DeFi Technologies Inc. (DEFI) Earnings Call Transcript

Hi everyone thank you very much for attending.

We are fortunate to have 3 veterans on the panel today. We'll introduce them to you shortly. The topics that we will cover in this webinar will include an overview of DeFi Technologies, recent growth in assets under management, some new product development, leverage to the Altcoin market and why we are not nor should we ever be compared to a miner?

So if at any point during the webinar, you'd like to ask a question, please do so using the Q&A function and questions will be answered at the end of the presentation.

And thanks, Jamie. So we'll introduce our presenters, introducing Russell Starr, Head of Capital Markets at DeFi Technologies. Russell, a seasoned professional brings a wealth of experience as a former Bay Street Executive, Associate Hedge Fund Manager and forward thinking CEO, entrepreneur and financier. Russell possesses expertise in capital markets and a track record for orchestrating transformative deals to drive business expansion.

We're also joined by Olivier Roussy Newton, Co-Founder and CEO at DeFi Technologies. Olivier previously founded and served as the President of HIVE Blockchain Technologies, the first publicly traded crypto miner. He is a partner at Latent Capital, an investment fund focused on breakthrough technology in quanticomputing, finance and bioinformatics. He currently sits on the Board of SEBA Bank AG. And lastly, we'd like to introduce Anthony Pompliano. For those who are familiar with this space, Pomp needs no introduction. Pomp is an American entrepreneur, an investor and host of the Pomp podcast. He posts video interviews and personal opinions, particularly with a focus on technology and finance. Welcome, gentlemen.

Welcome. Okay. So before we turn it over to Russell, a little formality. So I'd like to remind everyone that the certain statements made during today's presentation may contain forward-looking information within the meaning of applicable securities laws. Such statements may include estimates, projections, goals, forecasts or assumptions that are based on current expectations and are not representative of historical factor information. We want to be clear that such forward-looking statements represent the company's beliefs about future events, plans or objectives, which are inherently uncertain and are subject to numerous risks and uncertainties that may cause the actual results or performance to differ materially for such statements. And so with all that said, Russ us, we'll kick it off, and over to you.

You bet. Thank you very much. Thanks, IR labs for hosting us. And obviously, thanks to Oli and Pomp for sitting in as well. For many people here, you're going to be familiar with DeFi and Valour. But typically, what I'd like to do is go through the presentation at a pretty high level. And relatively quickly, I might add, just because I find that in general, the question period provides a lot more opportunity to dive into what's happening with the company. As you all know, DeFi Technologies owns 100% of Valour, which is our ETP company. We have 16 ETPs now listed in Europe. A lot of people ask us why Europe? Well, the reality is that, obviously, the U.S. has been a very difficult market. The SEC has been challenging at times. But while the U.S. has been challenging, the rest of the world has actually been adopting into this space at an incredibly fast pace. And with that, we've been able to grow substantially, and you've seen that literally within the last 4 or 5 months, we've gone from about CAD 150 million, CAD 100 million in AUM to over CAD 500 million terms. And this year is going to be very, very exciting for us. We plan on launching another 18 to 20 ETPs. And obviously, the backdrop, in my opinion, for crypto and Pomp will elaborate a bit. And so will Oli but it certainly looks like Bitcoin has seen it's difficult times, and we're looking at a robust Bitcoin market, and in particular, a very, very robust Altcoin market. You can see the various other areas of our business. We are a partial owner of SEBA Bank, which is now known as AMINA, 6.6%. And for anybody who's been paying attention, a competitor to this bank in Switzerland, just raised it almost a unicorn status and that's Sygnum Bank at about a $900 million valuation. We have a venture portfolio that Oli is going to elaborate on. But basically, we like to take small investments in what we believe to be up and coming protocols that ultimately we could launch an ETP on. And then obviously, you can see our infrastructure business, which at times can be actually quite supportive of revenues, just managing nodes basically. Just going to spend a quick moment on here. You've got Oli on the call, Founder of HIVE. I want to address a couple of new board members, [indiscernible], both with area and capital in Europe. 3 incredible additions to the Board, one with a ton of crypto experience; and then 2, obviously, with a lot of European leverage. I think it's important to address new people who have joined the company and the Board. I will spend a little bit of time on Johan here. Johan is basically the founder and creator of XBT provider, which ultimately became Coin Shares. Extremely involved in the company in the background. I call them kind of our mathematical genius. If you ever want to talk first, second, third, fourth, fifth, sixth derivatives, he's your guy. Brilliant and working on some really interesting things in the global markets right now for the company. Obviously, Pomp, he's on the call right now. I won't spend too much time on him. Pretty much everybody knows who he is, and thanks a lot for joining Pomp. So what are we looking at doing here in the near term? And really, what's been transformative in the space? Well, obviously, Bitcoin's in a strong one over the last 4 or 5 months. But what's really been impressive in our company, in my opinion, is the movement in the Altcoin space. The last time we were at this level of AUM would have been about Q3 2021 back when Bitcoin was at about 65,000 and our 2 dominant products were our Bitcoin Zero and Ethereum zero products. And now a little bit surprisingly, but maybe not so much so now that you see what's happening with Solana. Solana is now our largest product. And if everybody is familiar with what we do, we're in ETF ETPs, obviously, I use ETF as terminology, just because it's a little bit more familiar to North Americans. But an ETP provider who's able to stake their underlying and for most people who are familiar with the staking and lending space, you can actually make a lot more on your Altcoin staking. And you're seeing those yields erupt as of now and probably over the last couple of months, and it's our expectation that you're going to see that continue as the space evolves. Given that we have so much leverage to the Altcoin market, I think people need to really, really take a look at our business model and stop really comparing us and you saw the earlier question to the miners. We are so much more diversified. Yes, we have a large Bitcoin zero product, a Ethereum Zero product, but we've got Polkadot, Cardano, and like I mentioned, Solana and you're going to be seeing a lot more of our products in the Altcoin market drive our revenues. So what are the products that you're looking at right now? You can see them here. It's nothing sort of incredible what we've been able to do over the last little while. I do want to address a little bit of an AI component with our acquisition and part ownership of Neuronomics. You will see an AI strategy ETP at some point that really looks at maximizing yields and opportunities in the Altcoin space. But as I mentioned and what people need to start really looking at with this company is not necessarily comparing us to a minor, trading us with Bitcoin going up, Bitcoin going down. We are far more leveraged now to Solana and the Altcoin market than we are to Bitcoin and Ethereum just by way of how we drive our revenues. And it would be -- and I say this with respect to everybody, but it would be naive to sort of put us in that miner/Bitcoin basket moving forward, with the amount of products and innovation that we have coming this year. And obviously, we'll see more and more of that in the coming years after 2024, '25, '26. 16 products now up substantially from that 4% or 5% in 2021, Q3. And I would indulge or suggest that people take a look at our [indiscernible] SEBA or CEDAR filings and take a look at how our revenues were driven back in those days because I think you're looking at an opportunity here to buy this company very, very cheaply based off of what you can see from that Q3 2021 revenue model. And another thing that we've done an incredible job, and kudos to Oli on this, but we've really taken our costs down. So you're looking at sort of USD 5 million, USD 6 million, USD 7 million in all-in costs. Whereas before, when we first started the business, it was obviously a bit more complicated and costs were higher. I draw your attention to this slide. I don't want to get into it in too much detail, but basically, this just shows that even while the market was selling off, we continued to add unitholders in our products. And why that's so important is, as I mentioned, when we hit our CAD 500 million Q3 2021 time frame, our revenues were driven off of basically 5 products, mostly off of Ethereum and Bitcoin. We now have far more unitholders across far more products. And so if you look at sort of the Bitcoin market rising, sort of the high tide rising all boats, you're going to see that if Bitcoin was to get to 65,000, we probably have closer to $900 million in AUM, and that's the [indiscernible] that you're going to see to our AUM. So as Bitcoin grows, our AUM grows substantially just because of the Altcoin market and how many more people and products we have. And I've always said to people, we get to that $1 billion mark. Again, forward-looking statement, I just want to caution everyone, but you're kind of looking at a $90 million in revenue, $80 million to $83 million in profit business model. We don't need to increase our cost to scale our business. And in fact, it's the true economies to scale business where revenues continue to grow and costs do not. So this is an incredibly compelling business model. We don't have to buy new chips. We don't have these massive infrastructure costs that you see across the mining space. So in a way, one could argue that this is potentially a more appealing business model just because of how much lower our costs are and the leverage we have to the Bitcoin and Altcoin space in general. I want to pass it over to Oli now just to discuss what he's seeing. He's on the ground, boots on the ground in [indiscernible] and witness the firsthand just how aggressively are trading revenues, lending staking and AUM has grown. So I hand it over to you, Oli, and you can get me to move slides as you see fit.

Yes. And Russ, I think just to your point in terms of the comparative analysis of a mining business model, which I spent several years on versus our business model. We have differentiated crypto assets that we can monetize in the form of ETPs and this kind of demonstrates when myself and Johan first set up the [indiscernible] circa 2017. We spent probably 3.5 years filing all our regulatory prospectuses in order to make the underlying engine and infrastructure of our core business as monetizable and efficient as possible. So we're one of the only ETF, ETP issuers -- the only one that does our own internal market making, which allows tighter spreads and more attractive products for our customers on both retail and institutional side, but allows us to drive a lot of daily revenue, monthly and yearly revenue, and we've been investing heavily in the infrastructure associated with staking operating validators and nodes for the newer growth products where we're seeing interest, which are the [indiscernible] of the world and setting ourselves up for further launches of those products. And I think one thing to kind of note is there's been a -- with the U.S. ETFs coming into the scene. There's been kind of a price war in terms of basis cost percentage cost ...

Management fees.

Management fees essentially. So we were the first to operate and issue 0 cost trackers for Bitcoin and Ethereum, our BTC and ETH 0 products, and we'll continue to kind of innovate within that ecosystem.

I think that's a really important comment as well to focus on Oli. And that is, one, maybe you can elaborate just a little bit on our -- the developer acquisition in the Solana space. But also everybody should note we saw a little bit of a sell-off in our share price when the ETF was permitted and that might have been driven just because Bitcoin sold off. But we've actually added AUM and clients to our Bitcoin Zero product. So there was no cannibalization of our Bitcoin product when those ETFs were launched which just shows how strong our business model is and how appealing our Bitcoin Zero product is, but, yes.

Yes, I think that's one thing to stress is that we operate and provide services to a very sticky customer bases, sticky customers. If you saw in kind of the last slide, our client and customer base are our [indiscernible] and buying through -- have been actively buying through the bear market and question that I got frequently asked in the last few weeks and months is the U.S. ETF launch going to be competitive to your business then I think it's only kind of grown our business in the form of providing more liquidity to Bitcoin, which brings in more capital to the space. And our customers are really focused. They're trading in their own time zones. So the majority of our AUM sits in [indiscernible]. They want their own localized currencies to trade in, which we offer. So the ETF launches in the U.S. have provided I think more attention to a business model which will go and pioneered in 2015, with the launch of the first crypto ETP product. And I think you're seeing from where we started to where we are now. A very kind of more thoughtful institution and retail end user who is very aware of the crypto market, looking for new differentiated offerings, and we want to be in the best position to continue to offer new protocols. I'll also cover them with thought market-leading research where Pomp comes in and differentiate ourselves in those capacities.

All right. I'm just going to unpin the screen here just because some people are saying they can't see everything. Hopefully, this does it this way. I know that this is a problem with Adobe and Zoom. Hopefully, that's fixed it for everybody. Yes. And then there was a couple of questions just quickly, I'll address. One of them was when is there going to be a Solana ETF launch in Canada. Just so everyone is aware, the regulators haven't even approved an ETF in Ethereum in the U.S. And so we just continue to sit back and honestly, build our business incredibly fast in Europe, and we are looking at other jurisdictions as well that are very, very favorable to Altcoin, ETFs and ETPs. So when we will be one in Canada? I don't know the answer to that. But as soon as the regulatory environment in Canada and the U.S., and Pomp might have more color on that, but we still don't even have the Ethereum ETF, let alone a Solana ETF. I'm sure the SEC is going to opine on that. But when and if it does happen, we'll be the first to do it. But the reality is everyone if you want exposure to Solana, this is a great way just owning DeFi. It is our largest product. You've seen us trend a lot with the Solana product. And I'd argue that by owning DeFi, you get a very diversified way of playing the entire space rather than buying a single asset ETF. And there was another question just quickly on a NASDAQ or an upgraded U.S. listing, we will absolutely pursue that as soon as our share price gets reasonable. I say that it still shocks me. I can't believe we're trading where we're trading right now, went at the same AUM. In 2021, we were almost a $3 share price. There is a severe disconnect with the market in terms of what our revenues are looking like, what our profits will be and our AUM growth and our stock price even compared to Galaxy, we're trading at a severe discount. So just everybody can keep that in the back of their minds. I'm just going to allow Oli to speak briefly on our venture portfolio because it is really compelling, and we're actually making a bit of an exit right now on 3 IQ on about a 6 or a 7 bag or Oli.

Yes, I believe it's a bit higher than that. But we've definitely focused and are focusing on kind of early stage seed round stakes in promising companies with interesting potential to essentially help them build first-to-market ETF strategies. So when we see or come across a very innovative protocol, we like to take an early state and essentially help steward that company towards understanding the regulatory requirements and thresholds for listing and productizing their protocol into an [ ETB].

Yes. You'll see us continue to do that just because we do have a real edge that no one else does with, in particular, Pomp who's on the call right now, Oli and Johan, who kind of know everyone in the space, and so we get access and see really interesting opportunities that may be only raising $2 million, $3 million, $4 million, $5 million. They're not looking for a ton of money. But if you can get a $100,000 or $200,000 stake and this happens to be another Luxor or one of those sovereign is another one that Pomp helped us get exposure to that's doing very well. It would just be insane not to take advantage of that. Look, I'm getting all these questions, and I'll get to them. But what I wanted to do is thank everyone for attending the call. At this point, I think it's probably smarter instead of going through our strategic partnerships, which everybody knows, Bitcoin, Suisse, SEBA Bank, AMINA, [indiscernible], which I did address earlier, I think it would be good to just hand it over to Jamie for a couple of questions for Pomp, just because he is on a tight time line. And then I'll get to addressing either through Oli or myself, the questions that are up on the Q&A board.

That sounds great. There is a question here for Pomp. It says, why did you do the deal with DeFi and reflexivity. You could have done it with anyone, why DeFi?

Yes. everyone. Nice to see you all or at least see some names that I recognize. In terms of reflexivity, when I started this business, I've helped start a couple of different research businesses in crypto, but the opportunity we saw was to do crypto-native research for a non-crypto audience. So most of the other research firms are very insular. They're doing crypto-native research, specifically for people in the crypto industry. But if you want to get mass adoption, if you want to educate people, you've got to be able to get outside of that industry. And so distribution is a huge part of that. Very kind of popular term or phrases first-time entrepreneurs worry about the product, second-time entrepreneurs worry about distribution. And so very much focused on the ladder. We were able to build so far a pretty interesting business. We've booked quite a bit of revenue quickly, have tons of distribution both in terms of owned distribution where people have signed up in today, I want this research directly, but also we've got a number of distribution partnerships that we publicly announced with Trading View, [ eToro], many other exchanges or data providers. And so through that, we've been able to work with some of the top organizations, Solana, Avalanche, et cetera, in producing high-quality research and then getting it out to a lot of people. Now when we think about going into these bull markets, I think that there's really 3 things that led to the decision when it comes to DeFi Technologies. The first is, as investors, right, who have equity in a private company, we are much more attracted to holding public company equity than private company equity. Very similar to the guys at DeFi, but also all the shareholders. You want to have that public market exposure, especially when kind of bull markets hit because share prices should expand if the company is doing what they're supposed to be doing. The second thing is if you have an information advantage in finance, the single best way to monetize that is via asset management. And so given what DeFi is doing is kind of a sector focus, we thought was quite attractive. And then the third thing is, this is a pretty big bet on our part in terms of this Altcoin ETF or ETP strategy. And so if you look inside the United States, BlackRock and Fidelity kind of the big winner so far, GBTC is bled out a little bit. Bit-wise, maybe is $600 million or so in assets, but they're all fighting in this marketing award to get assets into a Bitcoin ETF. Well, I'm of the belief that people on Wall Street are no different than people on the Internet who have been buying a lot of these cryptocurrency assets. And so people on Wall Street, many of them I know they would love to get exposure to whether it's Solana or any of the long tail of assets. The problem usually is that there are some sort of friction. There's no publicly listed vehicle for them to do that or frankly, they're just lazy. They don't want to go sign up for a coin-based account and kind of manage it in a separate account. And so by being able to partner up with these guys, we think that there's really 2 things. One, we've got high-quality research that we can then take that and bring it to people, educate them. And now they've got a place to go. They can go allocate their capital to not only the ETPs they see here on the screen, but also ETPs that are kind of coming down the pipe. But then the second thing is in reverse. There's a number of companies or organizations that we work with who would love to get an ETP out into the public market. And so we're able to take those relationships and introduce them to the DeFi Valour team and get those ETPs out as well. And so the only reason to do an acquisition, I think in terms of companies is one plus one has got to equal more than 2. And I think that ourselves and the team over at DeFi think that this situation contracts that box and so we're excited to work together.

That's great. All right, Jamie, should I go to the other questions then? Pomp, I know you're on a tight time line, but hang out if you want for a few, but -- all right. Spencer has asked a few really good questions. What's the competitive advantage for DeFi versus the U.S. ETFs? I think Pam kind of addressed that in Spencer you're looking basically at a single asset ETF being distributed across 5, 6, 10, 20 players as time goes on. And you really have no clarity as to whether or not the Ethereum ETF is going to be approved and then take it a step further, what's the SEC's thoughts on Solana, Polkadot, Avalanche, Adam, Engine all these other protocols that we're launching, and you're seeing us doing some pure foundation deals, which was Oli's idea, which are fantastic. It's the ICP that you've seen deal, and you're going to see more foundation deals. And those type of deals -- sorry, Oli, go ahead.

Yes. No, I think just to touch on this, like quite explicitly like the growth that we're seeing and we've all been through several crypto cycles is really in the disruptors that are using Blockchain technology and pushing new technologies such as AI in new ways and people want exposure to those kind of products early with research, which is why I think the tie up with [indiscernible] makes so much sense because we've created a funnel where we're attracting all of the top projects that want to have a sticky institutionalized and differentiated retail base of holders that we do essentially provide them and accommodate for but you're seeing all these very interesting protocols that are either combining AI and the Blockchain or new ways of making transactions more efficient, and that's really what people are wanting exposure to. So I think the ETFs in the U.S. are providing just tremendous institutional capital to inflow into the space, further increase the whole space that we're going to be specifically focused on bringing the newest and most -- the coolest innovators in the blockchain into ETP ETF formats first.

Yes. So Spencer, like just to break it right down. Our competitive advantage is that none of the U.S. companies can launch ETPs or ETFs on any of the Altcoins. We can't. And I get it, the U.S. is a very big market. But guess what, the rest of the world is as big or bigger a market. And we get access to that before anyone in the U.S. can even rationalize or visualize or see the opportunity of even investing in Solana ETF. So that's a huge competitive advantage for us. And like I said, a lot of people were thinking, "Oh, hey, maybe we should sell DeFi when these U.S. ETFs get launched?" Not realizing that not only did we not lose any AUM in our Bitcoin zero ETP, we actually gained both clients and AUM. As mentioned, yes, we're absolutely...

One other -- just real quick, Russ. I think is important also on kind of this competitive advantage. And frankly, one of the reasons why this deal was so attractive to us is the Bitcoin ETF issuers, which I'm an investor in many of them, right? I'm an investor [indiscernible], which is doing custody, I'm an investor in a bit wise, I'm an investor in 21 shares, et cetera. They basically have a race to the bottom. They are all competing for 20 basis points, 25 basis points, fee. And so they're going to have to raise tens of billions of dollars for it to make economic sense and be attractive. What I think is really interesting about the kind of Altcoin ETP strategy is not only one, do you have more stickiness when it comes to the fee and you don't have to cut fees down to 20 basis points, et cetera. But two, as I think it was Olli mentioned, there's the market making. And so there's the opportunity to generate revenue there. And then 3 is many of these kind of much more crypto-native assets have staking and other types of revenue-generating activities. And so when you look at a Bitcoin ETF, I don't know, the average revenue that's going to get driven here is going to end up being tens of basis points, call it, 20 to 50 basis points, depending on which the issuer is. When you look at these Altcoin ETPs, you're actually going to be talking about hundreds of basis points in terms of revenue depending on which asset it is. And so really, it's just if $1 goes in a Bitcoin ETF, they make way less money than if $1 goes into an Altcoin ETP. And so the economics are in your favor in our opinion there.

Well, not only are you dead on, but we're actually seeing that in our bottom line. There's a question here. How does the AUM number translate into revenue? Body, well, as Pomp just mentioned, not only are we getting management fees for our Altcoin products. We don't charge any management fees for Bitcoin or Ethereum. We have our trading revenues, and then we have our staking revenues. And if you actually average our staking revenues across all our products, you're kind of looking in that 6% to 7% range. Tradings 32 basis points and then management fees or call it, [ 1, 1.5 million]. So Bobby, if you take -- and we're at $500 million now, but I'm just going to use $1 billion because that's sort of our Holy Grail, at least near-term objective. But at $1 billion, we're going to make about 8%, 9% off of that, and our costs are USD 5 million, USD 6 million, USD 7 million, depending on how many products we launched over the course of the year. So you're looking at $80 million to $90 million, maybe even higher in terms of revenue depending on which Altcoin products tends to dominate our AUM growth and just these tiny minimal costs, and we don't have to grow those costs to scale up versus you look at any of the minor businesses, their costs are directly correlated to the scaling of their business. So we have massive leverage and huge margins as our AUM grows. And then, again, back to Pomp's point, we love the fact that Solana is our #1 product. These Bitcoin ETFs in the U.S. are, as Pomp mentioned, it's a race to 0 in terms of management fees. We're already at 0 and people seem to get that. And yet we're still managing to outpace any of these companies on a revenue basis just because of that average yield and our trading fees. Importantly, Spencer asked, do you see any capital raises in 2024? I never like to say never, but I would say that in a perfect world Spencer, we'll never have to raise money again. I can only envisage a couple of instances where we -- you might even consider it, and Oli can elaborate more on this, but one would be M&A. Maybe there's an incredible deal where we might need to tap the market for something. And the other would be if we uplift in the U.S., it usually is a good idea from a capital markets perspective to do at least a little bit of a raise when you uplift because you see a few institutions when you do that. But in terms of operating is. I'd like to think we don't have to raise again, and I'll pass the back baton to you, Oli, I'm not sure your thoughts.

Yes. No. I think if there's -- our balance sheet is strong. I think if we were to look at strategic M&A opportunities and stuff, we could shave off some of our venture portfolio to be more opportunistic. But yes, we're seeing great revenue acceleration. So a fan of less dilution. As Russ pointed out, potentially it would make sense on an uplisting to get some institutional people seated. But aside from that, we have no plans.

In terms of a regular weekly update on AUM, I think what we're going to envisage doing on a monthly basis moving forward, everyone is sort of a monthly update on just key data points that have occurred over the month and then an update on our AUM. And ultimately, I think we'll get to a point where that AUM is live on our website at all times, but ...

Working on it, website updates to make that all live in real time. But for now, we have our monthly updates, and I think we can do -- we'll be doing a lot more in terms of updates.