Bitfarms Ltd.

Good morning, everyone. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bitfarm's second quarter 2023 financial results conference call. 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 one on your touchtone phone. As a reminder, this conference is being recorded today, August 8, 2023. I would like now to turn the call over to David Bernard from LHA Investor Relations. David, you may begin your conference.

Great. Thank you, Alan. Good morning, everyone, and welcome to Bitfarm's conference call for the second quarter of 2023. With me on the call today is Jeff Morphy, President and CEO, and Jeff Lucas, Chief Financial Officer. Before we begin, please note this call is being webcast live in an accompanying presentation. To watch along with the slides, you can log on to our website at www.bitfarms.com under the investors' presentations. If you prefer to listen to the call on your smartphone, you can download the presentation from there as well. I would like to remind you that this morning, BitFarms issued a press release announcing its second quarter 2023 financial results. Turning to slide two. I'll remind everyone that certain forward-looking statements will be made during the call and that future results could differ materially from those implied in these statements. The forward-looking information is based on certain assumptions and is subject to risks and uncertainties, and I invite you to consult Bitfarms MD&A for a complete list of these. Also, during the call, reference will be made to supporting slides, and you can find the presentation, again, on our website at www.bitfarms.com under the Investor Relations section. This company will also refer to certain measures not recognized under IFRS and that did 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 press release and the company's second quarter 2023 MD&A for definitions of the aforementioned non-IFR measures and their reconciliation to IFR measures. Please note that all financial references are denominated in U.S. dollars unless otherwise noted. During today's call, CEO 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 Q&A. We have also requested investors to send questions in advance, which I will read to management after we open the call to analysts interested in the live Q&A. And now it's my pleasure to turn the call over to Jeff Morphy.

Thank you for joining us today. I'll begin by emphasizing that we have built a quality portfolio of assets and the resources to manage them very effectively. Together with ongoing investments, they provide investors with excellent exposure to rising Bitcoin prices, particularly as we approach the next Bitcoin halving. To capitalize on this further, we are executing an aggressive and disciplined growth strategy to optimize overall returns while managing risks. Pillars of our growth strategy are responsible capital deployment, reinvestment in our fleet with the latest in minor technology, continued geographic diversification, adherence to strong financial and operating controls, audited by a big four accounting firm since incorporation over five years ago, and we have the most highly experienced and accomplished team supporting our global growth. In the past 24 months, we have expanded from 69 megawatts powering five production facilities in Quebec to 212 megawatts energizing 11 operating farms in four countries. During this time, we increased our hash rate over 275% to 5.3 exahash per second. We have built an incredibly sound infrastructure to support scalable and sustainable growth, and we are now leveraging our infrastructure as we pursue current and future opportunities. I'll now review our foundation. Our farms are well established and efficient, maximizing output while minimizing costs, leading to higher and more consistent profitability, with each location contributing positively. We excel in operations and continuously work to improve facilities and processes, including the adoption of cutting edge technologies to enhance efficiency and productivity, driving effective deployment of miners and fleet enhancements. We carefully manage our capital structure. And this quarter, we further deleveraged our balance sheet by utilizing our surplus free cash flow after debt service while still investing in growth. We ended June with only $16 million in debt, enhancing our financial flexibility to expeditiously seize upon growth opportunities and deploy capital quickly and effectively. A perfect example is our accretive expansion in Paraguay, where we acquired 150 megawatts of hydropower contracts in July and recently initiated deployment plans for the first 50 megawatts, which I'll detail in a moment. We are truly a global player. with a well-diversified portfolio of production assets and management personnel. These attributes mitigate risk associated with concentrated operations in a small number of facilities in a single region. Our stellar corporate development team is actively seeking new opportunities, including expanding into new geographies, adding complementary businesses, and improving overall operations. With just eight months until the next Bitcoin halving, the pipeline is growing. And with our global footprint, sound balance sheet, and respected integrity, BitFarms is well positioned to take advantage of situations meeting our criteria of stable low cost power contracts, quick paybacks, and high return on invested capital. Simply put, our portfolio of high quality assets offers exposure to rising Bitcoin prices. And BitFarms leverages this inherent value with efficient operations, strong execution, financial discipline, global diversification, and a proactive approach to identify and act on opportunities, and risk management practices incorporated to safeguard against potential adverse developments. On slide five, I'll review some of our accomplishments for Q2 2023. We ended June 2023 with 5.3 exahash per second, up 10% from March 31, 2023, and up 47% from June 30, 2022. Current installations in Rio Cuarto and Bay Como continue, and our target for completion in September, increasing our hash rate 19% to 6.3 exahash per second. During Q2 2023, we mined 1,223 Bitcoin. With higher average Bitcoin prices, Q2 2023 revenue increased 18% from Q1 2023. We delivered adjusted EBITDA of $8 million and increased our HODL to 594 Bitcoin at June 30th, 2023. Slide six. shows a summary of operating capacity and installed miners for our farms. Eleven operating in four countries, and we now consider our two new locations in Paraguay as farms under development. In July, we reached 212 megawatts in operating capacity, up 28% from a year ago. Notably, 86% is powered by sustainable hydroelectricity. I will now review our operations and development plans. Turning to slide seven. In Paraguay, we acquired two power purchase agreements totaling 150 megawatts of low-cost hydro power in July that will energize two new farms. These were very strategic acquisitions because Paraguay is highly attractive for development. Based on our experience, this country has amongst the lowest build-out costs Quickest project timelines to completion and a straightforward importation regime. Yesterday, we announced our initial deployment at our new Paso Pei farm. The Paso Pei farm will be only about one kilometer away from our existing Bijarika farm. In addition to plans for 30 megawatts of air-cooled facilities, we purchased Micro-PT hydro-cooled miners and related containers entirely with vendor credits. or 20 megawatts of deployment of this latest mining technology. We expect the new farm to be fully commissioned at 50 megawatts in Q1 2024. Turning to slide eight. In Rio Cuarto, Argentina, we increased production to 29 megawatts as we imported and installed approximately 5,100 new M30S What's Miner miners. This added approximately 510 petahash per second to the facility and brought its total hash rate to approximately 700 petahash per second. We also qualified and strategically became a self importer of miners. Doing so streamlines and lowers the cost of importing miners into the country. And as of today, 4,680 additional miners have arrived and are being processed by Argentine customs. and additional 2,797 miners are in transit, and all miners are expected to be installed and running in Q3 2023, which will bring us up to 50 megawatts at this farm. We can provide more details on this equipment if so desired. In Canada, we closed the purchase of the Baycomo acquisition and initiated production in early July. The acquisition not only brought new production capacity but also provided us with the opportunity to optimize our fleet by redeploying miners from Magog. This was undertaken to free up suitable rack space in Magog for higher performance miners. The Bay Como farm is presently operating with 1,300 miners at five megawatts. And with the remaining miners from Magog, we should reach 11 megawatts in Q3 2023 as planned. This, in conjunction with the Rio Cuarto build-out that I just mentioned, gives us confidence we can achieve our 6.3 exahash per second Q3 2023 target. Regarding Magog, in July, we leveraged our assets to respond quickly to a lightning strike that took out our primary transformer. Our proactive risk mitigation strategy handles unforeseen incidents and minimizes their impact on production and operations. By combining redundancy, geographic diversification, in-house capabilities, and spare equipment, we were able to respond swiftly and effectively to the outage, ensuring minimal disruption to our overall business. Favorably, the facility is hashing at full capacity, and no miners were damaged as part of this lightning strike. In Washington State, we upgraded intake and exhaust systems, greatly improving efficiencies. The intake is now equipped with a two-stage filter, which includes an evaporative cooling component, which saves energy and reduces service requirements. The exhaust system now includes automated fans, reducing power consumption by as much as 90%. Results have been impressive. For example, deterioration of hash rate on 100-plus degree day has been limited to only 2% to 3% versus approximately 30% previously. Considering this, we are now evaluating these enhancements for use on our other farms. We continue to enhance our MGMT proprietary software. This software remains one of the longest running and robust systems in the industry. New capabilities include the precise tracking of power consumption and operating performance per miner per location. This enables greater detail on miner performance the optimization and reconciliation of electricity consumption, and adds the predictive capability to power forecasting for all micro VT miners, which comprise about 90% of our fleet. In summary, as we execute against our fleet expansion and upgrade plans, we are projecting 20% sequential growth in our hash rate in Q3 2023. And with PasoPay expected to come online in Q1 2024, we are expecting to achieve 7X a hash in Q1 2024. Those are our near-term goals as we continue to evaluate other diverse capital efficient development opportunities. Please turn to slide nine. With that, I will now hand over the call over to Jeff Lucas for the financial review.

Thank you, Jeff. I'll begin by highlighting some key elements of our financial strategy and position. We have efficient operations and stable and predictable energy rates that, with over 85% hydro, are not subject to the energy cost variability associated with fossil fuels. We have a laser focus on rapid payback of capital. We enjoy low capital requirements necessary to meet our near-term growth plan, including using our existing equipment credits to reduce the capital expenditure funding needs. And we enjoy the strongest balance sheet in the history of our company that gives us the flexibility and enables us to utilize our operational expertise, take advantage of attractive growth opportunities, and positions us well for the unpredictable economics of the having. I will now review our mining economics, our performance, and our balance sheet. Turning to slide 10, in the second quarter of 2023, we mined 1,223 Bitcoin compared to 1,297 in the first quarter of 23, and 1,257 in the second quarter of 22. The differences reflect increases in average total network difficulty, about 24% sequentially and 67% year-over-year, offset by our hash rate, which was 10% higher sequentially and 52% higher year-over-year. Our second quarter revenue was $35 million, comprised of $34 million from our mining activities. This compares to $29 million for mining in the first quarter of 23 and reflects a 24% increase in the average Bitcoin price quarter over quarter, partially offset by 6% of fewer Bitcoin mined during the quarter. Focusing on mining economics, we turn to slide 11 here. In the second quarter of 23, Bitfarm's direct cost of production for Bitcoin was under $15,700. That's up from $12,500 per Bitcoin in the first quarter of 23. The change reflects the aforementioned increase in network difficulty and approximately 7% higher energy costs quarter over quarter. While we benefit from a low-cost stable hydro power across our productive capacity in Quebec for the first time in several years, we had a rate increase that resulted in 6% higher energy costs. With Quebec representing about three-quarters of our total Q2-23 production, the impact was significant. That said, our increasing geographic diversification paid off as the impact of rate adjustments in one jurisdiction is moderated. I'll add one more caveat for those building financial models. Our direct cost of production since February 2022 includes a 15% accrual for value-added taxes on Canadian energy costs, reflecting proposed legislation. but which has not yet been determined or legislated. Excluding that accrual in the second quarter of 23, our direct cost of production would have been about $14,000 to Bitcoin, $1,700 less than our reported direct cost of production. Second quarter gross mining profit was $14 million or 42% of revenue compared to $12 million or 42% of revenue in the first quarter. The total cash cost of production for BTC was just under $21,800 in the second quarter of 23, up from $17,600 in Q1 23. The largest contributor to the increase was higher network difficulty, which resulted in higher energy costs for Bitcoin. General and administrative, our G&A expenses were also higher over the prior quarter, as a result of costs associated with moving miners among our farms to optimize efficiency, higher professional service fees related to corporate development and prospective due diligence work, and business taxes in Argentina that were incurred and paid during the quarter. The quarter-over-quarter comparison also reflected benefits in the prior quarter from a one-time insurance refund and a reversal of an accrual associated with the dismissal of noise penalties at the former Villa Point facility in Sherbrooke. Going forward, with that having in mind, we will continue to focus on reducing our G&A cost structure and have already identified savings in insurance and other discretionary areas. Please now turn to slide 12. For the second quarter, our operating loss was $25 million, including non-cash depreciation expense of $21 million and an impairment on short-term prepaid deposits and P&E of $10 million. This compared to an operating loss of $15 million in the first quarter of 23, including a $3 million reversal revaluation loss on digital assets, a $2 million loss in disposition of PP&E, and a $1 million realized gain on disposition of digital assets. Our net loss for the second quarter was $25 million, or 10 cents per basic and fully diluted share. Compared to a net loss for the first quarter of 23, of $2 million or one cent per basic and fully diluted share. Higher Bitcoin prices contributed to improved profitability with adjusted EBITDA increasing from $7 million in the first quarter of 23 to $8 million in the second quarter of 23. Profitability in the quarter was $6,200 per Bitcoin versus $4,900 per Bitcoin in the first quarter of 23. Turning to slide 13. At June 30th, we had cash of $31 million and 549 BTC valued at $17 million for total liquidity of $48 million. This compares to $42 million of liquidity at March 31st of 23. In summary, of the 1,223 Bitcoin we mined during the second quarter, we sold 1,109 to generate $31 million of proceeds to fund our operating and debt service requirements, and deposited 114 BTC in treasury with a June month end value of about $4 million. In July, we deposited another 45 Bitcoin treasury, increasing our Bitcoin in custody as of July 31st, 23 to 594 Bitcoin. This represents a total value of approximately $17 million based on the Bitcoin price that day of just over $29,200. In the second quarter of 23, We also raised $22 million in net proceeds from our ATM program. For the third quarter of 23 through August 7th, we have raised additional net proceeds of $26 million. These monies that we raised under our ATM are specifically earmarked for the growth initiative, which Jeff spoke about earlier. We continue to use cash generous from operations to deleverage our balance sheet. Total indebtedness was reduced to $16 million on June 30th. into under $14 million at July 31st. As we've noted in previous earnings calls, our debt is scheduled to be fully repaid by the end of February 2024, well in advance of the halving. With that, I will now turn the call back over to Jeff.

Thank you, Jeff. Before I open the call for questions, I would like to mention some upcoming events, especially our analyst day on September the 14th, which will begin at 8 a.m. at the convene in New York City. In addition, we will be at the Canaccord 43rd Annual Growth Conference in Boston on August 9th and 10th, the 3rd Annual Needham Virtual Crypto Conference on September 7th, the HC Wainwright Conference in New York September 11th, 12th, and 13th, and we will also be presenting at several industry events in Europe this fall. In summary, BitFarms remains focused on accretive and diversified growth while further optimizing our facilities, fleet investments, and infrastructure, including the adoption of innovative technologies and practices to enhance efficiency. Our core strengths include a competitive low-cost structure, stable and surplus sources of energy with attractive pricing, proprietary mining and facility management software, a vertically integrated electrical subsidiary, and an exceptional management team. Our growth in 2023 and advance of the halving will come with minimal capital outlay, given our full use of our microBT hardware credits. We expect to meet our near-term 6.3 exahash per second target before the end of September and 7 exahash per second in Q1 2024. The first 50 megawatts of our 150 megawatt expansion in Paraguay is underway, and opportunities that meet our criteria for growth both before and after the halving are abundant. Operator, you can now open the call for questions. Please go ahead.

We will now begin the questions.

And just before you do it, I just got a note from David. I understand that we have a few questions from online investors. Let's handle those questions first, if you would, and then we'll go to the analysts.

Sure. Thanks, Jeff. I'll read them. There's two questions. I'll read them both at the same time, and then you can answer. One of the questions is, how greatly do you think the Bitcoin halving will impact financial results in the coming fiscal year, 2024? And then another question, totally different, does BitFarms run any third-party firmware?

Yeah. Interesting. Go ahead. Okay, let's start with the halving. The halving, we've seen it before. They happen every four years. It's going to be a big event. And nobody's fooling anybody here. Miners that want to survive the halving need to be well prepared. We have a cost structure that is as good as anybody in the business. And as we've said in the past, we are planning to get our debts completely repaid so that we don't have P&I payments. We plan to get all our construction finished so that we don't have construction commitments. We plan to get all our miners bought and installed so that we don't have CapEx commitments. So that when you go into that having, and frankly right now with Bitcoin prices just below 30,000, our cost to mine a Bitcoin on a cash basis is 15,700. If we get the accrual back from the Canadian government, then it'll be 14,000. But it just goes to show that that margin will quickly disappear. We all see the analysts talking about margins and how other people's costs are higher, some are lower, but some are much higher. They are going to be extremely stressed. And typically, as we've seen in the past, the adjustment to the halving takes five or six months. I think my gut's telling me this time that it might be a little quicker because there's more adoption and more knowledge in the industry. And, you know, that four or five, six months later, Bitcoin prices go up and then things get really exciting. But in the meantime, you have to be battened down and ready for a storm, frankly. And we are For example, it's because of that discipline and our orientation that when Bitcoin prices fell below $16,000 in the fourth quarter last year, we were one of very few miners with a positive adjusted EBITDA. And that goes to show what happens. I think if you really want to test what miners were, go back to the fourth quarter last year and see their results. We're well positioned. And I think sort of as we go into the next summer when the having is going to take place, Without debt, we're going to even be better positioned. And with the Paraguay expansion, those are going to be low cost. We are going to have more cash flow. And the other thing you have to remember, when things get adverse like they do, miners with inefficient operations go offline. So that's when the network hash rate goes down, our market share goes up, our block rewards go up, and there's a compensating factor there. We think we're well positioned. So that's the first question. Okay. Firmware. Yes. Because we are so operationally focused, we have people within our operations that look at these types of things and test them all the time. So it's getting better control of your miners and squeezing more output from them. Of course, we all want to do that. Sometimes it's firmware. And now there's some hardware fixes with cards as well. We test a number of them because there's advantages to that. Sometimes the OEM firmware is fine. And the other thing that we need to keep in track, which is a little bit different from some of the others, about 90% of our fleet is micro VT versus Bitmain. So some of these firmware changes are more tailored for Bitmain, some work with micro VT. But yes, we're always looking at these times trying to get an advantage. So, and it's not necessarily uniformly applied across the fleet. We do not want to fall into a bug or something like that. So we test them on a very limited basis and roll them out a little more when appropriate. So hopefully that addresses those two questions. So operator, let's go to the analyst, please.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Josh Siegler from Cantor Fitzgerald. Please go ahead.

Yeah. Hi, guys. Thanks for taking my question today. I guess to start, it would be helpful to get an understanding of how you're thinking about future growth, specifically which geography is really going to drive that growth. You know, with the new Paraguay contract in place but still opportunity in Argentina, how are you going to balance between the two geographies when thinking about scaling in the future? Thanks.

Josh, we've got management and personnel in every single geography. It makes sense to have critical mass in every geography that we have. We operate in so that we can do that. And we, over the last two, two and a half years have done an active technology and knowledge transfer amongst employees so that we have. Argentine employees and Washington employees coming up to Quebec, Quebec employees going to the other geographies and, and teaching. So those best practices that we developed in Quebec years ago, uh, they're now embedded in our other geographies. And we now feel we've got critical mass in Argentina. We've got a good team, solid team in Washington and of course in Quebec. So now the opportunity came about to really take our 10 megawatt operation in Paraguay and build it up. And frankly, we're excited about Paraguay. It was the site where it was a bit of a test bed back in late 21 when we built it, it became active in January 22. 10 megawatts. We shipped down used miners from Quebec. The experiment was a very good success. We put that facility together. It's a warehouse style building in about three and a half months. It was our lowest cost infrastructure to build. And we subsequently put a brand new miners in there and brought the production up. But our plan is to, uh, to hire more personnel in Paraguay for this build and build established critical mass, the Paso pay, Facility is one kilometer from our Visarico site, so we can already take advantage of some of the talent there, but this is a much bigger build out. It's 50 megawatts, involves the build of a substation, so we're going to high voltage and knocking it down. 50 megawatts is what's been announced. We've announced 20 megawatts using the micro VT hydro containers, and those orders have been placed. As I said in my script, we're feeling very confident about the 6.3% growth for September because that's going to be from the miners coming into Argentina right now and from taking Baycomo from 4.85 megawatts right now up to 11, which is the maximum capacity of the electrical current available. It'll be upgraded next year. And then with the 20 megawatts of contracts that we've done, that'll take us up to seven. Civil work is going to start probably in early September there. Miners are going to start arriving later in the year and into January. The longest contract there is the transformer, the big main transformer there. We're actually overbuilding it with hope that we can get more expansion in the area. So instead of 50, we're buying an 80 megawatt transformer there. It's got the longest lead time, about six and a half, seven months. We plan to put that order in in the next number of days, get that started. It's actually going to be the last thing to arrive. So we expect to go from basically zero megawatts to 50 megawatts, literally with the flip of the switch. Hopefully that's in the latter part of February. Maybe it's early March, but certainly before the halving. And that's for 20 megawatts. And then there's 30 megawatts that we have not talked about yet. And that 30 megawatts, We hope to provide more news in the coming days and weeks, but this isn't guidance, but that could very much take us up to 7.8 exahash if things come together as we expect. Our guidance is right now for 7 exahash in the first quarter of next year. I added a little bit extra there, but feel free to have a follow-up.

No, that's all really helpful colors. Thank you. Appreciate that. And then I also wanted to touch on, you know, as we're heading into the halving and mining rigs and secondary markets, at least, still remain at fairly depressed price levels. Are you thinking about potentially replacing some older machines and improving the efficiency across the fleet?

Josh, all the time. All the time. That's the nature of the business we're in. If you do not upgrade your fleet, frankly, you're going to die. And the halving is going to expedite that process. So I think we have some M31s right now. Some of them were redeploying, but other ones were selling. But most of those are coming out. They're the least efficient of our miners. And we continue to upgrade. Case in point, these hydro miners are amongst the most efficient in the world with the highest output. they are going to very much enhance our efficiency across the fleet. And just like what I mentioned about Washington in terms of the changes to the intake and exhaust systems there and bringing the temperature down and getting more out of our existing miners. But our fleet, if you were to look from top to bottom is already modern and we are continuing to modernize it and go with the latest models. Uh, we are not going for immersion cooling, but we're going to air cooled, which we do very, very well, particularly with our geographies and, uh, these hydro miners. We're very excited about that.

Got it. Thank you very much for answering my questions today.

Thank you.

Our next question comes from Kevin DD of HCW. Please go ahead.

Uh, Mr. Murphy, Mr. Lucas. Thanks for taking my question.

Good morning.

I guess the first thing is maybe you peel the onion back a little bit on the PPAs, plural, I guess, in Paraguay. Are they both with Andy? Can you talk at all to, I guess, the costs associated with them and whether or not there are curtailment opportunities for you there?

Okay, so the first answer to the question is yes. We bought companies that owned, two separate companies that owned power purchase agreements. They are both with Andei. So the Visarica site is with Clifsa. So we moved from the regional distributor to the national distributor. The cost of the power for that is 3.9 cents. And as I've talked about before, some optimism and hope that with the new party in the election and the promises that were given that that power might actually be reduced, like the cost of it. So, you know, fingers crossed there, and it could be a tangible reduction. So that, we haven't banked on that, but that's what we're hoping for. In terms of the deployment, we haven't put out any big, any of the numbers on that yet, except for the fact that the 20 megawatts of micro BT hydro containers, we used our credits. So from a cash, there's still a cost there, but from a cash perspective, we're not out of pocket. So really it's the substation that has a cost to it. The air cooled warehouses have a cost to them, but we do that very efficiently. And in Paraguay, it's frankly the lowest cost in our whole fleet. Jeff Lucas, do you want to come in with sort of a little more finality with some of the costs there? With the 30 megawatts not announced yet, we're kind of stuck on being able to sort of give total project costs at this point. So I give that as a caveat.

Yeah, sure. I'm more than glad to speak to that here. So for PasaPay, what we're looking at here, we're contemplating roughly 24 megawatts And that encompasses not only the infrastructure build out here, including the substation and 80 megawatt substation versus the initial opportunity of 50 megawatts here. And secondly, certain guarantees and other payments that we made about $4 million to the power provider here. But overall, we're looking roughly again, around $20 million for what's happening in Paso Peg, which we're contemplating $14 million being paid remainder of this calendar year. And the other $6 million or so will be done in early 2024.

I know, Mr. Morphy, you mentioned that importing things into Paraguay was a little bit easier than Argentina. And I'm wondering if the hydro machines already manufactured, would you expect any delay getting those onto site? Or is it really exclusively just a matter of getting that I mean, from what I understand, you're starting with a greenfield open plot of land, and that needs to be treated, and the substation and the grid connection and all of that has to come in. And I'm just wondering if you would expect or would it be prudent from our perspective to assume that micro-BT might hit hurdles in getting their new machines to your site?

We really don't anticipate any problems bringing the equipment into Paraguay. It's always been pretty straightforward. Compared to Argentina, it's always been quicker and easier to get equipment. In fact, even use equipment into Paraguay and the ability to source other equipment that goes into the infrastructure. It's always been really easier in Paraguay as long as you have the right documents. You can bring it in, you pay the VAT and you get it on site. Argentina, as we've learned over the last two and a half years, has been more difficult. First, we didn't have the self-importation rights because we hadn't done business there for a couple of years and didn't have the track record to apply for that self-importation. We had to rely on brokers that were expensive. They only had small allocations. And then last summer, when the government was was really under strain for its US dollar reserves. They stopped direct importation for people like us and in many other industries dead in its tracks. And we were stymied for a lot of months and our 50 megawatt warehouse there was fully constructed in October, but we weren't able to put it into sort of bring it up to full operation until earlier this year. And that was a real setback. The government didn't provide any alternative mechanisms until we could qualify to be a self-importer, which fortunately we are, and things are a lot better now. But they also have a government change coming in November. There is uncertainty there, and it's one of the reasons why we decided to take advantage of these opportunities in Paraguay and really make that one of our geographic opportunities. Obviously, the whole Latham area is a geographic hub, but putting more emphasis and more growth into Paraguay at this time. It's also all hydro, too, which we think long run is going to be a win for the industry and our company.

Just switching gears to Quebec for the moment. You spoke to a rate increase. I'm wondering if that was universally, and I apologize, I'm not having... research this, I was wondering if that was universally applied by Hydro-Quebec or if it was more for a township regulated and whether or not you would expect that to be rolled back or something that continues forever going forward.

Well, fortunately, rate increases in Quebec don't happen very often. But this was applied right across the board. It applied to our tariff with a few nuances. It happens to other industrial tariffs. This was pretty much right across the board. And this is Hydro-Quebec reassessing where they are, realizing their electricity grid will become more strained as electric vehicles and greenhouses and other industries using electricity in the future surge and they contemplate building new hydro projects down the road. There's a lot of discussion with the new provincial government in Hydro-Quebec about that. We've been intervening in some of the hearings and some of the things happening. It was actually a great opportunity for us to once again talk about some of the benefits that we can bring to Hydro-Quebec of Bitcoin mining, taking our miners and putting them in areas where the hydro is rather than wheeling power long distances, using some of the thermal benefits that are available. And I think they're finally seeing that our ability to curtail on a moment's notice can actually be a huge benefit to them and we're unique in that feature. So there's more developments gonna happen in Quebec, but I do not contemplate another increase at least for the foreseeable future in Quebec. But yeah, this was a universal one and it was too bad. It impacted our results and will continue to impact our results. But compared to the level of inflation, like we've had one increase, 6%, that was basically the rate of, less than the rate of inflation last year. And this has been several years since our last rate increase. So really we're still below the increases in inflation, which by and large is good.

Last question for me, gentlemen. In the past, there was some discussion of a future opportunity in Washington. Congrats on improving your efficiency there, but I'm curious to how you might see potential expansion in Washington state.

Washington still is a very attractive place and it's nice that we have talent there. It's one of the hotbeds of crypto mining. So there's opportunities to expand both Greenfield and through acquisitions. But the one thing that happened, at least in the county we're in and with the utility we're dealing with, is they put up the price of power earlier this year as well. So we've gone from being one of the low-cost power facilities that we have to once again sort of being in sort of more in the upper quarter or so. And So that's taken some of the attractiveness out of Washington for the time being. But similarly, we're having discussions with that utility, talking about the benefits. And looking around that whole area, that Columbia River and what was built for effectively the smelters from days gone by, makes it a very interesting area. So no, we're not giving up on that area.

Thanks very much, Jeff. Appreciate the color.

Thanks, Kevin.

Our next question comes from Bill Papanastasou of Stifel. Please go ahead.

Good morning, Jeff Morphy and Jeff Lucas. Thanks for taking my questions.

Hello, Bill.

Hi, Bill. Yeah, so for my first question, just hoping to gain some insight on the average cost of power that was realized in Argentina in the quarter, just for the purposes of measuring the impact of margins and the road ahead. Now, obviously, the company shifted from drawing on power from the grid in Rio Cuarto to the very attractive 3-cent power contract. How should we look at that?

Sure. Let me speak to that, and then Jeff can add a little further color to that. So we are starting to get the benefits, and we did see the benefits beginning to accrue in the second quarter from that shift that you spoke to. But we didn't get all the benefit here. So we've talked about Argentina, you know, cost being in the 3-cents, range here, and we didn't experience that in the quarter, again, because part of that quarter was actually from the grid itself. So while we didn't get that much of a savings, to give you some concrete numbers here, in the first quarter, the cost of power in Argentina for us was about 4.6 cents. In the second quarter, the average amount in Argentina, again, was about 4.4 cents. That includes this period of time where we had in the 3 cent range, getting it right from the power provider, and then also a period of time when we were getting it from the grid as well. So that kind of gives you a bit of a context. So the expectation here is that we're actually going to continue to achieve, you know, rate improvements in Argentina. That's actually going to lower our rates overall. Now, bear in mind, another comment to keep in mind here, that Argentina wasn't that large a contributor in the second quarter. As we're ramping up, you know, to 29 megawatts and then going to 50 megawatts, perhaps even beyond here, you know, we're going to have a much larger portion of the total Bitcoin that actually will be mined. in Argentina. So that's going to include our benefit. Let me add to that.

Let me add to that too. As Jeff mentioned, we're moving from the 29 megawatts up to the 50 megawatts very soon. That will optimize our facility there. We're still ramping up, so there's costs to do that in terms of the natural gas and the power costs. Once we're at 50 megawatts, we can optimize better. But almost more importantly is start to get a little cooler in this part of the world in the northern hemisphere. In the southern part of the hemisphere, they're warming into the summer season and starting in October, which is where the summer starts, warmer temperatures, they consume less natural gas, the price of natural gas goes down and that's where for the six, seven, eight months, we should see much lower natural gas prices, which will lead to lower electricity prices and that's where I think when we do our next quarter results or certainly in March when we do our full year results, you'll be able to ask the same question and hopefully we are talking more of the, we've had less than 3 cents, we really are averaging the 3 cents type of area and we start seeing the real margins come out of that facility. And there's one other thing, they are putting an extra pipeline up Providing more natural gas to the area in which the power plant next door to us is, which was a supply constraint in the past that was being activated in July. So it should be in pretty good state right now. So with more natural gas coming up and not being constrained, that should help the price too.

Our next question comes from Chase White of Compass Point Research and Trading. Please go ahead.

Thanks, guys. So just so I'm clear, the 7-exahash target includes only the 20 megawatts of the 150 you just acquired in PPAs in Paraguay, right? Correct. So there's nothing incremental from Argentina past 50 megawatts. Um, just the additional 20 megawatts per way. Okay. Just making sure.

Correct. So, so yes, uh, if we infill the 30 megawatts on that 50 megawatts, as we expect, I think you'll see us bump our guidance up to sort of that 7.8 ish area. Um, but we're not ready to do that yet. We won't, we generally only do guidance when we have clear and firmer sight lines to how to get there.

Gotcha. And then, you know, in terms of obviously that would still just be 50 of 150 plus everything else in Argentina. I mean, what would you need to see in the market to want to green light all of your potential expansion projects? And would you generally finance it with, you know, the Bitcoin sales and selling ATM shares? And how do you think about that?

Let me start. Go ahead, Jeff. Please, Jeff.

Lucas, go ahead. Okay, sure. So, you know, the one thing we need to see, Chase, more than anything else, a little more stability and certainty in terms of what the Argentinian outlook is. And I say that because bear in mind right now they're in the process of going through an election. They actually have their presidential primaries this Sunday, and they have the presidential election itself on October 22nd. There are four different candidates, and not to dwell too much on the politics here, but there are four different candidates who are remarkably close in the polls. Some are advocating financial policies that seem to be very constructive for us. Others require a little more thinking involved here. And part of, by the way, what's driving the fact that their US dollar reserves are actually negative between about $8 billion. So they know they have, the country has to address this. That can introduce uncertainties similar to what we saw in the pain that we experienced obviously last year. So we want to make sure. As we're looking at great opportunities here, we're also very cognizant of the potential impact and the benefits that the halving is going to bring to make sure that we're moving very carefully and very thoughtfully from that angle. In terms of how we're going to finance it, first of all, this is Argentina. You don't finance with debt, clearly. Those opportunities just really aren't available at anything worthy of a reasonable rate or price. But the goal here primarily, as overall strategy speaks to, is to use our excess cash flow from operations. to fund the capital expenditures down there. And then secondly, of course, to use the ATM. But we're always, always tapping the ATM with a very careful eye to how we apply those funds to make sure that they're accretive and that we get an attractive ROI and a short payback on them.

Go ahead, Jeff.

That's right. Paraguay, as I mentioned, the longest lead time is the primary transformer. It's seven months. That gets us really close to the having. And with our own internal guidelines is that we do not want to be in construction. We do not want to have debt. All of this during those first few months of the having, we want to be lean. We want to survive. We got long-term goals. So when we saw this opportunity to buy these two contracts, we didn't see it for necessarily immediate build-out, although we were hoping we might be able to. We saw it as long-term. And so that 100 megawatts, is an opportunity to expand. We are looking at developing it right now. Maybe we'll do the substation sort of over the next seven months. Maybe we can add some production or maybe we just do the substation and maybe we get ready so that we have warehouses and a site ready to go sort of that four, five, six months after the halving when Bitcoin prices start to rip again, when the network hash rate is lower and we have more market share, And it makes pure sense because of our capital structure and what we've built over the last number of years to then just jump right in with both feet and fully build it out. But we practice a very disciplined decision process here. And so far, the pieces are not coming together to build it out over the next seven, eight months. But we are examining that very closely. And we're looking at a number of other things, too. So capital allocation is important. And we continue to want to be a diversified company and make sure that we put our precious capital where it will do the most good.

Got it. Helpful. Thank you.

Now, I think Bill got disconnected there from a note that I got. So maybe he's back and maybe, operator, you can put him back in. I think he has another question.

We will take another question from Bill Papanistatsu. Please go ahead.

Hi, thanks, guys. Sorry about that. I'm not sure why I disconnected, but I just wanted to talk about the recent purchase of the M53S Plus machine. I know these are the first hydro-cooled mining units in the fleet. I believe you alluded to the fact that we could see a higher proportion of hydro-cooled miners in the overall fleet in the long run as you continue to improve fleet efficiencies. I just wanted to gain kind of a high-level understanding of how the company is looking at hydro-cooled mining units compared to other types of ASIC uses, such as air cooling or immersion cooling. Could we see more peers also move towards hydro-cooled mining in the future?

Well, I can't really speak for our peers, but I can speak for us. And hydro-cooled is a new technology. It's not that we are on the bleeding edge here. There are deployments. And it can be more efficient in that you do not have to plunge your miners into a bath of dielectric fluid, sticky, oily dielectric fluid. It's more efficient. But then we're going into more plumbing related type of things where You have cool water that's going through, you're cooling the circuits, and we think it's more efficient. We think it supersedes immersion. I guess time will tell, but that's our position on it. Immersion has turned out to be expensive, and I think this offers more opportunities for expansion. Like these things push out production at two and a half times more than sort of pretty much the S-19s and M-30s in our fleet. The efficiencies are tremendous. So we know enough and we think this is exciting enough that this is where we're going to go next. It will not replace air-cooled. Air-cooled is still something we do very, very well. But as you look at supercomputers and other things, they use these type of technologies. And as we continue to push For higher levels of efficiency, you have to look at what some of the other industries have done. So we're doing that. And I can tell you as well, Bill.

Go ahead. I was going to say, and by the way, I was going to interrupt Jeff here, but what gets us excited, not only in the performance business scenes, but the economics behind it for our benefit as well. For those of you who just aren't familiar, particularly with the M53S Plus and Plus Plus, these things have 24 watts per terahash. They're about 280 terahash per unit. And the economics of these things is well below a third less than, for example, an XP or others, which may be a little better performance here, but are dramatically more expensive. Right.

And where I was going to go next is because you have this hot fluid, you can also take this industry to what we think is also sort of the next frontier, and that's capturing the residual heat and putting it to good use. When you have air cooled, it's very tough to transport hot air. any distance at all. We do it now in Quebec by heating some of the warehouse spaces in adjacent industries. We look for aqua farming and various other things, but in fluid form and not dielectric fluid, you can push this into other things. And I know micro BT is looking at future generations where they concentrate more heat into the, it's going. And I think the ability to to provide heat to buildings and other things much more effectively and efficiently is there. So while we don't know that for sure by buying these machines and getting more familiar with them now, we are very hopeful that we can squeeze more efficiency out by possibly selling some of the heat in the fluid form down the road. And that would be particularly attractive in possibly Washington, but more so in Quebec as we get more adjacent to industries and things like that.

Thank you for that color. And Jeff, you know, you were talking about the halving that's coming up, and I was just hoping to get your expert knowledge and your team's expert knowledge on kind of the evolution of mining, you know, as we proceed to another event of Bitcoin rewards getting halved. We've seen a lot of Bitcoin mining operators transition their business from being completely self-mining to diversifying into high performance and cloud computing. And many of these players cite that they've gained a significant amount of experience at operating data centers. But, you know, BitFarms is arguably... has the most longstanding experience. You guys are scaling to 12 farms by early next year. How do you see kind of the industry evolving from where it is today, given a potential trend of margins deterioration?

Bitcoin is an amazing thing. That protocol with its self-adjustment mechanisms And with adoption and everything else, we, we absolutely feel confident that over time, the adoption of Bitcoin with the inflation in the world, with governments printing money, that, that Bitcoin has a real place. And, uh, over the next few years, five, 10, the adoption is going to be tremendous. That will take care of a lot of things because the price is going to go up and that will allow the industry through the having. to sort of reinvent itself. The weakest players will go bankrupt. There'll be some upstarts, but then there's going to be a handful of us that are public and others. There's a lot of private companies in the world that will do very well. And they will expand. They will continue to push the barriers in terms of efficiency, as I said, using their thermal properties and residual heat in other applications, being closer to sources to to the electricity sources to be able to work on solar and wind and these types of things and energy management, all that's going to continue to evolve. But in terms of other opportunities and data center management, we operate data centers basically on steroids, high performance, but not like tier three data centers where there's redundancy and everything else. They use a lot less electricity. They need to have 99.9% uptime. And then we see AI and high power computing that sort of comes somewhere between. There's gonna be a huge demand for that. High power computing we can sort of do, but we're not set up to have redundancy in terms of diesel generators to come on when we have to curtail. So there has to be a fine place for us to play. And I, AI is exciting. Some of the high power computing is exciting. They're talking about phenomenal growth over the next six years. We do have experience, but I'm not sure if it's the right experience. And frankly, we're doing that research to understand whether there might be a role for us there, but we're not going to jump willy-nilly into something where we don't know much about. And it changes the fundamental aspect of your commercial operations too. Right now, effectively, we have no clients. We mine Bitcoin and we sell Bitcoin online. to the pool and then we get them and we sell them to make the business work. If you start getting into commercial contracts, sometimes you're hosting, sometimes you're not. These contracts tend to have two or three years. You have to be much more customer focused. None of us really have those customer facing people right now. So we'd have to build that part of the business and get ready for churn. It's not a simple overnight decision just to jump into that type of business. And if we're going to do it, it needs to have the margins and longevity to make sense. We're evaluating that very closely.

Bill, one other comment to make here. Actually, a shout-out goes to our IT team. Because the economics naturally tighten with the habit coming up here, managing and getting information from your miners to run them more precisely and more efficiently is going to be key. And I think our MGMT2 programming and the developments we're making to that right now really give us an edge in that area. And we think that's going to work to our advantage, certainly, when the habit comes.

Great I really appreciate that color color amazing response.

That concludes our question and answer session i'll now turn the call back over to Jeff morphe CEO of bit farms, please go ahead, Sir.

Thank you Alan I would like to reiterate three points about that farms one. We've maintained profitable mining operations each quarter as a result of our determination to maintain stable low energy and operating costs. Two, with little capital outlay, we expect to reach 6.3 exahash per second by the end of Q3 from our existing portfolio and reach 7 exahash per second in Q1 2024. Three, a major expansion is underway in Paraguay and we are well positioned to move quickly on other major as well as minor expansion opportunities that meet our investment criteria. Thank you all for attending today's conference call. We look forward to updating you with our monthly production reports as well as our other developments at our upcoming analyst day on September 14th and when we announce our Q3 results in the fall. Thank you very much.

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