Bitfarms Ltd.

Good morning. My name is MJ and I will be your conference operator today. At this time, I would like to welcome everyone to the BITFARM second quarter 2022 financial results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. As a reminder, this conference is being recorded, August 15, 2022. I will now turn the call over to David Barnard from LHA Investor Relations. David, you may begin your conference.

Thank you, MJ. Good morning, everyone, and welcome to Bitfarm's conference call for the second quarter of 2022. With me on the call today are Jeff Morphy, President and Chief Operating 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 to our website at www.bitfarms.com under Investors Presentations. If you've heard or listened to the call on your smartphone, you can download the presentation from there as well. I would like to remind you that this morning, Bitfarm's issued a press release announcing its second quarter 2022 financial results. Turning to slide two, I'll remind you that certain statements that we make during this call may constitute forward-looking information and statements. Bitfarm's cautions listeners that forward-looking information and statements are based on certain assumptions and risk factors that could lead to actual results that 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 Bitfarm's public documents filed on SADAR as well as SEC.gov. The company undertakes no obligation to revise or update any forward-looking information or statements other than as required by applicable securities law. During this call, the company will refer to certain measures not recognized under IFRS and that do not have the standardized meaning prescribed by IFRS. and therefore may not be comparable to similar measures presented by other companies. The companies are following non-IFR measures, gross mining profit, gross mining margin, EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin as additional information to complement IFRS measures to provide a further understanding of the company's results of operations from management's perspective. Gross mining profit is defined as gross profit excluding depreciation and amortization and other minor items included in cost of sales for the mining segment of the company. Gross mining margin is defined as the percentage obtained when dividing gross mining profit by revenues for the mining segment of the company. Direct cost of production represents the direct cost of Bitcoin based on the total electricity cost and hosting cost related to the mining of Bitcoin divided by the total number of Bitcoin mined EBITDA is earnings before interest taxes and depreciation and amortization. Adjusted EBITDA is EBITDA less changes in the value of our Bitcoin holdings and non-cash G&A charges included in equity compensation expense. These alternative IFR measures have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing the company's results as reported under IFRS. We invite listeners to refer to today's earnings release in the company's second quarter 2022 management discussion and analysis for definitions of the aforementioned non-IFR measures and the reconciliations to IFR measures. Please note that all financial references are denominated in U.S. dollars unless otherwise noted. During today's call, President and COO Jeff Murphy will review our operations for the quarter. CFO Jeff Lucas will follow with a detailed financial review, and Jeff Murphy will return for some closing remarks after the G&A. We requested investors to send questions in advance, which I will read to management before we open the call to analysts interested in live Q&A. And now, turning to slide three, it's my pleasure to turn the call over to Jeff Morphy.

Thank you, David. I would like to welcome everyone to today's call. In Q2 2022, Bitfarms mined 1,257 Bitcoin, up 31% sequentially from Q1 2022. Building on our momentum in production, we mined 500 Bitcoin in July. The strong Q2 2022 production completely offset weaker Bitcoin prices such that we also grew revenue sequentially to 42 million and still generated cash from mining operations as defined by adjusted EBITDA of $19 million. As evidenced by the results of our publicly traded Bitcoin mining peers, These are not just solid, but superior operating results. 2022 has been one of the most challenging periods in the history of the Bitcoin mining industry, due to the sharp decline in the price of Bitcoin since November 2021, and the more severe depression in prices starting in early May 2022. Yet, even in this environment, we continued our growth trajectory and expanded operations. In March, we commenced production at the bunker, phase one, and then Leger in April. We also increased our corporate hash rate 33% from the end of Q1 to 3.6x a hash per second at the end of the second quarter. Now, our corporate hash rate is just shy of 4x a hash per second, which means we continue to gain market share. We estimate we now represent approximately 2% of the network hash rate, which is a company record. In June and July, we took decisive actions to maintain our financial flexibility and increase our liquidity. In doing so, we reduced the balance of our Bitcoin backed loan facility from 100 million to 23 million as at the end of July and secured new equipment financing of 37 million. Jeff Lucas will detail the financials in a moment. Regarding operations, some key achievements include. In Q2, we brought online the bunker phase two in the city of Sherbrooke, Quebec, representing 18 megawatts of new capacity, installed 10,300 miners and mined 1,257 Bitcoin, validating our superior operating performance. Since quarter end, we increased total electrical capacity across all locations by 29 megawatts, 266 megawatts. Today, we are approaching 18 Bitcoin per day in daily production, and 135 Bitcoin per average EXA hash per second in July, which is top quartile efficiency and performance. Slide four summarizes the status of our farms. We ended the quarter with nine locations and 137 megawatts in capacity, up from eight locations and 121 megawatts in capacity at March 31, 2022. Leger started production in April, initially adding 16 megawatts of capacity which has since expanded to its full capacity of 30 megawatts. And in conjunction with the bunker phase two, increased our total corporate capacity to 166 megawatts as of August 15th, 2022. Construction continues on two facilities in Canada and the first of two warehouses in Argentina. Now I'll take a moment to detail the operations, plans and recent progress at some of these locations. Turning to slide five. As you recall, we have contracted power with Hydro Sherbrooke within the City of Sherbrooke, Quebec for a total of 96 megawatts. With the creation of the Bunker, Loge, and Garlock, we expect to be fully operational at these farms by the end of December, a full two months ahead of schedule. These three facilities are located in close proximity, which affords numerous efficiency advantages. We are shifting to new state-of-the-art farms from an older site, Dillapoint, our first location in Sherbrooke. Dillapoint is presently operating at 18 megawatts and is planned to go offline by the end of 2022. Again, two months ahead of schedule. With its earlier than expected termination, we can begin the sale process for this property and we expect to convert this unencumbered real estate into cash in early 2023. The bunker. first activated in March 2022, is currently drawing 36 megawatts and running 9,000 miners from its first two phases. Phase three, which is targeted for completion in the fourth quarter of this year, will add another 12 megawatts. Upon full build out, the bunker is slated to be a 48 megawatt farm, housing 13,000 miners and anticipated to contribute a total of 1.3 exahash per second, as noted. Leger contributes 30 megawatts and is operating 7,400 miners, delivering over 740 petahash per second. As you may recall, in mid-March 2022, we acquired our newest site, Garlok, in Sherbrooke. We own this asset outright. We have completed the warehouse cleanup and building improvements with electrical infrastructure, louvers, fans, racks, and miners the following September. we expect Garlok to be fully operational by year end. Each of these locations on our Sherbrooke campus benefit from advanced design and sound reduction monitoring systems. With 18 megawatts at Garlok, 48 megawatts at the bunker, and 30 megawatts at Leger, we will fully utilize our 96 megawatt power contract in the city of Sherbrooke. Please turn to slide six. In Rio Cuarto, Argentina, we have contracted plans for up to 210 megawatts consisting of four warehouse style buildings inside the gates of a private power company, which will utilize available capacity and otherwise stranded power. We are building out warehouses number one and two, and warehouses number three and four remain under consideration for future expansion. During the quarter, we made significant progress on construction of our first two 50 megawatt warehouses and associated infrastructure. The initial electrical supply line is nearing completion with a connection expected to take place within the next 30 days. So far, we've imported over 4,800 miners. The installation of racking, miners, servers and data cabling in the first warehouse is underway with miners expected to be installed starting in mid-September. Significantly, We continue to expect to begin production at the first 50 megawatt warehouse in the fourth quarter of 2022 and expect to complete construction at the second 50 megawatt warehouse in the first quarter of 2023. Last week, to better align our capital plan with our production schedule, we successfully renegotiated the timing of some minor deliveries for our second 50 megawatt warehouse. The net effect shifted 39 million in scheduled capex from Q4 2022 to the first nine months of 2023. Please move on to slide seven. The LATAM team also is responsible for our current operations in Paraguay, and this slide shows our 10 megawatt farm in Visarica. Like our farms in Canada and the United States, this farm is run on low cost and abundant hydropower. The economics here are quite positive, and we are able to productively utilize some of the older miners in our fleet in this location to optimize assets, performance, and capital deployment. In Paraguay, we are building on our experience from constructing eight farms in North America. As stated in our last earnings call, we continue to believe Paraguay is ripe with opportunities for expansion. We started building the core LATAM team to support our growth and development in this critical and opportunity rich region in early 2021, and now have 15 people on board in both Argentina and Paraguay. We started the process to hire technicians for the first Rio Cuarto warehouse. Turning to slide eight. In summary, at the end of the quarter, we have nine farms in production in three countries and are drawing power from five hydroelectric providers. Today we have capacity of 166 megawatts and an additional 63 megawatts under development that are expected to come online this year for total planned capacity of 229 megawatts by the end of the year, representing 89% growth in nine months. Moving to slide nine. One of our tools for continuous improvement is our recently revamped proprietary miner management system called MGMT2. which enable us to manage at the individual miner level, hundreds of thousands of miners across our global decentralized farms with a focus on maximizing uptime. MGMT2 features improved controls, tracking, sensors, alarms, visualizations, and performance metrics, enabling increased efficiency in operations. As noted earlier, we are at 135 Bitcoin per average exahash per second in July. which is top quartile efficiency and performance. Another measure of efficiency, joules per terahash, is realizing steady improvement. At the end of July 2022, we were at 40.6, improving 17% compared to 49.1 at June 30th, 2021. Looking ahead, we plan to further optimize the performance of our fleet by prioritizing the most economic repairs first, making sure that we are focusing on cash flow. Additional features such as variable load, hash rate control, and underclocking are under development. In addition to integrating Bitcoin mining economics, we also will be incorporating external data to better optimize our operation, such as grid load balancing and market pricing, taking our operation control to the next level. Regarding fleet activity, during the quarter, we installed 10,300 latest generation miners. Additionally, the first 4,800 were imported into Argentina and are being held for our first 50 megawatt warehouse and will be made operational in the coming months. Year to date, we have installed over 25,000 miners, bringing our total installed base to over 44,000 active miners. With another 4,000 miners currently in transit, in addition to what we already have received, accounts for approximately 80% of our expected miner deliveries for 2022. Please turn to slide 10. For discussion of our updated quarterly hash rate goals, based on our current infrastructure construction and miner delivery schedules, we are targeting 4.2 exahash per second as of September 30th, 2022, and six exahash per second as of December 31st, 2022. In addition, with the contracted minor delivery scheduled, we expect to add 1.2 exahash per second when fully operational in the first half of 2023. Please turn to slide 11. With that, I will now hand over the call over to Jeff Lucas.

Thank you, Jeff. I'm very pleased to report we continue with our operationally profitable growth during the second quarter. Let's discuss some of the highlights. I wish to reiterate that we mined 1,257 Bitcoin in the quarter. This performance improved our top and bottom lines as well as shaped our financing activities as we continued actions to maintain financial liquidity and flexibility to execute our growth plan. Our quarterly revenue was $42 million, up 3% from the prior quarter, at 31% higher Bitcoin production, more than offset the 20% decline in Bitcoin prices. In comparison to the prior year quarter, our revenues were up 16%, reflecting almost 500 more BTC mined in the prior year period, offset by an average BTC price 30% lower than the prior year period. As illustrated in slide 12, Bitfarm's average direct cost of production for Bitcoin in second quarter 2022 with $9,900 among the lowest reported in the industry. This is a 14% increase in production costs from the $8,700 in the first quarter of 2022. The increase can be broken down as follows. Small percentage points from the increase in quarter over quarter average network difficulty, which was partially offset by an equivalent of a three percentage point decrease from incremental operating efficiencies achieved during the quarter. And with five percentage points of the increase attributable would accrue for potential Canadian tax legislation affecting VAT tax rates or VAT rates and our electricity costs. Without this accrual, our production cost for the second quarter would have been $8,700. Similarly, the average direct cost of production for Bitcoin in the first quarter without this tax accrual would have been about $8,000. Turning to slide 13, gross mining margin impacted by the decline in the price of Bitcoin with 66% in the second quarter as compared to 76% in the previous quarter and 79% in the year-ago quarter. Worth money in profit was $27 million compared to $28 million in the second quarter of 2021. For the quarter, we recorded an operating loss of $173 million, which included a $78 million realized loss in the disposition of digital assets, a $70 million unrealized loss in the revaluation digital assets, and an $18 million impairment charge in goodwill. This compares to an operating loss of $2 million in the second quarter of 2021, which included at the time an unrealized loss of $15 million on the revaluation of digital assets. That loss for the quarter was $142 million, or a $0.70 loss for basic and diluted shares. This includes $8 million of non-cash compensation expense and $5 million of interest expense offset by $20 million of foreign exchange gain associated with funding our Argentinian expansion and an income tax recovery of $19 million. This compares to a second quarter 2021 net loss of $4 million and inclusive of a $5 million loss in digital assets, a comprehensive net loss of $9 million, or two cents per basic and diluted share. Most importantly, we continue to generate cash from mining operations. We achieved adjusted EBITDA of $19 million, or 45% of revenue for the quarter, compared to $24 million, a 65% of revenue in the second quarter of 2021, and $21 million, a 53% of revenue in the first quarter of 2022. Turning to slide 14, our financing strategy continues to focus on maintaining the strength and flexibility of our balance sheet and protecting shareholders' investment while supporting our key financial goal of funding our planned growth at a relatively low cost of capital. As part of this, we adjusted our Bitcoin management strategy to sell a portion of our Bitcoin production in Treasury holdings to partially fund our operating needs and ongoing growth investments. During the quarter, we executed the following. We sold 3,357 Bitcoin, generating proceeds of $69 million and reducing leverage and interest expense. We paid down $62 million of our revolving Bitcoin-backed credit facility, reducing borrowings under this facility to $38 million and freeing up $27 million of Bitcoin that was otherwise collateralizing the loan. We secured a new $37 million non-recourse equipment financing during the quarter. This is on top of the $32 million non-recourse facility we put in place in February, and we raised $9.6 million in net proceeds from the judicial application of our ATM program that we launched about a year ago. In all, we ended the second quarter with cash of $46 million and 3,144 Bitcoin values as of June 30th at $62 million for total liquidity of $108 million. In addition, as the quarter ends, we paid down a further $15 million in our Bitcoin-backed facility, and we raised another $4.1 million net of expenses under our ATM. Before turning the call back over to Jeff, I'll mention that we have a number of industry events coming up, including the Needham Second Annual Virtual Crypto Conference on September 8th, the H.T. Wainwright 24th Annual Global Investment Conference from September 12th to the 14th, and the B. Reilly Second Annual Crypto Conference on September 29th, all these events being held in New York City. Turning now to slide 15, I'll turn the call back over to Jeff.

Thank you, Jeff. Before we take your questions, I'll summarize our strong market position and our growth strategy. As of today, we are operating with 166 megawatts and 3.9 exahash per second, which powers about 2% of the entire Bitcoin network, which is a company record. We have mining production in three countries, Canada, the United States, and Paraguay, and we fully expect to begin operations in Argentina before the end of the year. Other Bitcoin mining companies struggle to keep a lid on costs of electricity fueled by commodities. We have long-term hydroelectric contracts that sustain cost of production amongst the lowest in the industry. This is evidenced by our average direct cost to mine Bitcoin of $9,900 in the second quarter. Even at recent pricing levels, we continue to generate positive cash from mining operations. We have a flexible balance sheet and financing resources. We've built an international management team that brings operational expertise and capabilities to drive the most efficient and profitable operations in the industry today and for the future. We're following a path of growth with discipline and as evidenced by our track record of operating excellence, we are well positioned to take advantage of emerging opportunities and be a consolidator in the industry. David, could you please start the questions that you received in advance and then maybe go to the operator after that?

Great. Thank you, Jeff. A couple of questions we had in advance. I'll start with this first one. Aside from warehouse number two in Argentina, what is your growth plan for 2023? For 2023, we have a lot of exciting opportunities.

As mentioned, Argentina, we're bringing on the first warehouse, 50 megawatts in the first half of the year. Its construction is underway and we're excited about it because some of the things that we learned from building the first warehouse in terms of being able to do things quicker and with less cost will be able to apply to the second warehouse. So that's exciting and we also see numerous opportunities in Argentina. But we also, as we've commented on previous earnings calls, we're very excited with Paraguay. There's a lot of opportunities there and large-scale opportunities because of their abundant hydro situation. Also mentioned on previous calls, Washington represents an area of abundant hydroelectricity where there's opportunities. And then right in our home backyard, our original home backyard in Quebec, we have multiple facilities and some which we're still building out. but they've released information on the RFP process. That will be something in the order of about 267 megawatts across the industry that they're going to award. The information on Hydro-Quebec's website indicates that there should be more information, and I think while the formal submission process is underway, the qualified applicants will be able to actually submit their offers with locations and all the other criteria that was listed in the RFP approximately mid-September. And while we don't know when those megawatts will be awarded, we would anticipate given past performance, it'll probably be later this year, November, December type of timeframe. But being the largest Bitcoin mining company in the province with what we believe is one of the strongest social responsibility records in the province, and having spent considerable time and effort lining up new locations, we think we're well positioned to do very well with that RFP process. So those are the things that are in our geographies right now, but we also believe that where the industry is right now, that there's going to be opportunities both to merge and consolidate. There's going to be opportunities with some of the other miners that may not be as efficient. that they need the type of operational prowess that we have to actually do inter-grantic expansion as well. And from what we understand from investment bankers, we're getting closer to seeing more of those type of opportunities this year, and we're ready. We've got the management team to embrace those opportunities and a strong and flexible balance sheet. So we're very excited about what's going to come this year and what's going to come next year. And while we're not providing a lot of guidance for next year, Much of it will be depending on the economics and the industry and the opportunities presented to ourselves because we will remain disciplined and we're ready for it.

Great. Thanks, Jeff. One other question we received in advance. You adjusted your huddle strategy. What might make you change back to huddling BTC?

So let me answer that one. Yeah, thank you. Go ahead, Jeff. So we have modified our HODL strategy and really we did it as we're looking at our overall financial position and how best to fund our operating investment activities as we continue our growth trend. And really we do that very simply with a very keen eye towards minimizing shareholder dilution and maximizing financial flexibility. You know, we anticipate selling a portion of our production to fund our operating and debt service requirements. And as a matter of fact, at current production levels and BTC prices, Our production exceeds our ongoing operating expenses, even the debt service of principal and interest. So we feel very effectively at this point in time that using the Bitcoin that we're producing is one of the lowest means of cost of capital for us to certainly fund our operating and our debt service requirements. But in addition to that, what's critically important to us is that we do be positioned, you know, for the financial flexibility to really fund our growth requirements going forward. And to do that in a fashion that's going to be as low a cost of capital for us as practical. And that's really been one of the key elements that's driven our decision to begin tapping into our Bitcoin holdings and to continue to do so, at least at a minimum, what we produce on a daily basis, again, to fund our operating needs going forward and as a relative inexpensive means of funding our growth targets going forward as well.

Thanks, Jeff. David, is there any more questions, or do we want to turn it over to MJ to poll the listeners?

Those were the couple of questions we got in advance, so turning it back to MJ for the poll.

Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Kevin Deedy of HC Wainwright. Please go ahead.

Thank you. Good morning, gentlemen. Thanks for having me on the call. Can we start sort of with... where you are, Jeff, Mr. Lucas, that is, could you please just make sure I understand you, your equipment funding was at about 32. I think you said you added 35 for 67. Does that account for the full 1.2 extra hash machines that you'd add to phase two in Argentina? Yeah.

Well, first of all, that doesn't reflect actually the machines that we're putting in place in Argentina, given the fact that they're located in Latin America, and you can probably appreciate some of the collateral considerations that a lender would have. What I will point out to you, though, Kevin, is that we do have additional unencumbered miners currently in Canada and North America, and we're having new ones coming on as well, that we have not yet used as collateral for borrowing facilities, and that we can certainly do so to further fund our capital requirements relatively inexpensively going forward.

Okay. So it's fair to assume that machines that go to Latin America have to go unencumbered and that, uh, that 67 million has to do with or is behind the machines that you're installing in Quebec and Washington.

Yeah, it does. But bear in mind that a number of those machines that are actually collateralizing those loans were machines that were previously paid for. So much of the funding that we generated to those two loan facilities actually is being used at an expensively for us to fund our other goals, opportunities, including, you know, including for example, Argentina as well in Paraguay. Okay.

Uh, the, all right, the, maybe let's look at it from a, from an infrastructure cap X requirement perspective, and maybe you can help me understand for the phase three bunker. Are you all set for your requirements there? And do you have the financing you need or the capital you need to continue to phase two in Argentina, just on plain infrastructure?

Sure. Yes, we're in good shape, actually, from financing of our infrastructure activities. As I'm sure you're pretty well aware, Kevin, the infrastructure costs are really a small percentage of the total cost compared to, for example, the miners in particular. But overall, for our capital expenditures, for our infrastructure growth, Both in Canada and Argentina, we're in good shape.

Okay. So if you look at phase one and phase two, that's about 100 megawatts you're talking about. But it looked to me that the draw for the miners there would be around 85 megawatts. Does that give you a little more wiggle room to add to those facilities you're pretty much set at what you've offered.

Kevin, we need about a thousand more miners, uh, to fill out the second warehouse.

Um, okay.

In the, in the scheme of things, um, not, not a big, uh, challenge at the, at this point, like right now, uh, to buy miners, uh, there's lots available and a very good price. Yeah, that's enjoying some of the feedback. Sure. Absolutely. Yeah, absolutely. Jeff. And, and I guess we, we bring this warehouse on sort of in, in the first quarter, mostly in the first quarter of next year, like we're happy that we have that flexibility. We've got, we know we've got the miners coming, but we're going to get this right. We're, we're going, uh, it's important when you, when capital is so precious that you deploy it on time. and on a reasonable basis. So we want to make sure that we build the infrastructure and then bring the miners in. As Jeff Lucas mentioned, like the lion's share of your cost is in the miners. So we want to make sure that we get the infrastructure and the warehouses built, then bring the miners in to coincide. And we have the flexibility to do that with the miners that were deferred that are on contract and with spot buys, which could be quite lucrative right now for us. It's nice to have that flexibility. And in terms of the warehouses, because transformers continue to be the big lead time situation, all these things are ordered for all the construction that we're undertaking right now. So we're in good shape that way. And the miners, unlike a year and a half ago, are much more liquid and we can pull them in.

Okay, can we talk about power prices a little bit, please, Jeff? Did Hydro-Quebec reflect any of some of the fluctuations that we saw through the second quarter? And how have the people you've negotiated with for the Rio Carto deployment reacted to pricing? I mean, as I understand it, you sort of scaled back given that there might be some changes there. You wanted to sort of reassess. now that things seem to have become a little bit more rational, maybe that's offered an opportunity to step up expansion?

Okay. Thank you, Kevin. The first question was regard to power pricing in Quebec. And the tariff that we enjoy in Quebec continues on. We have not had any changes in the price from Hydro-Quebec. Now, as Jeff has mentioned, the Canadian government has put in plans to change some of the VAT pricing, which increases our cost of electricity. And that's more of a political tax-based situation as opposed to Hydro-Quebec changing rates. So I think if you want to go into that, then we can talk about that in a separate question and answer. In terms of Argentina, yes, you're right. We were very concerned about natural gas prices increasing. Only a portion of the electricity contract is fixed. We've got for the first four years at 2.2 cents. The rest is market-based pricing. And we were very concerned, and rightfully so. The prices of electricity have gone up. We've seen that around the world. We've seen it impacted with some of our competitors who use... electricity generated with natural gas. And we didn't want to put ourselves into a position where we were bringing online facilities with marginal profitability. Favorably, the prices have gotten better and favorably the exchange rate to move US dollars into Argentina has also moved to our benefit. So we're quite liking the cost dynamics of our first and second warehouses in Argentina. But we also anticipate that this winter, at least in the northern hemisphere, as Europe seeks natural gas to warm their houses and we expect prices to go back up. And we're cautious about that. Fortunately, Argentina is in the southern hemisphere and is a little bit more immune to that. But still, they are affected by global prices and we expect prices to go up. But between the portion that is fixed and the portion that is market driven, We're very happy with where rates seem to be right now. And that has allowed us to go ahead with the second warehouse. And if rates get better because the world pricing of commodities, of energy commodities, comes back down, then we're all set to move on warehouses three and four, as well as perhaps other opportunities in Argentina.

Okay, last question for me, Jeff. Can you talk a little bit about some of the immersion testing you're running in Washington? How far have you sort of pushed the limits there? I noted that your slide said you have an opportunity to expand one more megawatt to 21 in Washington. And I think, if I remember correctly, that's two separate facilities. But you've also alluded to having expansion opportunity there. So maybe you could kind of sum up the situation in Lexington State for me, please.

Sure. We continue to play with immersion cooling. We think it's quite potentially a dynamic that will at some point change the industry, but it's still very, very expensive from a capital cost standpoint to enter into immersion. But We need to familiarize ourselves with the technology and the ins and outs of it. So we have our first container in Washington. That is an immersion. It's still in the test mode right now. We are seeing some good production come out of it, but we have not fully utilized that. We're still tweaking it. We're still getting things going. That container was only delivered weeks ago. So we continue to move through that, get familiar with the container itself and more. And I think we are still very much fortunate that our air cooled facilities have a lower capital cost. We are in environments where it's working very, very well. It's tough to compete against like the air cooled versus emerging cooling at this point because of the high capital costs and the thinner operating costs right now. So we're still working through that, Kevin. Now, I said there's opportunities in Washington. It's more than just immersion cooling and what we're playing with there. We're having favorable discussions with the local electricity providers. There are smaller scale operations in the area. Whether we buy or whether we expand, we're working on all those opportunities. But Washington has a lot of electrical hydropower that was developed in many ways for the Alcoa and big dams were built decades ago on the Columbia. And the aluminum operations have all moved away, which means that there's good, clean electricity at attractive prices available. I think we've mentioned on earlier calls, and it's still the case, our Washington facility is our lowest cost operating facility available. amongst our fleet. And the other part of it is that we've now had that facility now for close to a year, approaching a year. And we now have staff and a team down there that we're confident in that's capable of doing more. So we've got that nice foundation that we can grow from now. So that's making me and us a lot more comfortable with looking at new opportunities in the state.

Very good. Thank you very much for entertaining my questions, gentlemen.

Thanks, Kevin. Take care.

The next question today comes from Chris Brendler with DA Davidson. Please go ahead.

Hi, thanks. Good morning, gentlemen. I would love to first follow up on Kevin's power question. I've seen a lot of miners with, you know, you're behind the meter or sort of grid-connected, facilities where power costs have been higher than expected this summer. A lot of those have been in Texas with the heat issues. But I just would love a reminder. Your impressive results here with the cost per coin below $10,000, even with these power prices, is it more a function of the hydro, more a function of your PPAs and your power contracts that have locked in low pricing, or something else?

Well, let me start, and then Jeff Lucas can add to it, because this is a calculation with a lot of math involved with it from a variety of factors. But yeah, we're very fortunate to have hydroelectricity that has not flexed as a result of the commodity prices. So the prices that we've had historically are the same prices we have now. So we have not been susceptible to commodity price increases like many others have. And as a result, we continue to enjoy good, solid, consistent hydroelectricity rates in all our locations. Argentina will change that once we get it on board, but a substantial part of that contract is fixed at a pretty low price, 2.2 cents per kilowatt. So that's looking like it could be amongst our lower cost facilities as well. Jeff, why don't you add a little more in terms of that calculation on the on the cost of mining of Bitcoin because there's other influences as well.

Sure, glad to. But I do want to just emphasize, by the way, Chris, Jeff's comment there, one of the true virtues for us of hydropower is the stability of our costs. As you see, you know, the cost to mine Bitcoin, the direct mining cost, which is comprised of electricity and in the past, not currently hosting expenses, when we incurred those, were the elements made up of the direct mining or the incremental mining cost. But overall, if you take a look for us, terms of the quarter that just ended how much it cost the cash cost to mine bitcoin and the direct mining cost is about ninety nine hundred dollars and on top of that you have about eleven hundred dollars of other uh costs that comprise cards so overall you find that we've got roughly about uh you know eleven thousand dollars all in cost here in a cash basis for the money of bitcoin so that puts us be thinking a pretty good position and even to expand upon this you need to factor in G&A, which is a fair question to ask, the cash G&A, nonetheless, it still brings us to an overall cash cost of around $15,500. So we feel overall we've got the structure in place, including the benefits of hydro here, of having and continuing to have a very attractive cost structure.

That's great. Thanks for the detail. Just to follow up on that question, I saw in the deck on – I guess it was Page 12 has this five percentage points attributed to the VAT tax issue. So that's on top of some of these numbers are being inflated by this VAT tax?

That's correct. To be more specific here, actually, the impact was five percentage points to that 14% increase in return over time. So to go into a little more detail here, in Canada, the Canadian Financing Authority is considering legislation, actually, that would remove the opportunity for to recover your VAT or your input taxes, which is about 15% right now of our energy costs. So in essence, our costs in Canada go from 4 cents to 4.6 cents. That's reflected, by the way, I want to underscore this, that's reflected in the $9,900 that I quoted there in front of you. Now, this may not come to pass. You know, the legislation hasn't been fully approved yet, but being consistent in accordance with IFRS accounting, we did have to recognize that accrual in our financials. So, therefore, appropriately, we also included in our various operational measures, including the direct mining cost of Bitcoin. So, again, that has an impact on the Canadian portion. And, by the way, you know, of our all of our electricity costs, Canada represents about 88% of our total cost of electricity, you know, each quarter. So, yes, we had a 15% increase in the Canadian portion. Obviously, no increase came into play in Paraguay or Washington, which, as Jeff pointed out, is sub-3 cents. Paraguay is around 3.6 cents. And now we have Canada about 4.6 cents. If that legislation does not pass, we will revert back to the 4 cents and, of course, have a massive catch-up from the previous two cores when we have indeed been accruing this amount. But all in all, even if that legislation is passed, we feel we're going to be in a very strong and very competitive position with the cost to mine Bitcoin.

Chris, and to add to that, the Canadian government announced that in February. And as Jeff mentioned, we're accruing for it because we think that's the prudent thing to do and what IFRS requires us to do. But we actually took a leadership position because we're one of the largest riders in Canada in terms of developing a coalition to bring in the experts that are required to advise us on this, to review the proposed legislation and to really work with the Canadian government to figure out whether this is the right thing for them to do. Obviously, we don't think it's the right thing to do. And what we've learned is that it's inconsistent with the way they treat some of the other industries. So we're hopeful, but we certainly can't plan on it, that the Canadian government will pull this back and we'll be able to bring our Canadian energy mining costs back down again. But until that happens, we're just making sure that we We make sure we put away the money and make sure that we don't have a surprise cash hit later this year or next year or whenever this might or might not happen.

And by the way, Chris, we're getting a lot of support here because there are over a dozen companies working with us as part of this coalition.

Great.

Best of luck.

So the other question I had was on the fleet. I really appreciate the disclosure here. You guys break out your fleet better than most and I see that little over 40 joules per terahash number. That hopefully can come down over time, as you mentioned. But I'd love to hear, like, are we at the point where some of the older fleet is being retired? And do you think that's one of the main reasons we haven't seen the overall network hash rate increase more? Just given all the folks that are coming online, we've seen the hash rates sort of moderate here. I think it's because the inefficient machines from the past are being turned off.

Certainly, we have... We've seen or heard anyway through others that a lot of S9s have been turned off because of profitability. We have taken a number of the micro BT miners that are new and moved them into Quebec and are just part of our update program, replacing M20s with M30s. And that's helping our efficiencies as well as increasing the pure size with new M30s that are incrementally adding to the fleet as we bring more infrastructure and megawatts on. But yes, we are continuing to upgrade our fleet. Washington is absolutely modern with entirely new equipment. Argentina's got the new equipment scheduled for there. As we've mentioned with Paraguay, we sent down some of our used miners, three different series of used miners there. So it was a very low cost installation. And in Quebec, we've got our legacy operations there by no means old dinosaurs, they continue to be upgraded. We've completely retrofitted like our Collinsville last year, entirely new facility, Dilla Point's being phased out and replaced with three new facilities in Sherbrooke. All of those are by and large enjoying next generation, latest generation miners. And we're getting the performance. Go ahead.

Just to add to that, Chris, to give you a bit of perspective here. So a lot of the miners that we now have up for sale, like our old S9s, you know, they were 90 Watts per terahash. The F 19 pros that we put in place in Washington are about 31 Watts per terahash. And the M thirties are also in the mid 30, you know, the M 30 S's that we're putting in place and Legere the bunker are in the mid thirties in terms of wattage per terahash. So you can see the huge difference that that's making in terms of our efficiency.

Yeah, that's great. Just one more quick on that as, um, yeah, as prices have come down, there's certainly some opportunities to pick up some additional machines cheaper. Do you lean towards the latest model, or is it all just a question of the XP, or is it all just a question of the price and what you're paying for TerraHash?

A mixed bag. We've been a big supporter of MicroBT historically. We have Bitmain, the S19 series in Washington, but we've been a big supporter of MicroBT. That's where the 48,000 miner order has been. They've been a great, great supporter of BitFarms, and We're looking at M30s, M50s, S19s. We will use our relationships as we look for miners to get the best possible terms. And right now there's a lot of machines around. So I think if we had a preference, it would be for some of the best micro BT units because we have more experience with our repair center with those units. We know from history that they perform longer and stronger. without breakdowns. So, um, but we will at this point at least have two primary manufacturers that we're relying on and, uh, and our familiarity with their, their equipment is great, but yes, it's, it's important as we look in these times where profitability is, is squeezed, we've got a having coming up that we make sure that we continue to use some of the best quality and performing miners available.

I agree. That's great, Colorado. Thanks, Jeff and Jeff, and congrats on the great results. Thanks, Chris.

The next question comes from Dylan Heslin with Roth Capital Partners. Please go ahead.

Hey, thanks for taking my question. I think in your July operational update, you talked a little about in Canada having some curtailment on power due to just temperatures. I was wondering if you could talk a little bit more about that. How big of an impact is that having on sort of your uptime and how you think about power costs in relation to Bitcoin prices and what you can maybe do at some of the new sites that are coming down the pipe in the future?

Dylan, thank you for your question. It's good to connect. Dylan, in July, we didn't have any miners that were down for curtailment. Curtailment in Quebec is a factor that we deal with, but only during the winter months. We do not have curtailment as part of our contracts in Washington and Paraguay, and we won't in Argentina either. So I'm not sure where you're picking up that July factor.

I might have been misspoken about curtailment, but more so just, like, higher temperature or higher, like, seasonal temperatures.

Okay. That's different, and yes. Higher temperatures... uh, get to be a challenge on, on our miners and really tax, uh, our facilities and our infrastructure and being able to, to move air through the machine, our facilities to, to keep the miners, uh, the lower enough temperature that they're optimized. This year in Washington and Quebec, uh, we were faced with higher temperatures and, and that meant that, uh, sometime miners go offline because of hardware, they get hot, they protect themselves. and they need to be rebooted, and we generally reboot them when things are a little cooler in the evenings and overnight. So yes, we lost some efficiency there. It's actually led us in some of our facilities in Quebec, which are the newer ones, to better optimize some of the airflow in some of those facilities while we I think we're onto our sixth iteration of design for our facility. So we think we've got it right, but there's always room for improvement. And with the squeeze on profit margins in the industry right now, because of Bitcoin prices, we are trying to get as much uptime as possible and mint as many Bitcoins as possible. So we are absolutely looking at the airflow in those facilities and how to optimize it, get more air through them. And we're succeeding. Like every percentage point you can get in uptime is money in your pocket, is value for our investors. And we continue to press that really hard at all of our facilities and our operations people have really been able to take it to the next level in that regard. So you will continue to see improvements that way as we go ahead.

Great. Thank you.

That concludes our question and answer session. I'll now turn the call back over to Jeff Morphy, President and COO of BidFarms. Please go ahead, sir.

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 our Q3 conference call in November. One final remark. We will be launching our new website later this week. In addition to an improved look and feel and easier navigation, it includes many metrics from our operations and monthly production reports that we are sure you will find useful in tracking our results and progress. Additional functionality is envisioned, and we will be adding that to the website in the future. Please be sure to visit bitfarms.com in the next several days. Thank you very much for everybody attending today's call, and have a good day.

Take care, all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.