DeFi Development Corp. (DFDV) Earnings Call Transcript & Summary

Yes. Emphasize probably -- so you said it expands the total addressable investor base for the company, 100%. I think that's the major strategic advantage for CHAD. So with CHAD, we can issue more of it at $10, which is the idea to issue at $10, pays 13% dividends every trading day. And that appeals to a different investor base than DFDV common does. Of course, DFDV common shareholders are welcome to and I think are likely to participate in CHAD, but we can target a different segment. And that segment doesn't have to know anything about crypto. It doesn't have to know anything about Solana. As a segment might just say, oh, 13% looks like a pretty good deal. These guys have dividend coverage for 150 years. This looks like a fairly safe investment. And then those purchases of CHAD at par result in additional SOL purchases for DFDV, which accrues essentially to common shareholders because we get more exposure to SOL and we get to pass on that leverage exposure enabled by CHAD to common shareholders.

By the way, one thing I'll add is if we do end up closing at $9.75, that would imply that CHAD is pacing ahead of comparable instruments on the race to par.

Love it.

The memes are going to be really good.

They are.

The memes are going to be phenomenal. And I guess on that note, real quick, -- there's been a number of things that we've talked about internally, too, as it relates to just marketing CHAD and like how to position it. And I just want to drive home the point, Joseph, you said like we have this view internally that for now, and this could, of course, change, that CHAD should very much just be positioned as it is this high-yielding preferred equity by NASDAQ-listed company with more than 160 years of dividend coverage and keep the story as simple and clean like that. We've seen Strive very much kind of follow this similar kind of model. It's done well for them. And I think that's just something that I want to hammer home and also maybe use this as an opportunity to let folks know that we've pursued a number of different marketing channels for this, including radio, billboards, your traditional platform advertising. So call it LinkedIn, Reddit, kind of experimenting all across the board. And yes, we want to keep the story as clean as possible. And that's why even our funnel pages like whoischad.com, which I'm sure folks have seen from the billboard photo on our Twitter. It's just trying to keep the story as simple and clean as possible. And I think that there is still a massive market opportunity just going after retail folks who want income yield. And of course, there's still a big cohort of crypto natives who I think will see CHAD and understand how it works with the crypto engineering behind it and want to ape it. So yes, I just wanted to call some attention to that. I guess also, there's a number of things I want to ask on CHAD, but one real quick. This morning, we did also announce this repurchase program. Do you guys want to hit on that real quick? What was that all about?

Yes. I'm going to try to nail a couple of questions on CHAD and talk about, like, the issuance strategy for CHAD and some of the levers that the company has available for, like, supporting the CHAD trading to par and potentially staying there or around there.

Yes. Just go crazy on it.

Sure. Okay. So of course, we pay a lot of attention to Stretch. And Stretch launched in July last year and then went through depegging, we could call it, in June or July of this year. And -- we've seen debate quite a bit internally on causes, the difference between Stretch and SATA, like, we've spent a lot of time on thinking about this and how to make CHAD resilient. So what we've tried to do here is issue an instrument that accomplishes the goal of allowing us to get leverage exposure to Solana without diluting common shareholders for the benefit of ultimately long-term common shareholders. And so kind of, how that's come about or the outcome of that line of thinking was a relatively small issuance that we hope quickly trades to par, and we have an ATM available on CHAD. So once CHAD trades to $10, we can issue more CHAD and sell it into the market at $10 or higher potentially. But the idea would be that we issue additional CHAD shares at $10, sell it into the market, use the proceeds to buy more SOL. And then the mechanisms available for maintaining or for nudging the price toward $10 is, one is, we can change the dividend, SOL up. So if CHAD doesn't trade to $10 or it comes down from $10, we can increase the dividend. So for example, we could theoretically increase the dividend from, say, 13% annually to 13.25% annually or 13.5% annually. And the Board makes this decision, and it can happen pretty quickly. There can be month-to-month changes in dividends, no problem, up. Now there's terms on reducing the dividend, the stock has to trade above a particular price for a particular amount of time in order for the dividend to come down. So -- like, for example, right now, the terms of CHAD prevent decreasing the dividend because it hasn't traded up to par and it hasn't been above the particular price level for any period of time yet. So it's like a one-way ratchet when CHAD isn't at par or right around par on the dividend. So we have the potential to increase if it comes down. Then the next instrument available is what we announced this morning, the buyback program. So if we're not issuing CHAD, like if we're out of the market, it's below $10 then the company has the ability to buy CHAD back. So let's say, what happens to -- Stretch happens to CHAD. CHAD trades down from $10 to $7.50, maybe because Bitcoin went down or there was some other situation, right? Then the company has the ability to buy back CHAD, which can have the effect of stabilizing the price, also just reducing the ongoing dividend cost to the company or maybe we just think the issuance got too large, and we're in a bull market and we say, okay, we think we're getting close to the top and we want to delever the company has the ability to buy CHAD back. And there's no intention to buy back to reach par. There's only an intention after CHAD reaches par, more of it gets issued to support the price if needed, which we also see Strategy doing. They've been buying back Stretch for, I think, now more than $100 million a week on average over the last at least 6 weeks, which I think has been effective in nudging Stretch back to par as well. I don't think I missed anything.

No, I think you hit most of it, actually. I mean, look, I always have said that capital markets vehicles are about maximum flexibility, right? That's at the end of the day, what matters most. So having any number of options available to us, to support the instrument at par in the future when it matters is really the impetus behind putting this in place. It was -- as I'll emphasize again, like not meant to signal that repurchases are beginning on CHAD right now. The intent is to make sure it gets to par first, but making sure that we have the full arsenal available to us to support par over the course of the long term.

Guys, maybe one thing I would love to quickly wrestle on or get your thoughts is we have our own views internally as an issuer of digital credit and dare I say, experts. But maybe you could quickly hit on how we view the competitive landscape and how we view CHAD being able to attract capital when there are arguably competing. We don't view it as competing, but someone might say they're competing products out there like Stretch or even Strive. How do you think -- yes, how should folks be thinking about the competitive landscape?

DK, do you want to take a shot at that one or shall I?

Yes, I can talk about it a little bit. I mean, look, to some extent, yes, these are competing products when you think about the investor bases that these instruments are tapping into, right? If you're going after the income investors, preferred investors, yield buyers, folks who typically index towards these, I'm going to say, like steady yield instruments, then yes, definitionally, you are trying to attract the same investor base. At the same time, like -- there are also a subset of folks, I think, who are more willing to underwrite, I'm going to say, in big quotation marks, the digital creditworthiness of an instrument that is backed by Bitcoin versus backed by Solana, right? And Bitcoin, obviously, I'm going to say, has more, I'm going to say, favorable, I don't know, more favorable outlook among institutional investors by virtue of being better known and Solana is just a lesser known quality. But one of the things that has resonated particularly well as we've been chatting with a lot of investors on CHAD is that when you look at the funding options available to service the dividends by virtue of CHAD being a Solana-backed instrument, we have a funding mechanism that is not available to stretch or SATA. So let's go through those mechanisms. Historically, Stretch and SATA have had to pay their dividends doing what, either selling the underlying BTC on the balance sheet in order to shore up the cash or running the common equity ATM to service cash obligations. We obviously have those options available to us as well if we wanted to, but we are not beholden to those funding sources because SOL has native yield, and our organic yield has been best-in-class in the space. Simplistically, if you're able to service your obligations from the treasury itself being productive and earn consistent recurring economics from the assets that exist in your balance sheet, it sort of puts the instrument into a league of its own, right? So in some respects, again, yes, there are competitors in that we're going after very similar investors. But mechanically, these sources of funds come from quite different places. I think Joseph had a good phrase of this pretty recently, which is to say that CHAD doesn't actually require us to consume the treasury, right? The treasury works to pay CHAD itself. And I think given the relative size of our treasury, the yields we've historically been able to generate, we obviously have ample room for CHAD to scale.

Awesome. Joseph, anything you want to add on that? Or should we move on?

I think that's great.

Cool. Just a couple more. I know we're coming up on time. DK, maybe this one is for you. The SOL Boost Framework. That launched in a much weaker market. Actually, third quarter, I think, gave us like the first real opportunity to watch it, work in the other direction. Anything that we've learned from like the last 2 months that have taught us about our ability to deliver amplified SOL exposure? I know we highlighted it on socials and folks can, of course, see it on stateofsol.com. But the common outperformed SOL quite handsomely. Anything you want to note on that front?

Yes, it's working exactly the way we intended it to. I have much more to say on it. It's always really -- it's funny, like, it's always really interesting to highlight a framework or provide a new lens of thinking about these things when the market is not acting well, right? And we obviously introduced the SOL Boost Framework before SOL started running, before our common equity started running. And frankly, I thought -- or I think the last few months are a really good affirmation that the way we've been thinking about the structure of the business has been more or less right. So what are some proof points. I think in the SOL Boost Framework, we talk about two various sources of return to amplify SOL price return. There's obviously intelligent leverage, which we've spoken about as long-duration capital, low coupon, stuff that, again, can withstand a prolonged bear market. CHAD is a very good example of intelligent leverage, and I expect is going to be the primary form of intelligent leverage that we lean on. But our convertible debt was really the first, let's call it, first iteration of that, that we took on last year. And then there's SOL per share growth. And throughout various market environments, we've actually seen both of those factors kind of toggle and deliver some kind of boost, if you will, versus SOL price. So when I think about, let's say, the common equity versus SOL year-to-date, common equity is up, SOL is still down a little bit, right? And again, I think that speaks to the element of SOL per share growth offsetting what you would expect to be a natural amplification on the way down, but we've actually gotten a little bit of a cushion by raising the NAV floor of the business, if you will. And then when you look off of the lows, we've outperformed SOL off of the lows. In Q3, we delivered 1.5x SOL's return roughly. The common was up 83% versus SOL 57% in Q3. And then August was really like -- if you isolate just August performance, I think we delivered nearly 3x SOL's price return. SOL was up somewhere around 38% and the DFDV common was up over 100%. Again, like you can chop this up any number of ways. But again, it speaks to this very simple idea that if you have conviction in this asset, the way that we do, how do you structure your business so that you create amplification of that asset, amplification of that return. And again, 1 year is maybe just a little bit of a taste of what's to come and certainly 1 quarter as well. But we think structurally, we're going to try to do whatever it is that we can do to create more amplification going forward.

Excellent. Last one here. What do we think -- I'd love to hear from both of you guys and maybe it's the same answer, but what do you think is the biggest growth opportunity for DFDV going forward?

CHAD.

Yes, 100%, let's get it to par. We put the $300 million ATM on it. It will only run at $10 or I think I have to say right around $10. That's going to give us more leverage, give us more SOL boost. And yes, it's the biggest opportunity we've got. It's our #1 focus. And so far, I know it's early and it's small, but it looks like it's working.

The memes will continue until par is reached. And even once par is reached, the memes will continue. So we have -- everyone has that to look forward to.

I'll add one thing to this. And I'm going to give credit to Matt Cole over at Strive for this framing, but it's something I've thought about for quite some time, which is that I think a lot of folks focus a lot on protecting downside risk and don't spend a lot of time focusing on maximizing total returns to the upside. I actually encountered this dynamic a lot on the buy side, where I was lucky at least for the time that I was on there to work for a portfolio manager who wasn't afraid to take very concentrated positions and really swing for the fences. And his whole philosophy was like if you're investing in tech the way we were, tech typically outperforms like most sectors in the market, and you might as well try to go for as many wins as possible and go for a 30% year, a 40% year, a 50% year, whatever it is. And traditionally, on Wall Street, you're taught to manage risk. You're taught, like, a steady 5% here, a steady 6% here, like, is really the best way to go about it. And again, that can be a great business model. I don't want to diminish the idea that small wins can really compound and build up over the course of the long term. I think we've certainly demonstrated that in our near-term execution. But despite being, I'm going to say, focused on as many base hits as possible in the near term, like, the goal is not a single base hit over the long term. The goal is we have this asset that sits on our balance sheet that we think is going to go up 80x. How do we focus on maximizing the total returns of that asset? How do we focus on amplifying this as much as possible? And frankly, our focus every single day, our whole purpose for waking up and working at DFDV is to structure the business to amplify to the maximum extent possible. And I think it's absolutely crucial that we work to get this right over the course of the next year, 2 years, 5 years. We've seen some, again, really encouraging early proof points, but CHAD is going to be absolutely crucial to this vision.

Great. Thanks for that last little bit there. Guys, we can call it a wrap. And I guess before just concluding remarks, I want to take a second to maybe acknowledge or point out the fact, maybe folks have forgotten that we are actually 4 days out from 10/10, where, of course, you saw the biggest crypto liquidation in history and that kicked off what has been roughly a 1-year long bear market. And so I think needless to say, the vibes are starting to feel good. We're feeling really optimistic. I personally never have felt like there's been a better time to be at DFDV and super, super excited for what's coming. And I think I kind of speak for everyone and I say that as well. So Yes. With that said, thanks, everyone, for coming on in. And also thanks to those who submitted your questions. DK, Joseph, thank you guys both for attending. Any final remarks?

Yes. Thank you for sticking with us for everybody who's on here and listening. I really appreciate it. Of course, it's been a tough year or a little over a year, but we're optimistic, and I appreciate you all sticking around.

Yes. Well said. Let's wrap. Thanks, everyone. If you have questions, comments, concerns, please don't hesitate to reach out to us as always, any and all constructive criticism is welcome. So with that said, let's close out here and service and SOL per share growth. This is Pete and the DFDV team signing out. Thanks, everyone.

Thanks, everyone.