Kevin Dede: Okay. Just along that line, have you fully utilized the credits that the manufacturers have offered you? Or do you still have more on the books?
Geoff Morphy: We sure have. Jeff, do you want to comment on the $19 million?
Jeff Lucas: Sure we did. We actually had around $15 million, $16 million remaining and we fully utilized that asset for the Paso Pe, for the hydro cooled and for the miners and the containers associated with that. So that pretty much utilized fully the remaining credits that we had, Kevin.
Kevin Dede: Okay. So when we look at the December balance sheet, you’ll have zero machine credits.
Jeff Lucas: Correct.
Kevin Dede: Okay. You mentioned, Jeff, this situation with the Quebec tax authorities, or maybe it’s, I guess, the full Canadian picture. I just want to understand what exactly is going on there and where your confidence comes in that CACI that goes away and maybe previous allocations are refunded. How should I think about that?
Jeff Lucas: Sure. So, first of all, this legislation was originally proposed back in February 2022, and at that point in time, we began accruing the expense of that VAT. So, in essence here we have a 15% value added tax on the energy cost. Normally we can actually apply for a refund, or historically, we can apply for a refund and recover that VAT. Effective, actually in February that’s when this proposed legislation was put forth, February 2022 indicating that that recovery or that refund would no longer be available to that bitcoin miners here. So that’s why we’ve actually been incurring that additional cost and accruing to that additional cost here since that point in time. About two months ago or so, the legislation was officially passed.
Actually, they removed that opportunity with certain exceptions, including where if you are actually selling – if you are selling your computing power capacity to a third-party pool as we do actually with Foundry, which is located in New York here, you actually can therefore recover those VAT taxes that are inputted here. So what we are actually now doing is that we’re getting a specific revenue ruling that makes it completely clear, 100% that we had the recovery of that refund here. And as a matter of fact, if we get that back what will happening rather than recording roughly $0.047 per kilowatt hours you did in Canada in the third quarter, you’ll be down to a little under $0.04, more like around $0.039 and that going forward. In addition, speaking to your second question here, Kevin, as a matter of fact, we’ve actually paid around $16 million of VAT taxes since February, actually a little more about $17 million at this point.
And we would get a refund for that amount. Not banking on it yet, not putting into our projections, but it’s something we feel we’re very entitled to. The legislation implies we should get it and that we’re going to be pursuing that very vigorously. Hopefully that addressed your questions.
Kevin Dede: Right. And just help me understand which authority that is. That’s beyond the territory province of Quebec, right, that’s for the entire country.
Jeff Lucas: It’s the Canadian Revenue Authority and also it’s at the provincial level, the MRQ as well.
Kevin Dede: Okay. And…
Jeff Lucas: Because they’re harmonized between most of the provinces and the federal government, but, yes, this is a federal government initiative. It’s their lead. It’s the interpretation from them that we need to clear this up. And we’ve been trying to be patient, but they seem to be taking an awfully long time and getting this crystallized for us.
Kevin Dede: Can you just maybe offer a little more color on your confidence and the ruling going your way?
Jeff Lucas: We’re highly confident. I don’t think I can be any more. I don’t think would beneficial be more specific than that, but we have every expectation as we read the regulations as our attorneys read the regulations, it seems very clear to us that we are indeed entitled to that VAT refund.
Kevin Dede: There are a slew of other bitcoin miners operating in Canada, are they in a similar position, you think with offering their hash to a U.S. resident pool?
Jeff Lucas: I’m only going to speak to our situation here.
Kevin Dede: Fair enough. Fair enough. The Synthetic HODL that you’ve put in place, right, I’d imagine that’s 35 contracts, right, you spoke to 35 bitcoin?
Jeff Lucas: In essence that’s correct. That’s right.
Kevin Dede: Okay. That’s all since the September quarter closed?
Jeff Lucas: That’s right.
Kevin Dede: Okay. How would we see that show in the balance sheet in December?
Jeff Lucas: Yes. That’s a good question. So we do not practice hedge accounting here. There are some complications and wrinkles associated with it at this point in time here. So where you actually see the results of the impact of that is going to be actually below the operating income line and sort of financial income and expense. So we’ll be breaking that out in the detail there. And in future reporting, you’ll see it broken out in that section and in the footnotes.
Kevin Dede: Okay. Obviously, you gentlemen scrutinize the capital allocation decisions carefully. Can you offer just a little insight on the factors that led you to deploy capital in that vein; given the improvement that Mr. Morphy addressed in the hash price and the purchase or at least the utilization of the equipment credits?
Geoff Morphy: Let me. I’ll start off here. First of all, we utilize equipment credits because we were going to get it, actually. It was a great price for us in terms of the equivalent value for what we’re doing. Secondly, obviously, we do want to tighten our cash as carefully as we can here, given the uncertainties coming up with a having overall here. But I think what’s important to keep in mind, just sort of step back and give you a little more color here. As I pointed out at the beginning here, our cost of equity for the industry overall is around 35%. So we do have a pretty high hurdle here in terms of what we’re looking for on a return on our projects. And we find, though, however, some of the economics, such as what we’re seeing in Paraguay, is very, very compelling at this point in time.
And while sure there’s greater uncertainty and greater risk, which in turn warrants a higher hurdle rate for that part of the world here, we find that even so, that the potential returns that we can achieve here in that part of the world make it very compelling for us to sort of continue to make investments of that nature. Does that address your question Kevin; I want to make sure I’m being thorough here.
