as carbon neutral and it's something kind of personally I would love for us to do given my -- having a foot in both boats where Bitcoin mining and very into the uranium nuclear space as well. So if there is an opportunity in our space, we would absolutely look to that. And we do believe that that is 100% carbon neutral.

Well, that was it guys. Thank you so much for taking my call.

Robby Chang

My pleasure. Thank you.

Operator

Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Rob Chang for closing remarks.

Robby Chang

Thank you, and thanks, everyone, for your participation and insightful questions. We look forward to updating you on our continued progress next quarter. Operator, that concludes today's call. Thank you.

Operator

Thank you. This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.