This is the first time that DeFi Technologies has corrected a significant error in its financial statements. This change consists primarily of applying a Discount for Lack of Marketability (DLOM) to its equity investments. According to the company’s recent public filings, these adjustments affect net loss. Aside from being non-cash items, they don’t play into the ongoing cash position. This use of DLOM has resulted in a significant derecognition and reclassification of equity investments from current assets to non-current assets.
The company took a DLOM on its equity investments. This replacement occurred sometime around the middle of 2024 Q2 – 2024 Q3. The cumulative DLOM taken over these spans was $102,555,552. This change is meant to capture the reduced value of some of the equity investments in light of their lower liquidity.
During the period ended March 31, 2024, DeFi Technologies estimated a DLOM of $98,657,552 on its equity investments. This change had a material effect on the company’s financial statements for that quarter. We used the DLOM in our valuation as of Q2 2024. This move resulted in the reclassification of $122,794,452 in equity investments from current assets to non-current assets, indicating a change in the anticipated liquidity of those assets.
In Q3 2024, the company deepened the damage with more misleading changes to its financials. It used an increased DLOM of $3,890,000 to further leverage its equities investment. This brought the total DLOM that would have been applied by the end of Q3 2024 to $102,555,552. During the first quarter of 2024, DLOM was used accordingly. This adjustment caused the restatement of all equity investments reclassified of $155,050,000 from current assets to non-current assets.
For the nine-month period ending September 30, 2024, applying a total DLOM of $102,555,552 to all equity investments is still the case. This combined number further highlights the disciplined manner by which DeFi Technologies has valued its more illiquid assets.
The use of DLOM materials affected the company’s published net loss for Q2 and Q3 2024. It had an impact on the cumulative nine-month total, as well. In Q2 2024, the use of DLOM increased the net loss by an additional $98,657,552. The use of DLOM as of Q3 2024 reduced the net loss by $3,890,000. For the nine months ended September 30, 2024, the net loss increased by $102,555,552. This increase was due to the application of the Discount for Lack of Marketability (DLOM).
DeFi Technologies made clear that the DLOM adjustments are non-cash items and have no effect on the company’s cash reserves. This is an important and fundamental distinction for investors. That makes it clear, these changes are about valuation and not cash outflows. In response to a discovery request, the company had informed the IRS that the changes caused by the application of DLOM were essentially non-monetary in nature.
A Discount for Lack of Marketability (DLOM) is a discount to an asset’s price. This is especially true for private equity holdings, emphasizing the illiquidity of these assets. This factor recognizes the fact that assets that cannot be readily traded on public markets are less desirable to investors. DLOM is often used as a blanket adjustment to equity investments in private companies or public companies with low trading volume.
DLT is in fact a standard accounting practice. This ensures that investors get a clearer picture of the true fair value of hard-to-trade assets. By doing so and applying this discount, companies hope to give investors a more accurate picture of their financial health. This gives investors full visibility to the fact that these assets may be difficult to convert into cash.
Furthermore, the reclassification of equity investments from current to non-current assets is yet another substantial downstream effect of the DLOM application. Current assets are those that are expected to convert into cash within the next 12 months. On the other hand, non-current assets typically have a multiyear horizon. The reclassification is meant to reflect DeFi Technologies’ expectation that these equity investments will be illiquid for a longer time horizon.
This reclassification gives investors a better picture of the company’s overall asset mix. This investment strategy aims for sustained, long-term growth. It puts building long-term value ahead of chasing after short-term returns. The reclassification of assets is seen as a move toward a more conservative financial reporting practice that is in accordance with industry standards.
DeFi Technologies’ decision to racially apply DLOM to reclassify its assets was not a simple strategic decision. This step is intended to improve transparency in its overall financial reporting. By being transparent about the illiquidity of some investments, the company hopes to create a level of confidence and trust among investors and stakeholders. This proactive approach to managing their financial impact can improve the company’s brand perception and market credibility.
In addition to focusing on the non-cash character of these adjustments, the company’s alternative fact number five du jour is an essential red flagger. It sends a signal to investors that the company’s underlying operational cash flow is not impacted, further instilling stability and confidence in its financial health. This transparency is crucial, especially when it comes to the unregulated cryptocurrency and decentralized finance (DeFi) sectors.
As a leader in this emerging space, DeFi Technologies is taking proactive steps by implementing DLOM and reclassifying assets. This strategy aims to address the increased scrutiny from regulators and auditors head on. Perhaps more tellingly, the DeFi space is maturing, and fast. As seen by the examples above, increasingly companies are being held accountable to higher standards of accounting and disclosure. By implementing these measures, DeFi Technologies is demonstrating its commitment to being a responsible and transparent participant in the rapidly evolving industry.
Further, how the company applies DLOM can affect the company’s future investment decisions. After this wild ride, DeFi Technologies has a renewed appreciation for the illiquidity risks associated with specific assets. In this scenario, the company can afford to be more conservative in its investment strategy. You may want to reduce risk in your portfolio by introducing more liquid assets. Or, you might want to pursue investments with more potential for long-term growth.
Additionally, the company’s choice to apply DLOM would be influential on the other companies operating in the DeFi sector. As we all know, the industry is changing every day. Consequently, we must have uniform accounting standards that properly reflect the distinct nature of digital assets. DeFi Technologies' actions could encourage other companies to adopt similar measures, leading to greater transparency and stability in the market.
Whether or not it is appropriate to apply DLOM will immediately affect the company’s valuation. It’s ability to initiate cascading, downstream impacts that undermine economic security. DeFi Technologies is sensitive about the illiquidity discounts of these assets. This new approach certainly provides a much more accurate picture of its true value. This may change how investors view the boondoggle risk and how that risk may impact the company’s stock price.
That being said, we should acknowledge that the increased application of DLOM is a good thing. It is this last approach that results in the most grievous net loss. It does provide a better picture of the company’s underlying financial health. This type of transparency can help protect investors in the long term by letting them make more informed decisions.
DeFi Technologies needs to get creative if it wants to find a way around DLOM’s effects on its financial statements. This forward-thinking step will protect their bottom line. Open up new channels of private capital to address the liquidity of current investments. Time to consider new valuation methodologies that actually reflect the unique nature of digital assets. The company will likely still have to undertake a strategy for audit and regulatory engagement to comply with shifting accounting standards as they develop.
Additionally, the company’s proactive approach to financial reporting could double as a competitive advantage in the long run. By being proactive about these issues, DeFi Technologies can gain investor confidence by highlighting its focus on transparency and accuracy. This commitment further establishes the company as a transparent and trustworthy partner in the DeFi space. This has the potential to result in higher investor confidence and improved capital market position.
In addition, the use of DLOM could further shape the company’s capital allocation judgments as well. DeFi Technologies is better positioned now than ever to understand the risks and rewards associated with each asset class. That knowledge will enable them to better decide where and how to invest their capital to create the most long-term value. This could involve investing in more liquid assets, pursuing strategic acquisitions, or returning capital to shareholders through dividends or share buybacks.
On the company’s side, it emphasizes the non-cash nature of the DLOM adjustments. This concentration is particularly important in the context of the DeFi industry. It’s no surprise that investors should be inherently wary of companies that are so reliant on non-cash accounting shortcuts. They are concerned that these high-pressure tactics could mask more serious financial problems. DeFi Technologies brings good news, having made investors fully aware that DLOM adjustments will not affect its cash reserves. This is a sign that the business continues to be basically healthy on the core.
