TON Strategy Company (TONX) Earnings Call Transcript

Good morning and welcome to the to Tom's Strategy Company's second quarter 2026 earnings conference call. Joining us today are Chief Executive Officer Kevin Wilson and Chief Financial Officer and Chief Operating Officer Sarah Wilson. Earlier today, the company filed its quarterly report on Form 10Q for the quarter ended June 30th in 26 and issued a press release with its financial results. Both are available in the investor section of the company's website. An accompanying presentation was posted to the investor section of the company's website before today's call and will be referenced during management's prepared remarks. The press release, quarterly report, presentation, and webcast replay of today's call will be available on the company's website. Following management's prepared remarks, the company will address selected questions submitted in advance by shareholders. Before we begin, I would like to remind everyone that today's call includes forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results that differ materially from those described in looking statements. Please refer to the company's fines with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31st, 2025, and its quarterly report on Form 10-Q for the quarter ended June 30th, 2026, for discussion of these risks and uncertainties. The company undertakes no obligation to update any forward-looking statements except as required by law. Today's remarks may also refer to non-GAAP financial measures and supplemental measures that are not defined under GAAP. required reconciliations and explanations of these measures are included in the earnings release. With that, I'd like to turn the call over to Tons Strategy Company CEO, Kevin Wilson. Please go ahead.

Thank you, Operator, and good morning, everyone. For today's call, I'll begin with an overview of our Q2 operating progress and recent developments across Tom. Sarah will then review our financial results and staking performance. I will come back on to discuss our capital allocation framework, priorities for the second half and the longer-term opportunity we see developing around Tom and Telegram. The second quarter demonstrated the productivity of our Graham Treasury at current scale, while we also made important progress in simplifying the rest of the business around that Treasury and the TAM ecosystem. We ended June with approximately 230.5 million grams, including approximately 229.9 million gram deployed in staking. During the quarter, we earned approximately 9.4 million gram compared to approximately 2.2 million in the first quarter and recognized $15 million of staking revenue. The increase in rewards primarily reflected Tom's April network upgrade, which increased the frequency of validation rounds, along with the larger amount of gram deployed throughout the quarter. Since staking operations began in August 2025, we estimate the Treasury has earned approximately 13.8 million gram through June 30, 2026, and generated approximately $22 million of cumulative staking revenue. Those rewards increased our gram holdings without requiring additional capital to purchase the tokens. Once earned, the additional gram can be staked to generate future rewards, creating a simple but powerful compounding effect. IN TWO, WE ALSO LARGELY COMPLETED THE ACTIONS REQUIRED TO DISCONTINUE THE INHERITED VERB LEGACY OPERATIONS. focus the business around the grand treasury and the TAN ecosystem. During the quarter, we terminated vendor agreements, reduced contractor and personnel expenses, and certain lower margin service contracts. Sarah will discuss the expected cost savings in greater detail. I also want to briefly address the Kingsway Advisory Agreement. As I'm sure you've seen, the company filed a Form 8K on August 10th, announcing that we terminated our advisory services agreement with Kingsway Capital Partners, following the previously disclosed efforts to negotiate a settlement. The company stopped making monthly payments under the agreement in March 2026. During the quarter, the Ton community approved the rebrand of Ton's native digital asset from Toncoin to GRAM with the ticker GRAM. Rebrand took effect on June 8th following a community vote. The token name and ticker changed, but the underlying blockchain, token balances, addresses, and smart contracts were not affected. Graham was the original name of the currency envisaged in Telegram's first-time white paper. Restoring that identity helps distinguish the open network or TAN from gram, the network's native currency. The name change occurred as a series of technical improvements made TAN faster, less expensive, and more useful. Pavel Dorov, CEO of Telegram, has publicly described a seven-part initiative for improving PON. Based on public announcements, four elements have been identified to date. increasing network speed, reducing transaction fees, expanding Telegram's role in network validation, and restoring the gram name. The remaining three elements have not been publicly detailed, and we will avoid speculating about what those steps may include. The actions announced so far have addressed several hurdles to expanding time use. including by improving network speed, transaction costs, and validator support. And I'd like to take a moment to explain the technical changes in greater detail. Telegram's global platform gives TAN a distribution engine that most blockchains do not have, but that distribution is only valuable if the underlying network is fast and reliable enough for people to use inside everyday applications. Consumer payments can't be slow or uncertain, and small, frequent transactions do not fulfill their value proposition if fees consume a meaningful portion of each transaction. The recent upgrades directly addressed both constraints beginning with speed and followed by transaction costs. On April 9th, Tom deployed the CACHEIN 2.0 consensus upgrade, reducing blockchain times from approximately 2.5 seconds to approximately 400 milliseconds. Transaction finality improved from approximately 10 seconds to approximately 1 second, while estimated transaction throughput decreased approximately tenfold. Later in April, the network completed a validator software update that reduced transaction fees approximately sixfold, bringing the average transaction cost to a small fraction of one cent under a fixed fee model. Tom's strategy supported both updates through its participation in network governance. Additional upgrades implemented in June improved how validators communicate, organize transactions, and reach consensus. networking layer reduce network traffic by about two to four times and improve node connectivity. Han also continued improving the infrastructure used by applications. New APIs expanded support for staking pools, validator operations, and decentralized applications, and data indexing improvements made frequently referenced blockchain information available two to four times faster. The technical upgrades have strengthened Tom's ability to support activities such as payments, and emerging AI agent applications inside Telegram, where near instant settlement and negligible transaction costs can make frequent, automated transactions more practical. These upgrades matter directly to Tom's strategy. We hold a strategically significant amount of gram, substantially all of which is staked. Greater network activity can expand GRAMS utility by creating more reasons for developers, service providers, and users to hold, stake, or use the asset. Over time, more productive use can support demand for GRAM. Separately, the April upgrades also contributed to the staking performance we reported for Q2. I will now turn the call over to Sarah to discuss our financial results and staking performance. Sarah?.

Thank you, Kevin, and good morning, everyone. Our second quarter results reflect a strong quarter of staking performance and productive Treasury operations. Before I walk through the results, I want to note that our first and second quarter results reflect the VERB businesses as discontinued operations. Total revenue was $15 million compared with $3 million in the first quarter. The increase was driven by higher staking rewards generated by our grant holdings. Gross profit was $14.3 million, or 95% of revenue, compared with $2.8 million, or 95% of revenue in the first quarter. Total costs and expenses were $13.8 million compared with $6.5 million in the first quarter. During the quarter, we resolved a historical equity plan issue, the predated DonEx, which resulted in the surrender of certain legacy RSUs. Under GAAP, this required us to recognize immediately the remaining $5.5 million of unrecognized compensation expense associated with those awards. Therefore, this charge was non-cash and had no effect on cash flows or stockholders' equity. The results also included approximately $2.9 million of non-cash expense associated with the one-time setup fee under the Kingsway Advisory Agreement. This charge reflects the write-off of the remaining prepaid asset following the termination of the agreement on August 10th. Operating income from continuing operations was approximately $0.5 million compared with an operating loss of $3.7 million in the first quarter. The improvement reflected the increase in staking revenue, and we generated positive operating income despite recognizing the $5.5 million accelerated stock compensation charge and the approximately $2.9 million non-cash Kingsway-related charge I just described. Net income from continuing operations before income taxes was approximately $83.5 million, compared with the net loss of approximately $91.3 million in the first quarter. The second quarter included an $82.8 million net gain from changes in the fair value of our gram holdings, while the first quarter included approximately $87.9 million net loss. As mentioned on prior earnings calls, we account for grant fair value, so changes in its market price can create significant non-cash gains or losses between reporting periods. Operating income, therefore, provides a clear view of the performance of our staking activities and the operating cost base. Our digital assets had a fair value of approximately $369.5 million at June 30th, compared with approximately $272 million at March 31st. The increase reflected both the additional gram earned through staking and the increase in grams market value during the quarter. We ended the quarter with approximately $29 million of cash in restricted cash and no debt. continue to take a conservative approach to managing U.S. dollar liquidity as our revenues are generated in gram while our operating obligations are denominated in U.S. dollars. As Kevin mentioned, we also substantially wound down the legacy VERB operations during the quarter. Those actions are expected to remove approximately $4 million of inherited annual operating costs from our existing cost base. Turning to staking, we earned approximately $9.4 million during the second quarter, bringing our total holdings to approximately $230.5 million at June 30th. Our growth staking yield was approximately 17% on an annualized basis during the quarter. As time as a blockchain, staking economics are determined by the network, not by us. Our focus is positioning the treasury to efficiently capture those economics as they evolve. In April, a change to the network's consensus mechanism increased the frequency of block production. with substantially all of our eligible grants staked. That translated directly into greater block production and higher staking rewards for us during the quarter. Our grant remains unlevered and is staked with institutional partners through segregated nominator pools. We remain focused on institutional-grade custody and staking infrastructure with the goal of keeping our grants secure productively deployed in compounding the Treasury over time. I will now turn the call back to Kevin.

Thank you, Sarah. I want to explain how we plan to make decisions from our stronger operating base. One of my priorities during my first three months has been to create a simple way of communicating how we evaluate the opportunities available to Talent Strategy. Going forward, we will describe that framework in three words, own, advance, and compound. OWN refers to the foundation already in place. Maintaining the strategically significant position in GRAM and participating in securing the Tom network through staking. continue to manage the treasury with a focus on gram per share rather than the absolute treasury size. Advance reflects our ability to use that position along with our public company platform and institutional relationships to invest in, acquire, or partner with select businesses and infrastructure that can promote the overall growth of the TAN ecosystem. Potential areas include payments, financial services, Tom developer infrastructure, AI, digital identity and the custody, liquidity, and market structure to expand access to Graham. Compound describes how we evaluate capital allocation decisions. Does the allocation increase long-term value per share? Our objective is to produce returns beyond those available from simply holding grant, which requires that we compare every use of capital, including additional grant purchases, share repurchases, maintaining U.S. dollar liquidity, and making operating or ecosystem investments on the same per share basis. This framework is not meant to be rigid, but it's there to guide our decisions. Every use of capital must compete against the alternatives, and retaining liquidity can be the right decision when no other available opportunity offers a sufficiently attractive expected return. Today, our current focus is on five main alternatives. purchasing additional gram, continuing to stake the gram we own, repurchasing Tonex shares, retaining U.S. dollar liquidity, and selectively investing in operating or ecosystem opportunities. We will be selective. We will not pursue an acquisition simply to add revenue or make the company larger or deploy capital merely because it is available. Any investment should either generate an attractive standalone financial return or strengthen town adoption, utility or the market infrastructure around the asset in a way that can support long-term value of our grant position and ideally accomplish both. Put simply, we will selectively invest where strategic initiatives and shareholder value are mutually reinforcing. The capital allocation framework explains how we make decisions today, but I want to close our prepared remarks by discussing the long-term opportunity that informs where we may choose to advance strategic initiatives and why we believe the opportunity around Tom and Graham can become more valuable over time. The Internet made information native to the web. Information could be created, distributed, and accessed directly online globally, but asset ownership and economic activity have largely continued to depend on separate financial systems and intermediaries. We believe TAN is designed to be able to make asset ownership and transactions increasingly native to the internet. Practically, this means that payments and settlements can occur directly within digital applications using programmable infrastructure that is continuously available. The TAN infrastructure can support a broad array of activities across payments, financial financial services, commerce, entertainment, and more. Fast settlement, low transaction costs, and scalable design make it a particularly well-suited to high-volume, always-on applications, while Telegram can provide a familiar interface and direct distribution to users on a global scale. Our primary treasury asset, Graham, serves as the native asset supporting the settlement, validator participation, network security, and coordination across TAN. AI agents are one of the most relevant examples of how this shift could develop within the TAN ecosystem. As AI evolves from generating information to taking authorized actions on behalf of users, an agent could be asked inside Telegram to buy a product, book a service, or pay pay another agent to complete a task. Telegram would provide the interface where the instruction is given while Tom could provide the identity, permissions, ownership, and settlement instructions needed to complete it. If this model develops, AI agents could initiate a much larger number of small, recurring, and automated transactions than users initiate manually today. This could expand transaction frequency across POM, although the opportunity remains early and will depend on useful applications being built and adopted. For Tom's strategy, the relevance is that increased activity can create recurring reasons for developers, applications, service providers, and users to hold, stake, or use ground. If Tom becomes increasingly useful as infrastructure for consumer, application-driven, and automated economic activity Network adoption could expand Graham's utility and strengthen the long-term opportunity of our substantial treasury position. Our role is to own and stake grant through institutional custody, participate in network validation, and provide public market access to that opportunity. Where we have a credible advantage, we can selectively invest or partner around capabilities to support PONS adoption. We are focused on strategic opportunities with identifiable economics and credible paths to improving long-term value per share. Looking ahead, our priorities for the second half are to manage and compound the grand treasury, maintain appropriate U.S. dollar liquidity, improve investor access to TAN, and evaluate selected opportunities under the framework we discussed today. Our objective is to develop an operating company around a strategically significant grant position so that the Treasury, our public company platform, and any future operating capabilities can reinforce one another over time.

That concludes our prepared remarks. Operator? Thank you. We will now begin the question and answer portion of the call. Today's questions were submitted in advance by shareholders and will be moderated by Alec Wilson from Gateway Group. Sir, please proceed.

Thank you. Our first question is for Sarah. How much of the benefit from the wind down of the VERB operations was reflected in Q2? And when should we expect the full run rate savings to become visible? And what, if any, meaningful residual costs or obligations remain that are associated with the legacy business?.

Hey, Alex, thanks. Sure. So based on a current assessment, we expect the wind down of the legacy for businesses to reduce annual OpEx by approximately four to five million. And that's on a normalized look back basis. Because we continue to incur certain transition and wind down costs, we expect the majority of those savings to become visible probably in Q4. I should say while we've substantially wound down the legacy operations, we definitely expect certain limited obligations, think legal, admin, other wind down activities to continue into next year. Those costs are expected to be significantly lower, though, than the historical cost base. I think it's also worth noting, beyond the financial savings, an important benefit is really just organizational focus. As we complete the transitional way from the legacy business, our team can dedicate substantially more time and resources to executing and focusing on a core strategy.

Next one's for Kevin. What developments would give management confidence that TAN is becoming more deeply adopted, and how does that translate to value for TAN strategy?.