DigitalX Limited (DGGXF) Q4 2022 Earnings Call Transcript

DigitalX Limited (OTCQB:DGGXF) Q4 2022 Earnings Conference Call February 9, 2023 12:00 PM ET

Company Participants

Lisa Wade – Chief Executive Officer

Operator

Okay, everyone. We have got a good forum to get started today. So welcome to the DigitalX December 2022 Quarterly Investor Webinar. Thank you for joining us this afternoon.

Just a few housekeeping items before we get started today. If you have any questions, please direct them into the Q&A box and we’ll endeavor to answer those at the end of the session. The session will be 30 minutes. We do welcome as many questions as possible. If we can’t ask them today, we will reach out to you.

I’d like to introduce the CEO of DigitalX, Lisa Wade to take us through the webinar today. Thank you, Lisa.

Lisa Wade

Thanks, Liz and hi everybody. Well, I am super excited. This is as you probably all know our – only our second ever quarterly webinar. So thank you for joining us today. I wanted to start by acknowledging the traditional owners of the land, the Gadigal people of the Eora Nation and elder’s past, present and future and thank them very much for the land on which we work and live. We might just jump straight into the webinar. From there, usual disclaimers and obviously, this is the DigitalX webinar and we are an investment management company creating transparent investment management at the intersection of technology and finance.

Next slide, please. So today, we thought we would start just by running over the strategy slides again and I am just getting really clear on the benchmark and the measurements that the leadership team and management team use. Firstly, we are aiming to be – to lead the market in positive social impact and be a leader in cultural environment and a stand for positive social impact while generating sustainable financial returns. It’s really important, I think for shareholders to understand that we benchmark and measure ourselves internally and use constant measurement. The key results for having social – positive social impact we believe is moving to profitability and looking at the impact of our treasury investment. The overall aim of the business is to build shareholder wealth and to increase our market capitalization. And to do this, we use revenue as a benchmark and to drive revenues. In our funds business that is, looks like investing and our total value locked. And as we grow the business, we have customer at our heart and soul and to measure that we have a net promoter score.

Now in this quarter, I am really excited, because we started this strategic initiative in June when we did a refresh with the board. And the way we have been sort of coining this strategy internally is strategic simplification. And we really have been looking at and focusing on what we believe is the foundations for success of DigitalX Now, Next, and Beyond. And to do this, we have been focusing on right people, right roles and intensely laser sharp focus on costs and growing revenue – reducing costs and growing revenue, and making sure we are spending money in the right areas for sustainable growth. One of the highlights that I will go through is we do have a new finance and ops team and they have been working very hard managing the costs of the business, stripping out costs, excesses that we don’t feel we need to be in areas we don’t feel we need to be spending money and I am happy to go through that in more detail.

So next slide please. Just a quick refresher on the structure of DigitalX and how we describe ourselves as digital investment management and we do operate across two main spheres, which we will describe as Web 2 and Web 3. So we have our Web 2 business which is our Sell My Shares business and that was acquired in August 2021 as a channel to monetize and to create Drawbridge, which is our RegTech Web 3 offering to create profitability for that. We also run an investment management business which has currently two products, which is a Bitcoin Fund and a Digital Asset Fund. And as we will describe later on in the presentation, our strategic focus for that is growing new opportunities in that funds business which have been the growth of our ETH staking nodes and the development of a real world asset tokenization fund. Just to round out the structure of the business, although Sell My Shares, it’s not a deviation from what we have been doing, we have been working on amplifying revenue channels inside of that business, which you have seen in this result. We have had some really positive results from that and they are in the deceased estates area and the same day settlement areas.

Next slide, please. And just on that, I see a question which I will be addressing around the execution of Automic. Now, as you know, we are subject to continuous disclosure requirements from the ASX. And in order to put our links up on the Automic website, Edward, we did have to pass penetration testing and get through a compliance layer at Automic and there will be some news on that in the next day or two and we will have some dates – some firm dates of when we believe that we will be rolling that out onto the platform and that will be an ASX release, possibly tomorrow, but more likely on Monday. So we will have some movement in that which we will be very excited to share with the market.

So I just wanted to go through some highlights of this quarter. And really, as I said, management is focusing on building scalable sustainable revenue. And we are very laser sharp focused on that. Pleasingly, we had – we recorded a quarterly record for revenue generation for Sell My Shares. And as you would know, if you have been – as you’ve been following us that really was our number one strategic focus for the quarter. We put all our development efforts into that. And our aim was to grow two different streams within that business, which was the deceased estates and the T+0 opportunities. And as you will have read in the quarterly, we had some really pleasing results from that.

In November and December, the deceased estates were 27% and 20% respectively for deceased estates and T+0 is creeping up. Now, T+0, because it’s a risk management element, which we will speak to that is a slower growth opportunity for us, because we had to test internal systems, but deceased estates really was plug and play business as usual and a new marketing channel for us. And we have had some really pleasing results in that area.

We also have a surprise – had a surprise revenue kicker, which was in international share sales. And we are really building out in this quarter that avenue and pathway and working with our team to streamline that process as well. That resulted in 20% overall increase in recurring revenue and we will be looking forward to replicating that over the years to come. The most exciting piece of news there to build off that foundation was that focus for us of landing the Automic referral agreement. Now, as we did discuss in that question, we have not uploaded ourselves onto the Automic platform yet, we had to go through penetration testing and there will be an announcement to market for that. However, in that – what I can say about that partnership is there were many parts to it. And as we onboard this most simple part, which is Sell My Shares as a team, we are really looking forward to growing and developing that Automic relationship as the years unfold. And we do see a lot of potential upside in the Now, Next and Beyond for Drawbridge and we are looking forward to growing that in the future.

We began with our new finance team, looking at active treasury management, and really putting our balance sheet to work for shareholders. Now, there have been already a number of questions around a sale of Bitcoin that we made before Christmas and the timing of that in the market. Now obviously, we have seen stronger markets in January. We do and our investment team do believe that there will be continued volatility in digital assets in 2023. And we made that Bitcoin sale we felt as a prudent measure to not only shore up our cash flow for growth initiatives and we have put that Bitcoin sale to very good work in funding our strategic initiatives in terms of T+0 and the real world asset tokenization initiative. And we will be looking forward to sharing more color and information on that as we go through the presentation.

But I do – I can assure everybody that that was a very conscious decision. It’s not a move away from Bitcoin treasury management. In fact, we see that we will be much more active in managing the Bitcoin in our treasury and a bacon of the future of corporates where we believe that one day we will facilitate and be part of a conversation where all corporates have Bitcoin on the balance sheet and we are putting that to very good use in the development of our real world asset tokenization fund and other growth initiatives in a non-dilutionary manner for shareholders.

If we could skip to the next slide, please and I am happy to answer more questions on that as the day progresses. So we just wanted to go over a little bit more detail in the quarterly business activity in this webinar. Obviously, we have talked a little bit about so much shares. It really was very exciting to see records getting broken, left, right and center last quarter. And we know we do have direct line of sight into our strategic initiatives really paying dividends for shareholders and we are really proud of that we focused we knuckled down and we saw the benefits and the fruits of our labor. So, we had 33% revenue growth over the previous quarter.

And as I have stated, there is direct line of sight into 27% and 20% of revenue in November, December respectively being from deceased estates. T+0 was a smaller percentage. However, that’s a much higher margin. And as we grow that avenue of the business with the growing risk appetite with the support of the board and moving that into the real world asset opportunity, we do believe that that is going to be a very profitable channel for us going forward and for shareholders. The Automic referral agreement is exciting. And we seem to always have a little bit of a timing mismatch between being able to make exciting announcements and quarterlies and AGMs and things like that. But I can reveal looking forward that we – the pen test has gone well and we will be making announcements on timings and really landing that. We have all of the work ready to go.

The team is poised. And in the – any perceived gap from the pen testing taking a little bit longer than we thought, the team has been working on that new channel that we haven’t spoken about very much, which is the overseas trading. And that will be something that will be a feature once we have knuckled down some small dev changes so there is less pressure on the sales team for that. We are again focusing on really maximizing those initiatives, so that we are not doing too much in the quarter. And we do see much more potential in deceased estates and the T+0 as we expand those offerings. So in the deceased estates, we are launching enhancements for the lawyers and the uplift in the December quarter really was down to marketing. And we look forward to seeing the fruits of our labors of the dev work that was done in the previous quarter.

In the digital asset management space, obviously last quarter was another truly volatile quarter with the damage caused in the markets by FTX. As I alluded to, the investment team is still very cautious. There is still a few more Chapter 11s to come from the fallout of that. The market has moved into a risk-on phase post-January, whether that’s the January effect or long-term market move to the upside, I think remains to be seen. However, there still will be we believe volatility across all financial markets.

Our funds in December did fall 26.5%, which is obviously very disappointing, that’s the Bitcoin fund and the Digital Asset Fund declined 22% – and sorry, the Bitcoin fund was 18.8%. One thing we have done very consistently, however, is to really improve the consistency of the offering in that business. We now have monthly analyst information sessions. We now write weekly and monthly information letters to investors and to the market. And we will be introducing more of that this year into our channels such as daily notes and really maximizing the fact that we are on some platforms.

And as we have talked about and I will talk about more on the outlook, we are at the very end stages of launching our real-world asset tokenization offering which we see as incredibly scalable and we feel it’s a very exciting offering for both the market and for our funds business to reach and achieve our goals, which we have some very large internal targets for the funds business and are looking forward to really moving into this real world asset space in 2023. And as you will notice, it is starting to become a very powerful theme in the market, of which we believe we are leaders in that space both in Australia and globally.

In terms of our product development, aside from the wonderful work that the team did tokenizing and running proof-of-concepts with the ASX around the T+0 investment pool, we also increased our ETH staking nodes from 1 node to 4 to continue to experiment in that space. We are generating small amounts of revenue in that area. And we also did a lot of planning around Drawbridge and how that will be integrated into – particularly into our new client Automic and how that will play out. Definitely happy to answer questions on that as we go through.

If we could just go to the next slide, please. Great. And just in terms of the corporate activities, I have mentioned the sale of Bitcoin that we did, so an amount of Bitcoin to shore up our growth cash position for – to have capital for growth into some exciting initiatives in relet and T+0 in a non-dilutionary manner for shareholders. We also, as I said just before, started to build some revenue and yield of 3.8% on an annual basis in the ETH staking node.

Now, I do want to point out that one of the things we have instigated internally is a Board Risk Committee. And in this Board Risk Committee, we have put guardrails around internal investment and the internal hurdle is greater than 5% for internal return on revenue. And so we will be looking to expand the yield on ETH staking node to 5% as we go through and we believe we can do that through engaging customers and expanding the way and rationalizing the way that we are doing that.

We did have another cash flow event, where we divested 100% of our human protocol tokens, which generated $1.1 million in cash. And in the last quarterly there was in – we did have some movement on that, but we weren’t able to speak to it. So again, that cash is being put to work for growth initiatives in a non-dilutionary manner for shareholders. We continued making strides in our ESG sort of citizenship – corporate citizenship if you like, which I don’t think it sort of takes much to see that, that has become essential corporate hygiene in the 2023 world. So we worked with social suite for that. And we are working on some exciting initiatives with some large buyers on that in the world of carbon and hoping to really advance that and be a global leader on that.

During the quarter, we also had an executive change, a couple of executive changes. And I am super excited to announce that the Board has appointed Christopher Alexander as the Interim Chief Financial Officer. And when we go to the outlook, Chris and I have been working very tirelessly. Chris has been working very tirelessly with also, Jaime Underdown, who is our new Director of Ops, to really look at and bring some strong and powerful, sustainable costs out into the business, and to really make sure that we are humming on all cylinders. And I think that’s a super exciting development for shareholders.

So if we could skip to the next slide, please. Great. I think this is probably my favorite part, because obviously, next week is my one year anniversary with the firm and I really looked at the first 100 days is getting to know the company. Then we presented the strategy to the board. The last 6 months has been massively a focus on just execution, execution, execution, right people, right roles, making sure we are spending money in the right areas, focusing on revenue opportunities, mapping that pathway to profitability, which we all would know is essential for this company going forward and getting real clarity on how that pathway to profitability will be managed and how it will manifest and super exciting to see how the team is really firing together. I believe we have a great team, everybody working together across Sydney and Perth, and really executing on these great initiatives.

Obviously, we have achieved some of our goals in the Sell My Shares business and we do see more growth opportunity there. We are where I really see that coming from is continuing to position Drawbridge as a centerpiece for listed companies to bridge compliance and digital financial services. And really, I can’t underestimate the importance of that Automic relationship in that. It gives us a really key strategic relationship, a really key partner to work with and to really excel in what we see as a growing thematic and used case for blockchain, which is this regulatory and compliance tool. And we are super excited to advance that as we advanced the Automic partnership. And I hope to have exciting news on that.

Now, Drawbridge in and of itself does not make a lot of revenue for us. The Sell My Shares business was really acquired to monetize the Drawbridge offering and we see huge potential for that with Automic and beyond. One of the things that is personally a big focus for me is developing and strengthening strategic partnerships. Not only to support draw Drawbridge, but to support the funds management business, and to establish DigitalX’ place in what we describe as this Web2.0 to Web3.0 transition.

We probably – if you know me, one of my favorite quotes is if you want to go fast, go alone, if you want to go far, go together. And what you will see from this team and this company has some really exciting announcements over this quarter in these partnerships, and in really developing these strategic initiatives, both offshore and onshore. And really looking at it, we are not going to shift our focus. We will really be drilling down into this laser sharp focus we have for developing so much shares in the Real World Asset Tokenisation space. And we are going to have some exciting announcements coming to market. And the team is working very hard to be able to make those announcements. And I am excited by some of the deals.

People do question, our use cases for blockchain. And the way we are looking at it is, if we can solve Real World problems with Real World Asset, then we can see a really great foundation for our Real World Asset Tokenization Fund products. And we are very excited to be launching that in this quarter. That will generate returns for both investors, and for the company in terms of management fees, and bringing strategic partners into that world and to bring in funds under management. And we have been having some exciting conversations. They are at the nascent and preliminary stages. However, we are working very hard to bring those to life for shareholders and for our colleagues. And some of the things we are working on, we believe we are going to be dissect so much as it helps Australians realize cash flow out of selling shares when they don’t have access to brokerage accounts. We believe we will be able to create financial products that help give people access to capital and access to investment returns that they previously haven’t been able to.

As I mentioned right at the beginning, in terms of the operations of the business, which always flies under the radar operations, but we really have been focusing on organizational transformation. My definition of transformation is incremental change. From my point of view that’s coming from simplification, implementing the revenue initiatives, and then really focusing on costs. So, you will have seen that the cost reduction of 36%, yes, the September quarter, there was a lot of one-offs and a number of things like legal fees. But actually underpinning that 36% cost reduction was real work and effort going on cost discipline in the business and ownership of costs and accountability. I am really honing in on that area.

And Chris, as I mentioned, has been appointed as Interim CFO by the Board. And he is working towards delivering and is confident on delivering which I believe we can attend to 15% reduction in the cost base. And really beginning to paint for shareholders a picture of this pathway to profitability that we believe is really important to do that. It’s simple, grow revenue, cut costs, and that is, management team is super focused. And we have also had an announced that exciting hire over the quarter, where Matt Dent, formerly of Macquarie Bank and Bendigo Bank, we announced at the AGM has joined us. And he really is starting to map and build this revenue function, which we believe not only plays out into our own ecosystem, but also in the ecosystem. A lot of the startups that sit on our balance sheet and really leveraging the heart and soul of the success of the Sell My Shares business is, we have this brilliant customer success engine, and working with that team on growing and building that supporting that, and making sure that we share that ecosystem and grow that ecosystem, as I mentioned also through strategic partnerships.

One of those is the Digital Finance CRC, where we are doing a lot of work in the adoption of Web3.0 and that transition from Web2.0 to Web3.0, and working with the market to build new digital financial infrastructure. I particularly enjoyed, I play a role sitting on the commercialization board. And we are starting to see some really great opportunities come through. We have got the work with the Reserve Bank on the Central Bank digital currency. That’s going to play into stablecoins and how we are looking at tooling the Real World Asset Tokenization Fund, which actually is going to manifest as like cost savings in our business, as we rationalized through tokenization, how we manage that funds management business, and also some great initiatives.

And I think everybody would have seen the conversations with National Australia Bank around stablecoins, and really honing in on what we see as these thematics in 2023, Real World Asset Tokenization, yielding stablecoins, and the role we play in the market. All that boils down to and where I want to finish this webinar is we have continued focus on long-term strategic execution, and building this solid sustainable revenue base and foundation with a continued ESG and cost conscious approach. And every single day, every single employee of DigitalX walks in every morning with the shareholders in their crosshairs to maximize shareholder returns.

Now, I did make an effort to leave a few minutes for more questions. And I can see a couple coming through on the chat. And I am happy to answer those. Each quarter, I will try and get better. And this – last time, we had 30 seconds for questions. So, we have got four minutes, we will try and keep it to maybe 10 minutes for questions, or even extend the webinar as we get better at it. This was our second one.

So, thank you everybody for attending. I hope you are as excited about the future of Digitalx’ me and the team are. And I might just jump to questions. Liz, I can read them out, because I can see them here. The first question from Edward is now if staking has been set up, will the company state that if the tokens from the digital fund, so it will generate returns for the investors and the company?

Absolutely. So, that is work that we have been doing. And there is a little bit of legal work around that – in that there has been – there is no liquidity in the ETH staking right now. And in April there will be the ability to withdraw from the ETH staking node. And that will make the legal easier for us to stake in the funds. The reason we did have the fund, obviously, as an investor in the fund with the balance sheet funds, that was our end game, because we are super conscious of putting any assets to work. And absolutely, that is our intention. And then some accidental conversations around that could look like also partnering with others in facilitating at staking for others.

However, that is very early days. And it really is our intention, yes to give the fund investors the benefit of that knowledge and that internal learnings as well. So, thank you for asking that question. Because I think people can see that’s probably a pet project of mine. And something that I think would be really great for DigitalX to bring to Australia because as we come into regulation, coming into this space, we haven’t talked about it very much. But the team is working on the token mapping with the Australian Government both in my role on the Board of blockchain, Australia, and an individual submission from DigitalX.

And I do believe that one of the things that will happen is that we will need to have Australian domiciled, ETH staking nodes and infrastructure built in Australia. And I think that’s really important. And I do think DigitalX as a listed company, with Bitcoin on our balance sheet and other digital asset exposure through the funds. And through our investment in the funds, we have a massive role to play, leading that conversation for the benefit of shareholders and for Australia, keeping up with the world and having infrastructure in Australia.

And then I have got a question on why the share price has bottomed. I like to think that it’s because of the great work that the team is doing in this new strategic focus and building the foundations for our success. And also, we are highly leveraged to the Bitcoin price because we do have digital assets on our balance sheet. And we have – we did see a massive route in Bitcoin price and digital asset prices overall last year. Our share price is very – better and highly correlated to that. And I believe our share price has rallied largely due to that Bitcoin rally. And I do look forward to the day that we do get priced on the strategic initiatives that they are running and our passionate drive for generating revenue for our shareholders. But at the moment, I do believe it’s the rally in the Bitcoin price over the last five weeks to six weeks.

And that is time. Thank you very much for your questions. And I am so excited that the number of people that joined us. This was only our second quarterly webinar, and I look forward to seeing you in the next quarter. And keep an eye out for a few more announcements over the next week or so. Thank you.

Operator

Thank you, Lisa. Thank you everyone. The recording of this webinar will be made available later on today. Feel free to send any questions through to investors@digitalx.com. Have a great evening. Goodbye.

Question-and-Answer Session

[No Q&A session for this event]