Tokens.com Corp. (SMURF) Q3 2022 Earnings Call Transcript

Tokens.com Corp. (OTCQB:SMURF) Q3 2022 Earnings Conference Call December 30, 2022 10:00 AM ET

Company Participants

Andrew Kiguel – CEO

Martin Bui – CFO

Deven Soni – COO

Jennifer Karkula – Head of Communications

Conference Call Participants

Joshua Zoepfel – Noble Capital Markets

Operator

Hello and welcome to the Tokens.com Year-End Financial Review Conference Call. My name is Sheryl and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference call is being recorded.

I will now turn the call over to Andrew Kiguel. Sir, you may begin.

Andrew Kiguel

Thank you very much and welcome everyone. On the call today from Tokens.com is myself, Andrew Kiguel, the CEO, Martin Bui; our CFO; Deven Soni is our COO and Jennifer Karkula, our Communications Head. So in terms of reviewing the year, I mean, 2022 has been a frustrating year on many counts. It’s been frustrating for sure on the share price, although as a company, I feel like we’ve achieved quite a lot. And unfortunately, that’s always overshadowed by which has been generally a bad year in Cryptocurrency and in the markets as a whole.

Today, I do believe we’re a better company than we were a year ago and we had close to a $400 million market cap. And in terms of things, we can control such as reducing our overhead building good businesses, I think we’ve been successful in areas that we can’t control such as Crypto price, our share price and macro events, we’ve obviously suffered through that. But with that, maybe let’s just dig into some of the key things of the year for stakeholders and shareholders to understand.

In terms of our year-end cash and Crypto balance is approximately $13.1 million or CAD80 million. That’s equivalent to $0.13 or CAD0.18 per share. One of the questions that I always get asked is, what is the capitalization of the company and we’ve seen so many bankruptcies in the space that people are always very concerned about everything going on there. And some people are well capitalized, we have an inventory of liquid tokens plus cash. I don’t foresee us requiring any capital next year, so companies will capitalize.

In terms of total assets, CAD20.1 million or close to CAD28 million that is CAD0.20 to CAD0.28 per share. And I left these out because that last week we’re trading at around $0.08 per share or something like that U.S. or at about CAD0.11. So certainly feel we’re undervalued and that the intrinsic value in the audited statements for some of our businesses is reflected.

Our startup subsidiaries, Metaverse Group and Hulk Labs both became revenue positive this year. Not seen champers yet. But again, these are nascent businesses in areas that we’re continuing to grow and build and innovate. Some of the key highlights of the year Metaverse Fashion Week which was hosted in digital land owned by Metaverse Group attracted over 100,000 visitors over 60 brands. Hulk Labs was only launched at the beginning of this year, the player or gaming sector which could we’ve made a lot of great inroads and they’re doing some really exciting things there.

Metaverse Group has had a really great year. Lots of big tenants such as Forever 21, Skechers, UPS Store and there’s a whole bunch more they’re going to be announced in the New Year that the company has landed and is working on. They host a digital version at the Miami Fashion Week, entered into an exclusive or into a partnership with AIR MILES. So lots of positive things there. The Hulk side, that continues to grow. We entered into an exclusive partnership with the Democratic Republic of Congo. There’s now a workforce of over 1,000 players we did the acquisition of Playte Group, which is a proprietary software tool that we’ll use to integrate potential investors and Playte earn into the gaming economy. And we did a completion of a small strategic investment grounded Hulk Labs in the U.S. in pre-money, which works as an $11 million post money.

Again, Hulk Labs on our balance sheet is carried I believe it is almost zero Yes, the market sees us as the interest being much higher. When I look at some of these years, it’s been a really frustrating market. You know, I struggle with the fact that there’s been so many disappointed shareholders and they’re trying to respond to everybody. Obviously, I can’t control the share price and I note that while we fall in a lot, we’ve fallen in line with other Crypto companies especially that small cap ones. Management remains aligned, we own 25% of the company and the management and the board and we have a view as they say in the press releases with creating value in the long-term and what do I mean by that is I have always tried to be careful stewards of capital, there is no [indiscernible] what they talk about, we have been approached by the seven different other public Crypto companies that are looking to merge or buy us.

Nothing has resulted anything, no one really scratched the surface. Everybody sort of looks at us and expect cash, they’re interested in because we are so well capitalized. Although we’re in what is considered a second into the area and being Crypto, the Metaverse gaming, we have been adults at the table here. We’ve tried to manage things carefully. We haven’t gone out and blown everything that shows up on our balance sheet. I’ll mention again, 2022 mark, you look at our income statement, it’s marked with a lot of losses, most of those are non-cash repeat, we have to revalue our Token inventory quarter-to-quarter and our NFT inventory quarter-to-quarter. So what that means and if we buy something in dollar, and it trades to $2, you can show gain of dollar, if it drops back to the dollar next, we have to show that.

Again nothing changes in terms of what we’re holding, that’s always reflected as these non-cash assets, which again don’t impact the growing businesses that we have, but certainly makes a concerted look fairly unattractive. In terms of the market have already talked about, this has been one of the worst years in terms of the S&P and the NASDAQ on the record. There has been a ton of macro factors, including seven interest rate hikes in the United States, high profile bankruptcies and failures, fraud places like FTX, Becerra, Luna, it’s been a bad year, and whereas 2021, I would say was full of overvalued assets, which was really a result of the economic stimulus that the governments added into the system post-COVID.

Everything sort of came back and sort of went the other way. And so whereas simply may have been overvalued towards the end of 2021. Certainly, things from the other way that significantly undervalued today. In terms of our operations, going to say this, I’ll move it over to Martin. We’ve been an early mover in lots of areas such as the Metaverse, gaming, these are all areas that we remain highly confident are going to be impactful in the future. Again, we’ve been overshadowed by the poor performance of Crypto credits this year and high profile dealers in sector, we’re still feeling quite confident, we’re in the right areas. We do have an long-term, it’s a struggle for us, and it’s frustrating to see people disappointed in our share price. Again, we’re looking at this with a long-term perspective.

We did recognize that the 2022 Crypto prices were volatile to the downside. Our ownership of Cryptocurrency inventory resulted in some significant non-cash losses related to the revaluation of assets, we’d have taken steps post the quarter to sell down some of those crypto assets and holding cash. Right now our Crypto inventories primarily in the form of Eth. The reason why is we just don’t know where the markets going to go. There’s talk about finance potentially having issues and other things. So we just want to make sure that the company is well capitalized regardless of what happens in the Crypto market. We’ve taken a lot of steps to reduce corporate overhead to preserve capital. As I said, again as of September 30, we apply for the cash renewing from crypto tokens, respectively for $2.1 million in terms of what I would call cash or cash equivalents, and approximately CAD18 million in cash and equivalents. I’ll note again, we’re not a crypto exchange, we don’t engage in performance enhancing derivatives or leverage products.

We do not custody assets for other people. There’s no room here for things like embezzlement or anything else. We only custody our own assets. We don’t have external clients for whom we manage assets for. And as we look forward again, there’s more information in the MD&A regarding Metaverse, we can help that and rest of these businesses, but we’re really focused on positioning these businesses to be leaders in the space, I continue to be excited about what we’re building in those areas.

We did pivot a little bit away from just being a pure staking company. I think that’s a positive thing. I don’t think that these new businesses are adequately reflected in our financial statements or in our share price. But over time, we think this will benefit our shareholders. So with that, maybe I’m going to turn it over to Martin to give a quick review of the financial statements and then we’ll open it up for Q&A.

Martin Bui

Great, thank you Andrew. And hello everyone, thank you for attending the call today. I understand this is not really the best time of the year for a call. So I promise, I’d be quick, so that we can turn over to Q&A with Andrew. So like I said, I won’t be going over the financial statements in details. I believe the shareholder and support of the company, which we’re always grateful for, understand these periodic revaluation of our Cryptocurrencies and other items such as warrants, which create these non-cash accounting gains or losses, every reporting period, that really do not matter to our operations. So I won’t go over those.

But I’m happy to take any questions regarding the financials later. So before I proceed, I want to remind everyone that the numbers presented are in U.S. dollars, unless otherwise stated. So our revenue for the nine month was $678,000 compared to $1.1 million for the 12 months of last year. So if we annualized our nine month revenue, you get very close to last year, despite the markets have changed significantly. This is because of the two new revenue streams that we added throughout the year from our two subsidiaries, Metaverse Group, and Hulk Labs.

Our operating expenses for the nine months are $2.7 million, a 60% decrease from the 12 months of last year’s of $6.3 million, excluding shares based compensations, our real expenses come to about $2.5 million. So we look at what the cash balance at the end of the year is, of almost $6 million, and high level debt we have, this shows that again, Tokens.com is capable of paying for our overhead and cash expenses for the next 14 to 20 months without a need to raise capital. And this is excluding the revenue that we earn with the Metaverse Group, which is 100% in cash, the liquid tokens that we have available to sale and management is always looking for ways to reduce our overhead. So again, I just want to point out there are few highlights that really matter to our operations. And I’ll turn the call back to Andrew. Thank you everyone for listening in.

Andrew Kiguel

Thanks, Martin. So just before I open it up to questions, again, my view is I think we’re a better company today than we were 12 months ago, although we are much larger market cap 12 months ago. Why, I think we have more cash, a straightforward business, I think our business compared to other public Crypto companies is a lot better than most of them out there. And again, why because we’ve been good stewards of cash, our businesses have more growth potential, we’re not involved in highly regulated businesses, or have to custody other people’s assets. So, again this has been a year of struggle on the capital markets for us. We’re working hard to try and continue to get our story out there. And we’re hoping that 2023 has better things in sight for us from a public market perspective. So operator with that, I can turn it over to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Josh Zoepfel from Capital Markets. Your line is now open.

Joshua Zoepfel

Hi, good morning, guys. And thank you for taking my question. So just wanted to ask first obviously with the market kind of being away, it is just kind of an FTX issues and maybe potentially mine. I guess noticing something, anything in the regulatory market and what that might mean for you guys?

Andrew Kiguel

Nothing for us. Most of the regulatory oversight involves protection of people’s assets. We don’t custody assets for anyone. If you go through our businesses on the staking side, we are staking our own assets. They remain in our custody and we earn a yield for helping them validate blocks on the Blockchain. And the Metaverse Group side, our books being done there, it’s almost turning into what I would call sort of this marketing agency business where we’re landing big Tier 1 clients and dealing with the marketing departments that these clients and these people aren’t necessarily concerned with the prices of Crypto, they’re like what can we do here to create something immersive as a way of interacting and becoming better ways of interacting with our clients and the Hulk Labs, similarly, we’re using our own assets. We have the player network that are playing games on our behalf, and earning revenue for us. So there’s nothing really that we’re doing to get regulated to answer your question.

Joshua Zoepfel

Okay, yes, perfect. And so I know you guys obviously have a lot to deal with Decentraland. But I know you guys kind of own also other like just Metaverse parcels. Can you guys provide us an update just on those?

Andrew Kiguel

Sure, so Metaverse Group owns now in 12 plus different Metaverses, a lot of the attention does go to Decentraland. And I think it’s 40% or 50% of the digital real estate owned is in Decentraland. But Decentraland has the advantage of being somewhat more advanced than some of the other players. And so the Metaverse function, and then Decentraland has come under some criticism in the last few months over. The number of people that are in it are visitors. But we hope our events, we’ve been able to attract people to fashion show, in fact about 108,000 visitors, we recently did a Music Festival, they believe attracted over 10,000 people. So it’s just an easy place to do that.

So in terms of Metaverse Group, the idea is to remain Metaverse agnostic. And the new installations are being done there, being done across several Metaverses and trying to get them to do things like Twitch and YouTube and areas like that. To create a broader presence, it could be more sort of touch points with potential clients or brands.

Joshua Zoepfel

Okay, perfect. Thank you for that. And so obviously, you guys mentioned earlier in this call, and also on the MD&A. And news release how you guys are just lowering overhead, so I’m guessing when looking at it is this year, it’s like CAD800,000 and professional fees. And roughly say like $400,000 in management fees, is that a kind of a good number to look at going forward?

Andrew Kiguel

So my target is that outside of like, things that show grants and [indiscernible] the board, looking for the cash spend. I’d like to get everything below CAD1.5 million for 2023. So including salaries, fees, audits, legal fees.

Joshua Zoepfel

Okay, and then you also mentioned just how you guys were not needing to basically raise capital in 2023. And so how do you really kind of plan on just kind of investing in additional assets over this next year?

Andrew Kiguel

So the business is more than investing in FX. On the staking side for surely that means we’re not going to be applying new capital into staking. That remains there as a reserve and in particular was 6.6% or 6.9% was the yield for us in our staking assets of 2022. Metaverse Group and Hulk Labs are self-sustaining. They don’t need new capital to grow. And the growth in those businesses is more dependent on gaining customers. And so the Metaverse is a a B2B play. There’s a fairly large pipeline of businesses. There’s work being done for those installations will be announced in the New Year. But the investments in those businesses are really driven by their revenues.

Same thing with Hulk Labs, Hulk Labs, there’s no assets investment requirement there. I would say, the markets became blanked again, in our share price was just $3 or $4, we would certainly consider raising capital speaking, but as of right now, the key thing is make it through the winter. I think we can more than adequately do that. But sure, that might mean at the expense of going into a whole bunch of new capital or new businesses.

Joshua Zoepfel

Okay, thank you. And then last before I go back in the queue is I know that now since you guys are now seeing positive revenue in both Hulk Labs and just your Metaverse divisions. So you guys have any kind of foresight to how maybe next year how those revenues will look for both of what your play to earn in Metaverse?

Andrew Kiguel

Well, we do but I don’t want to provide guidance. Yes, I think we’re too small in the area that there’s some volatility. But I would say internally, we certainly have robust forecasts within each of the businesses. But at this time, I’m not prepared to give guidance on revenue or earnings.

Joshua Zoepfel

Okay, perfect. Yes, no, I’ll jump back in the queue. Thank you guys for answering my questions.

Andrew Kiguel

No problem.

Operator

Thank you. [Operator Instructions] Our next question comes from Bill from Stifel. Your line is now open.

Unidentified Analyst

Hey, guys, how are you?

Andrew Kiguel

Good, hey Bill.

Unidentified Analyst

So my first question is regards to the decrease in staking revenues for the period. Obviously, asset prices came down in the quarter. But wanting to get a little bit more color on what management was doing during the quarter, that may have also contributed to the decrease in staking revenues? My understanding is that you liquidated a substantial amount of the portfolio or a substantial amount of tokens following the quarter. Were you guys trying to unstake a lot of these assets in the third quarter, just given the lag in getting those tokens back after unstaking, and if you can share some color on what proportion of the portfolio is staked to today versus unstaked?

Andrew Kiguel

Sure. So in terms of the question, staking is it’s somewhat of a passive business, and so the issue on the revenue and why it’s more is last year for staking Eth, which is primarily what we’re staking now, and you earn an Eth, I think Eth hit a high of like $4,800 or something, your revenue accounts is $4,800. This year Eth is trading at around $1,200. The staking, the amount of tokens that you’ve staked doesn’t increase, because we’re staking and getting paid in the native token. And so we’re receiving a yield of whatever it is 6.9% or close to 7% in Eth, that we receive an Eth. And so whereas the revenue last year would have been $4,800 for every Eth staked this year, it’s only $1,200. So it’s not necessarily anything that management has done to decrease the revenue.

Like I said, it’s somewhat of a passively operated business. Frankly, it’s just the price of Crypto came down. And so the value what we’ve been thinking was not that dissimilar to maybe a mining company where if you don’t mind, can Bitcoin last year versus technically this year, same amount of Bitcoin, you’ve mined, same amount of work, but the revenue is going to be far less. In terms of few other questions question disposal, we didn’t disclose that much. And we put out a press release, and it was CAD1.4 million. And it was just a decision to say there was a whole bunch of other smaller tokens that we were staking like Oasis and NFTX and some other things that we said weren’t necessarily poor to where we wanted the business to be going into the New Year.

And the idea is, if there has to be another, what I would say another failure in the sector from one of the big exchanges or something, there’s another college shoe to drop, we wanted to make sure that the tokens we own that were most susceptible to decreases in losses are going our favor, we’re really just removed from our books in favor of holding additional cash. And part of that, because we had so many companies calling us up asking to see if we were interested in sort of doing a merger or being acquired and everybody was really interested in cash. And it’s not that the company is up for sale, but I just started realizing, hey, if we’re going to survive here, and we want to be able to survive here from one, two years, it was fired, holding on to somebody smaller typing, necessarily in a way to balance.

If this month turns, we think it’s going to turn in favor of things like Bitcoin and Eth. And certainly the Eth right now, you’ll get substantial upside in that turn, while also preserving our cash balance in the event that it doesn’t or goes down further.

Unidentified Analyst

Great, thank you. And in regard to and…

Andrew Kiguel

And just to add to that, I think one of the things here, it’s good to focus on the assets. But I think one of the things that management has done relatively well is we’ve managed to grow two businesses that I think are not even adequately, their intrinsic value is not reflected on our balance sheet. And we’ve managed to do that while preserving a fair amount of cash. Whereas I think, if you look at the balance sheet of a lot of our peers, they don’t have a lot of cash left. So I think that’s been a good task of balancing those things.

Unidentified Analyst

Great. Yes, I mean staking revenues did come down sequentially quite a bit. But just moving on, the OSC decision resulted in Cryptocurrency assets moving from current to non-current, can you provide a little bit more light on terms of the reasoning behind the decision as from my understanding that that results in that’s likely due to the results of the portfolio being staked? Is that correct?

Andrew Kiguel

I will let Martin weigh in on this a little bit. But the one thing that I said that decision he submitted, this was way back, we have submitted a Shelf prospectus, I’m going to say six or seven months ago, for review by the OSC if it’s publicly filed in SEDAR and the idea there was in the event that we were looking to raise capital in the future to streamline it, and also to make sure the OSC was familiar with our business. After a lot of like, back and forth, the OSC asking a lot of questions, we had a lot of really positive conversations, and they really looked at our business with a magnifying glass over the course of several months.

At the end of all, that the only key item that they sort of had recommended to us is if we wanted this to be the tokens that we held. So this is not the NFTs with a digital land and Metaverse Group, but just the tokens that we held from the current to long-term, we get pushback on it, because we said, hey, as we showed up posted this last quarter, we can turn around and sell some of these assets where we need to, we were in favor of cash. They were fairly limited. This is the treatment, they wanted to see the balance sheet and we didn’t want to create any issues. And so we actually asked for that. And that’s why it’s shown like that. Martin, I don’t know if there’s anything else you want to add as to that why?

Martin Bui

Yes, for sure, I think the result of the OSC review is to give a better presentation of our digital assets to shareholder and reader of the financial statements. So for example, so one thing we also do, we break down between the NFTs, the NFT’s and the cryptocurrencies. And we move both of them to non-current assets, which makes sense for NFTs because these are assets that we want to hold on and to build business and revenue upon. The cryptocurrency is a little bit trickier. Because they are given our strategy of staking and then holdings these tokens over a long period of time. It makes sense to move, move it over to non-current, but operation wise, those tokens are available to us to liquidate if we need to, so yes.

Unidentified Analyst

Okay, great. Thank you.

Andrew Kiguel

Yes, the positive thing is that we started off making certainly wasn’t like the OSC came and said, hey, we had extensive conversation with them around our business. And I think there was an earlier question about regulation in our space. After a lot of back and forth the fact that at the end of those conversations, if this is really the only issue that concern them. And in my opinion, it’s a fairly benign issue. And it doesn’t change any of the numbers. There was no restatement of financials acquired, I think that’s a pretty good sign.

Unidentified Analyst

Great, thanks for that. Just moving on to a couple other questions. I wanted to touch a little bit more on that earlier question on operating expenses, it appears that cash OpEx would have come down sequentially. Had it not been for that doubling of professional fees in the quarter, can you shed some light and you know, it’s great that you guys are trying to cut cost on a go forward basis, just given the challenging market environment, but can you shed some light on what caused that uptick in professional fees? And how should we look at that expense line going forward? Thanks.

Andrew Kiguel

Yes, Martin, I don’t know if you want to talk a little bit about it. I mean, I have to go back and check Martin probably has some more details on it, but I would change. Some of the things are things that would be pre-committed to. So professional fees, I believe that might include some things like legal costs. I think earlier in the year and especially, we have been engaging in some marketing programs, different IR programs and things that I think over the course of time, we just decided we didn’t need. And so that’s why today, our overhead is pretty low. It’s basically the four people here. And from a corporate side, it’s the four people here on the call. There are payments that come up to us from the subsidiaries as well.

So each of the three subsidiaries is self-sufficient in terms of its costs. And, there’s like some small things that we outsource on a monthly basis that can be terminated with 30 days notice if we needed to, but overall, this is the league of the businesses again, I think in its history. Yes, because we remain to be pretty well capitalized, but Martin, I don’t know if you have specifics on those professional fees.

Martin Bui

Sure, yes, I think the obvious the most significant change from last quarter is the addition of Metaverse Group and Hulk Labs. So these are the degrees, this increase is primarily just additional costs incurred within the Metaverse Group and Hulk Labs, which has to be consolidated into Tokens financial statements. So I think that that is the reason why there’s an uptick there from last quarter.

Andrew Kiguel

I think to your question Bill, between Hulk Labs and Metaverse Group might have been the only two technology companies this year who are actually hiring people and growing. And what I mean by that, it’s not like we weren’t grossly out in hiring a ton of people. But certainly there’s like, three or four people at Metaverse Group that were hired, and two or three that were hired to Hulk Labs throughout the year, as those businesses continued to grow and have more demands in terms of human resources.

Unidentified Analyst

Okay, great. And then last one, just before I head back into the queue is can you share some color in terms of the player onboarding at Hulk Labs? Subsequent to the quarter, you announced that more than 1000 players that are onboarded, where does that number sit today? And you previously gave guidance of trying to ramp it up to I believe, 10,000 players, how’s that looking? Any color you can provide on that is great.

Andrew Kiguel

Sure, I’m going to turn that over to Deven to respond.

Deven Soni

Sure, so on the Hulk side, I think we’re still kind of dedicated to growing the player base in the capital efficient way as possible. A few of the games we were playing during last few quarters were heavily reliant on couple of Token ecosystems that did not definitely not fare as well over the last couple of months and critically Solana. So, Solana based games obviously are denominated in price of Solana, which has taken hit more than other crypto tokens. So because of that, they temporarily some properly changed a bit. So we took an active decision to slow down player acquisition, because we’re also really envisioning a bunch of really Top Tier mobile kind of mobile friendly play to earn games coming out in Q1.

So the next three months, that we’re kind of wrapping up for building tooling for so, the players today are higher than the 1,000 press release, lower than 2,000. But I think our goal really is the tooling is built for us to scale very rapidly from that sort of mid-range 1,000s to 10,000. The player demand is there, we’re really just waiting for the right titles to jump into. So as those kind of appear, hopefully kind of in mid-Q1, that’s where we’re going to see sort of an uptick.

Unidentified Analyst

Great, guys. Thank you. Appreciate the color.

Operator

Thank you. And at this time, I show no further questions in queue. I will turn it back to the presenters for closing comments.

Andrew Kiguel

Yes, I mean thank you very much, everyone. I thank investors for their patience, certainly this has been, for myself as the largest shareholder has not been a fun year. We’re working way, we’re trying to build value in the company. I think if there’s any further questions from anyone, please reach out to us. I think everyone has the ability to access us either contact tokens.com or me directly, and we can respond to further answers. But again, fingers crossed for 2023 is a better year and we’ll keep an eye on that, so we have some exciting things in the works. Hopefully the market will recognize next year. Thanks.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.