GoldMoney Inc

TSX:XAU

Good morning, everyone. Thank you for joining us for the Second Quarter 2019 Conference Call for Goldmoney Incorporated. My name is Renee Wei, Director of Investor Relations. On the line with us are: Founder and CEO, Roy Sebag; Chief Operating Officer, Paul Mennega; as well as Chief Financial Officer, Steve Fray. First, I will hand it over to Roy for his opening statement.

Good morning, everyone, and thank you for joining us for the Goldmoney Inc. second quarter 2019 results. I think I'll start with the financial highlights for the quarter. We get consolidated revenue of $118.2 million, which was stable compared to Q1 2019, despite a decline in precious metals and cryptocurrency price environment quarter-over-quarter. The adjusted gross profit of $3.1 million, an increase of $1 million or 51% year-over-year over Q2 2018. We had an IFRS loss of $4.5 million for Q2 of 2019. Gross margin increased by 68% year-over-year, to $1.6 million. Precious metal gross margin growth accelerated despite a global and industry-wide slowdown in precious metal sales, achieving an increase of $0.5 million, or 53% growth year-over-year. Precious metal revenue increased by $4.7 million quarter-over-quarter, despite an industry-wide slowdown. Cryptocurrency business revenue of $11 million compared to $17 million in Q1, a decrease of 37%, driven by sector volume slowdown and a high level of volatility in Bitcoin price, as well as a decrease in Ethereum price of 49% quarter-over-quarter. Our tangible common equity stayed strong at $109 million, a significant increase of $47.9 million year-over-year, with a strong cash position consisting of $32.2 million in cash, $24.9 million in GIC certificates, and $20.2 million in secured loans receivable on precious metal loans. Shareholder equity stood at $165 million at Q2 2019. Mene revenue, our new jewelry company, increased by $600,000 or 43%, quarter-over-quarter, to $2 million, despite minimal inventory levels and a $1 million wait list. Our currency loans totaled $20.2 million of balance sheet capital; these are the loans that we extend against pledged precious metals through LBT, with our average interest rate ranging between 2.8% to 4.7%. Lastly, our corporate precious metal position now stands at $22.7 million as of September 30, 2018, which equates to around $0.30 per share of Goldmoney Inc. This reflects our company's strong commitment to grow long term precious metal ownership per share from surplus returns on capital. Client assets also stood stable at $1.62 billion as of September 30, 2018, which, of course, reflects the nominal value in Canadian dollar terms and not the weight. I would like to discuss the Mene stock distribution that we've announced and today finalized, both in terms of the distribution date as well as the record date. As you all may know, Mene Inc., our jewelry business, which was created within Goldmoney, was spun out last week on the Toronto Venture Exchange. Of our 80 million share position, we have been able to distribute 4 million, according to the escrow and lock-up rules. The Board of Directors of Goldmoney Inc. has decided to distribute all 4 million shares to Goldmoney shareholders pro rata, this will result in approximately 0.05 shares in Mene for each Goldmoney share you own. Of course, after this distribution has been completed, Goldmoney will continue to own around 76 million shares of Mene -- Class B shares. I'd like to now read you a statement that I've written for this quarter:Goldmoney Inc. continues to deliver shareholder value while growing long-term optionality on a rising precious metal environment. This quarter was no different, as we continued to preserve our balance sheet while demonstrating our company's unique ability to create value organically through the spinoff and listing of Mene Inc. -- TSXV symbol: MENE -- on November 6, 2018. Mene, a nascent direct-to-consumer jewelry brand, which now averages over $1 million of monthly revenues, was an idea that began as an exploratory venture within Goldmoney 2 years ago. This idea has now produced a $60 million windfall -- of course, this is a non-IFRS mark-to-market accounting -- for Goldmoney Inc. shareholders from a $2 million cash investment and the leveraging of our existing group infrastructure. To be clear, even these quarterly financials, the ones we're reporting today, still consolidate, rather than mark-to-market, the value for 80 million Mene shares, as required by IFRS accounting standards. This asset, however, is very real, as demonstrated by our decision to distribute 4 million shares of Mene to Goldmoney Inc. shareholders today. For the time being, the remaining stake in Mene is being held for investment purposes and reclassified, effective November 1, 2018, under the equity accounting method of IFRS. That means Mene will no longer be consolidated as a subsidiary within Goldmoney's accounts, bringing more clarity to the group's core businesses' OpEx, CapEx and earnings power. We continue to enhance our core business which generates stable recurring cash flows and allows us to grow our long-term precious metal position, which now stands at $0.30 per each outstanding Goldmoney share. We're also observing strengthening signs across our other business lines. Our coin business, Schiff Gold, has recently seen significant increases in both sales and profitability, some of which is visible in this reporting period. Moving forward, we see a great opportunity in further consolidation of this space and growth opportunities, both organically and through M&A.There are 2 things I would like to leave with our shareholders with this quarter. The first is that I believe you will start to see a serious transition -- excuse me. The first is that I believe you will start to see a serious transition in terms of CapEx, OpEx, professional fees over the ensuing quarters as we simplify certain pillars of our core business. I am aiming for our reported non-Mene cash OpEx, including professional fees, to normalize to no more than $2 million per quarter in the near future. I know this has been an important point for many of our investors. The second is that our operations team led by Steve Fray and Paul Mennega have identified significant cost savings in our business structure which will materialize in further OpEx reductions in 2019. These 2 enhancements to our activity should result in a clearer picture of the intrinsic value in our core business and allow long-term shareholders to better calculate the sum-of-parts valuation of Goldmoney Inc., which will now include: one, our tangible capital per share; two, our investments in Mene and Lend & Borrow Trust Company; and three, the value of our custody, coin and cryptocurrency, that is to say BlockVault, businesses. The last item I want to discuss today is Goldmoney China. We have determined to suspend this joint venture for a variety of reasons. The main reason is due to the People's Bank of China requirement, announced after we began this initiative, unilaterally requiring digital gold bullion sellers to register and deposit a large amount of capital under a 51%/49% structure, with local entities owning the majority. This rule, which was named "Internet Gold Business Provisional Administrative Measures," was surprisingly announced on May 11, 2018, 6 months after the signing of our JV and the investment of capital in establishing a Chinese subsidiary. We have been working with our JV partner to seek economical solutions in light of this measure. Unfortunately, we have been unable to find a path forward. We retain our intellectual property assets in China and have capped our total investment at $1 million. This investment will be written down over the ensuing quarters unless circumstances change. It is disappointing to me that China's central bank has imposed difficult impediments on the retailing of digital gold and, more importantly, imposes unfair capital requirements for foreign investors. It was this fear which regulated our foray into China and why the board treaded carefully in terms of capital outlay. Over time, we will continue to take such calculated risks with our capital and earnings power when we feel there exists a great opportunity to expand our enterprise. Some risks will succeed, as in the case of Mene, Schiff Gold, BlockVault, and some will fail, as may be the case with Goldmoney China. Both successes and failures are shared equally by all shareholders and management. As the development of our group and balance sheet show, we're clearly outperforming our peers in building significant shareholder value in what is a challenging precious metal environment. Thank you for your continued support. With that, I would like to now introduce our shareholders to Paul Mennega, who is our group Chief Operating Officer. Paul began his career at Goldmoney as an engineer, one of our first employees, and over the last few years has ascended the ranks, taking on more and more responsibility, and today essentially runs the entire group operations, excluding Mene, of course, which is its own independent company. Paul has an operational update that he would like to share with our shareholders, so I'd like to now turn it over to Paul.

Thank you, Roy, and good morning, everyone. From an operations perspective, we've had a busy quarter. Today, I'd like to highlight a few areas that we've been focusing on, including the buildout of the active trader platform, the preparation for the BlockVault launch, and our overall process review and business intelligence activities. Our soon-to-be launched active trader platform is an exciting change to how our Goldmoney Holding product works, allowing clients the ability to better time their purchases while also improving our operational efficiency. Active trader will be launching in 2 phases, the first of which is nearly ready to deploy. The first phase includes the introduction of limit orders, a new active trader view that allows users to better manage their metal positions, and the high [indiscernible] for -- for Phase 2 of the project, which includes instant execution orders and further refinements.While the launch date for Phase 1 is yet to be announced, we've completed development work. We're in the final stages of our internal QA process on this new feature. On BlockVault, we've completed all of our internal customer-facing development work and have completed our full end-to-end operational tests. We're currently working to complete on-boarding of our initial launch clients, and while we are not prepared to announce the date for the launch of this game-changing product, we anticipate that this will take place during the current quarter. Finally, we dedicated significant time this quarter to reviewing our internal processes, with the goal of improving our overall level of business intelligence. As Goldmoney has grown both organically and through acquisition, our portfolio of products and the underlying systems and processes surrounding these products have grown commensurately. As we strive to [ generally ] improve all levels of the business, we've put our business intelligence activities at the top of our priority list this quarter, ensuring that we can properly identify and manage our operational risks and ultimately improve our margins. We anticipate that this renewed focus will be a continual effort moving forward. Overall, it was a very busy and, I think, a very successful quarter in terms of our operations, and I'm very happy with our progress this quarter.

Thank you, Paul. That was a good update. I think I'd like to now turn things over to questions. Renee?

Yes, we have on the line Nikhil Thadani from Mackie Research.

Roy, so I wanted to go back to your comments on Mene just for a second here. So good to see sort of the first escrow coming off, and if my math is right, it sounds like there's about $0.70 per share for a Goldmoney share, more a value sort of embedded right now. Does that math sound about right to you?

Yes, that's correct.

And do you have any sense in terms of when that value might be surfaced to Goldmoney shareholders in terms of timeline?

Well, as I said in my statement, at the moment, the board has approved the first dividend. As we've advanced through this process with regards to the spin-off, we have communicated in the past that it is our intention to distribute these shares. Thus far, in the first opportunity we've had to distribute them, we decided to distribute all of them. So I think it's likely that we will distribute more shares, but I believe, at this point, it's important to not make any representations in that regard. The company may decide that it's best to hold on to those shares.

Got it. Then moving on to the sort of the planned changes to the OpEx structure going forward, maybe just walk us through the moving parts there, to sort of how you arrive at that $2 million per quarter annualized, or sort of -- sorry, normalized number from where you are at right now, given the fact that there were lots of sort of onetime items in this quarter just ended and perhaps in this December quarter as well, right?

Yes, so first, I think it's a -- this is a great question. The thing to understand is there's been onetime items in our company's income statement for almost 2 years because we've been trying so many different things: we pivoted, we launched different businesses, we've made investments. So in a way, it's been a bit unfair to the core business, which has been an engine of free cash flow, because when you look at our IFRS OpEx table, you kind of think, "You know, am I crazy, where -- what are you talking about, Roy? I just see expenses." So if we look at, say, the last quarter, the first 2 that you need to understand is paid service provider fees and advertising and promotion. So this consolidates Mene's finances. So this was probably the biggest drawdown quarter for Mene: it was its 6th month in operation, it was making a lot of investments, it was doing a lot of things, and so a lot of the capital which is being spent in Mene ran through that line item, advertising and promotion. For example, Mene spent $0.5 million, $550,000 printing catalogs for the next year, something in the realm of 100,000 catalogs. So that ran through that line item. Now that's not a recurring expense, that's not even a Goldmoney core business expense. Service provider fees is a number that elevated because it has to do with our prepaid card issuance business and our card processing business, and over time, I expect that number to go down to 0. It's not a real cost. I want to be clear how I represent that. Obviously, if it is on the financials, it's a real cost, but if you -- there is other ways we're probably going to eventually account for that, which will net out the number. Stock comp -- not that I want to lighten it -- that's a noncash expense, and once again, I believe, a lot of that this quarter has to do with Mene stock comp. The payroll expenses are very real, but even there, you probably have a bit of a room for reduction, and of course, those payroll expenses include Mene's expenses, too. So if you net out Mene and you look at what our normalized payroll for the quarter should be, it would probably be in the $600,000 to $700,000 a quarter range. G&A, once again, includes Mene, so that should be much lower, perhaps half of the number you see there, the $514,000. And professional fees really is a misleading line item in a way, because it can include expensive legal fees associated with spin-off, audit, various things that we're doing on the regulatory side, and we're trying to get licenses that are onetime. So this was a big quarter where we had costs like that on Mene's side and on Goldmoney's side and also on Goldmoney Jersey's side, and that number on a normal quarter, heading into, say, June 2019, should be no more than $250,000 a quarter. So -- and then FX, obviously, is a nonrecurring variable cost, depreciation and amortization is noncash. And technology development, it's probably a real cost; we run a lot of things through there when we're capitalizing our software. So if you look at kind of how I look at the business, those line items that I just read to you on the OpEx can easily be around $2 million a quarter, if we were just talking about the core Goldmoney group, no Mene, and once we can sort of focus on the core business and not make all of these extraordinary investments of capital.

Got it. Great. Thanks, and moving on to the fiscal '19 CapEx guidance that you mentioned in the MD&A, into $3 million to $5 million, what is that mostly pertaining to? Is it new branches or investments in BlockVault and things like that in there as well?

It's actually -- exactly those 2 things. So we have -- we're actively working on the next branch in New York. We keep coming up short. Every time we've had a few good opportunities and we couldn't quite agree on a price, but we feel confident -- I know this is very important to James Turk as well -- that the next branch in New York be open soon, but we definitely accommodate for that. We still think there is a play with BlockVault. We're looking to hire a CEO right now for that company to run it from within the cryptocurrency space. If anyone's interested, feel free to email me or tweet to me. We -- so there are going to be continued investments there, but we're not really sure how we feel about the price of cryptocurrencies here, but we think that, at this stage, investing another $1 million or $2 million in the final buildout and launch of BlockVault for institutional custody is a wise investment. It's an investment that pays for itself, because the crypto business is already one that generates free cash flow for us today.

Got it. And just one last one before I pass the line here. In terms of BlockVault, how should we think about that going forward? I know you just mentioned that you're probably going to launch in this December quarter, you're building out the product a bit more. The overall crypto market hasn't really helped, I guess, this calendar '18. So how should we think about that line of business in calendar '19? And how you're going to break that out separately in your financials?

Thank you, Nikhil. I don't think that we will, because it's essentially the cryptocurrency business, which we already break out, but we feel optimistic that it's a good complement to our existing business. And we also believe that, just reading the tea leaves, it may also prove to be a good M&A candidate. In other words, we may build it out and have an opportunity to sell or monetize it with other companies that are primarily focused in the cryptocurrency space. So, for the moment, we still see BlockVault as part of our CapEx plans, and we're still focusing on it. We haven't seen a product like it still, we haven't seen anything like it, it's very innovative. In fact, it's now going to be using some of our facilities that we have built for the jewelry business, because we're doing engraving of bars with the keys. So it's interesting how we're building the infrastructure in our group. We always talk about the tangible common equity, but tangible common equity is just half of what we have today. It doesn't value with what our business is worth, our cash flows. There's things that are obviously intangible, for example, having a factory that can produce jewelry and have a laser engraving machine that could allow the BlockVault bars to be engraved with secure keys. So I think we're -- we continue to build really good infrastructure to capitalize on a rising precious metal environment, and in the interim, we're just continuing to build balance sheet capital, build cash flows and grow our precious metal position. Almost every quarter, we're growing our precious metal position into this environment. We think prices -- precious metal prices are getting quite attractive here. We think they may drop a little bit more but not much more, and we see in fact the next phase of the global economy as a loosening of monetary policy, not a tightening, which is something that you're not seeing anywhere yet. We think the global economy is slowing down very, very fast, and it's probably already in a recession, and I suspect the next few prints will show that. Renee, maybe now we can turn to some investor or shareholder questions.

Absolutely. Now we'll turn over to some of the questions that came in through the emails. We have Cihan Tuncay, an analyst from GMP Securities asking the timing on canceling the China joint venture. If the regulatory updates were announced back in May, why cancel now and not earlier?

Yes. So this is a good question, and one that's been raised several times even before we formally announced what we did today. It's true that the announcement was made in May -- May 11. But at first, we weren't really sure how serious the announcement was, if there were ways to get around it. Through the summer, we worked diligently with our JV partner to try and salvage it. We were trying to find every way not to invest the capital that was required of us. It wasn't that we don't believe in China as a market to the point where we could invest that capital. It's just that we all felt at the board level of Goldmoney that this was some kind of a sleight of hand by the Chinese government. On the one hand, we had a state-owned joint venture partner that was supportive, but on the other hand, a policy was issued that directly attacked the business that we were going to engage in. So we -- the saying, "Trust but verify." We wanted to take our time, study it a little, get some legal counsel, a local legal counsel to help advise us. We worked with the JV partner through the summer, and ultimately, by the end of August, it became clear that we weren't going to be able to get around it. The only way was to comply with the policy, and it was at that point the Board of Directors of Goldmoney worked through a session, where more research was done, a memo was written and ultimately we decided that in this quarter we would make the announcement and secure the intellectual property assets that we developed. And that's where we are. So it's important, when you're trying to implement good governance, not to rush too quickly. We never saw the policy on the date of May 11 as being material. We see the materiality being now, as we're deciding to basically exit the JV or temporarily pausing it. We're still hopeful that, perhaps in the future, things will change. All the source code is in our possession. All of the translated source code, the translated technology is in our possession. Goldmoney.cn is a domain that we acquired as well and that we have a right to. So that is sort of the explanation of why we announced it today.

Our next question is from an investor in Germany. Are shareholders holding the [indiscernible] listings of Goldmoney ticker 9DT eligible to participate in the distribution of Mene shares?

Yes, all shareholders, including German shareholders, holding 9DT will receive a distribution through the electronic clearing system.

Great. So that brings us to an end of the Q&A portion of the call. Any closing statement from Roy, Paul or Steve?

I'd just like to thank everyone for your continued support. And I think that this was, overall, a wonderful quarter for our company, really driven by Mene. We're very excited about Mene. We think it's a better business model than the core Goldmoney business, and we think that we correctly mitigated the potential risks associated with Mene early on. And we're now positioned to harvest the gains as Mene seems to -- just to getting started. It's really just the beginning of that business and how big it can get. I think it could become a business that generates $50 million or $100 million in revenue within 1 or 2 years. That's the kind of demand we're seeing. So thanks again, and until next time.

Great. So that brings an end to today's conference call. Our thanks to those of you who submitted questions or participated on the phone. This has been Goldmoney Inc.'s second quarter 2019 earnings and business update, and we look forward to chatting with you on our next call.