Goldmoney Inc. Year-End 2018 Earnings Conference Call Transcript

June 22, 2018. 3:00 pm ET

Executives

Roy Sebag – Chief Executive Officer and Director

Josh Crumb – Chief Strategy Officer and Director

Analysts

Nikhil Thadani – Mackie Research

Steve Boland – GMP Securities

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Renee Wei: Good afternoon everyone. Thank you for joining us for the fiscal 2018 year-end conference call for Goldmoney Inc. My name is Renee Wei, director of investor relations, and we will start today’s call with an opening statement by Roy Sebag, founder and CEO of Goldmoney, as well as Josh Crumb, co-founder and chief strategy officer of Goldmoney. Handing it over to Roy.

Roy Sebag: Good afternoon everyone and thanks for joining us. We are going to be reviewing our annual results for 2018. I thought it was a really good year for Goldmoney. I think I’ll start with the press release we had issued this morning. We had total IFRS net income of $5.6 million in fiscal 2018. Our first ever non-IFRS adjusted net profit of $10.1 million in fiscal 2018. We saw annual revenue of $572 million for fiscal 2018 versus $523 million for fiscal 2017, an increase of 9.2% year over year. It should be noted this was achieved entirely through organic operations, as we did not acquire any businesses in fiscal 2018. We saw record quarterly revenue of $171 million for the last quarter, ended March 31, 2018 versus the prior quarter of $149 million for the quarter ended December 31st, 2017.

So, we saw a 14% increase quarter over quarter. It should also be noted here that precious metal revenue contributed $140 million for this quarter versus $127 million the prior quarter. So, once again, highlighting strong organic growth for our core business, the holding business. We saw $30.6 million of cryptocurrency revenue compared to $22 million in the prior quarter. An increase of 36% sequentially quarter over quarter on an organic business we have built and developed internally over the last six months. We saw our precious metal loan portfolio grow to $19.4 million from $8.6 million in the prior year, earning us around $1.2 million of interest income versus $0.3 million the prior year. This, once again, is an indication of our investment in Lend & Borrow Trust, the FDA regulated peer to peer lender we have invested in that was founded by James Turk.

Lastly, and most importantly, we ended the year with around $111 million of tangible capital. It’s about 1.45 per share in fiscal 2018 versus $58.7 million for 85 cents a share in fiscal 2017, an increase of about 90% in our tangible net worth for the year. These financial results have been achieved over a period where leading precious metal viewers have suffered significant decline with as much as 30 to 50% in their top-line revenue. We know the least two competitors in the precious metals viewing space that have reported between 40 and 50% declines in their top-line revenue. So, what’s very important is that we achieved this growth in 2018 by growing our brand and growing our core relations with our customers even through what appears to be a secular headwind in our core industry with a relatively neutral price activity for precious metals.

I also think another important factor to note is that in our operational numbers, you can see there are significant expenses that are attributed towards either growth or non-cash accounting entries that we feel should be highlighted. In the last year, we reckon there’s around $11 million of such expenses. So, when we try to guide our long-term investors towards an understanding of our core operations, we want them to appreciate that if we really wanted to, we could cut expenses further. But, we choose to invest in growth because we believe we can generate some great returns for us. So, I think a great way to sum the results of 2018 are that we achieved a real monumental gain in tangible net worth, but we’ve also sown the seeds for future harvests that we think will be very valuable for us.

Before I move on to the specific non-financial operational results, I do want to mention a few things to our core investors. The first is beginning to use this term more and more – “Return on Metal Weight.” We believe that it’s very important that we measure our success over time on a gold-adjusted basis. And we think this is a very important philosophy for other gold companies to embrace because we don’t want it to appear as though we’re gaining from gold’s natural increase over time in nominal terms versus fiat currency. So, what we’ve done is we’ve established a framework, that we are beginning to disclose, where we essentially measure our tangible net worth in gold grams. It’s really a gold equivalent measurement because, of course, we’ve got our entirety of our tangible net worth in gold grams.

But then we also highlight the return on that equity to sort of exhibit to our investors what kind of a yield we’ve generated on our gold. And, in the last year, we generated about 66% yield on our tangible gold weight per share. And, of course, we adjust these numbers per share so that they reflect a meritocratic process over time. The other important metric that I’d like to go over is the one I just discussed, which really talks about the path of what we achieved before. I think another interesting method for investors to employ when trying to analyze our business is to use that metric as a basis for their sum of parts valuation.

And then also try and project what we can achieve in the future. And, of course, there are around three components I think that can contribute towards that analysis. The first component is the tangible capital that we already have. The second is we projected free cash flow that we can generate from our core businesses. Something like the holding business, which has around $1.8 billion of custodial assets, that creates a lot of cash-flow every month. And, of course, the optionality on both the overall portfolio of assets that we own, our business, our companies, in a rising gold price environment coupled with what is now beginning to be a management track record of unlocking value through new innovation and new ideas.

And so, we think, when you put all that together, it makes a compelling case of what our intrinsic value is. Whereas the return on metal weight is a great way to measure our performance year over year, or over multiple years. A last point I’d like to make before progressing towards the operational metrics is that over the last few years, it’s been necessary for us to raise a lot of capital at Goldmoney. We had to do so because we needed to build out the infrastructure of our core business. I’m happy to say that we’ve invested close to $50 million over the last years investing in a core operations’ infrastructure build out for our various businesses.

And, at this stage, the board of directors at Goldmoney feel that we’ve reached a state where we should begin to view our own shares and our own capital structure as rare as gold. And what that means is that we no longer want to issue shares out of necessity, which we no longer need, but rather when we believe we’re gaining more in intrinsic value than we are giving away. And, in lieu of that circumstance, you will see us prefer to buy back shares or use our capital that way. If we can move on to the last year in review, I can start with the Goldmoney holding business, our core business, which we now call the Goldmoney Holding division.

We have a total of $1.5 million … $1,515,345 account signups as of fiscal 2018. That’s from over 150 countries. We’re at $1.7 billion of client assets under custody. It is important to mention that any attempt to compare the $1.78 billion year over year in nominal terms should account for the fact that silver had a meaningful decline in nominal terms, which would mask what is an overall net inflow of assets for Goldmoney last year. We see that inflow, both in the cryptocurrency assets, which came in and in, and some other metals, saw a weight gain. So, overall, we feel that the business is very healthy. It grew or stayed the same in most key-performance indicators.

What’s very important to note here is that we saw a tremendous amount of activity emanating from an August 23rd, 2017 Peter Schiff interview, where he was on the Joe Rogan podcast for around 20 minutes discussing Goldmoney and showing off his Goldmoney Gold card. That caused a great uproar and demand for our services, which we have had a very difficult time meeting. And this is partly due to the onerous requirements for anti-money laundering and know your customer across the seas in Jersey, where we are regulated under the Jersey Financial Service Commission.

I’m happy to say that we have now worked through most of those back-logs and we are now on-boarding once again through our various goals that have been seeing various potential funnels depending on a customer’s demographics, country of residence, wealth brackets, etc, etc. The core technology that operates the Holding is the same for everyone. Our community remains very strong. We have definitely noted that there were some criticisms of our timing to sign up. There’s been a lot of customer complaints that have been vocal relating to that. We feel confident that we’ve cured those issues and that, going into next year, those will be resolved.

In another section of my review, you will see that we do know how to provide very good customer service. It’s really a function of demand flow and regulatory requirements, which means that, unfortunately, as an internet service business, we simply have to verify who we’re dealing with. And, sometimes, that’s a far more arduous process than we would prefer and our clients would prefer. But, once again, I feel strongly that a year from now, we will no longer have these types of issues. And, overall, I see it as a prosperous problem to have. A good problem because it reflects that our brand is very strong and there is a tremendous amount of demand for our service for what is still a very early stage concept that more and more people seem to be hearing about more and more.

Next, I just want to move into the Goldmoney branches. We opened our two branches in Toronto and Saint Helier, Jersey. In Jersey, of course, in our company-owned building, where we have converted the lobby into another branch. In Toronto, at 38 Avenue Road in Yorkville. Both branches we consider to be a great success. They have broadened the relationship we have with our customers beyond the online and into the offline world. We’re seeing that customers really respond to this relationship with our brand where they can come in, engage in customer service in person, read a book, read our latest research, maybe get a Goldmoney T-shirt, and really see that there is more to Goldmoney than just an internet website. There really is a culture, an egalitarian culture, that revolves around spreading information and knowledge in addition to building technologies and tools to essentially preserve one’s savings.

There are photos of the new branch, as well, in the shareholder letter, which I have published. And I have for our clients and shareholders to review those photos. I’m also very proud that we’ve built out these branches and the CAPEX that’s associated with them from cash-flow over the last few years. So those expenses are now gone and will mean that we have a lower CAPEX and OPEX for these two branches for the next year. We are, of course, very interested in expanding our branch network. We’re looking at multiple locations around the world. The next one will most likely be in New York City.

If I can move into Menē 24 Karat Investment Jewelry, which is a company that I have co-founded with Diana Picasso. Goldmoney currently owns 37% of the company. There is a pending spin-off from Goldmoney Inc. Last I have heard, that spin-off is weeks, or maybe two months, away from being approved by the Toronto Stock Exchange Venture. Menē is a business that grew out of Goldmoney, for those who don’t know. And it was really an idea that we had to disrupt the jewelry industry with investment-grade gold that could be sold transparently, and fairly, at the daily prevailing rates for precious metals.

We teamed up with Diana Picasso and Sunjoo Moon to create an entire business that is a direct consumer luxury jewelry brand. It produces its own jewelry in the United States in our own factory. We have our own fulfillment center. We have hundreds of designs and all the jewelry is made up of a precious metal weight of gold or platinum. It’s subjectively priced by that weight in a transparent mark-up. The value of the jewelry changes every day. There is an interactive digital platform where you can track the value of that investment jewelry, you can sell it, you can exchange it, you can gift it.

And the business launched January 6th of 2018. It has done tremendously well, far beyond our expectations. Thus far, we are looking at over $3 million of revenue for the business. Most of the designs are sold out and we have reached a point where our existing manufacturing facility is really unable to keep up with the demand. We have now shifted towards a more scalable manufacturing process, which was initiated two weeks ago. And, by the end of August, we believe we will be able to accommodate around $1 million of monthly revenue, which is where we believe demand would be at today if we were able to carry the inventory mix with all the various sizings that we need to accommodate the demand that we’re seeing.

There was some really great press around Menē this quarter. The most important piece I’d say was a New York Times feature. That’s a first for our group, for me, and titled “Jewelry Worth its Grams in Gold.” Really a long-form piece all about Menē , and the concept, and the jewelry. We’ve seen a lot of other press around the business, such as from well-known fashion magazines such as Vogue. Just today, there was a piece in Le Monde in France. So, in total, we’re seeing that Menē has the potential to really become a big business. I would dare to say it may even become bigger than the holding business in a few years. Albeit, this business is a physical business. Every order has to be manufactured, packaged, fulfilled. So, scaling it will require more time, probably in the five to ten-year span, I’d say.

Goldmoney Inc.’s total investment in Menē has been only $2 million Canadian. Today, we own about 80 million shares of the company. In November of 2017, Menē raised around $21 million at a 35 cent valuation, which means that Goldmoney shares are worth about $27 to $28 million today. As the spin-off advances towards fruition, we expect to see that stake worth within the vicinity of between $30 and $100 million. It is important to stress that those shares, and that value, are not presently being reflected on our balance sheet. As things stand under IFRS, our balance sheet is consolidating the Menē operations. That’s also an important note that people should consider when analyzing our tangible capital and balance sheet and income because a significant amount of our expenses are attributed towards Menē in this last year.

So, the point that I’m making is it’s clear, barring any unforeseen events, that once Menē spun off, those 80 million shares as they begin to be marketed to market on the balance sheet of Goldmoney Inc., will add additional tangible value to the company. We’ve previously discussed that we may dividend some of these shares to shareholders. We continue to believe that that may be an important milestone for us to execute. And we ask our shareholders to stay tuned as we consider the best route to move forward with regard to that development.

If I can move on to Goldmoney China. This is a venture we’re also very excited about. We are rapidly approaching launch date. It would probably have been something that we could have launched by now, had there not been a few events that caused us to just pause for a second and consider whether what we’re doing is long-term sustainable. We want to make sure that when we operate in a country such as China, where we see tremendous potential, we’re not making any missteps.

There was an event a few weeks ago where the People’s Republic Bank of China (PBOC) implemented new guidelines for digital gold buying services. These guidelines don’t preclude our service in any way, but they do require us to be thoughtful about how we operate in that country. So, our approach hasn’t changed much, but we are making a few adjustments in service that we think are very important to make sure we communicate to the Chinese government, our joint venture partners, and our potential clients in the country, that we are there for the long-term. And, we also will gladly abide by the local laws and regulations.

We also feel strongly that the PBOC’S decision will exclude competition long-term. And the fact that we have a strong joint venture partner is also something that we believe is going to help us long-term. What we’re presently doing, in terms of the technical aspects of the launch, is we are hiring and training Mandarin-speaking relationship managers, Mandarin-speaking compliant staff, and beginning to test out live accounts. The entire build-out of Goldmoney China has been completed in both the back-end and the front-end. The URL is actually available. We purchased the domain Goldmoney.cn. And, we have also set up a local server within the Great Chinese Firewall. So, we ask our investors to stay tuned, but we expect this venture will be launched within the next four to eight weeks.

Moving on to Lend and Borrow Trusts, we have raised our stake in fiscal 2018 from around 13% in Lend & Borrow Trust to 23%. We have now invested a total of $850,000 Canadian for our stake. Our other shareholders in Lend & Borrow Trust are Adam Fleming, Eric Sprott, James Turk, people we have enjoyed investing with historically. We have seen LBT really contribute a lot to our company. We have underwritten around $20 million of fully collateralized precious metal loans and generated, as we said earlier, around $1.3 million of interest. So, more than our actual outlay.

We’ve already made back our outlay and generated a return on equity capital. We have transitioned Goldmoney VP John Butler to become CEO of LBT and we’re very excited about that. James Turk, who was the prior CEO, stepped down and he is preparing for his own retirement from operational manners. He, of course, intends to stay on the Goldmoney Inc. board as lead director, one of the largest shareholders, and our beloved founder, of course. John is bringing a plethora of energy and ideas and we are eager to help him grow. We also have a lot of ideas on the lending and borrowing side for gold. A lot of insights that we have gained through the jewelry industry and becoming participants in the jewelry space. We think these are going to be actionable items for 2019. And we look forward to sharing those with our shareholders.

Moving into SchiffGold, which we own 100% of, but through a joint venture with Peter Schiff, we split 50% of the net profits with Mr. Schiff. This acquisition, we feel, has also been very successful. It was an all-stock acquisition at the time where we not only gained the operational business of SchiffGold, which is a leading precious metal coin dealer in the United States, but we also gained the partnership with Peter Schiff, who has now been a marketer and advisor and trusted colleague of the Goldmoney brand. We’ve seen a lot of synergy emanate from this relationship. Peter has been excellent in terms of marketing our service and really helping people know about Goldmoney better and learn more about our various different subsidiaries, such as Menē , and BlockVault, and LBT.

Jon Sosney and Matt Malleo are the managing directors of this business that’s based in New York. And it has generated around $73 million for fiscal year 2018. We think that there’s a lot of opportunities in this business. We’re long-term believers in the coin business and we think it isn’t going away any time soon.

If I can move into the crypto asset business and BlockVault. As things progress over the next few months and years, you will begin to see us treat crypto as BlockVault. The term BlockVault really denotes our crypto business long-term. Today, there’s still some nuances to that but I believe that within a quarter or two, every activity that’s conducted with relation to cryptocurrency, will be done inside of BlockVault and re-serviced to Goldmoney. And there are few reasons for that.

We’ve been very successful in the cryptocurrency space. We built out an entire cryptocurrency custody exchange trading business. We’ve also begun to onboard some very important clients. One of the largest cryptocurrency miners in North America, a second miner, which has a very large operation in the western United States, and we’ve also on-boarded a company which is going to be one of the first cryptocurrency style ETFs in Canada. So, we’re seeing that business grow organically, both from our existing customer base, but also from an institutional client base that’s seeking exposure to aim all compliance custody. And we feel that, even though we pretty much invented this whole concept in a cryptocurrency state, there has been a lot of competition recently as the retail exchange has figured out that this is definitely a way to go.

We think we have the staying power to grow our business organically. And we also know the types of clients that seek this type of service and we think we can be very competitive here. So, with that, I think I’ve covered all the operational aspects of the year. I should also note, the cryptocurrency business has generated $30.6 million of revenue, up 36.8% quarter over quarter. Again, this is a business we created from scratch. It’s probably delivered us around $800,000 in EBITDA since we started. With that, I think we can open the line for questions, or, actually, Josh you might have your opening statement as well, that’s right?

Josh Crumb: Yeah, no problem Roy, I appreciate it. I’ll try to be brief and we’ll get into questions, but I think as regular listeners and stakeholders probably know by now, I like to spend my time on these half-year calls discussing our broader roadmap. What we like to call our five year path to being an overnight success.

So, I’ll comment briefly on the significant developments and the things we control, but also things we don’t control and we’re trying to learn, build, and react as we’re still a young and growing company.

In many ways, the past six months have been one of the more interesting periods in our company’s short history, where many of our investments and theses are beginning to bear fruit.

But, it’s also a period where we’ve had little in the way of short-term news and shareholders feeling the pressure of a deflating crypto bubble that actually has little to do with the business we’re building.

However, while I’d like to echo Roy’s positive comments about our record quarter year- end, and the vision he expressed, in a very thoughtful annual letter, one that I personally believe will age very well, I’d also like to address some of the misconceptions and perceived challenges in the markets we’re positioned in and address our approach to growing our business to the scale and scope of our balance sheet – something that I think we’re getting much closer to in the second half of this five year journey.

First off, starting with our longer-term thesis, we launched a business called BitGold three years ago into a brutal bear market in gold and two and a half years before anyone cared about Bitcoin.

As of December 2017, I don’t think anyone could say that our thesis wasn’t perfectly timed, with gold compounding steadily at about five to ten percent a year against every major gold currency during that time. And no need to comment on crypto mania.

However, those same two markets, structurally bullish in our view, have faced significant challenges the past six months. With two-thirds we trace them into crypto capitalization and still little to no volatility or excitement in the retail gold market, despite its slow and steady climb higher.

But, what I want to remind our stakeholders is that the goal is not to be this high-flying Silicon Valley startup. We’re high ROE that’s highly leveraged as a financial institution. Where some move fast and break things, our mission is actually to move safely and fix things.

Eleven years ago this summer, Citigroup CEO Chuck Prince commented on needing to dance with the musical chairs of the credit market. But, the Goldmoney business model is actually the opposite. We sell those dancers the last chairs when the music inevitably stops. That business model is naturally not a quarter over quarter business.

So our day-to-day job is to one, proactively build our market share into that optionality, and, in our view, inevitability. And two, reactively develop synergistic businesses in the near term that can leverage our technology, our brand, and, most importantly, our client relationships.

What I mean by the second part specifically, because I think this is probably one of the most interesting parts of our company when you look through this lens, is that you look at the two billion in client assets that are held by Goldmoney, and, in the broader global financial services, two billion dollars doesn’t seem like a lot of assets.

But, when you realize that these are ultimately tail risk or, what Goldmoney founder James Turk used to call, “last plane ticket” accounts, this is naturally an asset that is unlevered and it’s typically somewhere with our client base, probably between one and ten percent of their portfolio.

So, if you look at two billion dollars in assets through that lens, you’d be looking at anywhere from two hundred to five hundred billion in purchasing power of our clients, and, inevitably, when that purchasing power is greatest, in a real basis, it is much, much higher.

So, with those two strategies in mind, when you look at what we’re building, I can safely say that there’s not one natural competitor in the marketplace. That makes it very difficult, particularly being a young company with a lot of complexity, for people to think about individual aspects of the business.

But, from a gold perspective, we’re focused on innovation market share. We’ve invested tens of millions of dollars, as Roy laid out in the annual letter, in markets that have been lack of volatility. Many of the retail gold coin competitors are sort of down thirty percent year over year in their revenues where we’re actually having record quarters, and I think that’s focused on being tough leadership, investing in our clients, investing in our technology, and investing in our brand. And that’s a big part of what we continue to do and we still have a long roadmap ahead of us.

From a crypto perspective, we were waiting and watching for many years as the risks, we felt, were still too high for our brand and our shareholders. With our gold being the safest financial institution on earth, there’s a lot of things in the crypto world that are the exact opposite, even though the core thesis of crypto developed under this idea of having a self-sovereignty over access, something that Goldmoney shares from the perspective of building a safe financial institution that’s free of counter-party risk.

So, what we did in crypto and what we’re continuing to build, and, again looking at that dual lens of the purchasing power of our clients and relationships, just the significant revenue that’s been generated over the last four and half months into this year end, and then subsequently another three months since, is really just a testament to the purchasing power of those clients. But, from a safety and financial perspective, I can also say that I don’t think we have one natural competitor to what we’re actually building.

Launching BlockVault, we’ve already put a lot of key pieces of it in place in moving over Goldmoney client assets and client accounts, and, in the next months, you will look to see us build external, big B2B business accounts as well and we actually had a press release yesterday. Although it’s a small company, we thought it was a significant announcement in that a company called Malbex Resources has been converted to being a crypto asset merchant bank and is actually the first TSXV approval as a business model to hold crypto assets and a big part of that was using our infrastructure of having full insurance and auditing on the assets.

And so, despite this now hundreds of billions of dollar market cap, there’s actually not an institution like Goldmoney in the gold space which offers a very custody-focused business, which is fully audited and fully insured. And so, that’s where we wanted to use our expertise and leverage our client base and client relationships rather than take high-risk businesses.

So, wrapping up, looking at the last six months from this lense and perspective, while tail risk protection aspect of our company is naturally hard to quantify progress, other than the market share we’re building, the last six months, I feel, we’re showing a lot of progress in leveraging the strength of our client base with Menē and crypto. And we look forward to more of this to come through innovation as well as M&A. So, I think, with that, we should probably turn it over to questions. We can dive into some of these questions into more detail, whether they’re from the operating front or some other strategy.

Renee Wei: Thank you very much, Roy and Josh. Now we will open up the line to our analysts. First question, turning over to Nikhil Thadani, Mackey Research.

Nikhil Thadani: All right, thanks guys. Can you hear me okay?

Josh Crumb: Yes, we can.

Nikhil Thadani: Okay, great. Well, first of all, I’m going to ask about the performance in your Q4 here. At a high level, I just wanted to get a sense from you in terms of you expanded into a lot of new revenue streams in the past, probably, two years or so. From a philosophical standpoint, how should we think about expanding into more, sort of, new revenue lines versus growing the existing revenue line. How are you focusing your time and energy with being those two priorities?

Roy Sebag: It’s a great question. I think that we’re always focused on both. And I think that every company that has an excess surplus of capital is naturally focused on both all the time. So, in our case, we have this core business that’s a really good business. It generates a free cash flow. It can really just be a business that could be run on a lot less equity capital, let’s say, but that business has seasonality to it.

People, no matter how hard you push, are not going to use gold, as money, or as currency, or invest in it, if the price isn’t rising as compared to when it is. That’s just a fact of life. And so, it’s important that what we do during periods of when the price of gold isn’t rising is we maintain the integrity of the brand by investing in new features and new growth initiatives and new business minds that can then plant the seed, so that when the price environment returns to a rising price environment, we can generate significantly more income from all these business lines.

The other thing to understand is that we have gone through a lot of consolidations. And all of these consolidations and mergers have caused us to really delay the customer acquisition model for the core business.

In other words, we haven’t been able to go back and market Goldmoney, the Holding business, in a very long time because we’ve had these backlogs and it’s important to note that, say in the last year, we’ve had very little in the way of customer acquisition costs spending on the Goldmoney holding business.

So, while you see advertising and promotional cost line items, they’re actually far lower in terms of what’s being associated for Goldmoney Inc. Holding business versus other business lines. And you can also see, sort of, a decline year over year in overall advertising and promotion, which I think is also indicative of that.

So, we’re trying to balance, on the one hand, what we feel is a deep understanding of the core business. At this point, there’s really nothing within the core business that could surprise us. We know how the core business works, we know where it’s headed, and we know what we can also do to accelerate its growth.

And, if we’re talking about the potential growth sectors for the core business, one that we’re very excited about is these local partnerships. When we first started, a lot of the internet companies when they first start, they just launch in different countries with localized versions of their websites and maybe localized versions of customer service. But, what we found is that, when you partner with a local joint venture partner, and you’re entering these difficult markets with completely different cultures, it’s a much more holistic way of building up the business infrastructure.

So, I think you’re going to see us try to do more of those deals over time. But, overall, what we see that we have achieved so far is we’ve taken our success in the core business and we’ve expanded it for the benefit of shareholders. Because we have our capital allocator hat on as well, we try to expand it through innovative ideas, through well-timed investments. But, at the same time, the core business is running perfectly. If you just take its results every quarter, it’s just performing better and better. More business lines, growing margins, and I can’t imagine how well this business will perform when we have, say three or four years of gold rising at fifteen percent a year in US dollar terms.

Josh, anything to add there?

Josh Crumb: No, I think I agree with all of that.

Nikhil Thadani: Okay, great. And, a part of that actually answers my second question, Roy. So, is it fair for us to expect that user sign-ups should accelerate going forward, although we can assume, sort of, a higher level of marketing spending as well? Is that a fair assumption?

Roy Sebag: Yes, I think that’s a fair assumption. I think that we are focused, obviously, on a different demographic of user than we were focused on initially with the BitGold days, but we definitely feel that we can expand the user sign-ups more than where they are presently, and I think that could definitely lead to margin growth. But, from where we sit, we feel very strongly, as Josh mentioned, that there isn’t a natural competitor at our level.

And, what we mean by that is, there is no business out there that has our level of capital and our depth of technological expertise. In other words, these features that you see, or potential entrants, they’re really poorly financed and poorly constructed. So, they use a lot of trickery to try to pretend like they’re really moving gold around or using physical gold. So, a serious client, a serious customer with a serious amount of money, is never going to trust these companies to hold their wealth and to build a lifetime of savings relationships.

Conversely, we’re regulated. We’re regulated in multiple jurisdictions. We have a very strong balance sheet, we’re profitable. And, though we try not to spice up our technology too much, it’s actually very comprehensive technology, in the sense that we’re deeply integrated into so many vaults. We have so many payment methods that are integrated. We have daily cash reconciliations in multiple currencies and we really have the ability to guide a lot of these utilities in both payment systems, usage of gold as we see in some of our other business divisions. And, also, in this kind of custodial wealth management relationship where people just add to their position every month and trust us and believe that, over the long term, we’ll be there.

Building that infrastructure, so that, the next time there’s a financial crisis, we’re there and we can be a place where people can count on us to protect their savings.

Nikhil Thadani: Got it. And my next question was just to verify what I heard on your prepared remarks. Did you say that there’s about thirty to a hundred million of embedded value for Menē on the Goldmoney balance sheet? Did I hear that right?

Roy Sebag: Yes, that’s correct. As things stand, the balance sheet does not reflect the equity value of Menē under a spin out. It’s a consolidated financial statement. So, we’ve taken actually all the losses, which, in this case, obviously Menē is losing money every quarter as it’s ramping up its business.

Nikhil Thadani: Excellent. And then, the last question before I pass the line. In your MD&A, there’s a comment about three to five million dollars in expenses in fiscal nineteen. Is that mostly pertaining to CAPX for the planned new branches, or is it for product things, or perhaps the Chinese joint venture? Any color on that? Thanks guys.

Roy Sebag: Thank you, Nikhil. Okay, that’s a blanket CAPEX estimate for the year. So, for all the various divisions that we had. That’s the Goldmoney Inc. CAPEX estimate.

Nikhil Thadani: Got it. Thank you.

Josh Crumb: Yeah, one of the ways to think about that is, again, because we have this dual sort of growth and innovation mandate as well as just a strong balance sheet, we like to keep our net cash changes probably limited to, say, a million a quarter. But, again, we can push harder. We also like to be really reactive and on top of things. If a particular market really picks up and we need to invest in customer acquisition, whether it’s a currency issue like Brexit or obviously the crypto in December, I think that’s where we like to be conservative until it’s time to push hard and use the things we learned to invest quickly in these markets.

Renee Wei: Thank you very much, Nikhil from Mackey Research. Now we will call on GMP for any questions.

Steve Boland: Oh hi, Steve Boland. Roy, the first question is on China. First, what would that operation look like in terms of personnel? Like, who is running or overseeing it? And, secondly, as I guess time has gone on since the first announcement, what’s your expectation in terms of demand as the operation builds-out in anticipation, I presume is building, what do you think the demand in China is for this service?

Roy Sebag: Hi Steve, so I think that’s a great question. So, the individual that’s running that business for us is Yu Ming Zhao. He is the background in technology and essentially started a joint venture digital gold platform with Zhaojin Mining, which is the second largest gold mining company in China. The issue, in terms of gauging demand, is that it’s just not really the approach that we take. I’d say we’re really more focused on getting the technology right and the licensing and the infrastructure. So, it’s something that we have to make sure we get right before we launch and then I think I’d be more comfortable projecting demands. The delays, I’d say, up until April had to do with technical issues. There wasn’t really a meaningful delay, as part of the road map, that was a surprise.

And then in April, we definitely had a surprise in terms of the PBOC guidelines. So, at that point, we had to invest a little bit more time and energy into how we were going to approach this launch from a regulatory side. We’ve addressed the issue, we feel that we have a path forward. It’s just difficult to make an estimate. In terms of personnel, there’re about twenty people there that work in that office. Again, it was an existing technology company called Taojinyn, which was a venture founded by Zhaojin and this entrepreneur. So, we are essentially in a joint venture with that company, so the employees of that company are working for this Goldmoney China joint venture. But, what we are doing now, as part of this, sort of, pivot into the new regulatory requirements, is we’re also going to be hiring some employees that will work for that division in Toronto. We’re probably thinking about four or five people exclusively on the compliance side. So, we think that, in total, we’re looking at twenty, twenty five people to run that operation, and then, depending on demand, we’ll either scale it up or down.

Steve Boland: Okay. And, second question, maybe I don’t know if this is for you, Roy or Josh. Just in terms of BlockVault, the new customers that you’ve mentioned, I know they’re trading and using you guys as an exchange, but are they actually using a BlockVault product as a custodian at this point or is that forthcoming? Or, is it kind of soft launch I guess I would say?

Josh Crumb: It’s a good question. It’s a soft launch. One thing to think about, when it comes to BlockVault, is that there’s actually two, sort of, client businesses. Goldmoney is, sort of, the full service, just as it is, in gold, silver, platinum, palladium, where it’s both dealing and custody. Whereas BlockVault is really just an institutional custody business. So, Goldmoney as a dealer of assets is actually a client of BlockVault, very much like Goldmoney is a client of Brinks to be the underlying custodian.

So, the two that we’ve mentioned, so far, that have onboarded, are actually Goldmoney clients involved in both dealing and custody. So, the BlockVault part being opened up to clients outside of Goldmoney has not happened yet. We expect that to happen over the next month. We’re still really testing. And we use tier one institutions as far as insurance, vaulting, auditing, and, when you’re moving into a whole new stage, you inevitably have to move slow and make sure these partners, who have a lot to lose reputationally, are extremely comfortable in what we’re doing.

So, that has been a huge success so far, as far as working with our institutional partners to get them comfortable, but we are not yet operational to allow third party institutions, outside of Goldmoney, to use the BlockVault service. But, minting the bars, the ColdBlocks, the back end cryptography, systems, controls, that’s all in place.

So, we have onboarded Goldmoney clients and Goldmoney is on board with BlockVault, but we have not onboarded institutions directly to BlockVault. What I will say on that, though, is there is very high pent-up demand for BlockVault, both in asset managers, as well as broker dealers, exchanges, and we are all going to be very deliberate and cautious with who we onboard first and what partners.

We really want to start up market. There’s a lot of froth and people moving without a lot of planned financial competence in the retail crypto space and, I believe, in finance, those are mistakes you can’t really ever get out of or get away from. So, we really are going to focus, even if it takes time on only working with regulated broker dealers or institutions that have regulated entities and other business lines or other business stays and not just focus on growth at any cost.

So, just wanted to make that caveat that BlockVault really is focused on regulated institutions as much as we can.

Steve Boland: Okay, that makes sense. I have a last question for you, Roy. You’re pretty vocal about when you look at your share price and you mention your NCIB. I presume you intend to be active especially at these levels?

Roy Sebag: Yes, I think we are going to be active in these levels. It’s been difficult to execute the plan when we have wanted to be active due to a confluence of factors, either a blackout, that we view to earnings or other activities that we are having, so I think that you will see us definitely get active, more active on the buyback side, especially given the relationship between the market cap, our tangible capital, and what we internally believe our intrinsic value to be.

Steve Boland: Okay. That’s it for me. Thanks guys.

Roy Sebag: Thank you.

Renee Wei: Thank you very much, Steven from GMP. Now we will turn over to some of the questions that came in from the email. First question by Robert Hemowitz in terms of share buybacks: what price do you deem that capital would be better deployed within the business rather than shrinking the share count? Is there a number of shares or average price you are targeting?

Roy Sebag: We obviously are not able to comment on those specifics. I think that the last question from GMP, the answer I had to that question sums it up quite well. We have provided a framework to investors through, which they can calculate our tangible capital and then go ahead and try to asses or intrinsic value and we are doing the same thing as a board and a management team when deciding how many shares we should be buying and whether the best investments ahead of us is the shares of our own company. And, it’s clear, as I’ve expressed in the letter, which we implore everyone to read, and in the last comment I just made, that we feel that the current relationship between the market cap and our tangible capital, as well as our intrinsic value, provides a great opportunity, long term, for us to cancel some shares.

Renee Wei: Okay. Next question, also from Robert: why not issue debt in fiat if you think it will be inflated away against the company’s hard assets?

Roy Sebag: Well, I think that we definitely don’t like debts in our company, but also, I would say that, on the surface, it’s a wise question, except I think that you have to take into count that the most important thing Goldmoney has is our clients. And, in order to maintain our clients, we must maintain financial integrity. So, I think that incurring any form of debt, no matter how confident we are about the future destruction of the value of fiat currency, would be a non-conservative way of growing our business. At this point, we really don’t need to step over any six-foot hurdles to get to where I think we’ll deliver growth. So, most definitely, I think at this stage, it’s too premature to raise any form of debt for Goldmoney.

Renee Wei: Next up, is from Mr. David Nattler: how many designs for Menē do you currently have? And what percent is currently being offered online?

Roy Sebag: That’s a good question as well. We currently have about two or three hundred core designs that run through charms, chains, rings, earrings, bracelets, and gifts. And we have about two or three thousand different skews when you consider all the variations: the gold, the platinum, the different finishes, and the different sizings. As things stand presently, I’d say less than 20% of our inventory mix is available. It’s a great problem and source of frustration for Menē , but it’s also reflective of demand, which is very strong. We feel that in the next quarter or two, Menē ‘s inventory problems will be solved, and at that point we expect to see significantly more revenue. As of this stage, I think we have around a million dollars of pent-up demand for Menē jewelry, as of today, just from customer wait-list indications. So, that’s definitely a place we need to be at by, say, the end of the year, is to be able to have all the inventory in stock all the time. Unfortunately, the factory we built had a capacity for around five kilos a week of production, which we are now easily over.

Renee Wei: And how long will it take to offer all designs online? Will it ever be possible based on demand and manufacturing constraints?

Roy Sebag: Yes, most certainly. I think by the end of the year you’ll see all the designs online and you’ll see a stable inventory mix.

Renee Wei: What percent of gross sales has been from credit?

Roy Sebag: Very little. I would say probably two, two percent, no more than two percent of the gross sales for Menē has come from credit.

Renee Wei: How much credit is currently outstanding? And how much more credit is planned to be offered for the next fiscal year?

Roy Sebag: We can’t really disclose that number, but it’s not meaningful.

Renee Wei: What are you seeing on effectiveness of online advertising? Are there plans for different marketing strategies next year?

Roy Sebag: We definitely think that our marketing strategies have been successful and we will continue employing those strategies. I think that online is an important source of customer acquisition for us and we will continue focusing on that as a channel.

Renee Wei: What other KPIs are you following or have goals for in the future?

Roy Sebag: I think the most important KPI for Menē is customer satisfaction. Unlike, in the case of Goldmoney, where anyone can really open an account and, from that moment forward, they expect a certain level of customer service, which isn’t always possible to deliver because, as a financial service, there are all these regulatory hoops that a customer must jump through, and all these regulatory hurdles that the customer service rep must go through as well in order to service that client. So, we tend to see that when people want to write a review about Goldmoney, it’s generally a negative review. And I’ve checked this out with PayPal and with Coinbase and with other leading internet financial services companies, and if you go and check out their reviews, they’re all negative. Because, really what propels someone to make a review, in this case with a financial service, is generally a negative experience.

What we’ve seen with Menē is it’s very, very rare. We’ve seen overwhelming amount of positive reviews. People go out of their way to talk about how great the brand is, how positive the experience was, how unique the jewelry looks and feels, how much pleasure and positive emotion it gave to them and their family, how amazing the packaging is, how incredible the customer service is. And that’s really what we have to do. We’re a very ambitious group. We’re very ambitions entrepreneurs. We did not start a jewelry company to have five or ten million dollars of annual revenue. We’ve already reached those numbers. We’re here to build a jewelry business that will have hundreds of millions in revenues. And the only way to do that is to sell tens of thousands, hundreds of thousands, of items and build hundreds of thousands, if not millions, of customer relationships. So, the only way we can do that is if we plant the seeds for excellent customer satisfaction. So, the most important indicator that I look at when building that business is customer satisfaction.

Renee Wei: Next question from Mr. Michael Shelton: how have you improved your process and staffing to onboard new customers?

Roy Sebag: That’s a great question. So, with regards to Goldmoney onboarding, we have implemented Jumio. We’ve waited a long time to get regulatory approval for Jumio. We received that regulatory approval over the last few months and we’ve implemented it. Jumio means that a customer no longer has to use Equifax, which a lot of people hated to do, and they can now upload their government issued I.D. with a photograph through their smart phone and we can accept that in most cases.

The other thing that we did was we built out an operations team in Toronto to support the Jersey team, and we’ve added a lot of middle management which didn’t exist before. Between customer service, the executive team, and the marketing team, in order to create a better cadence that really didn’t exist from our startup days that now allows us to deal with customer demands, customer requests. Every single day we’re whittling down on that backlog. It still numbers in the thousands, but we’re getting there. And new customers signing up today, it’s important to note, will not really suffer from any delays. They should be able to get on the system quite easily.

Renee Wei: How many, or what percent of your previously existed Goldmoney customers, prior to announcement and commencement of training, have purchased crypto assets?

Roy Sebag: We can’t disclose that figure, obviously, but it’s a very small amount of customers that have actually bought cryptocurrency.

Renee Wei: What’s the overall value of crypto holdings?

Roy Sebag: Well, that’s disclosed in our real-time audit. I believe the number is around twelve to fifteen million dollars Canadian of cryptocurrencies.

Renee Wei: What are the details around trading volumes?

Roy Sebag: Once again, those numbers should be disclosed on the real time audit, but otherwise they’re also disclosed through our quarterly and annual results. So, if we look at the last year, we did around $36 million in, sorry the last quarter, $36 million dollars in crypto revenue, versus $22 million the prior quarter. So, it would be safe to say that we generated around $60 million dollars of cryptocurrency revenue, which is an indicator of volume, not always because of the account loss.

Renee Wei: Will the 2.5% service fee for cryptocurrency be sustainable?

Roy Sebag: Well, I think maybe Josh can handle that one, but my opinion is that it probably won’t be sustainable if the volatility of Bitcoin climbs, but, so long as cryptocurrencies move in the range that they are presently moving, 2.5% is a very low amount of money to be spending for peace of mind, which Goldmoney cryptocurrency position gives you. And, I think that our customers are glad to pay that. Me being one of them.

Josh Crumb: Yeah, I would echo those comments. You know, one might ask, “Is 2.5% retail FX sustainable?” and those things seem to only go up. And so, again, what Roy was alluding to, which I don’t think we get enough credit for, is it’s very different to pay 2.5% given the assurances and the public nature of our company, and the de minimis counterparty risks, and our custody solutions, really there’s just no competitor when it comes to that. So, if you’re looking to make a five year or ten-year allocation as a tail risk, given the volatility, 2.5% really is, they can move two and a half percent in a matter of minutes, not a high fee given the relative service. Where we still don’t believe there is any competitors. I still find it absolutely incredible that there is, purportedly, ten, hundreds of billions of dollars being held at exchanges in companies that have never been audited, that have no regulator, have no insurance, or have self-insurance. This, to me, is a great tell, very much like the 2006-2007 markets that were just in a late stages of searching for yield and volatility. But, anyways, I probably went beyond what the question was.

Roy Sebag: I totally echo that. It’s quite bizarre that a company like Coinbase, which claims to have seven or eight billion dollars of cryptocurrency under custody, has yet to ever publish a financial audit of any sorts in order to satisfy its investors curiosity. At the least, it seems to be a best practice. I don’t think any of the other ones do it either, but it would be really bizarre to imagine that this current trajectory could continue.

I think they’re going to have to abide by some sort of governance. And, obviously, that’s going to introduce a higher cost, at which point they’re really going to have to decide how they make money. Because, in a declining crypto currency environment, you can’t just sit on the other side and make money every time. You’re actually exposed, so this is going to, I think, feed in well with our long-term strategy, where if the cryptocurrency market continues to develop and isn’t this once-in-a-generation bubble, which it may still end up being, we are well prepared to play within that space and deliver a service that, I think, could become a leading custodial service, just like Goldmoney is in precious metals.

Renee Wei: Next question from Mr. Zino Hillman: do you plan to open a Goldmoney Europe branch? This would allow 340 million people to transfer money to and from their Goldmoney accounts for free, avoiding expensive bank wire charges.

Roy Sebag: Most certainly. It’s on our list. We definitely are going to open a branch in Europe. At one point, we got very close to doing a deal in Europe with a few principles. I think you’ll see us be able to focus on that over the next few years. Menē , the 24 karat jeweler brand, is opening a branch, a store, in Geneva, Switzerland and also in Paris. So, we’ll have some good experimentation, experience with the European markets.

Renee Wei: Could Menē offer 24 gold jewelry in bar-like weight units, such as in different grams, to fulfill the EU investment gold requirements for being excluded from the VAT, which is the value-added tax?

Roy Sebag: That’s a good question. I would argue that the Menē jewelry is already exempted from the European VAT. It’s just the function of establishing local fulfillment centers in Europe, which we are going to do. So, right now, when European customers order our jewelry, they are unfortunately taxed by the shipper for VAT under jewelry line items that rate. It’s quite unfortunate for our customers, but I’m confident we’ll be able to resolve that over time.

Renee Wei: So, our final question just came in via email from Mr. Gearhart: is Goldmoney considering the opportunity to embed the Lend and Borrow trust services into the Goldmoney Holding platform?

Roy Sebag: Well, I can’t comment on that specifically, but I think that one area where I think we should be focused on, long term, and we’ve seen there is strong investor demand from this, and I always think one of the great asset tests is, would Josh or I, who hold gold at Goldmoney, use a service or a feature? And it’s one of the things that allowed us to create the active trader feature that we’re getting ready to launch, which we haven’t discussed at all in any of the materials today. But, I think, one feature that we would really like to have is some type of an account within the Goldmoney holding where you would automatically earn interest on your metal weight, and the account position would not be physically backed. In other words, the metal you deposited would have to be used in some sort of a supply chain system.

So, for example, in the jewelry industry, Menē might reach a stage where it needs $100 million of metal, which is working capital metal, and it’s willing to pay a yield. Now, the risk to the customer is that, at some point, when Menē is moving the metal from its factory to the vaults, that metal gets stolen, which of course can be insured. So, there really is very little risk in that case, but of course it’s not at all the same as having a fully reserved metal position with zero counterparty risk, which is the case with the Holding today.

So, I think that there would be a great opportunity in establishing a facility where some clients who were able to take on that risk, that counterparty risk. I know, in my case, I’d be willing to put, say, 10% of my metal towards something like that. And Goldmoney might even stand behind that as well, given the strength of our balance sheet. But, in this case, we would be able to offer a yield of maybe two, three, four percent metal, and I think we would be able to generate a lot of money for the company as well.

Renee Wei: So, that brings us to an end of the question period. Any closing statements from Roy or Josh?

Roy Sebag: I just want to thank everyone, from our employees, our service providers, our colleagues, and, of course, our customers, for being patient as we continue to build-out this incredible company. We remain as passionate as ever. I believe that Josh had some very good comments in his opening statement, but one of his comments resonated with me, was that sometimes we hear from our investors that they either believe that we are working on too many things, or we aren’t as active in the promotion of our company within the financial markets. And, I think that, nothing probably hurts us more than hearing those types of comments, because they simply couldn’t be more untrue.

I think that people that know myself and Josh know that we basically wake up every day and we work on Goldmoney, Inc. And we work very hard. I think that as we’ve transitioned our business from raising necessary capital, building out infrastructure, building out operations towards more managing and investing in growth initiatives, it is incumbent upon us as management that has gained wisdom, not to be so active in terms of promoting and being in the public eye. It makes a lot more sense for us to keep our head down, operate, build out, and it doesn’t mean we still don’t enjoy Twitter every now and then or sharing our thoughts about the markets, or economics, things that we’ve been doing for, in my case, 20 years and will continue to do. But, we just really feel that when it comes to Goldmoney, Inc., the numbers speak for themselves. At this point, it really doesn’t make sense to measure us on anything other than our ROMW, our return on metal weight.

So, we implore our long-term shareholders who are investing their hard-earned capital, our customers who are saving their wealth, and our employees who are investing their time in us to really take a moment and reflect on how many companies in three years have achieved what myself and Josh have achieved here. From the moment we had an idea, with maybe two million dollars of our own capital, called Bitgold. And we now are sitting on $111 million of capital, $170 million of shareholder equity, $1.8 billion of customer access, four business divisions, no debt, and 40% personal shareholder ownership amongst the board. I think that it’s very clear that our incentives are aligned. We still don’t get paid a salary, and we’re very much focused on this business every single day.

The, quote, distractions, as they relate to myself, some of my other passive investments, I think were also unfounded. I’ve actually divested of all of my passive investments over the last year, and where I sit today is in a position where I am fully focused on Goldmoney, Inc. and Menē . When it comes to Menē , I wouldn’t be surprised if, in the next quarter or two, you’ll even see us appoint a CEO and see me remain chairman and founder of that business. Because that business is actually not as complicated in terms of the daily operational management as something like Goldmoney.

So, with that, I’ll probably turn to Josh for your closing remarks, but we do want to thank everyone for their support over the last few years, and we just want you to know that we’re working very hard.

Josh Crumb: Yeah, thank you, Roy, I actually echo the same thing, and again there’s a lot of things that are going on in our business and Roy and I’s investments, but they’re all towards the same singular goal, and that is to expand this ecosystem. I believe we reached a peak of high centralization, both in finance and some of the platform economies, and scary uses of data, and so forth. I think we are as … history has shown there’s these ebbs and flows of centralization and decentralization. I think that the decentralization tailwind is clearly behind us. And so, when you look at some of the other companies and boards and various things we’re involved in, it really is all added to the singular mission of expanding the ecosystem of Goldmoney.

You know, Stefan and I, we’re on the board of the company called COIN that we announced yesterday. And, again, the idea is to grow that asset base to potentially hundreds of millions of dollars as being a unique offering. And where Goldmoney and BlockVault are able to generate services on that business, off of the Goldmoney balance sheet.

And there’s other aspects as well. So, again, we’re not focused on just building a competitive retail gold business. We’re trying to build up a broader ecosystem in finance where we think we’re a couple steps ahead of the game, and, as long as we think that and have the support of clients and shareholders, we’re just going to keep moving forward.

So, like Roy, I echo and thank everybody for their support and patience, and we are going to continue to work hard for all of our employees, shareholders, clients, and stakeholders. So, thank you very much.

Renee Wei: Great. That brings an end to today’s conference call. Thank you for those of you who submitted the questions or participated on the phone. This has been Goldmoney, Inc.’s 2018 year-end earnings and business update, and we look forward to chatting with you on the next call.

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