XYO coin backer touts growth plan after posting strong financials
Updated
XY Labs, backer of the XYO cryptocurrency, is looking to expand its business and list its stock on an alternative trading system (ATS) after posting a $5.8m (£4.6m) profit for its fiscal year.
Markus Levin, an XY Labs co-founder, told Capital.com that the San Diego, Calif.-based firm is looking to get into non-fungible tokens (NFTs), and possibly so-called layer two projects that are built on top of existing blockchains and designed to make cryptocurrency transactions faster. The company will list on the tZero ATS later this quarter.
XY Labs engages in geospatial data mining in that it collects location data and other statistics through its XYO blockchain network – which runs on Ethereum, backer of the ETH coin – and contains four million nodes. As part of its services, the company rewards people who provide and verify data with an in-house virtual currency, which is enabled through the company’s blockchain network, and can be converted into the in-house coin, XYO, and traditional fiat money.
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Companies 'live off' reserves
Levin claimed that XY Labs is the only blockchain company – outside of a cryptocurrency exchange, NFT producer, or something along those lines – that is profitable. Levin, also the company’s head of operations, based the comment on his review of US Securities and Exchange Commission (SEC) filings and his discussions with other blockchain companies.
"For the normal protocol, which tries to solve some problems for the world, I haven’t found a profitable one yet,” he said.
Usually, he added, blockchain companies “live off” their financial reserves and “hope that their token price doesn’t crash too much.”
“We show that you can do it differently, that you can actually build a real business and real customers, especially if you look outside of just the crypto space,” said Levin. “We’ve got the technology and create revenue and profits.”
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Exemptions permit public share sales
The company said its revenue soared 73% year-over-year to about $13m, while cost of sales decreased by $1m.
XY Labs issued a news release on its financials on Monday after sharing the information with Capital.com and some other media outlets on Friday. Few private companies make a habit of sharing financial data for wide-scale public consumption, largely for competitive reasons. Levin said XY Labs decided to issue a press release because the company is required under US Securities and Exchange Commission (SEC) rules to include financials in a periodic regulatory filing after obtaining a Regulation A+ exemption.
Such exemptions allow private companies with more than 2,000 shareholders to offer and sell securities without issuing a formal offering. Companies with such exemptions are allowed to raise up to $75m.
Markus Levin, XY Labs co-founder (Courtesy of XY Labs)Shares to be tokenized
XY Labs used the exemption to raise $22m by selling shares directly to the public through crowdfunding rather taking the more traditional route and partnering with venture capitalists (VCs).
“We thought: We don’t want to take money from VCs,” said Levin. “We have a more decentralized (banking) mindset.”
While reporting results to the SEC, private companies receiving Regulation A exemptions do not often issue news releases, often because the firms are not profitable, according to Levin. He indicated that XY Labs issued a news release because it wanted to be transparent and “do the right thing” for its 23,000 shareholders before the offering through the tZero ATS is held later this quarter.
“We want to inform our shareholders (on) what we’re doing,” he said.
Shares will be tokenized and provide liquidity to existing and future shareholders, he added.
Finance expert skeptical
It is “plausible” that XY Labs is the only profitable blockchain company of its kind, depending on how narrowly it is defined, University of Florida finance professor Jay Ritter, who specializes in IPOs, told Capital.com.
But Ritter said he is skeptical of any company that does not list on the Nasdaq, New York Stock Exchange, or Toronto Stock Exchange (TSX).
“It doesn’t have that (regulatory) certification,” he said. “Now, in the cryptocurrency space, you might be appealing to a different clientele that wants to be more comfortable with some alternative trading system. But it’s still got that problem that you don’t have that certification.
“In the cryptocurrency area, there’s been all sorts of fraud and theft. My general attitude is: Nasdaq, NYSE, with their listing standards, that’s got the seal of approval (and shows) that there’s a lot of confidence that this is a legitimate company. Now, that doesn’t mean that every micro cap stock that trades on these exchanges is correctly valued.”
Ritter questioned why XY Labs is in a rush to go public via tZero. If XY Labs has a legitimate business that is generating profits, that’s great, he added. But he noted that it is common for a private company to have a fully diluted valuation that is “more than double a more objective number for the company.”
It is also common after a financing round to report a valuation that counts “inherently less valuable” stock options as being just as valuable as common stock, and to treat unissued stock options worth zero dollars like regular shares. He
“This doesn’t mean (XY Labs) isn’t legit and it isn’t easily all that valuable, but I wouldn’t necessarily give it the benefit of the doubt, given that it’s not planning to list on Nasdaq (and) it doesn’t have venture capital from an experienced venture capital firm that’s knowledgeable about cryptocurrencies.”
Levin said XY Labs is not ruling out a traditional IPO in the future, but added that one might not be necessary if the ATS ecosystem grows sufficiently.
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