Abaxx Technologies: Financing And Uplisting Marks Transition To Revenue Growth Phase Feb. 27, 2023 10:54 AM ET
Abaxx Technologies Inc. (ABXXF)3 Comments5 Likes
Summary - On February 22nd, Abaxx Technologies provided an operations update where they indicated the near completion of a 100-day sprint, with nearly all critical path items completed.
- Abaxx's last critical path item to launch is the raising of "regulatory" capital from strategic partners ahead of their exchange launch later this year. Abaxx "only" requires $16M USD.
- Like Intercontinental Exchange did 20 years ago, Abaxx is likely to bring in strategic partners to provide open interest on the exchange in terms of trading volumes or physical commodities.
- In the early 2000s, ICE gave away 80% of their exchange for free to key partners in exchange for their "order flow", Abaxx will probably follow the same model.
- Abaxx is engaging in a heavy commercialization period this March, attending key industry conferences. These events may provide an opportunity for partnership announcements or other positive catalysts.
Dilok Klaisataporn Introduction If the pre-revenue phase of Abaxx Technologies (
OTCQX:ABXXF) was written up as a book, in my opinion we'd be entering the final chapter as the company transitions to its revenue growth phase later this year. The company is coming out of a heads down all hands on deck 100 day sprint to prepare their 91% owned Exchange and Clearinghouse for launch including completing key technical reviews with regulators, and with the hard work in the rear-view mirror, is now set to author the final chapter of their pre-revenue phase. In the below article, I will discuss some key developments disclosed by Abaxx Technologies-particularly around financing their exchange-in their most recent operations update published on
February 22nd. I believe looking at Intercontinental Exchange (
ICE) as a historical analogue is instructive for this critical time period that Abaxx is about to embark upon.
Abaxx Discloses Strategic Equity Financing with Market Ecosystem Partners Before market open on Wednesday, February 22nd Abaxx Technologies
announced that they had nearly completed a 100 day sprint to prepare their 91% owned Singapore Abaxx Exchange and Clearinghouse for launch later this year. The company also indicated that they met with regulators to demonstrate their end-to-end trading and clearing software. The only remaining items left for the company is a "
launch-preparation workshops with general Clearing Members to be held in March". This is further evidence that the company is on the precipice of launch and simply needs one final step, raising the necessary funds for regulatory capital (more on that later).
Raising the regulatory capital will be the final chapter in a rich and interesting pre-revenue book that Abaxx has painstakingly authored over the last 4 years. Josh Crumb, CEO of Abaxx indicated as such in an informal ask me anything style
Tweet thread following the operations update on February, 22nd. In Josh's comments he indicated that only a few loose ends with the Exchange launch remained, with the last critical piece prior to launch being the "partner funding".
Josh Crumb Tweet 2-22-23 (Josh Crumb Twitter) Towards that end Abaxx announced in their operations update that they had officially entered into agreements with multiple institutions in order to secure the necessary regulatory capital the Exchange will need at launch.
"Engaged multiple institutions to lead a reserve capital financing with the goals of incentivizing exchange ecosystem participation with minority ownership, and to meet regulatory licensing capital requirements prior to the launch of the exchange[…]. The Company has initiated a strategic equity financing process with market ecosystem partners at the Abaxx Singapore subsidiary level. Potential strategic lead-investors and additional commercial participants seeking minority equity ownership in the exchange ahead of launch have been identified. We are engaged with multiple institutions and working toward acceptable terms and timelines in preparation for a formal equity offering in Abaxx Singapore. The potential equity placement is described by the Company as "reserve capital" that will remain in separated accounts of Abaxx subsidiaries to meet minimum regulatory capital requirements and future Abaxx Clearing risk-waterfall needs" Abaxx Feb 2023 Operations Update Let's break down the above quote from the operations update a little more, as I believe many investors didn't appreciate its importance. Before doing so, let's set the table by looking at how Intercontinental Exchange first got their start.
ICE as a Historical Analogue for Abaxx Intercontinental Exchange is one of the largest exchange and clearing groups in the world, with a market cap in excess of $55 billion and an enterprise value in excess of $70 Billion USD. ICE started off with humble beginnings in the late 90's famously bought for $1 by Jeffrey Sprecher in order to disrupt local utility energy trading. ICE's huge break came in the early 2000's when
Enron blew up spectacularly. Jeffrey Sprecher detailed this history in a 2018 interview with
Inside the ICE House (see minute 17-24). In minute 21 Jeffrey tells the story of how he "gave away 80% of the equity" to his future customers in exchange for order flow on his exchange (i.e., trading and transaction fees for ICE). The following year
ICE acquired London based International Petroleum Exchange which allowed them to trade crude oil futures in the form of Brent, creating an international crude oil benchmark, which put ICE on the map.
I think ICE is a really interesting case study for Abaxx in that ICE started off as a startup looking to deploy new digital and internet technology in order to disrupt what was effectively an analog trading system up until that point. ICE early on focused on energy futures and helped to develop a key benchmark in Brent (see acquisition of IPE link above) and got its name by rising from the ashes of a large corporate trading scandal that laid bare many market inefficiencies and corruption in Enron.
A little over 20 years later we now have Abaxx looking to disrupt global exchanges by deploying a new suite of cloud (and eventually blockchain based) trading tools to an industry that is still stuck in the web1.0 server world mostly. As I discussed in my
September 2022 Seeking Alpha article many exchanges such as
CME are just now starting to move over to the cloud. Other stalwart exchanges like the London Stock Exchange recently
signed technology partnerships and strategic investments with Microsoft (
MSFT). Abaxx has spent over four years painstakingly developing a physical LNG contract as its flagship benchmark for its global commodity exchange, and it's about to launch on the heels of a recent corporate trading scandal at the London Metals Exchange "LME" which has opened the door for Abaxx to launch a physically delivered Nickel Sulfate contract on top of their previously announced LNG and Carbon contracts. Not only that, they have developed a cloud native technology platform with custom verified security via their proprietary ID++ technology.
Strategic Partnerships As mentioned above, ICE effectively gave away 80% of their equity in their company to a group of strategic investors early on in order to incentivize market participation and order flow within the exchange. ICE did this not because they were being charitable, but because they knew that an exchange without trading volumes isn't worth much, but 20% of an exchange with multiple benchmark contracts could be worth tens of billions of dollars-put another way, 100% of nothing is still nothing, but 20% of order flow worth $10 Billion in transaction fees is $2 Billion. As an illustration of this point, Abaxx recently put together an
investor presentation slide deck that shows how valuable a benchmark energy contract can be-the Brent contract for instance is estimated to be worth $3 Billion alone (see image below).
Value of Benchmark Commodity Contracts (Abaxx Technologies) Abaxx Technologies Investor Presentation, February, 2023 Abaxx is acutely aware of ICE's history, as many of and directors such as Joe Raia, Thom McMahon, and Dan McElduff (among others) competed directly against ICE over the past 20 years.
Abaxx Exchange leadership team (Abaxx Exchange) Abaxx Exchange Leadership Team, Slide 16 Investor Presentation
What's interesting is that today Abaxx is not just giving their equity in their 91% owned Abaxx Exchange away, but instead are selling equity in the Exchange to strategic partners at a likely fair valuation. As the press release noted, Abaxx has "
Engaged multiple institutions to lead a reserve capital financing with the goals of incentivizing exchange ecosystem participation" and later calling these institutions "
market ecosystem partners". Furthermore, Abaxx noted that "
We are engaged with multiple institutions and working toward acceptable terms and timelines in preparation for a formal equity offering in Abaxx Singapore.".
Taken together, these comments tell investors that Abaxx has been busy over the past several months actively engaging market participants, likely in the carbon, energy, and metals trading space, who will invest in and then be incentivized to use Abaxx Exchange for their energy, metals and carbon trading needs. Similar to how ICE
gave away 80%, Abaxx is now selling off what will likely be a non-controlling interest in Abaxx Exchange to build open interest and trading volumes in their initial contract offerings in
LNG, Nickel, and
Carbon (see hyperlinks for additional information on contract submission to regulators).
The fact that Abaxx has engaged these strategic partners in a formal equity raising process, and is moving towards locking in "acceptable terms and timelines" tells investors that the final chapter of the Abaxx pre-revenue phase is likely being written right now.
What Type of Valuation Should Investors Expect From This Strategic Offering? ICE gave away 80% equity for free, but Abaxx in my opinion will seek a "fair" valuation of the exchange based on the historical value of SMX which was actually sold to
ICE in 2013 for $150 million USD. When ICE made the acquisition at the time they said the following (see above link for full article):
"ICE is not actually interested in the existing business, which is losing money, but rather in buying the ability to offer and clear trading in Asia, Sprecher said. "We are really buying the infrastructure and the fact that we would avoid a three-year process if we were to start on our own, and the fact that it's not particularly easy in Asia for a Western company to start an exchange and clearing infrastructure," he said." This historical "comp" tells investors what the clearinghouse and exchange infrastructure is worth. As I laid out in my
September, 2022 Abaxx article if investors inflated the 2013 sales value by 3% annually, then it would be worth approximately $196 million USD today. I believe this range is where Abaxx will wind up selling equity to strategic partners. This sweet heart valuation will effectively be valuing the exchange for just its infrastructure, and discounting any potential cash flow options that would come from potential benchmark contracts in LNG, Nickel or Carbon. If partners trade on the exchange substantially, then their investment would grow substantially in part because of their assistance in providing open interest or liquidity via trading.
Value of Abaxx Exchange (Author) Chart created by author.
How Much is Abaxx Looking to Raise, and How Will the Financing Work? In their
August 2022 investor call Abaxx indicated that regulatory capital for the Abaxx Exchange and Clearinghouse would likely be around $16 million USD. This will most likely go towards their Approved Clearinghouse license "ACH", which has a minimum requirement of
$10 million Singapore dollars (~$7.5 million USD) and their exchange or Regulated Market Operator "RMO"
"RMO" liquidity license requirements would be equivalent to ¼ of their annual operating budget, which Abaxx noted to be approximately $1 million USD a month ($12 million a year) in their August 2022 investor call, implying a $3 million USD minimum. Thus the minimum cash requirements for both the RMO and ACH would be approximately $10.5 million USD. That said Abaxx and their partners likely would want to have a larger cash cushion just in case, and hence this is probably why they are seeking around $16 million minimum.
Given that Abaxx is going through the effort of raising strategic financing at this point, my belief is that they will likely sell two to three times that requirement in order to spread equity out to a number of exchange partners at the initial fund raising among this group. In this case I think investors can expect to see an exchange dilution of somewhere between $25-$50 million USD.
Below I've put together a chart what this would imply for Abaxx in terms of Abaxx's equity interest in Abaxx Exchange, and regulatory and working capital requirements for Abaxx Exchange should Abaxx raise between $25 - $50 million USD at a valuation around $150 million.
Abaxx Tech equity interest in Abaxx Exchange with valuation at $200 million (author) In both instances I've highlighted $30 million USD as what would be the sweet spot for Abaxx Exchange in that all funds could go towards satisfying the projected regulatory requirements as well as a full 14 months of working capital for the exchange assuming the burn rate stays at $1 million per month. Raising this amount would also reduce dilution for existing shareholders. That said, if the opportunity presents itself to sell equity to some of the largest banks, trading firms, and commodity producers in the world in exchange for their partnership on contributing open interest on key contracts, then that would likely be a wise trade off. Not to put too fine a point on it, but that's why I think ICE gave away 80% equity initially.
Importantly, Abaxx noted in their press release that funds would go towards "reserve capital" that would be placed into "separated accounts", implying that the funds raised from strategic partners would go directly towards exchange requirements. That said, if Abaxx raises in excess of $30 million I would expect that some of that excess fund raising would find its way to Abaxx Tech. For instance, it's possible that the funds go directly to Abaxx Tech (they are selling the equity after all) and then Abaxx contributes their portion of the regulatory and working capital requirements via a pro-rata distribution back to the Exchange.
Who are the Likely Partners That Abaxx Has Engaged? At this point it's impossible to say who the strategic partners may be. Investors can speculate that based on the pedigree of current executives, and the engagement that they have had to date on their
Smarter Markets podcast and recent corporate events such as the
APPEC cocktail reception they threw in September, 2022 who some partners may be. Some potential partners could be:
Aramco Trading Company In
August, 2021 Abaxx announced that Cyrus Hiramanek would join the company as a director. Cyrus was one of the key players in the Saudi Aramco IPO, sale of SABIC to Saudi Arabia's Public Investment Fund, and also in the IHS Markit Merger with S&P Global. Cyrus's connection to Saudi Arabia helped introduce Abaxx to Aramco and PIF officials. Since August, 2021 Abaxx executives have travelled to the Kingdom of Saudi Arabia on several occasions. Abaxx also recently hired Altay Poyraz who previously worked on launching the Tadawul Exchange and Clearinghouse in Saudi Arabia. Furthermore, Aramco has a substantial presence in Singapore and
is actively looking to expand their LNG trading in Singapore.
BHP Officials from BHP (
BHP) attended the Abaxx APPEC cocktail event, and Smarter Markets host David Greely later went on to host a Women In Mining and Resource
event in September 2022. Australian based BHP has trading and marketing offices located in Singapore, and was
rocked by the LME nickel crisis in 2022. BHP has recently been very vocal about creating an
alternative nickel contract to rival that of the LME contract. Abaxx for their part announced last week that they had a Nickel Sulphate contract which will be launched later this year.
Potential TAM of Key Commodity Contracts (Abaxx Technologies) Abaxx Tech Feb, 2023 Investor Presentation, Slide 19
JERA In
2019 JERA announced an expansion into Singapore for LNG trading. JERA is one of the world's largest buyers of LNG contracts. The company has been active in posting LNG
trading jobs in Singapore over the past year.
Abaxx is also participating at the 2023
Japan Energy Summit and Exhibition from February 28th through March 2nd in Tokyo. Abaxx will be a sponsor of the conference, and Abaxx chief economist David Greely will moderate a panel discussion on carbon trading.
Abaxx Technologies Presenting at Japan Energy Summit & Exhibition (Abaxx Technologies) Goldman Sachs Josh Crumb was a former senior executive at Goldman Sachs (
GS) where he worked directly with Jeff Currie and current Abaxx senior economist (and host of Smarter Markets) David Greely. Jeff Currie has been a frequent guest on Smarter Markets, and was most recently a guest in
July 2022. Other Abaxx Executives such as Dan McElduff and Joe Raia also have former Goldman experience as well.
Trafigura Trafigura is one of the largest commodities trading firms in the world, and has trading offices in Singapore. Hannah Hauman global head of carbon trading at Trafigura was on the Smarter Markets podcast in the summer of 2022 as well. Trafigura was
recently embroiled in a huge loss related to nickel trading and would clearly be motivated to participate in the launch of a better nickel contract. It was also reported that Ms. Hauman attended the APPEC cocktail hour in Singapore this past September.
Ivanhoe Mines & Lundin Group Robert Friedland CEO of Ivanhoe mines (one of the largest global producers of copper) is the largest individual shareholder in Abaxx Technologies, and has participated regularly in the Smarter Markets podcast, most recently doing a two part
special series with Abaxx CEO Josh Crumb. It's not much of a leap to think that Mr. Friedland's participation could all but guarantee that Abaxx would launch a copper contract to complement their advanced stage Nickel Sulphate contract that will likely launch later this year.
Josh Crumb worked for mining legend Lukas Lundin and has frequently noted that he's borrowed heavily from the mining titan in terms of corporate structure. Lukas Lundin was an initial angel investor in Abaxx, and his sons
Jack and Will Lundin were recently on Smarter Markets this past summer as well. Like Ivanhoe, the Lundin group would likely be keen on developing physically delivered copper contracts.
March 2023 Marks a Heavy Commercial Engagement Period for Abaxx It's worth noting that in the midst of this strategic partnership financing Abaxx has the following events planned (see
Abaxx events page):
- 2/28-3/2, Japan Energy Summit and Exhibition. Abaxx will be presenting here, and will also be a bronze sponsor of the event.
- 3/6-3/10 CERA week in Houston.
- 3/13-3/14 Wall Street Green Summit in New York. Abaxx will be a co-sponsor of the event and David Greely will be leading a panel discussion at the event.
- 3/14-3/16 International Futures Industry Conference in Boca Raton, Florida.
- Mid-March, trip to the Middle East and Qatar (see Tweet from Josh Crumb below).
Josh Crumb Twitter, Mid-March trip to Middle East and Qatar (Twitter) Josh Crumb Twitter - 3/20-3/22 FT Commodities Global Summit, Lausanne Switzerland, Abaxx will be a silver sponsor at this event and potentially participate in several panel discussions.
One would imagine, that Abaxx may leverage their conference exposure to announce one or more strategic investments during this period, and at the very least promote the launch of their exchange, clearinghouse and contracts during this period as well.
Uplisting In addition to announcing strategic partnerships, Abaxx also announced that they will be holding a special investor meeting on Friday, April 14th where Abaxx has asked investors to vote on a 3 for 1 reverse share split so that the company can meet uplisting requirements for a senior US exchange listing. While the company did not specify if the uplisting would be on the NYSE or NASDAQ. The NASDAQ has a
listing requirement that companies applying for listing have a minimum share price of $4 for at least 90 days before applying-having a 3 for 1 roll back will easily enable Abaxx to meet that requirement. The current stock price is $1.90 USD as of the writing of this article. In the author's opinion Abaxx moving forward with this vote is another clear indication that the company is ready to transition to their revenue growth phase later this year.
Conclusion After a nearly five year development, pre-revenue phase Abaxx Technologies looks ready to transition to a revenue growth phase in the coming months. The company's February 22nd operations update clearly indicates that Abaxx is ready to engage key strategic partners prior to the launch of the exchange in order to incentivize order flow on their LNG, Carbon and eventually nickel contracts. Similar to how Intercontinental Exchange over 20 years ago incentivized interest and trading activity on their key contracts in the wake of the Enron crisis, Abaxx now has their moment to shine with the backdrop of the LME nickel crisis. The company's ambitious commercial event calendar for March may give investors a hint of potential near term partnership announcements and catalysts. Irrespective of how the final chapter is written, it appears clear that Abaxx is ready to write the final chapter in their pre-revenue tale and move on to the next book in their series.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
James Duade