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

Thank you, everyone, for joining us today. My name is Romain Nouzareth. I am the Co-Founder and CEO of SATO Technologies. Today, we will present the vision we have for the development of the company in the next growth phase for us. And I'm joined with Kyle Appleby, who is our CFO for now more than 4 years or since 2021, and we will go over our Q3 and first 9 months of financial results. The traditional slide about the forward-looking information, of course, everything we are discussing here is related to how much money we can deploy, how the market will react, how the Bitcoin will be in the coming months and years. And also for AI and HPC, which is one of the first of the new focus that we have for the company, everything is in motion as we speak. A quick update or a reminder of who we are and our history and what we have done so far. So very quickly, we have been created in 2017. We are operating from the USA in New York with operation in Canada, mainly in Quebec, where we operate a 20-megawatt data center for Bitcoin mining originally that is 100% owned. We transform our own energy into computing power. And today, we do it for self-mining of Bitcoin. We are also using one of the best energy source you can find on the market, which is hydro energy. Not only it's a green energy, it's not producing carbon or very low carbon emission, but it's also a very stable energy and a very well-priced energy. We pay around USD 0.43 per kilowatt hour, which is one of the best electricity price you can find in the market. And that's why we are able to pass the times related to a different kind of cycle of the industry, mainly related to the price of the Bitcoin going up and down, the difficulty going up and sometimes down, but also the halving that just happened mainly in Q3, and we will discuss that later. One thing that is very important in the market for people like us is to be efficient. And efficiency is not about your electricity price, but it's also about how you're managing your data center and how do you make sure that you can be producing the most Bitcoin or the most computing power from the energy that we're receiving. And over the years, you can see that on the graph on the right side, we have always been ranked one of the most efficient Bitcoin miner in the world for all the Bitcoin publicly listed company. It's an important thing for us because this efficiency is key not only for Bitcoin mining, but also for AI and HPC. We have now more than 8 years of operational expertise in data center management and operation. And this is what we intend to use to go to the next phase of growth for our company. As you know, the market of data center is very CapEx intensive on one side for the infrastructure that we run. So we run our own substation, not a substation, but own transformers. We are doing the distribution of our own energy. We have developed our own data centers, the racks and the ventilation and also everything related to heat exhaust because this is what it is about. You need to exhaust the heat coming from the computers and the performance into this. So that's one type of CapEx. And the other type of CapEx is related to the computers that we run, Bitcoin miners on one side and to some extent, GPUs, AI, I will talk about this later. And in order to be efficient also in the way we are managing this, we have decided to get listed in 2021 in order to follow the steps of other Bitcoin miners who are publicly listed and we are very successful today on the market. And we think it's the right way for us to be able to raise capital at scale and also to be accessing debt financial instruments, mainly for the long-term infrastructure that we are building. We are here for the long-term. Myself, I'm an entrepreneur since 1995. I'm here for the long run, started the company in 2017. We are really here to make sure that we can pass not only every bad time in the Bitcoin world, but also that we can really expand in the best time, which is currently happening right now. So now we are really focused on scalable expansion, mainly in North America. Canada is, of course, on our road map, but mainly the U.S. is where we want to focus. We are looking at different kind of options from 12-megawatt to 200-megawatt operations. We will see what makes sense for us and our shareholders in the coming weeks and months. The vision that we have for the company, as I was telling you, we started as a Bitcoin miner. And very early on, we saw that our business, our work, our knowledge is about managing computing power and transforming energy into computing power. So the way we see ourselves is really to be an infrastructure provider and an operator of these infrastructure. And we want to be able to host or to manage any kind of computing power, Bitcoin mining on one side, zero proof knowledge, for example, or AI and HPC. And that's what we've been focusing on for the past few months is how can we use the energy that we have in our data center in our 20-megawatt in Quebec and how can we deploy energy for computing power, mainly AI and HPC. But the vision that we have is that we want to have a possibility to manage our electrical load being able to divert it between Bitcoin mining on one side and AI and HPC on the other side. And I think this is really where we're going to stand out in comparison to other players in the market so that we can really be more efficient in the energies that we are getting in order to transform it to computing power and managing it the right way between what we get from the energy and what we transform it between Bitcoin mining and AI and HPC. So that's the first project that we are working on is really into our data centers using part of our energy for AI and HPC and showing how we can manage it between Bitcoin mining and AI and HPC. The market for AI and HPC is very hot right now. As you know, you have different kind of studies saying that just for the infrastructure, the investment only in the U.S. will be $1 trillion by 2030. This is a study from KKR. They just announced a partnership to invest $50 billion for infrastructure in data centers. Same thing from BlackRock, $30 billion plus $50 billion, that's not $1 trillion. So there are still more money flowing into the market and we intend to get some of this investment in order to not only develop our site in Quebec and in Canada where we are but also to grow outside of the border and mainly in the U.S., where we believe the market is really hot right now for energy, entrepreneurship, data center, which is where we excel. This is what we have done for the past 8 years and now it's our time to grow to the next level. Why us? It's true that a lot of Bitcoin miners are moving into that direction. And also on the other side, you have existing people doing AI, HPC or data centers. On one side, you have the hyperscalers. And on the other side, you have the legacy data centers. We believe we have a unique way to exist in that market, not by replacing them. We don't want to become a hyperscaler, obviously, at least not today. We don't want to go in the data center market. We believe our unique way to exist will be to use what we have developed and what we have gained as expertise for the past 8 years, not only on managing our electricity the right way, transforming it for computing power the right way but also to innovate on the infrastructure, how can we be faster, cheaper and more efficient in managing the load again between the energy that we are going to divert between Bitcoin mining and AI and HPC and really bring this efficiency on any kind of computing that we are developing. So today, again, we are operating 20-megawatts. It's our data centers. It's our transformers. It's our racks, it's our heat exhaust solutions. Everything is 100% owned from our company. We are diverting one part of this energy for AI and HPC. Again, we are looking at different kind of sites for expansion, mainly in North America, where we can put what we are developing currently into our data center in Quebec into play at a bigger level, at a bigger scale. On one side, just to finish on this slide, why we are not competing or why we think we have a way to coexist hyperscalers will be hyperscalers. You've seen the news from Microsoft, for example, buying a nuclear plant in the state of New York for 800-megawatts. They will continue being hyperscalers but they the workload is that they have, they need to adapt also to provide AI and HPC and same thing for legacy data centers. At the point we are in for AI and HPC, lots of people need to rethink, rebuild part of the data centers in order to be able to accept this kind of computing load. It's the same thing for us. So we are not late. We are right on time and we really plan to be growing for the next 5, 10 or 20 years in the making. Our road map is simple. You can see on the left side, this is the past started in 2017, listed in 2021, full efficiency in 2022. A few weeks ago, we announced a more precisely our vision on AI and HPC and how we will combine it with Bitcoin mining. This is really in the making. We start right now, we are in the planification phase for the first cluster that we will develop into our data center in Quebec. The idea being that we will be able to scale it in '25 and '26. We want to find new sites, again, from 12 megawatt to 200 megawatts. That's the kind of like deals that we are looking at right now. Nothing has been announced and we haven't raised the money to do that, obviously. So again, very forward-looking information. Like you could imagine, a potential U.S. listing could be interesting for a company like us because we will need to deploy capital at scale and get access to more debt financing instruments. Other Bitcoin miners have done it before us. We believe that we are in a well position to be able to do it at some point and really by 2026 to 2050s. So we have a long-term vision of where we want to go and where we want to go for the next 20 years. We are infrastructure people, operator. We have an excellent track record for the past 8 years. We have passed the crypto winter, the halving, we have passed the ups and downs of everything. And now is the time for us to thrive and grow to the next level of growth for our company. I will now give the floor to Kyle Appleby, our CFO, who will present the Q3 and 9 months results that we have published last week. Just one quick information on it. Q3 is the first quarter that was a full halving effect for Bitcoin miners, not only us, but for all Bitcoin miners. And that's really something that is stable when you look at precisely on the quarter. What is more interesting, I think, is to have a view on the 9 months and have a provision of what could be the full year for us, considering the new price point of the Bitcoin. Remember, in Q3, the hash rate for Bitcoin mining was pretty high. The price of the Bitcoin was pretty low. And we just had a full halving happened in Q3. And again, we've seen that before. The important point for us was to make sure that we can restructure our operation and make sure that we can still be efficient into that time. This is what we are proving that we have been able to do. And now that the market is coming back up, it shows that we are in an extremely well positioned to continue our growth without the issue of what the market was 6 months ago or 3 months ago. Kyle?

Thanks, Romain. So I'm going to present a quick snapshot of our results. As you know, our full financials and MD&A can be found on SEDAR. So please go ahead and read those for full details and disclosure. As you can see in this slide, our revenues for the 9 months were almost $13 million, which is a 5% increase from the 9 months ended in 2023. 3 months ended revenue was $2.6 million compared to $4 million in 2023. We earned 31 Bitcoin for the 3 months and 161 Bitcoin during the 9-month period compared to and 152 million for the same period in 2023. As Romain mentioned, our Q3 results were negatively impacted by, one, the halving event; 2, the increase in hash rate; and 3, we had a fire in our facility which knocked out about 10% of our operations in that quarter. So those were all impacted in Q3. We fully repaired the facility, and it's ready to operate at capacity currently. You can see again here for the 9 months, our net profit, $1.269 million, even though our Q3 results were not great, we still had a really good 9 month period as well the EBITDA for the 9 months over $4.2 million, a large increase from the previous year. So we're very pleased with our results for the period and look to trend upward going forward as well given the increase in price of Bitcoin that we've seen subsequent to the quarter end. So this slide here, you can see 3 things: our compute power profit, which is basically our gross profit adjusted for depreciation as well in the previous year, we had some hosting revenue for the first 2 quarters. So that is adjusted for that as well. And you can see a 116% increase in 2024 compared to 2023 for the 9-month period. As well, we had a 20% increase in adjusted EBITDA. So again, we're very pleased with our results. Adjusted EBITDA is basically EBITDA adjusted for noncash expenses like unrealized gains or losses on foreign exchange and share-based compensation. Here, you can see our cash position. At the end of the quarter, we had just under $3 million in digital assets, representing 75% and we held cash at $972,000, roughly 25%. So we're pretty strong in terms of our cash and digital asset position on the balance sheet. You can see at the bottom of the slide, we're showing also the price of Bitcoin. You can see the increase from December 31, 2022, about USD 16,000 moving up to the price of just under 65,000 at September 30, 2024. So that also helped boost the digital asset value at the end of the quarter. This slide just represents our capital structure at September 30. So our share price was $0.25. We had 73 million shares outstanding, 5.9 million options, 2.4 million warrants for a fully diluted shares outstanding of 81.6 million. We try to keep our share count low and not dilute. We've taken debt in the past to help with that. And you can see our symbols on the TSXV and OTCQB where we trade.

Thank you, Kyle. So that was the presentation of the financial Q3 and the first 9 months of the year. We are now open for questions. If you want to go on the chat or if people have something to ask, it's the time to do it. I will wait a few more minutes if someone is typing. Again, it's a very exciting time for us. The market was very difficult for Bitcoin miners post halving. We are in a completely different environment now and showing that we can thrive in difficult situation makes us even stronger for when the market is now in a bull market.

I don't think we can really offer results at this point. I mean it's not publicly disclosure, and we haven't fully closed out all our adjustments for the period in value. So I think we just have to wait for our published results for the fourth quarter and year-end for any indication there. But the price of Bitcoin increase definitely helps this quarter for sure.

Also, what I would add is that we've seen that situation before where the price of the Bitcoin increases at a faster pace than the difficulty of the hash rate. And that's where the Bitcoin miners like us make the most profit and the most revenues. And I think it's behind us. It's coming. The hash rate, as you know, has been growing very, very highly recently and it's still continuing. But I believe, it's my belief that it will plateau in some ways. It will not grow as exponentially as it was before, while at the same time, the price of the Bitcoin will. And in that case, this is where the Bitcoin miners are the most profitable again because the price of the Bitcoin goes high like this, the hash rate goes like that and then everything in between is pure profit for us. However, it's still difficult to know exactly what the price of the Bitcoin will be and that's one of the question actually, we have the prediction for the price of the Bitcoin. Honestly, if anyone knows, please let us know. We're seeing like different kind of prediction, 125, 150 by 2025. Some people plan like more than $1 million it's difficult to know what's going to happen. What is interesting, I think, in the market is to see the trends coming from one side, countries such as America and the U.S. leading the way in terms of having a Bitcoin reserve. It's a huge news and that think it could really push the price of the Bitcoin very, very high if it happens. On the same kind of like mentality, we see more and more companies adding Bitcoin on their treasury following Micro Strategy. You have probably seen the presentation from Michael Seller that he did to the Board of Microsoft to explain to them why they should have Bitcoin on their treasury. When we look at the success of Micro Strategy, you understand why companies such as Microsoft would want to do that. If we have the 2 catalysts of one-side countries pushed by the USA putting Bitcoin on the national reserve and companies such as Microsoft buying Bitcoin, I think we could really see a very high increase price of Bitcoin. But again, nobody can tell. So anywhere in the market, my expertise and my knowledge over the past 8 years, focus on efficiency, extract the most Bitcoin possible from the energy that you're receiving. This is the only way to manage the business, and whatever happened with the price of the Bitcoin is something that come after that. Then I have other questions. How are you seeing the market for facilities now that hash price has increased? It's a good question. It's always like when the market is in a bull cycle like we are today, there's more things happening and then people want more money or it's difficult to get access to energy. It's difficult to get access to Bitcoin mining or to computing power such as GPUs. Again, the knowledge for us and the way we want to manage it is really to understand and finding the right sites in which we can mix our load of computing power between Bitcoin miner and HPC. I think this is where we have an edge in the market and where we will be able to thrive in the coming months. Of course, a concern but I wouldn't really tell it's a concern. It's more like, okay, we're looking at the market, and we will pass on things that doesn't make sense for us. We have access to sites that have the right parameters for us or at least this is what we are looking at right now. I will pass on the EBITDA question for October because I think Kyle you answered this. For the U.S. where we're looking for new facilities, we're looking at different kind of states where it makes sense for people like us to operate. We have no real preferences even if you have more states who are more open to do what we do. But I think it's going to be everywhere in the U.S. The energy is going to open, and people who can build on top of this energy like us will be able to thrive, and runners like us will be able to thrive. That's what I see for the market. For financing, equity and debt, that's one of the questions, how do you finance all this? It's equity and debt and possibly an uplisting in NASDAQ. There's another question about efficient mining and how do we think about fleet improvement to match the network. It's a very good question. For people like us, it's always a trade-off on what kind of new miners do we buy and how long does it take for those miners to be amortize the time of the payback. Right now, we are running relatively newest generation into our data centers, and we plan to increase that in the coming weeks and months. But also we want to be very smart on what to do and how to do it, because we don't want to overpay for miners that would take too long to pay back. So that's really what we are focusing again, using what we have and making sure that we can thrive with the hash rate that we have and at the same time, show what we can do with AI and HPC in a very short time frame. I have a question about IR and Investment Relations Company. We have been working with them in the past. We are looking at different kind of situation in order to increase our visibility. It's a market that is very much taken by the big names, and we need to show that we can exist and coexist into the market. That's part of our strategy. I think that's all. Thank you very much for attending. We are really, really excited to be here with you today and more and more excited to show you what's coming for us. Have a good day. Bye-bye.