Abaxx Technologies Starts Commodities Exchange, Now Watch For Revenue And Earnings

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Investment thesis

Abaxx Technologies Inc. (OTCQX:ABXXF) has ambitious plans. It believes its software has the potential to operate a new and advanced commodities exchange. But, it is going beyond just software because it has subsidiaries that are setting up a new exchange and clearinghouse.

The Abaxx Exchange began operations on June 28, 2024 and investors are waiting to see if it can generate revenue, and how much, as well as produce a profit from that revenue. The firm is managed by a team with extensive experience in commodity markets, futures exchanges, and clearinghouse operations.

While the Exchange may generate revenue in the third and fourth quarters, there are no guarantees any of it will reach the parent company in the immediate future. The Exchange subsidiary will have to reach certain profitability measures before it pays royalties.

This is a new company taking on a major challenge, so a lot of uncertainty exists. Therefore, I have rated it a Hold.

About Abaxx

Abaxx is a holding company, and its main line of business is developing software that enables commodity traders and finance professionals to communicate and trade with each other.

According to its Annual Information Form for 2023 (the Canadian equivalent of a 10-K), it operates through five subsidiaries:

• Abaxx Technologies Canada Inc., a wholly owned subsidiary and parent of the following firms:
• Abaxx Technologies Corp., which owns the company’s software portfolio.
• Abaxx Singapore Pte. Ltd., which operates as a holding company for two operating exchange subsidiaries:
  • Abaxx Exchange Pte. Ltd., a new commodity exchange that began operations on June 28, 2024.
  • Abaxx Clearing Pte. Ltd., a clearinghouse for trades on the Abaxx Exchange.

The firm’s history as a publicly traded entity began with a reverse takeover in 2020, a deal with the mining company New Millennium that also made it the owner of two iron ore deposits in Quebec, Canada.

Following the deal, Abaxx began trading on the Cboe Canada Stock Exchange under the symbol ABXX; it also began trading in the U.S. as ABXXF under an OTCQX listing.

The Abaxx Exchange became fully operational on June 28, 2024, providing what it called, on its website, “centrally cleared, physically delivered futures contracts and derivatives to provide better price signals, improved risk management capabilities and an enhanced network for energy, metals and carbon markets.”

The first commodities to trade on it are three transitional energy products: LNG, carbon credits, and nickel (essential for EV batteries).

At the close on June 15, its share price was $8.79, and its market cap totalled $291.22 million.

Competition

Other commodity exchanges include:

• ICE Futures U.S. (Intercontinental Exchange, Inc. (ICE))
• Chicago Board of Trade (CME Group Inc. (CME))
• Chicago Mercantile Exchange (CME Group)
• New York Mercantile Exchange (CME Group)
• Tokyo Commodity Exchange
• London Metal Exchange

This is a group of very large and powerful competitors.

Of course, there are other exchanges, regional, national, and international with which the firm may have to compete.

Competitive advantages: in a March 11 news release, the company wrote,

“Abaxx’s initial suite of first-of-their-kind LNG futures products are uniquely designed to empower participants in the global LNG markets with a benchmark that will be physically deliverable, contain all the protections of regulated futures markets, and offer daily and final settlements against actual transactions on a regulated market versus index settled products that have been the only solution offered to the market to date.”

On nickel sulphate futures, it wrote,

“To date, the supply chain transformation has created a growing disconnect between the forms of nickel being produced and traded in the physical market, and the form being traded in legacy contracts. Abaxx intends to resolve this dislocation with its industry-first, physically-deliverable nickel sulphate contract.”

On environmental futures,

“We intend to introduce two futures contracts designed to recognize improving standards of quality in the voluntary carbon market and the advancing stages of Paris Agreement’s Article 6 market development.”

Comments: based on the language in this press release, it appears Abaxx has competitive advantages in each of these three areas. Still, we will need to see several quarters of revenue growth to know that the technologies behind the Exchange and Clearinghouse can live up to their promise.

And, Abaxx may have selected a relatively small niche that may not be as susceptible to direct competition.

Management and strategy

Founder and CEO Josh Crumb describes himself in the corporate biographies as a serial financial technology entrepreneur. Formerly, he was a Goldman Sachs Executive Director and Senior Commodities Strategist. His background is in minerals, mining, and engineering.

CFO Steve Fray reports having over 20 years of experience in forming and leading finance teams in global companies. He is a Certified General Accountant (USA) and Certified Chartered Accountant (UK).

In their Q3-2024 investment presentation (presumably, this is the same period as Q1 calendar 2024), senior executives claim significant experience and expertise in their industry:

On strategy, the company reported in its Annual Information Form that its business strategy has two components:

• “investing in new internet communication protocols and proprietary financial software architecture used in global commodity market trading, and
• “commercializing the Company’s exchange and clearinghouse subsidiaries, using the Company’s proprietary technology, towards liquified natural gas benchmark contracts, and a new market structure vision for metals and emerging ESG certified-commodity markets.”

From a marketing perspective, it said in its MD&A report for Q1-2024 that it wants to “commercialize its software technology suite and the Software and IP Portfolio through business-to-business (“B2B”) strategic partnerships, where novel technologies can be applied to specific markets heavily reliant on transactional transparency, transaction execution velocity, and compliance with stringent data regulation requirements.”

Comments: the CEO, CFO, and management team appear to have appropriate backgrounds and credentials for the task they have set themselves. Their decision to pursue B2B partnerships makes sense, since they have identified problems and opportunities that can be addressed at the corporate level rather than at the trader level.

Financials

In the MD&A report for Q1-2024, the company provided the following income statement information, in Canadian dollars:

Except for $200,000 in Q2-2023, Abaxx has generated no revenue. However, now that the Exchange and Clearinghouse have started operations, some revenue should appear in future quarters.

Total expenses are moderately higher than they were in the same period last year. The company attributed the higher operating expenses to “ongoing start-up work,” to meet its timelines for projects in Singapore and Canada. Note, too, that expenses were significantly lower than in Q4-2023.

With expenses but no revenue, net income and earnings per share are going to be negative. In coming quarters, investors should look for the appearance and growth of revenue, and reductions in bottom-line losses.

Abaxx also provided a snapshot of its liquidity and financial position:

If the company can keep its expenses at around the $8 million per quarter mark, then its $40 million cash provides a small cushion for now. Again, this points to the need to generate revenue.

Expect more of the same in the second quarter, as operations in Singapore began on the last business day of June. As explained below, there may be revenue in the third and fourth quarters, but none of it may reach the parent company.

Growth

From a broad perspective, the firm aims to build its revenues by participating in the transition from fossil fuels to greener energy sources:

The company has a significant amount of buyer interest to get it started, according to its Q3 investor presentation:

It also noted in the MD&A report that it “expects to generate more significant revenue within the next twelve months.”

Abaxx’ main revenue source will be the Singapore Exchange and Clearinghouse. This, from the Q1 MD&A, “Abaxx Singapore will accrue and pay a royalty equal to 2% of gross revenue to the Company, payable quarterly as of April 1, 2019, continuing in perpetuity until the obligation is relinquished by the Company.” Those royalty payments may begin this year.

There is, however, a significant caveat to that agreement, “The amounts payable become due to the Company after Abaxx Singapore generates positive earnings before income tax and depreciation of USD$25,000,000 in a calendar quarter.” The ‘after’ in that sentence should make potential investors more cautious.

It has another royalty agreement, the one that contributed the $200,000 of revenue in Q2-2023, “The Company has a royalty agreement with Base Carbon that would pay Abaxx a 2.5% royalty on gross revenue for previous financial assistance and the usage of software it developed.”

Comments: Abaxx has signed up a significant number of potential customers, and investors will watch to see how many make trades, the size of the trades, and the amount of repeat business. This new business will test the new software in real-world conditions, as well as the adjacent operational functions of the exchange.

Valuation

For a company with no revenue (to speak of) and no earnings, the share price has been relatively stable:

And when a company has no revenue and no earnings, any valuation will be, at best, speculation.

It’s hardly a full balance sheet, but the capital resources table above showed Abaxx had tangible capital (physical and measurable assets) of $56 million. According to its income statement at Seeking Alpha, it had an average of 31.4 million basic weighted shares outstanding. Dividing the tangible assets by the number of shares outstanding works out to $1.78 worth of assets per share, compared to the July 15 closing price of $8.79. The difference, we will assume, is what investors believe the software and other lesser assets to be worth.

If Abaxx generates any revenue in the second half of this year, investors will probably consider that a success and bid the price up. If that revenue is minimal or zero, the opposite will happen.

I consider it too early to predict either success or failure, or to offer a price target. With that, I rate Abaxx a Hold; there are no other ratings from the Quant system, from Wall Street analysts, or other Seeking Alpha analysts.

Risk factors

Will the company be able to generate revenue in 2024, as it suggested? As noted, Abaxx Singapore has to hit a couple of significant milestones before it begins paying royalties to its parent companies. Much is riding on the results of the third and fourth quarters.

As Abaxx notes in the Annual Information form, investments in its common shares involve a high degree of risk. That’s because of the “nature” of the firm and its current stage of development.

This is a small, growth-oriented firm, so it’s likely it will need additional financing. If that financing comes through equity, existing shareholders will experience a dilution in value. If it proceeds with new debt, the company becomes less financially sound.

Since it deals in commodities, its results may vary with geopolitical issues and global macroeconomic conditions. Investors also should factor in the degree of interest in climate change, green technologies, and associated issues.

All of its future success rides on the strength of the new technology it has developed. There is a risk its technology will not perform as well as expected, that other companies develop equivalent or more advanced technologies. And, it could face serious harm if it cannot protect its intellectual property.

Conclusion

Results from the third and fourth quarters will determine if Abaxx Technologies is a success. A strong revenue showing by the Abaxx Exchange, whether any of it reaches the parent company, will tell us if the firm’s software meets expectations.

The company has a strong management team, which should reassure current and future investors, but there is too much uncertainty to make a rating call either way. Therefore, I rate Abaxx a Hold.

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.