Canada Computational Unlimited Corp

XTSX:SATO

Earnings Call Transcript 2023-Q1

[Romain Nouzareth, executive]

Hello, everyone. Thank you for joining us today. We are here today to present SATO Technologies Q1 2023 results. My name is Romain Nouzareth. I am the CEO and Co-Founder of the company, started in 2017. We will spend today sometimes about like discussing our company that is privately -- publicly listed on the stock market in the TSXV in Canada, the ticker SATO and in the U.S. on the OTCQB:CCPU.F. Before I start the traditional forward-looking statements, it's not financial advice. We are going to talk about expectations, estimates and assumptions. But we are very happy and we're very eager to have you joining us today so that we can go into the detail of the presentation. We will spend mainly the time today to talk about the first quarter. We had outstanding results. We published recently the full year 2022. We saw that we were operating cash flow positive for the full year. A few days ago, we published Q1 2023, not only we are operating cash flow positive but also providing net results, which is outstanding. We will talk about comparables. But first, I will start by giving you a quick update on the company, where we are, where we're going to, and how we will continue growing into the actual market in the next -- coming market that is coming mainly on the holding, and we will then finish with some Q&A. Corporate highlights, as I was saying, we have been starting the company in 2017. So we are operating since a long time. In 2021, we decided to get listed on the stock market. We wanted to be a publicly listed company because we know that in a bull market, this is the right way to raise money at scale. In terms of operation today, we are operating around like 20 megawatts of power. It's a green power consuming -- producing almost 0 carbon emission. We are mining from Quebec in Canada. Our energy is at 99.9% renewable, mainly hydroelectric. We are close to 0.6 exahash mining power. To give you an idea, we are running around like 6,000 computers, 6,000 mining rigs. In the total in the world, you have around like 340 exahash. The biggest miner today have around like 10 exahash between 5 to 10 exahash. So at 0.6 exahash, which it shows that we are on the map and that we are a big enough to exit. More importantly, we've shown that we are financially stable, vertically integrated. This is extremely important for us. Why? Because in a bear market like we have been witnessing for the past year, you can only succeed if you have no intermediary between your computers and your energy. And this is what we have in our center. It was our own strategy to own the infrastructure. We manage our own electricity. We manage our own data center. We are what we call bare metal in some ways, and this is why we have outstanding results. More importantly, even we are ultra-efficient. It means that our center never stops. We make sure that we can run the computers on a long time, 24/7, 365 days a year. And it's important to do it well because you want to make sure that these computers can extract the most Bitcoin impossible today, but also in the long term. And that's what we've built and that's what we have shown for the whole year of 2022, again in Q1. Now we started to publish our monthly results. We started last month. We will start now every months publishing the monthly results, how much Bitcoin we make per exahash, how much Bitcoin we are producing and how much efficient we are. Next, we're going to talk about what is the long-term vision. As I was saying, we are extremely efficient operators. So we want to grow. We want to grow from 20 megawatts and to a minimum at 10x or more. So it means that we are looking now to expand in the coming 15, 18, 24 months, expanding our megawatt. And if we want to do it 10x, it means that we are looking at getting like a 200-megawatt of mining power. The good thing that we have in 2022, we bought some electrical equipment in advance. So we have 8 megawatts that we can currently deploy in a new site, and we are actively looking for our site. The idea, of course, to have more megawatt is also to produce more exahash. And you understood by producing more exahash, we are producing more Bitcoin at the end. So the idea is simple. We've been showing for the past 5 years that we are extremely efficient at doing what we do. we've been showing that we can do it at scale for 20 megawatts. We've been showing that we are able to be operating cash flow positive. We are showing now that we can produce net profit. We just want to do it bigger, and that's what we are focusing on. This is a long-term vision for the company. At the same time -- next slide. At the same time, we need to be ready for an event that is coming very soon to us. It's called the halving. You've heard about it. I'm sure if you are here. So the block is going to use half less Bitcoin than before. It's coming in about, I would say, 11 to 12 months. So it's near. And we need to be extremely cautious on the financial and how we run our operations. That's what we have been doing for the past 6 years, even more for the past year because we are in total bear market, and even now in Q1, it's still a difficult market. So we have been financially conscious, which want to be financially conscious. We want to make sure that the next halving we're going to be here, and we are going to be there. What we are working on also in the mid- short term is to see how we could add AI and HPC data centers. Why? Because as an operator, managing our own infrastructure, we believe we can bring excellent answers to this new world that is coming with the ChatGPT and a different kind of like AI, OpenAI, it's going to be open source also, this kind of like a data model, LLMs being are deployed. And we believe that the type of data centers that we have built will be extremely efficient for this type of computing power. The good thing on this topic is that we have 1.5 megawatts of energy we could deploy for HPC in Quebec. And so we are currently looking at finding the right way to do it and making sure that we can do it in the long term. We will report more in the coming months and in the next quarters as we deploy the solution. As you know, we're also a big fan of the Bitcoin, and every single Bitcoin. So we are working on a different kind of like applications based on the lighting network and also on ordinals. It's something that is very much interesting right now. It's very -- its innovation built on top of Bitcoin, and we think it's really into our interest to look at that and to provide solution for. You have probably not missed that a few weeks ago, or maybe even last week, the fees made per block were more than the reward. So sometime last week, we had a block instead of producing 6.25 Bitcoin for the reward, they produced more for the fees. So we had block at 10, 12, 12-dot-something Bitcoin. So it's really good for us. It means more revenue. But we believe that we're going to be able to even be better if we can bring solution to the market on this. But again, financially cautious. The halving is coming. We want to grow. We have shown that we have been able to grow in difficult time. In the first crypto winter that we've seen in 2018, we've been able to grow in the current crypto winter that we are in, we have been showing that we've been able to grow. And even better, we are making net profit. So the next slide, we will -- I will give the floor to Fanny. Fanny is our COO. You know her and most of you here know. She started with us as our CFO. She was an auditor for [indiscernible] for like 7 years, she is super knowledgeable, with her and her team, we have also a team extremely focused on our finance and financials and how to manage our cash flow and everything. And Fanny will go over our results for Q1. But first, she will start by taking a few minutes to explain the big pictures on how to read financial statement for Bitcoin minors. It's very [ packed ], sometimes difficult. So she is here and Fanny, you're on.

[Fanny Philip, executive]

Hi, everyone. So exactly as Romian explained, so I'm the CEO of SATO, been working with the team for many years now. And as a CPA, I usually have a question how can we map [ mainly in the 5% ] of the company [indiscernible] to digital assets. So it's been very difficult, I will say, and even more, if you try to understand financial statements from a company that do mine digital assets, so either Bitcoin or other digital assets. So I wanted to take like a few minutes this morning with you guys to try to give you more information or insight how to navigate in this financial statement because everyone -- every public miner really -- the year-end, Q1 is now pretty much disclosed everywhere. So I think it's a good additional knowledge if you are not comfortable with this. So my first thing will be good to the note in the financial statement and try to find the digital aspect. In this note, you're going to have all the movements during the period. So either the full year or quarter, that means our own digital assets, so either some digital asset mine, use. So you're going to have a picture of what happened during this period. After this, you have to think and remember that in the statement of income, if you mine a digital asset, you're going to have revenue -- in your revenue section, you're going to have digital assets. But this digital asset as recorded at cost when they are received. So it's very important to understand this. So as a Bitcoin miner, every day, we receive some digital assets. So we have the cost of every day booked in our statement of e-com under revenue. Then 2 things, as you use a digital asset in the period, that means you sell some digital assets. If you sell some digital assets, we have to compare to the cost when we receive and you're going to have, again, all of on news in your revenue in your statement of income again. If you are not use the digital asset that is called [indiscernible] in this industry, that means you increase the quantity of unit of digital assets, and this unit quantity is shown in the balance sheet. But here again, be careful in the balance sheet. So it's the picture at a specific time, it's presented at the fair value, meaning you're going to have an unrealized gain or loss on revaluation in the statement of income or comprehensive income again. So this is an unrealized gain or loss depending on the volatility of the Bitcoin all the digital assets that you have in your balance sheet at a specific date, so either March 31 or December 31, for example. Now we all know that basically, for other industry, when you want to have a good understanding of the business, what you look, cash flow statement. Here, again, you have to understand that all digital assets, so not only Bitcoin, all digital assets are not considered as cash or cash equivalent. So what does that mean? That means all digital asset value have to be deducted or added we're going to see it in the operating activity depending on the years during the reported period. So if we sold digital assets, again, Bitcoin during the period, what are we going to have, we're going to have an increase in cash value of the sale. That's exactly the amount you see gain loss in your statement of income. I just explained earlier. If you did not sell, that means it's going to only be in the financial position and you're going to have nothing in the cash flow statement. So be very careful. That means if you want to have the full picture, you have to think how much company sell during the period. So it's going to be in the cash flow statement. How much is produced you go to see in the notes and how much is left over, that's in the financial position, but the value it has a specific date, not the date during the financial statement. So I hope this is going to give you a bit more understanding of how to navigate in the financial statement, and keep posted because you're going to have more information from us on how to read more in detail, the cycle of revenue to increase the knowledge in this industry. So now, I think you're here for SATO. So let's jump into our numbers. So here, you see Q1 2023 and comparable is Q1 2022. So revenue, we have almost $4 million of revenue. Cost of revenue, a bit less than $2,800,000 million. That gives us a gross profit of $1,129,000. Expenses, so that's G&A expenses, a bit less than $1 million. That gives us an operating income of $725,000 compared to last year's same quarter lost just above $2 million. Other charges, so it's mainly financial expense. It's $214,000 and that gives us a net income for the period of $510,000 compared to last year, a net loss of $2,100,000. EBITDA. So for the Q1 2023, we have an EBITDA for $1,100,000 compared to last year, a negative EBITDA of $1,700,000. So some big highlights you might saw in the press release or in the MDA, but we have a total increase quarter-by-quarter on revenue, total revenue of 129%, increase of EBITDA of more than $2 million, almost $3 million, and a positive operating cash flow of just a bit less than $1 million. Here, you see the evolution over the past 3 years, full year here, and then you have at the right, the Q1 2023 result. So you can see that over the past 3 years, we had a negative EBITDA. But as soon as we remove all the accounting entries, nonrealized gain and loss, we have the adjusted EBITDA, and we see a good increase over the year. So we started with $332,000 in 2022; $1,303,000, 2021; 2022, just $258,000; and Q1, just below $1 million. Some other number that is very important, and that miners usually explain, it's how much cost you to produce 1 Bitcoin. So here, we put a lot of transparency, a lot of details in order to make you understand what we are in our cost to produce 1 Bitcoin. So Q1 average it's USD 11,000 to produce 1 Bitcoin. You have on the right to the evolution over each month, so January, February and March 2023. And on the left, you have a graphic when we compare to the price, so the average price of each month, so you see the profit we did, the gross profit in the dark blue for each month. You have the operating salary. So here, we put all the salary that we need to operate our centers, [indiscernible] operations. So it's some maintenance costs, insurance costs, again, linked to the production of digital assets and the main cost, again, is the electrical cost in the light blue. Here, we wanted to show some comparable on the historical efficiency. So you can see us it's, let's say, the darkest blue with the dot. So you see a graph for the -- all 2022 year, months-by-months and the first 3 months of 2023, the evolution. And we put 3 comparable based on the information available. So you can see on the average of Q1 2023 re-arranged number 3 with a production of Bitcoin per exahash equivalent to 93.61. Something interesting that need to be highlighted, you see that all the numbers from all the peers decrease at some point around September, let's say. September to March, you see a small decrease. And you see in blue, an increase in the network at ESH rate. So what's happened in the industry that we have more difficulty. So everyone produced a bit less since September. So the trend is the same for everyone, but it's something to look compared to the increase in the network at ESH rates.

Quick highlight on the cash and digital asset position. So you have on the left, December 31, 2022, numbers. So total [ CAD 1,300,000 ]. We report in Canadian dollars, the financial statements, so be careful as well if you want to compare to other miners, check the currency they use. And in March of this year, we have $1,400,000. Capital structure as of -- as at March 31, 2023, so we have $72 million of outstanding share, some warrant and stock option for $8 million that give us a total of security of $81 million. In this, we have $20 million -- almost $21 million under escrow following the IPO. We had a escrow rules that apply to some people. And I think it's important to highlight as well that 65% of the security on a fully diluted basis are owned by officer, director, insiders, our shareholders above [ 70% ]. So all these people have a long-term vision. So it's good to see this. We manage over the year to make sure to bring the most value to the shareholders. We are being very careful with the dilution, but we want to grow as well. So we take care of all the stakeholders' interest and having a long-term vision for SATO.

[Romain Nouzareth, executive]

Thank you very much Fanny. Thank you very much. Again, outstanding results, we are in a market in a bear market, being able to show operating cash flow positive and net profit is outstanding. Now imagine when the bull market is going to start, what kind of results we're going to show. That's what we have been focusing on. Why can we perform in this kind of market because we started a long time ago. This is not our first [indiscernible]. We started in 2017. We've seen the up, we've seen the downs, we've seen everything. Again, we are vertically integrated. We have no intermediary between our electricity and our computers. This is why we can pass this kind of like situation or with the kind of results that we show today. And one of the reasons is because of our electricity is one of the best in the world. Not only it's low cost and well-priced, we pay around USD 0.04 a kilowatt hour, which is extremely good in the market. But more importantly, the energy that we have is very stable. It never stopped, except of course, for curtailment like many other Bitcoin miners, but we have very stable electricity. And on top of that, the cherry on the cake, it's an energy that is 100% green. So we are near the carbon emission for Scope 1 of carbon emission. Scope 2, it's very little because we only run centers. Scope 3, a little bit complicated in the chips, but we can really say that we are near the all carbon emission for our centers. We have problems that we are financially stable. We are managing our finances very, very precisely. And on that, again, I would like to really give a big pop to Fanny and Fanny's team. I mean it's been -- since we've been listed on the stock market in 2021, it's been in our objective to be extremely professional on this part and showing to the market that we can be transparent, open and always on time at producing our numbers. More importantly, our team is ready. We are a small team. We have probably less than 12 people in the company. It's a small team, very dedicated, super-efficient not only on the operation, we show Sebastien that you see here on the picture, we have Cédric, we have Bastien working on the center, on the finance you have Fanny, you have Lydia, you have Ben working with us. We also have a corporate counsel in the company, Alasdair, who is also helping us very much.

But we've -- we are a core team of people dedicated on our mission. We've been showing for the past 5 years that we've been producing outstanding results. Now is the time for us to grow. We want to grow responsibly. Because, again, the halving is coming soon, so we need to be cautious. But at the same time, we've shown in the past that even in bear market, we've been able to grow and increase our mining power. So this is happening now. It's coming in the next quarter -- Q2, Q3, Q4, we are more than energized to do that, and it's a [ pun intended ] for the energy. And now we are going to deliver.

So stay with us, expect us continue watching us. We're going to show you a very, very good stuff in the coming weeks, coming months in coming years. We are not building for the next halving, but the next halving after that and the next halving after that.

[Fanny Philip, executive]

I see some questions. So maybe we can answer some of them.

So on the average Bitcoin production, so the ratio I showed earlier. So the 96.61 is per exahash. So if we go back to our numbers, that means around 58 for Q1, 58 Bitcoin per month. So that's a ratio that can be used to compare all the minor. With this ratio, you multiply by the exahash and you're going to have the production for each miners.

Another question compared to...

[Romain Nouzareth, executive]

Wait. Sorry. Sorry, Fanny. On this, I mean, I also see a question that is related, which is what average BTC the production per day?

So we published our monthly results, and we started last month, we're going to do that every month. Last month, 1.41 Bitcoin mine every day as a daily average and also aggregate of self-mining and roasting. And in terms of exahash target, we want to grow. Today, 0.6 is great. We're going to 1 exahash as soon as possible. We want to deploy our 8 megawatts of energy that we have already bought. But of course, we don't want to stop there. We want to go to 6 exahash, 10 exahash. We are in the race. We are extremely great operator. We are professional. So we can scale. For us, doing 10 megawatt and 100 megawatt is the same thing. Of course, you have a little bit of differences between the 2, but we can operate the same way. So it's a very linear business, which is also, I think, a question of Olivier saying what is the exahash target? And [ Mara ] is going to 23 exahash.

It's -- for sure, we're seeing lots of Bitcoin minors plugging more computing power. It's a good thing. It's a good thing for the security. But also you need to understand that it's not really competition because at the end, we are all sharing the same pie of the same cake. And you can be extremely profitable and efficient even with 10%, 1%, 50%. Although we can really continue growing, and we don't need to be the biggest one to be the most efficient, and that's what we've been focusing on.

[Fanny Philip, executive]

Question regarding the evolution of numbers quarter-to-quarter. So this information -- I'm going to give some numbers. But this information, it's presented in the MD&A. So on recent one, it's Page 15. So you have the evolution over the 8 past quarters. So that's an interesting data when you want to compare quarter-per-quarter results. So if we go back on -- to give you some idea, Q1 2022, we saw revenue was [ $1,700,000 ]; Q2 2022, $2 million; Q3 2022, [ $2,700,000 ]; Q4 2022, [ $4,100,000 ]; and Q1 2023, it's [ $3,900,000 ]. Why is the small decrease is because in Quebec, we do cost curtailment in the first quarter. So we always have a Q1 that is a bit lower than the first quarter, but maintaining. You can have in mine $4 million per quarter since Q4 2022.

On the expense considering we were in a bear market. We continue to manage the cost. We're very careful with the curve. That's why you saw a decrease in the expenses Q4, $1,600,000. And Q1 2023, a bit less than $1 million.

So let me see if I have another number, that is being asked. Yes. So the net income loss in Q4 2022 was $1,500,000 compared to net profit in Q1 of $500,000.

[Romain Nouzareth, executive]

So what we're showing is that we reduced our cost. In the bear market, this is important. I mean I've been managing companies in technology for the past 25 years. I've also seen 2008. I've also seen the Internet bubble. In bear market, you need to look at your cost and you need to cut and cut and cut, and yet you need to make sure also that you can continue operating because when the market starts back, you want to make sure that you can deploy and expand. So this is what we've been working on for the past few months.

Obviously, it takes time sometimes to see the effect on the cost cutting on the account, but this is also why we are seeing it in Q1, and we will continue doing this for the next quarter. Do we have any other questions?

One question, I think, is about the halving. Yes, the halving is coming. It's in our mind. We've seen an halving already since we started. It's going to be the fourth halving coming into the Bitcoin network. We're going to have [indiscernible] halving in the next 100 years. So we are prepared. We are very careful. What we're going to see -- and again, it's a gain of -- in a Bitcoin mining, you need to be the most efficient so that you can pass the next halving and the next halving. That's why we are building our company with this in mind. We are proven that we've been able to do it for the past 5 years, showing extremely good results.

So we will continue doing it at the same time. And if they're halving -- I mean the halving will happen, but if the Bitcoin market is not very favorable to Bitcoin miners, we're going to see another branch of Bitcoin miners who are not efficient, stopping. Of course, it's never aligned with the difficulty and the halving. So we might see a different in times before the halving and the halving event and maybe 4 months after.

We will see how it is, but we are going to take a very open approach like we've done before, taking the problems when they arrive and making sure that we can pass. But the way we've been structuring ourselves, our cost of energy, our efficiency of our miners will make it so that we will pass the next halving.

Is there any other questions in the chat? I don't see them.

[Fanny Philip, executive]

No. All answered.. So thank you. Thank you, everyone.

[Romain Nouzareth, executive]

Thank you, everyone. Thank you for being here. Again, tough time for Bitcoin. Though time for the market, but we are more than ever excited to continue growing and developing more solutions for SATO and for every vertical we're working in, focusing on Bitcoin mining, making sure that we can grow our operation at least 10x in the next month. I don't really know exactly at what time because you have different kind of variable that comes into play, but it's our focus. We want to grow. We want to put the recipe that we put in place in the past 5 years into the next 5 years. And at the same time, we want to deploy more energy for HPC and AI. This is extremely interesting what's going on. I believe that ChatGPT type of situation is going to explode.

I mean when we are going to have as much people using ChatGPT as people using Google Search today, we're going to see an increase on an explosion of computing power related to that. And as a Bitcoin miner, we believe the centers that we have built as an operator will be extremely well positioned to take care -- take pieces of the hosting market in that market segment.

So we'll come back. We will do quarterly meetings. So you will be invited. Please follow us our website, add your e-mail that you can receive news, also follow us on Twitter, follow-up on LinkedIn, and we'll have more good news to announce very soon. Thank you very much.

[Fanny Philip, executive]

Thank you.