Ideanomics Inc (IDEX) 2017 Q4 法說會逐字稿

Greetings and welcome to Seven Stars Cloud Group fourth-quarter and year-end 2017 earnings call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jason Finkelstein. Please go ahead, sir.

Thank you, operator, and welcome to the Seven Stars Cloud Group's Q4 and full-year 2017 earnings conference call. Joining me today I'm pleased to have Bruno Wu, Executive Chairman and CEO; Robert Benya, President and Chief Revenue Officer; Simon Wang, CFO; and Jason Wu, Director of Finance.

For simply the sake of clarity and communication fluidity, on the financial portion of this call Jason will be reading prepared remarks regarding our financials on behalf of our CFO, Simon Wang. A webcast of today's call will also be archived and available in the events and presentations section of the of the SSC corporate website for a minimum of 30 days.

Before we begin, I will read our Safe Harbor statement. We may make certain statements today, April 2, 2018, that are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake the obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

In addition, we are subject to a number of risks that may significantly impact our business and financial results. These risks and uncertainties are detailed from time to time in the Management's Discussion & Analysis section of our corporate filings, copies of which can be obtained from the SEC or via our website, www.sevenstarscloud.com.

In a moment I will turn the call over to Bruno Wu for brief opening remarks and Jason Wu for an explanation of our financials. And then we will begin the Q&A portion of our call, where management will answer questions emailed by our investors and listeners.

I would now like to turn the call over to Mr. Bruno Wu for brief opening remarks. Thank you.

Thank you, Jason, and thanks for everyone for joining our call. 2017 saw persistent operational improvements throughout the year, with our business gaining strength, diversification, and stability quarter after quarter. Sales were up substantially as the Company transitioned away from gold and began establishing the foundation for the future ahead.

Looking forward, SSC's market opportunities in fintech-powered digital asset securitization world are both significant and synergistic. Our ability to innovate and execute as we did in 2017 gives us the confidence to become a leader in the global asset digitalization space, as we foresee customers and partners beginning to recognize our platform innovations and market leadership.

The Company executed the first phase of its strategic and integration plan by acquiring, investing in, or partnering with firms focused on artificial intelligence, blockchain, and alternative trading system platforms. Now SSC is poised to launch the second phase of its strategic plan in 2018 and expects to introduce a global trading partner network that enables partners to list and trade financial products both cost-effectively and seamlessly across the globe.

With this plan in place, management remains very focused not only on sustained revenue growth, but increased and stronger margins -- all while continuing to evaluate our existing opportunities to create and maximize shareholder value. Management is very aware that with all the transition and transformation that occurred, that even with the best intentions of trying to communicate clearly all that has transpired in this evolutionary space, that there are still many questions and some confusion.

Therefore, so as not to cause any delays, we will have Jason Wu discuss the full-year 2017 financials on behalf of our CFO, Simon Wang, and then head into Q&A. With that I would like to turn the call over to Jason Wu. Jason, please?

Thank you, Bruno. And now the financials on behalf of our CFO, Simon Wang. All numbers are in US dollars.

Revenue for the year ended December 31, 2017, was $144.3 million as compared to $35.2 million for the same period in 2016, an increase of approximately $109.2 million or 310%. The increase was mainly due to our new business lines acquired in January 2017 and, to a lesser extent, one-time consulting services that we provided to certain customers.

This increase was partially offset by a decrease of our legacy YOD business in the amount of $3.8 million as the legacy YOD business shifts to a new exclusive distribution agreement with Zhejiang Yanhua Culture Media Corporation Limited, or Yanhua, which was announced in the fourth quarter of 2016. It is important to know that in January 2017, the Company completed acquisition of SVG and Wide Angle; and considering these acquisitions were under common control under our CEO and Chairman, Bruno Wu, since November 10, 2016, the Company's financials for the year 2016 have been adjusted to reflect ownership by the Company since November 10, 2016, when common control existed in accordance with US GAAP.

Cost of revenues was $137.2 million for the year ended December 31, 2017, as compared to $35.6 million for the year ended December 31, 2016. Our cost of revenues increased by $101.6 million, which is in line with our increase in revenues. Our cost of revenues is primarily comprised of costs to purchase electronic products and crude oil from suppliers in our supply chain business, as well as the cost of sales from the legacy YOD business, which is primarily comprised of content licensing fees.

Gross profit for the year ended December 31, 2017, was approximately $7.2 million as compared to a gross loss of $0.4 million during the same period in 2016. Gross profit ratio for the year ended December 31, 2017, was 5.0%, while in 2016 it was negative. The reason for the gross loss in 2016 was due to higher costs associated with a commercial electronic supply chain business as the Company looked to expand its customer base and sales volume.

For the year ended December 31, 2017, gross margin for the electronic supply chain business increased to 2.7%, which contributed gross profit in the amount of $3.3 million. Selling, general, and administrative expenses for the year ended December 31, 2017, was $12.8 million as compared to $10.9 million for the same period in 2016, an increase of approximately $1.9 million or 18%. The majority of the increase was due to: one, an increase in our sales and marketing expenses in the amount of $1.6 million in order to introduce and promote our services to various new potential business partners; two, an increase of approximately $0.9 million of share-based compensation due to option and restricted shares units that the Company approved for grant to independent Board members for their 2017 compensation, which included a significant increase in Board-related work during 2017 compared with prior years; three, an increase in headcount and relevant traveling expenses in the amount of $1.1 million; and four, leasehold improvement disposal losses of approximately $0.7 million that were incurred when the Company canceled its purchase of our Beijing office building in 2017.

Professional fees are generally related to public Company reporting and governance expenses as well as the legal fees related to business transition and expansion. Our professional fees increased approximately by $1.8 million or 125% for the year ended December 31, 2017, compared with the same period in 2016. The increase in professional fees was related to an increase in audit service fees, which increased from $0.6 million in 2016 to $1.2 million in 2017. This increase can be primarily attributed to the nonrecurring opening audit fees due to the auditor change as well as increasing legal, financial advisory, valuation, and auditing services fees incurred in relation to acquisitions and the general corporate business activity in 2017.

In 2016, the Company recognized an earnout share award expense to Bruno Wu's Sun Seven Stars of approximately $13.7 million for reaching certain milestones and based on the fair value of common stock issued at the time. In 2017, no such expense was incurred. Loss per share for 2017 was $0.16 as compared to a loss per share of $0.73 in 2016.

That concludes management's prepared remarks. I would now like to turn the call back to Jason Finkelstein for investors' questions and management's answers.

Thank you, Jason and Simon. At this point in the call, I will ask questions of management that were emailed by investors prior to and during the call.

So the first question is: what is the latest status with the previously announced $500 million sales volume commitment with SSC's joint venture partner Ocasia that was announced in November 2017?

Hi, Jason. All this is well on track. The $500 million is well on track, and we do expect that that number as committed by Ocasia is going to be met.

Does the $280 million 2018 revenue guidance include revenues from Ocasia?

Yes, it does, because of the fact that -- you know, we try -- at the time we were still -- when we announced the guidance, we were still working with the new auditor on the ways to recognize. So we tried to be very prudent.

What is the latest joint venture status with Beijing Urban Construction Holdings?

It's ongoing. We are doing two things parallelly at the same time. Number one is: we intend to establish our joint venture in the new capital area of Beijing, which is called Xiongan, and it takes about three to six months to get the Company set up over there. But once it's set up, it gets onto a green light -- while to get this set on Chinese exchange, because the construction -- our joint venture with Beijing Construction Holdings -- we hope to build this into an actual dominant player in the vertical of construction materials in China.

So parallelly, we are also building the entire blockchain-based digital ecosystem that starts with -- we call this a four-layer pyramid approach, starting from the bottom with the digital settlement and the logistics management system. The app layer will be the digital wallet, and that will be the digital B2B marketplace. And then on the top will be indexing through different construction materials, index and future.

So all this is served by the same token that we'll issue. So in other words, all is on track with Beijing Urban Construction Holding.

Okay. Can we get an update on the joint venture with Beijing He Ying Private Equity Fund?

Yes. The Beijing He Ying Private Equity Fund is in the same status with Cosco -- our partnership with Cosco. Because of the fact that our supply chain financing has a lot of room to improve itself, if it's structured -- you know, if it's done by a combination of AI plus blockchain-based market platform that supply chain finance providers -- the supply chain finance -- you know, the companies that are in need of supply chain finance can be finding each other on this B2B marketplace through the best AI-enhanced, artificially enhanced and risk-managed -- sort of the most and the best suitable solution for each other.

So therefore with He Ying and Cosco, we are now working with them on building China's -- probably the world's -- first blockchain-based, AI-enhanced structured finance B2B platform. It is kind of similar to what the Company also listed on NASDAQ, LongFin, tried to do. But we are a little more expanded because we are into the -- you know, building the entire marketplace, and we have two very big anchor supply chain finance fund partners -- one is He Ying, one is Cosco -- that each are willing to make about RMB50 billion available onto that platform.

So I think building a marketplace will be the best way to serve our purpose. And our partners He Ying and Cosco like it better, because we bring in AI-enhanced technology for risk management, and we bring also the blockchain-based B2B marketplace where the sellers and buyers can find each other for supply chain financing.

Okay. What is the status on Seven Stars Cloud and Next Gen X finalizing its own dedicated ATS platform?

Well, I think our first step is for Next Gen X to really strengthen the operational Delaware border trade. It's already been enabled. It's going to be synchronized and co-branded by Next Gen -- powered by Next Gen. I think our first step is to make sure that DBOT, Delaware Board of Trade, becomes a very, very, very strong operating entity. We certainly have the action in motion about setting up our own 100% dedicated ATS platform, but let's do it one at a time.

In the meantime, I think also philosophically -- because Seven Stars Cloud is so well positioned with its seven product engines and different strong technology platforms to become really the owner of digital assets and to become a leader of asset digitization in creating digital assets. So internally we call ourselves -- we want to become the digital Saudi Arabia or the digital Pacific Ocean.

So we also try to build a firewall in the future between us as a digital asset owner and the different ways of sales and market and issue and to trade the digital assets. So we have a complete open platform to work with whatever partners through our global trading partner network, in whichever country -- whether regulated or nonregulated cryptocurrency networks, or whatever that's in compliance with the local regulations.

So to us, owning our own dedicated ATS platform or working with DBOT -- eventually they will all become stand-alone partners. And some of them will own shares. Some we won't -- will just be pure partnership. But then again, Seven Stars Cloud itself will be very much focused onto just becoming, as we call it internally, the digital Saudi Arabia, because we simply have better engines, product engines, better technology to be able to digitize assets better than most of our competitors in the marketplace.

Thank you. How do you sell your product and services in general? How is the word getting out to use SSC's platforms? Does the Company have a sales team?

Yes, we currently have two very strong sales teams. Certainly our sales teams are primarily project management teams, whereas we have an entire open architecture that we work with whoever that are best in various verticals, various markets.

So our position is this: we own the best digital assets. We like to work with the best sales team that can sell it. So our sales teams in essence are our project management teams -- so not the actual field sales teams. So far in Asia we are developing five very strong sales partnerships.

Thank you. On the last earnings call you mentioned that the biggest challenges have been, quote, red tape in regards to regulatory banking, financing, infrastructure, etc., end quote. What hurdles in general are still outstanding, and how and when will they be addressed?

Well, I think in general, we are very proud of sales -- of having delivered and accomplished a gigantic growth in revenue. And it completely transformed the Company in putting itself into -- the Company onto the right track and being a leader Company that's completely positioned to become a leader in the space that we are in.

Bear in mind that we did this within a very short period of time. I myself and Bob only took over -- become active management -- become part of the management not until last October. We didn't really fully transform the Company into the new business model by deciding to get rid of the old legacy pay-per-view model until about May of last year. So it's a very short period of time.

So what I'd like to say is the red tape is one, and the fact that the Company needs time to set up -- particularly us as a US company so all the KYC know their customer. Internal (inaudible) requirements for US companies to set up offshore entities are very complicated and take a long time. A lot of partners of big corporations -- it takes time to react, even after we sign the deal, to when operations can actually start.

And also for us to find the right team and the right partner, the execution team, to run effective per sector. It all takes time.

But I think these challenges will always exist. We had to complain about this, because it was last year -- it was the first year. We really had less than a year. So the red tape in short-term and all these hurdles in short-term dramatically hurt our ability to perform last year.

But I think in the long run, in the scheme of things, we are now in the stage that we are catching up. These red tapes and these hurdles do exist, but we take our time, we relentlessly execute, and things will catch up.

So I think we will always address them. We become more and more experienced in dealing with them. And I think 2018 this will become less a problem than it has been and than it was in 2017.

Thank you. For the SSC Next Gen X ATS platform, the first press release for the global partners trading network stated 30 targeted exchanges and ATSs, but a later press release stated 20-plus, including DBOT. Can you just provide some clarity on the decrease in the size of the network?

Our goal is very clear. Our goal is to establish between 20 and 30 through our open architecture for finding the partners that would do issuance, primary trading, and secondary trading, all through our Next Gen X ATS platform.

However, it is not only purely ATS; it could also include the nonregulated crypto-platforms. As far as we are concerned, as I said, all we try to do is we own the best digital asset. All we try to do is we try to qualify and find the best sales partner that could sell -- that can take our digital asset, the best quality ones, as the raw material and cook whatever style of cuisine that they want to in compliance with their forte, their specialty, and in compliance with local governance requirements, compliance requirements.

So therefore our goal is very clear, yes -- particularly for secondary trading, post-IEO, post the Initial Exchange Offering; our target is 20 to 30 markets, encompassing both regulated ATS and exchanges and nonregulated cryptocurrency exchanges. Within the next few months I would like to put this together.

Now we have the product line all put together, and our engines start to work, and our products start to come out the door. Now with product, it's time to do the sales and trading network.

Great. Is the actual quantum technology that's been mentioned being actually used, or is it more of a brand name? How does the technology benefit the Company? Can you tell us a little bit more about your partner on this endeavor, Guangzhou Yongkai Industrial Company, and what their relevant capabilities are?

Well, it is actually quantum technology, quantum encryption technology. It's not just a brand name.

This technology will benefit the Company tremendously, because what we try to do is we, SSC, we are trying to become a Company that's an enabler of digitization of financial assets. We also want to become a provider of the financial infrastructure, because as I've repeatedly said, I believe that blockchain is a great thing. Blockchain is the future. Tokenization is an integral part of blockchain.

So this has nothing to do with bitcoins of the world, which trade on thin air. So I think bitcoin itself, together with many other cryptocurrencies, are -- even though they are awakening to the market, to wake people up to the asset digitization future, but they are also a major distraction to what blockchain should bring to the economy.

So what we try to do is we try to form joint ventures with Guangzhou Yongkai, which is the shell for the team that worked with IBM blockchain -- actually hide IBM blockchain for a big part of the technology development that's been already utilized and adopted by many banks and many countries -- and that under our guidance, they managed to convert the settlement platform into the world's -- one of the first platform of both being a swift -- in other words, a settlement platform for regular banking settlements as well as a settlement platform that's able to issue what we call utility tokens that can convert -- becomes the common currency that can convert different asset tokens by different assets.

So its relevant capability is very, very strong. And this is an integral part of our digital finance infrastructure building.

Great. It looks like you licensed the Red Coin Chain securitization platform to one company last year. Is this platform live and producing a revenue stream? Also, how many active licensees do you expect to have by the end of 2018?

This is a very, very good question. Now, Red Coin Chain securitization was our first licensing deal, and it's still going through the lengthy process, because we took our shares of Hong Kong as we -- signed to take over shares of a Hong Kong-listed Company, and it takes forever for the transaction to complete due to a valuation and regulatory stuff, regulatory procedures.

But since then we have developed a whole licensing model, where as we take the technology that we have now -- our technology, by the way, is completely operational -- is what we now call the pyramid technology, which we basically take a four-layer asset securitization platform that includes dynamic ontology-driven indexing, securitization of indexes and futures. That includes the management of digital wallets. Some can have a biometric feature to it.

That includes the B2B digital asset securitization and trading platform. That includes the digital asset settlement and the logistic platform. So we basically take our technologies -- our three major technology platforms, which is Apollo, Plutus, and Venus -- and we basically personalize it for various vertical industry leaders through a licensing deal where we take some cash upfront, some shares upfront -- you know, publicly traded cash or cash-equivalent securities. And then we would very much like to help our partner, who are usually already the vertical industry leader, to really do their own quantum leap into the asset digitization and digital asset ecosystem era.

So that's why we like to take a part on the upside of the company's shares once they enjoy the fruits of their -- you know, the results of their of market leadership. So therefore we are very, very strong, and we now have a very strong licensing model to help to enable many vertical leaders, because we like to stay with the sweet spot.

We cannot, for example, move into the crude oil industry or liquid natural gas industry and become a player there -- be able to manage all that. However, we just like to take the biggest margin, and take our technology, and continue to license to them.

So regarding your question about 2018, we'd like to do four or five of these licensing deals this year for sure. Then it will build up the basis and word of mouth, and we will be able to expedite it next year. So internally, internally, we set the goals for our team to talk to 20 to 22, which we're in the middle of talking. So hopefully this year we can close four to six and get them into operation.

Great. Last question. Just a status update on US headquarters: do you think that will be something that will be open by the end of the year?

Yes. Seven Stars Cloud is always a -- it was always a Nevada-registered Company. It's 10 times more so now, because our business is truly global.

Our US headquarters is actually not in New York. It's most likely going to be Connecticut. So we are in the middle of negotiating with the Connecticut state government. We are very close to securing a very, very nice site to build our US headquarters, and that's -- with acquiring about five buildings on the site.

In the meantime we have secured a location in the Wall Street area in the downtown -- lower part of Manhattan. So hopefully by May that we now build a very strong robust management team out there that will be headed by myself, Bob Benya, a very strong CFO, very strong IR, and a very strong Chief Operating person.

So in the past the Company was primarily a kind of decentralized Company, with some of the stuff in Beijing; some of the stuff in Shanghai, even in China. But we really had Jason as a one-man show -- well, other than the Board members -- in the one-man show in the US. But this will all change.

We are going to build a very strong organization, like we have already very successfully done so in Asia. And off we go. Yes, the answer is: US headquarters is well on its way.

Great, thank you. So this concludes the Q&A portion of the SSC full-year 2017 investor earnings conference call.

To be alerted to news events in a timely manner, the Company recommends following us on Twitter with the handle @SevenStarsCloud, signing up for SCC alerts at secfilings.com, exploring our website at www.sevenstarscloud.com, or setting up a Google or Yahoo alert with the keyword SevenStarsCloud or NASDAQ ticker symbol SSC. Thank you to everyone participating and listening to the call today.

This concludes today's call. Thank you for your participation.