Canada Computational Unlimited Corp

XTSX:SATO

Earnings Call Transcript 2023-Q2

[Romain Nouzareth, executive]

All right. Hello, again. My name is Romain Nouzareth. I am the cofounder and CEO of SATO Technologies. Today, we will talk our company building data centers for efficient computing power, mainly and originally Bitcoin mining, but also developing into AI and HPC. Legal disclaimer, you know the drill and you know how it works, everything that we discuss here is looking forward information. We are going to talk about different kind of things.

The first few minutes, I will give you an update, a business update of where we are in our development plans and also where we are going to. Then we will go more into the details regarding the financials for the Q2 results with Kyle Appleby, our CFO. We will then have Benoit Vincelette, who is going to join us to talk about comparables of specific data points in the industry, and then we will end with the Q&A. We are a publicly listed company. Our ticker in Canada is SATO, SATO on the TSXV. And we are also listed on the OTC in the U.S. under the ticker CCPU.F. We've been starting our adventure in 2017. Myself, I am an entrepreneur, have been developing internet companies and start-ups since 1995. And being passionate with Bitcoin in 2017, I decided to start mining for -- with 3 other partners. Since then, we've been able to grow our mining power and to become a 100% self-mining. Today, we are running close to 0.6 Exahash of mining power. To give you an idea, it's trading between 1.2, 1.3 Bitcoin per day during our last month. It's an important point also for Bitcoin miners to be self-mining because this is where we get our valuation for the company as a public listed company.

We are infrastructure people. We are operator people, and we are focused on efficiency. So we are running our own electricity, and we are transforming this electricity into computing power. And this is from this computing power that we are making our money. Being efficient means that we are making more money at the end of the quarter or at the end of the day, and we will go over the details lately in the presentation.

Now that we are efficient and that we've proven that we've been able to grow from 2 megawatts to 20 megawatts, we want to grow again, if possible, 10x, is possible more. The way we want to do it is not only grow our mining power, but we also want to address the new market or the nascent market or the booming market of AI and HPC. HPC stands for high-power computer and it's a different type of computer that we would host in our centers.

A lot of Bitcoin miners are following this way. Why? Because when we operate and when we built our energy, our data centers, when we manage our [ hit ], we are capable of hosting any kind of computing power. So we believe we will have a role to play in that part. Our goal, at least 10x. We are running 20 megawatts. We've been showing how efficient we were not only in how many Bitcoins we are producing, but also on the financials that we will show you. But now we want to do a 10x into our electrical infrastructure. So it means adding megawatts. First, we have 8 megawatts of electrical equipment that we bought in the previous years and that we can deploy very quickly. But we don't want to stop there. We want to go, again, if possible, 10 times, that means 200 megawatts of energy, maybe more, if we can. And we want to do it in 2 ways, 2 separate ways that are somewhat connected and will work together. One part is about Bitcoin mining. We want to have more Exahash and produce more BTC. In the industry, being the biggest is not always the best. I mean, it's great to be big if you are efficient. But you can exist and you can be profitable and you can make money and you can continue mining with any kind of size as long as you have some kind of economy of scale, but most importantly, as long as you manage your electricity yourself, that there is no intermediary between your energy facility and your computing power that your produce. So because we excel in Bitcoin mining, we want to grow. We want to grow our Bitcoin mining facility. We also want to grow in various geographies. We are today located in Quebec, our 20 megawatts are in Quebec, one of the best energy in the world. And not only it's extremely well priced. All in, it's $0.043 a kilowatt hour fixed price for the year, very stable energy, which is very important when you're managing current, and when you manage data computing -- data centers. It's also very environmentally conscious energy. It's 95% hydroelectricity. 99.9% is not producing carbon emission or very low carbon emission. Because we have this capacity, we are capable of advancing and moving into the different phases and cycle of the Bitcoin energy.

One thing that we want is to go also outside of Quebec and outside of Canada, mainly in North America or Southern parts in Europe, and we want to build out more centers and find more energies. We have a lot of opportunities in front of us right now, and we're going to work and find the right way for us to go to the next stage of our company. On the side, very quickly, you can see on the right side that we are also working on add to infrastructure because we have infrastructure people, not only we are building data centers, but we want to build the infrastructure on Bitcoin-based or using Bitcoin Layer 1 as a base, the security of these amazing tools that we have in our hands. You have new technologies such as the lighting network, ordinal, [indiscernible], very interesting.

We are working on this. We are innovating on this. We think it's a way for us to be aligned with our goal to have more digital assets on our balance sheet, mining Bitcoin, computing power for AI and HPC, but also developing services where we can have fees when people are using our solution. So you're probably wondering how do we finance all this? We are publicly listed. We decided to be publicly listed to be able to raise money at scale when the market permits. Right now, we are in a bear market. The way we decided to grow was to use one tool that we have for us was to do a debt for buying some Bitcoin miners.

We announced a very good deal with our bank in Switzerland called Sygnum. And it's a 9.5% interest rate for -- on a 3-year term. So it's one of the best ways to be able to grow without doing any dilution. Because one thing that we want to do and -- developing what we are developing, data centers, transforming the energy from [ a ] voltage to medium voltage, et cetera. I'm using [indiscernible] ventilation. It's a very CapEx business intensive, not only for the infrastructure, but also for the computers that we need to buy. So we need to raise money. We need to have access to capital and we need to use everything that we have at our disposals.

When you're publicly listed, it's already done. I mean we have different of tools we can use, and we plan to use them well. And we will do it with keeping in mind the dilution of our shareholders. We are all shareholders in the company, we are cofounders. Most of our shareholding or shareholders are also here with us since the beginning of the company. So we plan to continue this. We're building for the long-term.

Recently, we have had very good results with our stock price since January 1 to August 11, plus 350% on our stock price. I think we were the best-performing Bitcoin miners on the TSXV, maybe also the NASDAQ on this period of time. You can see here we are beating Bitcoin in terms of performance and also the award [indiscernible] Bitcoin miners, [ ETH ], [indiscernible], we are all going to make it. I'm going to leave the stage now to Kyle Appleby, our CFO, and he will present the high numbers for our financial statements. Thank you.

[Kyle Appleby, executive]

Thank you, Romain. I'm very pleased to present our results. We're very proud of the 3 and 6 months ended June 30. We had record revenues for those periods of $4.2 million for the 3 months ended June and $8.1 million for the 6 months ended June. So for the 6 months, that represents a 170% increase in revenues from the prior period and over 100% for the 3 months.

The revenues both include the Bitcoin and crypto mining, digital assets' mined and hosting revenues, which we have there. Our cost of revenues, you can see it increased given the increase in revenues, and it includes the site operating costs, which are electricities, salaries and depreciation, expenses. Mainly G&A expenses included here, most of them would be salaries, representing approximately 50%, and we have professional legal audit, custodial fees and other corporate and administrative expenses. Our operating income, again, positive growth and positive of over $1 million for the 6 months and $285,000 for the 3 months ended June. We ended up at the day with a net income of $600,000 in net profit for the 6 months ended June and $90,000 for the 3 months ended June. So you can see our trending positively in the right direction. We're not only efficient in our mining, but in our costs. We're focused on efficiency in both of those. And it's working out well. In addition, we've had positive operating cash flow for the 6 months ended June 30 of over $1.2 million, which is a great achievement for us. So there's those 3 really positive key factors trending in the right direction, revenues, positive operating cash flow and net profit.

So our next slide, you can see, again, our EBITDA and adjusted EBITDA for 6 months ended June 30, 2023, positive $1.8 million -- over $1.8 million for EBITDA and adjusted EBITDA of $1.7 million, again, positive trending in the right direction. EBITDA -- adjusted EBITDA is our EBITDA, which also includes adjustments for unrealized and onetime items. Here, you can see the holdings that we have of our cash and digital assets position at June 30 compared to December 30, holding over 20% in cash and around 75% to 80% in Bitcoin between the 2 periods. 99% of the digital assets are in Bitcoin and Ethereum represents 1%. Our [indiscernible] holdings generally like to hold it around 20% -- between 20%, 25%, and that's what we can show here.

Our next slide shows our capital structure at June 30. And you can see our outstanding shares, 72 million. We haven't issued any shares in 2023 yet, and our options and warrants at [ 8.8 million ] to get a fully diluted of [ 81 million ]. You can see here our 65% of the outstanding shares on a fully diluted basis are owned by officers, directors, insiders, and that shows the support and belief of the company of management and directors.

[Benoit Vincelette, executive]

Good morning, everyone. I'll be going over some metrics and comparables for this sector. I've noticed that we received some questions, we're going to be addressing those at the end of the live cast. So for this first chart, so what we wanted to represent was the -- for an average Bitcoin that is mined in a given month, what would be the percentage of gross profit, what would be the percentage of attributable cost regarding that Bitcoin. And those numbers were presented in USD. So for example, if we decide to take the month of February, you can notice that we have for a revenue of $31,694 if I'm not mistaken.

There is a $19,000 gross profit, which represents roughly 60%. And there's $229 per salaries. We don't have many employees in our facilities, but we've ensured that those are aligned with the business, they have stock options and other initiatives so that they are aligned with us. So they work really in an efficient manner. We have site operating costs, which would represent insurance, just so you guys know insurance is something that we consider really important in our facility.

So we make sure that everything is properly insured. That includes [ electronic ] equipment, infrastructure, miners themselves. And the last cost would be electrical costs. So there's 2 elements that you might see. There is a significant increase in the electrical cost per Bitcoin mine that because of 2 factors. The first one would be the rate hike that we sustained throughout around the premise of Quebec. So it was decided by the Hydro-Quebec that residential clients would get a 3% hike.

And for other businesses, which are pretty much all businesses, we received a 6.5% increase starting April 1. So that's why you can see that there's a major increase. And that other element that explains why there is a significant increase would be the network hashrates. So on a 30-day average, if you take the -- on January 31, you would have 273 Exahash of Bitcoin mining. And when we look at the number on July 31 -- July 30th, sorry about that, we would have 369. So that's a [ 36% ] increase. So that means that we mine-led Bitcoin with the same mining power. So that for sure has an impact on us. We decided -- on a transparency basis, we decided to add another component in our cost to mine a Bitcoin.

We have the all-in electrical cost, which includes the transportation, power premium and everything. And we have the kilowatt/hour cost because we've seen some of our competitors show aggressive rates. But sometimes they don't include power premiums and so on. So we decided to show people what would that represent in our facility. So on a year-to-date basis, you would get a Bitcoin mined for 8,195 for the kilowatt/hour cost, which includes the -- which excludes [indiscernible], the electrical premium.

So if we go to the next slide, one of the metrics that is often looked at by analysts in our sector is the Bitcoin produced by Exahash. This is a way to show if your mind is efficient or not. As you can see, there is a clear trend in between the main companies on the stock market on the TSX. It's almost kind of difficult to see which company is the best when you look at the chart. When we look at the year-to-date average, you can see that there is one big current difference between the 3 main competitors.

And just so you guys know, we're always proud to showcase that we're always [indiscernible] of all the miners, NASDAQ and Tier 6 combined. That's something that we are quite proud of, and that's because of the fact that we are efficiently running our mine. The next chart would be -- so this is a new chart that we came up with. It's operation metrics between peers and also the BTC price. What is super interesting with this chart is that we show there is a linear regression correlations about that with -- in between 2 items. For example, if you look at [indiscernible] [ 0.95, 0.96, 0.97 ] is very highly correlated, which means that when a company goes up, the other is pretty much going to be going up as well.

When we look at SATO, our closest correlation that we get a 0.679 with [ Bitwise ] but we also get a 0.70 with Bitcoin, which is the second highest and which would indicate that there is a high correlation between us and the [indiscernible]. So that could mean to the investor that someone that is looking for an exposure in Bitcoin that doesn't want to go through the hassle of the whole hot and cold [ wallets ] storage, the proof of funds of exchanges and so on, they can invest in a company such as ours, and they will get an exposure to the big brands stock.

[Romain Nouzareth, executive]

Thank you very much, Ben. Ben is our VP Finance and Special Project. He's working in Fanny's team, our CEO, Fanny is on vacation. He's working with us for the past 2 years. You have former auditor at Grant Thornton that's why we can -- we've been able to show [indiscernible] of data.

To finish and to go to the conclusion, I just wanted to expose where we are at again today and where we're going to. So we are infrastructure people, and we are operators. We have no intermediaries between our electricity and the computer power we are generating. It is extremely important in bear market. In bear market with difficulties that is going up, the Bitcoin price that is not going very high recently, plus the hosting that is coming.

So we need to be cautious. And at the same time, this is the best time to expand. This is the best time to go. We have opportunities in the right time. We know how to do it. We have the team to do it. We've been doing it for the past 5 years. We want to do it bigger and faster, always focusing on high performance, not only for Bitcoin mining, but also for AI and HPC. AI and HPC is not only a marketing [ since ], we really believe we have something to play in the market into providing a solution that will be able to do hosting and computing power for both. And we have the team ready to go. So we are super excited and energized to always talk to you to finish.

Just a quick update on the kind of events we will be able to see us. Right now in [indiscernible], we have [indiscernible] with -- at the conference. On September 7, we will be in Zurich. September 11, 13, [indiscernible]. We are part of the annual global investment conference they are doing in New York City. It's a 3-day event. We will be able to present one-to-one to investors, if you are in New York, come meet us. September 12, we participate to [indiscernible] ventures. This is the 66 conference of [indiscernible] Ventures. It's a huge firm from Singapore investing in Web3 and investors that participated into the listing we did in 2021 with the major shareholders, and we will be participating to this event.

I think with a table with a ledger, for example. So it's going to be very interesting. September 21 in Montreal, October 12, I will be speaking in BTC, Amsterdam. So if you are in Europe also come meet us. So October 25, there is a Blockchain Summit in Toronto. And then we will be in Dubai on October 30th, [indiscernible]. So meet us there, contact us. We have here our QR codes, our names. You can find us online, and we'll be able to meet. Thank you very much. We'll now go to the question and answers.

[Romain Nouzareth, executive]

We will start with 2 questions we received in advance. And maybe those ones could be for you, Ben, or you Kyle. The first one is, why is there such a big difference in the operating cash flow from $900,000 in Q1 to $345,000 in Q2 '23?

[Benoit Vincelette, executive]

So when looking at the financial statement, there's 2 components that would explain the difference. The decrease, I mean, the first thing would be that we sold for almost $400,000 less of Bitcoin. So we kept those in the balance sheet in spend. So that would explain part of the difference.

The second thing would be that, as I mentioned before, we had a rate hike of 6.5%. So it directly affects our gross margin for every single Bitcoin that we mine. So when we take these 2 elements into account, plus the difficulty network actually that went up, this explains why the we have less positive cash flow for the second quarter.

[Romain Nouzareth, executive]

Thank you. There is another question, which is, why is a change in other [indiscernible] cost to mine one Bitcoin from Q1 to Q2. I think you addressed, Ben, this question during your presentation. Maybe you want to add 1 or 2 things about it.

[Benoit Vincelette, executive]

I think I pretty much went over the whole thing. Maybe once again, the 6.5% was assigned to all business customers throughout the premise of Quebec. So it's not only for crypto miners but we -- every single company that operates in the premise of Quebec had to face those hikes [ leading ] to the inflation except really restricted category of -- category [indiscernible] mine companies that got the 4.2% hike, but those are major, major [indiscernible] and so on.

[Kyle Appleby, executive]

And it's augmentation. I mean this kind of augmentation that is across the whole province of Quebec is not happening every year. We have a fixed price that's part of our electricity. Our contract is fixed, fixed price and stable energy, and that's why we've been able to be very efficient when we mine, not only because we have the access to this electricity, but also because we transform it the right way by managing our [ aid ], by managing our software that manage our computers and all these kind of things. So it's great to be in Quebec, and we now want to continue growing as much as we can.

[Romain Nouzareth, executive]

I don't see a question in the chat. We will wait a few minutes if people want to ask more questions. If not, we will close the presentation. We will make it available on our YouTube. You can find the links from our website. You have our address here. Okay. So we have a new question. So the question is you mentioned 10x expansion, which is in 200 megawatts. Can you expand on where the synergy will potentially come from? Are you looking at energy sources from outside of Quebec?

So the answer is yes. We would like to borrow in Quebec as much as we can. We believe in the progress. We believe in the energy. We believe in the people. We are from Quebec originally. Today, we have about 20 megawatts of energy for crypto mining, and we believe we will be able to have more energy for AI and HPC. At the same time, as a company, we want to be in different places. It's important to be distributed because you never know what will happen in one jurisdiction. So we are looking at expanding and finding this energy in various ways.

The first way will be to sign a PPA. It has been done before. We can sign some -- ideally, we would like to stay in North America and maybe some places in Europe because it's what we understand, this is where we are, and this is a kind of -- type of territory that we want to address. And it's good to be distributed. So we are looking at different ways to find the synergy. We have lots of opportunities doing acquisition sites, signing PPAs, doing hosting deals if we need, a lot of things is among us. It's a difficult market for Bitcoin miners today. Again, the difficulty is high. The price is not going to the roof. It will change, the dynamics will change. It's always changing at some point. We are built to pass the up and down. We've done it since 2017. We want to continue doing it.

This time, we just want to do it bigger. We have the team. We have the knowledge. We have everything to be able to grow that way, but it's going to take the next 12, 15, 24 months in order to operate this 200 megawatts or more. I hope this answer your question. Yes, any more questions in the chat? If there is no more question, we will terminate the session.

I would like to thank you again for coming and participating. Again, this will be put online on our YouTube channel. We will meet next quarter. And in the meantime, we are available on our social networks. Bye.

[Kyle Appleby, executive]

Thanks, everyone.

[Benoit Vincelette, executive]

Thank you.