SATO Technologies Corp. (SATO) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of SATO Technologies Corp. Please note that today's meeting is being recorded. At this time, it is my pleasure to turn today's meeting over to Romain Nouzareth, Chairman of the company. Mr. Nouzareth, the floor is yours.

Thank you very much. Good day, everyone, and welcome to the SATO Technologies Corp. Annual Meeting. My name is Romain Nouzareth, and I am Chairman of the Board. Today's meeting will begin with the formal business of the meeting, followed by a business presentation. After that, we will conduct the question period for any inquiries of general nature. Shareholders and proxyholders may submit questions at any time using the online function on your screens. If you know already that you have a question, please submit it now and we will address it in due course. If you are a shareholder or proxy holder and have not already voted, you may use the online voting function on your screen now or during the formal business of the meeting. As we use any technology, unexpected glitches may occur, but we will do our best to ensure that the meeting runs as smoothly as possible. The meeting will now turn to order. In accordance with SATO's bylaws, I, as Chair of the Board, will act as Chair of the meeting. I will ask Alasdair Federico to act as Secretary of the meeting and Laura Stone of Computershare to act as scrutineer. The scrutineers are provided proof of mailing of the notice of the meeting, the form of proxy and the proxy circular. I direct a copy of the notice together with the proof of mailing, be kept with the minutes of this meeting. The corporation's bylaws provide that the quorum of shareholders is present at the meeting of shareholders is the holders of no less than 33.75% of the shares entitled to vote at the meeting, are present in person or represented by proxy, irrespective of the number of persons actually present at the meeting. Based on the preliminary scrutineer's report, I declare that we have quorum. Notice of this meeting having been duly given and a quorum of shareholders being present, I declare that the meeting is properly convened and constituted for the transaction of business. This morning, I'm accompanied with the webcast by members of the Board of Directors and members of senior management. In attendance from management are Fanny Philip, our COO, and Kyle Appleby, our CFO. And from the Board, we have today with us, Frank Di Tomaso and Fred Pye. Before commencing with the business of the meeting, we would like to provide instructions for our registered shareholders and duly appointed proxy holders may vote using the online platform. To the extent you have voted in advance of the meeting and do not wish to change your vote, you do not need to do anything. If you have not already voted at any time as we proceed to each items of the business, those that have joined the meeting using their control member or proxy holder invitation, may vote using the on-screen voting function. To vote, click on the voting button on the web portal and follow the instructions. You must click submit following your selection for your vote to be counted. If you have not already submitted your vote and you do not indicate for results or against as applicable, when voting is open, your vote will not be recorded, and you will be regarded as having abstained from voting. Preliminary results will be announced after voting closes for all matters and financial results will be publicly available on our website and sedar.com. All matters require a simple majority of the votes cast during this meeting or by proxy to be approved at this meeting. The annual meeting was called to consider 4 matters. Certain shareholders or proxy holders have agreed in advance to introduce the motions on the agenda. I will invite them to do so at the appropriate time. Now let's move to the first item of business. The consolidated financial statements for the years ended December 31, 2022 and 2021, together with the auditors report thereon, were sent to the shareholders who requested them and are available on the corporation's website and on sedar.com. I direct the secretary to file a copy of the financial statements with the minutes of this meeting. Moving now to this next item of business on our agenda, the election of Directors. Shareholders have been asked to approve the election of 5 directors to the board. Our proxy circular sets out a list of 5 directors for election as directors of SATO until the end of the next Annual Shareholder Meeting or until such Director's successor is a factor. All of the 5 nominees for directors are currently members of the Board. The nominees to be elected as directors are Frank Di Tomaso, Mathieu Nouzareth, Dominique Payette, Frederick T. Pye and myself, Romain Nouzareth. Biographies were included in the management information circular. Each of the persons nominated has confirmed that he or she is prepared to serve as a director of the corporation, and all nominees meet the qualification requirements for directors under the corporation's bylaws. I would also note that pursuant to the terms of the corporation's bylaws, no other nominations have been received and nominations are those closed. I will now ask our motion to elect Frank Di Tomaso, Mathieu Nouzareth, Dominique Payette, Frederick T. Pye and Romain Nouzareth.

Mr. Chair, I so move.

Mr. Chair, I second the motion.

Thank you. Is there any discussion on this motion? If you have anything to raise, please use the question feature in the portal. We will pause for 10 seconds to allow you an opportunity to type.

Mr. Chair, there is no discussion of this motion.

Thank you. As there is no further discussion, I declare this item of business closed. The next item of business is the appointment of the auditors. I ask for a motion appointing Raymond Chabot Grant Thornton LLP as the independent auditors of the corporation and authorizing the directors to fix the auditor's remuneration.

Mr. Chair, I so move.

Mr. Chair, I second the motion.

Thank you. Is there any discussion of this motion? I will also [indiscernible]

Mr. Chair, there is no discussion on this motion.

Thank you. As there is no further discussion, I declare this item of business closed. The next item on our agenda today is the consideration of the resolution ratifying corporation stock option plan. Details of the stock option plan are set out in the section ratification and confirmation of the corporation's stock option plan in the corporation's management information circular. In accordance with the option plan, the corporation made grant stock options to purchase a maximum number of the corporation shares corresponding to 10% of the number of outstanding shares from time to time. The number of shares which can be reserved in accordance with the option plan automatically increases or decreases according to the increase or decrease of the number of the corporation shares issued and outstanding. It is therefore considered a rolling plan. For informative purposes, as of the date of the circular, 10% of the outstanding shares of the capital of the corporation was equal to 7,258,546 shares. In accordance with the policies of the TSXV, the option plan must be approved by the shareholders of the corporation each year during its Annual General Meeting. The result of the board will be binding on the Board by simple majority approval of the shareholders. The full text of this resolution is reproduced in the management information circular as scheduled A. I will now ask for a motion to approve the resolution ratifying the corporation's stock option plan as more fully set out in the proxy circular.

Mr. Chair, I so move.

Mr. Chair, I second the motion.

Is there any discussion of this motion?

Mr. Chair, there is no discussion on this motion.

As there is no further discussion, I declare this item of business closed. If there are any registered shareholders or duly appointed proxy holders who have not yet cast their votes, I invite you to do so now before we close all voting. I instruct the scrutineers to allow voting for another minute and then to close the voting and we will pause briefly while any final votes are cast. [Voting]

The scrutineers have completed their preliminary report. According to the scrutineer's report, I am pleased to announce the following results. Raymond Chabot Grant Thornton LLP has been re-appointed as our auditor. All 5 nominates for election of the Board of Directors made the circular have been elected. The resolution authorizing the amended restated stock option plan has passed. Final detailed results will be disclosed in a press release, which will be posted on the company's website and on sedar.com. As there is no other formal business to come before this meeting, I would ask for a motion to terminate the formal part of the meeting.

Mr. Chair, I so move. Is there somebody who can second the motion?

Mr. Chair, I second the motion.

Thank you. I declare this motion carried, and this concludes the formal part of the meeting. We will now proceed with the presentation. So today, we will take a few days to present a little bit more about SATO, what we have done so far, but mostly where we are going to in the next coming months and years. With us today, I have Kyle Appleby, our CFO; and Fanny Philip, our COO since a long time with the company. Before we go to on the way, I'd like to remind everyone to review our forward-looking statements and the cautions and risk factors pertaining to the statements, which can be found in front of you and on your screen. Also note that certain non-IFRS measures are presented in the slide, and shareholders can find reconciliations of those measures to the nearest comparable IFRS measure of the company's most recent NDMA available on our website and under our profile on SEDAR. Today, we will particularly talk about company update, will give you a better view on our road map. We will talk with Kyle and Fanny with our exceptional financial results, and then we will take some quick Q&A. Corporate highlights. We exist since 2017. We are Bitcoin miner and we are now running 20 megawatts of energy, which is equivalent of 0.6 exahash of mining power. To give you an idea in the world today, all of the Bitcoin miners equals 360 exahash, we have 0.6. The biggest miners in the world are between 10 and 15 exahash. Our primary focus is to be extremely efficient and using a data center that is made to extract the most Bitcoin possible with a given amount of energy. We have one of the best cost of electricity in the world. And we have also one of the best electricity in the world because it's 200% renewable. It's from Quebec, and it's a very stable energy. Having and running a data center of 20 megawatts is very interesting for a company like ours, and it shows with our financial results that will be discussed later than it is data center that is providing enough revenues to be able to continue growing. But we don't want to stop at 20 megawatts. We want to grow at least 10x in the coming months and years and even more if we can because we are in a linear business, and we can deploy more capital to make more revenues using our computing power. The computing power we have built so far are made for Bitcoin mining, but we are currently developing our data centers to be hosting everything related to computing power for artificial intelligence and HPC for high-power computing, which is a need in the market today. In order to be able to grow the solution products, we will be to secure more PPAs where -- by which we will acquire more energy, and we will deploy our expertise in running data centers. We are extremely efficient operators, and we will prove that we can expand our operation as we want. We will also look at doing acquisition of existing operation, which will be a way for us to scale up even faster. Remember, our goal is to build AI next generation data centers and Bitcoin mining. With this concrete power, this is how we will make most of our revenues in the coming months and years. Just a quick one on AI. It's a lot of said about AI and lots of people are going into that direction. And it's true that it's an opportunity for a company like us. The market is here, and the demand is exploding everywhere, and it will even supply in a sense of computing power. We believe SATO has a legitimacy to be able to develop and deploy data centers made for computing power related to AI. We will show that and we will announce more development on this side very soon. How we will make money from running our operation. It's very simple. When we run a data center like we are doing today with our 20 megawatts, we are showing that we are profitable even in a different part of the existence of the company, but also that we can show very interesting results related to operating our data center at scale and with the right team. Obviously, the computing power, again, will be used for Bitcoin mining, high-performance computing and artificial intelligence. We are also developing and investigating the new type of technologies built on Bitcoin, such as the Lighting Network, [indiscernible] other technologies. In order to succeed and to continue growing, we have assembled a team of extremely professional and talented people. The board on the left, you can see with Frank, Fred, Dominique and Mathieu is extremely competent and helping us navigate the market and the stock market. On the core team of the company, you can see the management Fanny and Kyle will take the stage very soon. Alasdair is also with us from a long time. And on the infrastructure, mining, the finance and technology, we are teams that are working together for a long time. And we have demonstrated our capacity to grow in any kind of market, and we are ready to go to the next step, which is growing to the next success of our company. I will now leave the floor to Kyle and Fanny, but mainly, they will explain our outstanding results financially speaking for 2022 and for Q1 '21. Kyle, you have the floor.

Thank you, Romain. Yes, so we're going to just go through some of our financial highlights, as Romain mentioned. And first, I'd like to go through our highlights comparing Q1 2023 to Q1 2022, which we have shown tremendous growth and we can see that even though we can't control the price of Bitcoin that affects the results, we focused on building our mining power and center focused on becoming very efficient, adding miners. So over the course of the year, you can see the growth we've achieved as well as focusing on cutting costs during difficult crypto times. So compared to 2022, Q1 2023, we've increased total revenues by 129%. Our EBITDA has grown from a negative $1.7 million to $1.1 million, an increase of $2.8 million and a positive operating cash flow of $918,000. So we're very proud of our year-over-year accomplishments. As well, our financial highlights annualized going back from 2022, 2021 and into 2022, we've also achieved tremendous growth in revenue. 2020, there was the halfing event that contributed to it becoming more difficult to mine. 2021, we went public, raised some money and 2022, focusing on growing our center and building out our mining power. So you can see from there, our CapEx over the years from 2020 to 2022, we've basically focused on our -- spending our money on growing and investing in the company. 2022, spent almost $7 million on CapEx investments. We've increased our working capital from a negative $1.2 million to $4.1 million in 2022. And we have generally improved the company significantly since going public, stating ourselves as an efficient and growing miner. Lastly, I'm just going to go quickly through our EBITDA, adjusted EBITDA and operating cash flow from 2020 where in 2020, we had a negative EBITDA of $855,000, through Q1 2023, $1.1 million. Our adjusted EBITDA has grown from $332,000 in 2020 to $980,000 in 2023 Q1 and operating cash flow from $350,000 in 2020. We had a negative $2.7 million in 2021 and now in Q1 2023, $918,000. So we've set the base for our growth, and we look forward to the future in positive continuing financial results. I'll now pass it on to Fanny to continue the discussion.

So we're going to look here on a 1 key factor to be efficient in this industry, is the electricity. So being in Quebec, Canada, we have access to 99% of hydroelectricity. Not only it's a renewable industry, but it's a stable electricity source as well. You can see on the screen that the average weighted cost of electricity that we have in our center in Quebec is 0.04 USD. So it's very important that we maintain a cost of electricity very low and that we use this electricity on the most efficient manner because if you look at the -- this cost compared to the seat operating cost, it represents 95%. Electricity is included in the cost of revenue. So it's, for sure, one of the most important factor to look when you compare to our peer. We're going to move to the next slide and look at another measure that is very interesting and commonly used in the industry is the price to mine one Bitcoin. So we put here the numbers for Q1 2023. You have the electricity cost. So we just discussed about this one. The seat operating costs and the operating salary. SATO has always been focused on transparency related to numbers, and you could find very detailed information in our MD&A for every quarter and full year, when you can find mining profit and opting profit related information, but what you could see here is for the Q1 average SATO produced 1 Bitcoin for 11,115 USD to produce 1 Bitcoin. So that's the cost of electricity to produce 1 Bitcoin. On the next slide, I'm going to give you a quick highlight of the cash and digital asset position. So as of December 31, 2022, the aggregate cash and digital position is a total of CAD 1,349,000. It's composed of 26% of cash and 73% of digital assets. At the end of Q1 2023, the total is CAD 1,453,000, that represents 23% cash and 77% digital assets. Now we are going to have a quick look of the capital structure as of March 31, 2023. So at the end of Q1, again. So the cap table, we have the outstanding share of 72,585,000. We have warrants and stock options for 8,800.000 that give us a total of security of 81,385 -- sorry, 81,385,000 security. In this total, we have security on the [indiscernible], and you can see the number here, it's just a bit less than $21 million. Again, you could find us, as Romain explained at the beginning as the ticker on the TSXV so it's SATO and on the OTCQB:CCPU.F. Now we're going to look at some comparables. So in the industry and other metrics that's very interesting, it's the quantity of Bitcoin produced per exahash or per equivalent of exahash. So you have here in front of you the full year 2022 and the beginning of 2023. The information comes from our peers, the public information that they publish. So as you can see, SATO, we rank in the top 5 with an equivalent of BTC per exahash on 96 BTC per 1 exahash. You can see the different peers, I can say, on the left, and something is very interesting, and you may ask why this trend that go a bit down since I said, September 2022. It's because the increase in the network [indiscernible], that's the black line that you can see. So you see an opposite correlation between these two. And last, we can look at another way, if we said we invest 100,000 USD at the beginning of 2023, and we look this investment up to June 16, 2023. We put up here, and we can say that SATO has a return of 213%. So here again, we are ranked #2 compared to our peers.

Thank you, Fanny and Kyle. Thank you very much, everyone, for being here again. We are Bitcoin miner. We started in 2017. We are operators, we know extremely well how to operate a data center of 20 megawatts. We have a company that is publicly listed that is showing tremendous results in different kind of situations. We are ready to go to the next stage of the development of the company. We will grow our computing power in Bitcoin mining and also with the new artificial intelligence computing power that is coming. And we have an amazing team of people working together from a long time. We are ready, and we are very happy to have you with us into the next step -- going into the next step of the evolution of the company. We will now go and take some time to answer some questions, if any. If there's any questions, please, it's time to give it to us. We don't see any questions coming up. We're going to wait for a few more seconds. There are no further questions, that completes our meeting today. On behalf of the board and management team, we thank you for joining us. We appreciate your ongoing support and confidence in the Board and management team. We look forward to speaking with you again at next year's AGM.

Thank you. This concludes today's presentation. You may now disconnect.