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

Good morning or good afternoon for everyone who's joining us today into our live cast. We are SATO Technologies and, today, we will present to you our 2023 audited financial results. I am today accompanied with Fanny Philip; and Kyle Appleby, our CFO; and Fanny Philip being our COO. We are going to give a few more minutes for people to join us as we see that more people are currently joining, and then we will start. All right. I think we will be able to start. So welcome again. We are SATO Technologies. Today, we are going to talk about our financial results for 2023. They have been audited by Grant Thornton. We will also talk about different kind of vision we have for the company and where we're going to go. Of course, first, disclaimer. Everything we talk about during this presentation, during this deck is forward-looking information. Everything in our business more than ever is linked to how much money we can raise via equity or via debt. And until we have done so and announced it publicly, everything we are disclosing into this presentation is forward-looking information. Today, I am joined with Fanny Philip, our COO; and Kyle Appleby, our CFO. We will talk first about SATO Technologies. We will give you an update of who we are, where we're going to and what kind of like results we have been and we have had so far. Then Kyle the lead and talk about our 2023 audited financial results, extremely good result for the full year of 2023. And then we will finish with a question and answer at the end of the session. Who are we? We are a Bitcoin miner. We started in 2017. It's a company that I have cofounded. And since then, we have been dedicated into building our mining power. Today, we are running 20 megawatts of energy, which is for the average of 2023, around 0.10% of the total Bitcoin network. We have one of the best electricity prices in the world, around $0.043 a kilowatt hour, but it's not only well priced, but it's also a very stable energy. It's very important when you run data centers and Bitcoin miners in particular. And it's also an energy that is green because it's 100% renewable or close to 100% to being renewable. We are mining principally only in Quebec right now. Energy is mainly hydro energy. So it's very low carbon emission or zero -- almost zero carbon emission. What is important also with our company is that we have been always -- we have been able to grow our revenues and our operating cash flows over the years. You can see here since the start of the company, again, started in 2017, first year -- first fiscal year in 2018. You can see the progression of our revenues and at the same time, from our operating cash flows. At the beginning from the first 3 years, we were growing our energy but it's really in 2021 when we decided to become a publicly listed miners that we've really started our expansion. You can see from '21 to '23, the increase of revenues from last year to this year, it's 65%. And we are operating cash flow positive. Here, we are detailing a little bit more and go into a more detail on what does it cost really to produce 1 Bitcoin at our company, SATO Technologies. Let's take the last month, the closest month to us -- for us. It's January 2024. This is the one you see on the right of your screen. What we are showing in the light blue is that it costs in electricity around $18,000 to produce 1 Bitcoin in our data center. When we take the cost of production, including the site operation and the operating salaries, we make a Bitcoin for around USD 20,000. Think of it as a price and put it in perspective with the price of the Bitcoin today, and you see what kind of gross profit or margin we are making when we make a Bitcoin. In January, when the price was, I think, closer from 45-ish thousand dollars, we were making $22,000 gross profit on each Bitcoin. This is exceptional in the industry. And because of that, we've been able to expand and to grow. But of course, we all know about the halving. The halving, the block reward will be divided in 2. Today, we are making -- we Bitcoin miners are making 900 Bitcoin per day. In a few days or a few weeks now, it's planned for April 20, we we'll have the halving, and it means that every day, all of the Bitcoin miners will make only 450 Bitcoin per day. What does that mean for Bitcoin and for Bitcoin miners? It means that the Bitcoin will become more scarce. We will produce less Bitcoin that we put on the market. And at the same time, when people are buying more Bitcoin because of the ETF, because of different kind of reason in the world; at the same time, we Bitcoin miners, the one who are issuing new Bitcoin to the market to be bought by people, we will produce twice less. So usually, in the past, 3 occurrences when it happens, we had 3 halving already since the beginning of Bitcoin. I'm showing here the kind of price impact we have seen at the time of the halving the last time in 2012, in 2016, in 2020. What is important, of course, to know on this graph is that we are rescaling every year. You can see in 2022 -- in 2012, the all-time high was around like $110 or $115. In 2016, the all-time high was $700. In 2020, $60,000 -- $69,000. Now we are in a place where it's uncertain. We don't know where the Bitcoin is going to go. We know for sure that the price, the block reward will be divided by 2. That's a certainty. The price action, we don't know. What we know is that we have newer demands, mainly the ETFs that are coming into play. But what does it mean anyhow for SATO? We are publicly listed miners. We started a long time ago. We've seen a halving before. We were planning for the halving a long time ago, and we always think about the next and the next halving. But what does that mean for us? It means if our production -- cost of production, of a Bitcoin is around $21,000, our post halving, so is the Halloween where it was today, we will double that. But again, put it into perspective to the price of the Bitcoin today, this morning or right now, it's actually $72,100 on my phone. This is still more margin post-Halloween so we are fine. We have been built with this event in mind. We have seen in the past what kind of effect it was having on the price of the Bitcoin. This time, it's different. We have more institutional, we have more ETF coming into play. We will see what kind of impact it will have on the price of the Bitcoin. But in any case, we have been built for this halving. We are not sharing like some people might be depending on the price of the Bitcoin. Why are we prepared and how have we been prepared? First, because we're efficient. Efficiency is key in the industry. If you listen to some players in the industry, mainly the big ones, they will tell you that only the biggest survive. It's not true, only the more efficient survive. And this is what we've been focusing on. And now that we're efficient, we want to continue growing. So far, we've been extremely efficient. This is the report from Anthony Power and Power Mining Analysis. And every month, it takes a different kind of data published by miners. And he makes some kind of a graph and you can see in this graph, in February, we were the most efficient Bitcoin miners. It means that with the same amount of electricity and some amount of mining power, we make more Bitcoin. This is what efficiency is. Why? Also, it's because we have history. We started in 2017. We've seen crypto winters. We've seen the COVID. We've seen the bear market. We've seen the bull market. We've seen a first halving being. We are close to another halving. We have expertise, we have experience. And over the years, what we have been showing is excellence in operation also in finance. Independently on the price of the Bitcoin, you can see at the beginning, 2.5 megawatt in any case, the bear market, we continue to grow to 7.5 megawatts and then 20-megawatt and then being 100% self-mining. We are builders, we are operators, and we are developing our own infrastructures in order to be efficient because efficiency, again, is key. We also have a vision to where do we go from now? It's good to be good in the past, but where do you go in the future? What we see is that how can we build and expand in the next 4 years. Ideally, if we add all of the money in the world, we will build high-tension power solution for the end of the cycle and developing different and big centers. In the middle of a cycle, we would be able to raise more money and deploy to buy data centers at an already running, not only for Bitcoin mining, but also for computing power in different kind of sources. And at the beginning of the cycle, we ideally would like to grow our mining power and continue adding and being more efficient for Bitcoin miners. Everything that we talk about this next 4 years, again, it's forward-looking information. We will announce different kind of solution in order to put in place our plans. So now that I showed you that the world is fantastic for us, they could tell me what about the stock price? The public miners recently for the past few days, maybe last week, 10 days, we are all in the red. Why? I would say first because people are more interested into going to the source. First, buying BTC, buy Bitcoin, then buying the ETF or buying companies like MicroStrategy, they are all exposed to Bitcoin. It's an interesting bet, and this is what kind of seen -- we have seen in the market. I think that it's also coming from a possible wait-and-see from the market about publicly miners, like the halving is coming. They will want to see what's happening for them. There is this quote, for example, from Warren Buffet. He said "Once the tide retracts, we see who's swimming naked." That's not us. That's not SATO. So when green? Honestly, I have not the answer. I don't know the timing of it. What I know for sure is that the halving cuts supply at a time where people are buying more Bitcoin. ETF are buying more Bitcoin. Companies are buying more Bitcoin. Some countries are buying more Bitcoin. And at the same time, efficient minors like us makes more margin, we make more gross profit and it will show in the stock market, in shareholders the benefit of being a publicly listed companies. The question you could ask also is why you are not one of this list on the left? Why not -- they are all great companies. We love them. What we know is that we are today at the place where they were before. In the last cycle, you have the newest miners who've been able to raise money and deploy capital during the last cycle of bull and a bear market. We think bull and bear are common in the industry. Other ones who started to be listed in 2018, 2019. We are at a place where everything is open in front of us. We know how to go. We know where to go, we know how to do it, with whom to work. We've shown that we were able to do it with success in the past, and we will continue doing it at scale in the future. I will now give the stage to Kyle Appleby, who is our CFO, and he will present the first part of the financial highlight for 2023. And then Fanny Philip will join us to talk about different kind of information.

Thank you, Romain. I'm pleased to report our financial highlights for 2023. And just to note, these are all in Canadian dollars. So you can see our revenues very positively grew up to $17.5 million in 2023. With the acquisition and installation of new mining equipment, we are in 260 Bitcoin compared to in 86 in 2022, which is an increase in over 200%. And our revenues from digital assets earned increased about 289% to about $11 million. The increase in price of Bitcoin obviously attributed to a lot of the increase as well going from $16,000 on January 1 to about $42,000 on December 31. So we got 65% increase in total revenues, so growing to $17 million. $6.6 million of that was hosting revenue, which we ran for the first 6 months of the year. And then we ceased hosting equipment and used all the power for our own mining equipment. Cost of revenue includes site costs, which are mainly electricity, which was approximately $9.7 million. And the balance depreciation and salaries going to the cost of revenue. The increase obviously followed the -- our increase in mining power, so we consumed more electricity using up to 20 megawatts in 2023 compared to 10 megawatts in 2022. Gross profit increased to 29% from 2020 from 22% showing an increase in efficiency for our company as we mine more Bitcoin at higher prices. Operating income takes our gross profit, less share-based compensation, G&A costs as well as unrealized revaluation of our digital assets at the end of December 31. So for 2023, we had an unrealized gain of approximately $500,000 compared to 2022. There was an unrealized loss of about $2.1 million on the revaluation of digital assets. Net income, we achieved a positive net income of $776,000. And as you can see, a tremendous growth from a loss of $8 million in 2022 and $1.7 million in 2021. So net income also reflects interest, finance costs as well as unrealized gains or losses on foreign exchange. In 2022, there is also an impairment of some equipment we had. And then EBIT, which is a non-IFRS measure, you can see we achieved $4.2 million in positive EBITDA compared to a negative EBITDA of $5.6 million in 2022, which is a great achievement for us. As well, we had a positive operating cash flow of $1.8 million in 2023. So we're very pleased with these 2023 financial results. So our next slide, here, we have, again, in Canadian dollars, these are non-IFRS measures, which are these key performance indicators for us. So first, we have computer power profit, which is the true mining profit for SATO, which reflects our gross profit and we remove all revenue expenses related to the hosting as well as removing depreciation. So you can see a nice 341% growth there compared to 2022 to $5.2 million, which is again a big achievement for us. And we have, as mentioned, a big growth in EBITDA to $4.2 million and adjusted EBITDA up to as well, $4.2 million. Adjusted EBITDA takes EBITDA and removes noncash items and onetime charges. So you can see a 205% increase in adjusted EBITDA. So these 3 performance indicators very proud of. We did a great job in 2023 and hope to continue.

I'm going to give you a heads up on the cash position. Over the last 2 years and an update on February '24, which is the date of our latest operational update that you can see every month. So if we go back to 2022, we have 26% of cash and 73% of digital asset, which is -- what is important to understand is, at that time, in unit of digital assets, we had 44 Bitcoin. For BTC price, as of December 2022, you have the number below the price in USD was 16,000. Now if we go on 2023 numbers, the number of Bitcoin order at the end of year was 40, but the price increase through the year that the ending price was $42,000, which changed a bit the cash allocation, cash position with 51% being digital assets and 49% being cash for a total of unrestricted and restricted cash and digital position of $4.4 million. Now if we look at the situation of February 29, so 12 days ago, the price of the BTC was $61,000. As Romain mentioned earlier, now it's $72,000. So it doesn't take into consideration this 18% increases over the past 12 days. So if we go back in time, February 2029, we had 52 Bitcoin as was privileged in our PR for $4.2 million and $1.6 million of cash unrestricted and restricted for a total of $5.8 million. So that's something to not forget to take into consideration. You should look at the unit, the quantity and multiply by the price of the day you want to use because as you can see here, the evolution through the December 2022 -- 2023 and of today, the price of the Bitcoin has a big impact in our cash and digital asset position. On the next slide, Romain, please. We can have a quick look of our capital structure as of December 31, 2023. So we provide a number for basic share outstanding option and warrants for a total fully diluted share outstanding of 91 million. And we provide the share price of the last closing date, which is yesterday of being $0.46. So you can find us again on TSXV with ticker SATO, and OTCQB: CCPU.F.

Thank you, Fanny. Thank you, Kyle. Look, the presentation is nearing the end, at least for the slide and the deck that we have done. Again, what I was showing in the past, we are efficient. We are making net profit. We are EBITDA positive, operating cash flow positive. We showed that we were able to grow in different kind of situation. This is the past. Now we're focusing into the future and how can we go in the next 4 years? And how can we do it with SATO publicly listed entity in Canada? We have become focused. We keep -- and we tend -- we will keep our focus on Bitcoin. This is why we exist, and we want to continue growing with Bitcoin mining, but with also with everything software built on Bitcoin. We think we are on the verge of massive bitcoinization. Again, we can't tell you when, but we want to be able to serve this new and nascent industry by mining and securing the network and also by working on different kind of softwares. We started since 2017, we have history, I have myself and entrepreneur for the past 25 years. I have run lots of companies. And now it's really the time to deploy and put SATO on the map for the next 4 years. We're efficient. We are high performance publicly listed, which is a great way to have access to capital and to put dollars into our ideas and vision. And we are ready for the next phase, of course. So we're really, really happy that you were here with us today. You can see on the picture, this is [ John Sebastian. ] He is our first employee from 2017, 2018 and he is managing miners, which you can see on the iPad, the software that we have developed in order to be efficient on how we run Bitcoin miners in our company. We will now take some questions. We have the chat open. We had a form also available for people to leave questions.

Anyone? So I see a question about how to expand in Joliette? So we are mining our data center #1 for Bitcoin mining is in Joliette, it's in Quebec. And Quebec under -- since 2018 has a moratorium on building new data centers for crypto mining. So we are not planning at this moment to expand in Quebec, but we have ways to continue expanding and improving our fleet of miners in our center number one and also to find other centers in different places in the world where we could have access to energy at scale, well-priced and in the right form. That means being stable. So this is really where we are focusing on for growing our mining power or computing power.

See a question in the form regarding the curtailment that we have to do in Quebec. Again, I'm going to really explain what is the curtailment. So it's when we give back the energy to the grid. So it's something very beneficial for the electrical provider. So as soon as they need, we stop. We are probably the only one industry in the world where we can turn off our equipment and give back the electricity for the population need. So in Quebec, since it's cold area during the wintertime, we curtail during the winter when it's needed based on the temperature. So they send a notice and in a few seconds, we do curtail not 100%, but depending on their need. So in our model, we always plan the maximum as of our contract, which is 6% of the total hours during a year. But based on the history, it's data that we publish in our MD&A, so you can find the detail in this annual disclosure, but 2022, we had to curtail for an equivalent of 1.61%. And as of now, which we disclosed in our February PR for the operational update, we curtailed for around half of 1%, so 0.51%. Obviously, it depends on the temperature that to give you an idea of how we operate in Quebec.

I'm seeing a follow-up question also about raising capital and for what project. So it is a -- clear right now, we are not raising money. We have not announced anything publicly. We have shown with our results that we don't need to ask money; however, we live in a world where if we want to grow and if we want to expand, we need to have capital, to deploy capital for 2 types of investments: One, for the infrastructure, we are transforming energy into computing power. We need to buy substantial transformers. We need to build data centers. That's one kind of investment. We can finance it with equity or with long-term debt. So the second type of investment we need to make is about buying the computing power of the mining rigs for better minings or different kind of computers, if we wanted to do HPC. Right now, we are not in this position. We are looking at the market. What we said in our presentation, which is important, is that we have everything in place to be able to get access to capital via equity or via debt. And we intend to use them all in order to grow to where we want to go in the future. But again, we will announce raising money and deployment of capital when it publicly happens. The thing that we want to do is to make sure that we create always positive dilution. It's a company that I own. I am the biggest shareholder, I'm the CEO. We and the first shareholders, we are making sure that we are not going to over-dilute future shareholders. So we have this kind of like mentality in place where we want to make sure that we can go deploy capital the right way, being always very hands-on and focus on efficiency because it's more important to build for the long term rather than just go to where the market is going. And now that the Bitcoin is at this prices, we will see what we've seen before, the same kind of craziness around them -- on this business where people are going to buy whatever, for whatever price and our knowledge will be to be efficient and to know what to do and try to grow in this environment. Either it's a bear environment or a bull environment, we have seen them, and we are going to build on top of it to make sure that we can go to the next phase of success.

Regarding the area that we are looking for. So U.S., Africa, South America is in question. So it's always a question of risk and reward align with, as Romain explained, creating added value for the shareholders. So in some area, you have political risk, in other area, you have different process of electricity. So it's different metrics that taking into consideration in order to create and build projects that create added value for the shareholders, and that can have an earning per share increase over the year.

And I would add, it's not only simply cost. I can see on the question. It's not only simply cost. Yes, it's an important point because we become miners more than 80% of our costs are electrical cost, so we need to make sure that it's slow. But we also need to make sure that it's stable. Most of the time, people are focusing on the price per kilowatt hour, but it's, again, more important to see how long your data center can run on a day basis, but also on a long-term basis. We are in a long-term game. We are making Bitcoin with Bitcoin miners, rigs that we bought a few years ago. Most of them, some of them are fully amortized in our mining facilities. This is why we have this kind of results. So we need to be able to play and find new sites to expand. We have different kind of ideas in mind of where we can find energy at scale, the right type of energy. If you have a project, please contact us. You can scan on your screen, our QR code. I think it's a link to our LinkedIn. We are open to have a discussion.

I think all the questions in the form that was sent before were answered. Please for next live calls, don't hesitate to send your questions in advance as well.

Well, let's give it another minute in case someone, last time we had last question -- last minute questions. I want to make sure we don't miss them this time. All right, everyone. So this concludes our presentation. Thank you very much for being here with us. Again, follow us on Twitter, follow us on LinkedIn. We give live news and information about who we are, what we do, where we're going to. And of course, website where you can subscribe to our newsletter also if you want to receive information. Thank you very much.

Thank you.

Thanks, everyone.