Abaxx Technologies: Q3 2024 Investor Update

A review of Abaxx's business update for Q3.

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Transcript

Abaxx Technologies (ABXXF), a $300 million market cap operator of a fully licensed commodity futures exchange and clearinghouse in Singapore, just released their Q3 2024 operations update.

In this video, we will be reviewing the progress the company has made since launching their exchange in June.

The most important updates we need to see from Abaxx right now are their progression with onboarding more market participants onto the exchange. And we’re seeing the ecosystem slowly start to take shape here. The snowball toward reinforcing network effects is just starting to roll down the hill.

Management has confirmed that Mizuho, the largest financier and futures commission merchant in the LNG market, has been onboarded so their clients can trade on the exchange. This was the big event that investors who understand the story were waiting for. Mizuho is one of Japan’s three megabanks, and Asia is a key market for LNG.

With Mizuho onboarded, the access to Abaxx’s products has expanded greatly, and will continue to grow over time as more FCMs are onboarded. It will take time to get trading firms connected and transacting through block trades, so don’t expect this to be a quick process. It will take at least another 6-12 months to really ramp up exchange trading. But the foundation is being laid.

Abaxx has onboarded three full FCMs: StoneX, KGI, and ADM Investor Services. The two additional clearing firms are Marex and Mizuho, which is also their first bank FCM. They also expect another FCM to be onboarded by the end of the year, which will put us up to 6 partial or full FCMs involved.

Two more bank FCMs are in progress to onboard, and three additional clearing firms are gearing up to onboard in 2025.

Six merchant trading firms are onboarded, with sixteen more in progress. Nine financial trading and market makers are onboarded with ten more in progress. And ten interdealer brokers are onboarded, with five more in progress.

As you can see, Abaxx is starting to make some real strides in getting firms connected, and that will be the story for 2025. Expanding connectivity to the exchange. Then 2026 will be about really ramping up trading volumes as Abaxx’s markets continue to grow.

Many of the additional firms in progress are waiting for the launch of Abaxx’s battery metal futures contracts that should be coming soon.

To incentivize traders to start using Abaxx’s contracts, the company is offering trading rebates, so Abaxx won’t be generating any revenue from its trading volumes until at least Q1, if not later. This is extremely common in the futures industry when launching new contracts, so it’s nothing out of the ordinary. But it’s worth noting Abaxx won’t be making much revenue right now, even if trading volumes were to grow substantially.

It was confirmed on Abaxx’s investor call that both the nickel sulfate and lithium carbonate futures contracts have been finalized and submitted to the Monetary Authority of Singapore.

It has actually been cleared up to me that these contracts actually don’t need approval from the MAS. They just want to see the specifications, and might make some comments. But the MAS doesn’t need to grant approval for anything. The timeline as to when these contracts get released is entirely dependent on when Abaxx and the trading firms are ready to use them.

The company has continued to clarify that none of these futures products are being created in a vacuum. Customers are begging for these products. The lithium carbonate contract, for example, has no real competitors. Most existing contracts are financially-settled, and the only one that is physically-settled, meaning the buyer of the contract can take physical delivery of the lithium carbonate at expiration, is trading on the GFEX exchange in China. Which many traders won’t be able to touch or find relevant.

There are a variety of opportunities for new futures contracts like this, given that the large existing commodity futures exchange incumbents like CME and ICE have largely avoided creating new physically-settled futures.

Abaxx is confident both the nickel sulfate and lithium carbonate contracts should be released before the end of the year, or very early Q1. Management has mentioned that they will probably have to launch those contracts with low levels of liquidity at the start, as they did with LNG and carbon, because many traders can only push their organizations to begin using those products when its already available. If a contract hasn’t been launched yet, then few organizations are willing to allocate resources to getting connected and ready.

Gold is another offering that Abaxx has been working on, that should be released in Q1 if timelines hold.

In its update, Abaxx mentioned that they are working on allowing multiple currencies for collateral and settlement. Gold might actually be one of the potential ways to settle trades, so firms won’t necessarily have to settle in dollars.

The company has also teased that more metal futures contracts and potential weather derivatives are now in the works as well.

Something interesting mentioned in Abaxx’s update was that the company is preparing to file an application with the Commodity Futures Trading Commission (CFTC) in the U.S. to obtain a Foreign Board of Trade registration. Which is allowed in cooperation with the Monetary Authority of Singapore, which is seen as a comparable and stringent financial regulator.

With that registration, Abaxx could offer derivatives trading to market participants in the United States, potentially even without receiving additional costly and time consuming regulatory licenses.

Allowing firms to trade directly from the United States could open up liquidity on the exchange pretty drastically. This process typically takes around 6 to 12 months, hopefully we see it happen closer to that 6 month timeframe, so more traders can come in by next summer.

On the technology front… Abaxx has started to launch some of its ID++ products in the public sphere.

They released Abaxx Verifier Plus on October 8th on the Apple and Google stores. Verifier is a digital identity and access management application for secure identity verification.

The Abaxx Messenger tool had phase one of its production deployed, integration Verifier+ and full end-to-end encryption for messaging.

Together those applications, among others, are implemented into both the Smarter Markets Coffeehouse social media platform, and users of the futures exchange can utilize these products as well.

Really, the main goal of the ID++ technology suite, as I outline in my Substack write-up, is to provide more secure systems for identity verification, document storage, messaging, and more.

The futures exchange and Coffeehouse represent ways that Abaxx is rolling out these products to test with customers, and to eventually allow the company to monetize these technologies further down the line. Although, it’s unclear how Abaxx plans on generating revenue from ID++ for now.

Abaxx’s CEO, Josh Crumb, mentioned that the technology development and commercialization roadmap is set to be finalized in 2025. This includes the eventual creation of smart pricing for commodities and full digital title. Crumb teased that the company plans on launching two new software innovations in the coming year that would separate Abaxx from any other technology company out there right now. That might be what he’s referring to.

Since developing new software can get increasingly expensive, Abaxx mentioned on their investor call that they are exploring different ways to potentially fund the tech side of the business. Some common theories on what this might mean is a potential spin-out like what we saw with Base Carbon, or raising additional funds at a subsidiary level to avoid diluting the holding company’s stock.

Abaxx also recently released their Q3 financials.

As of September 30th, 2024, the exchange hasn’t had much time to ramp up yet, and still hasn’t, so revenue isn’t going to be anything worth mentioning.

Only around C$400,000 right now.

As for the cash situation… Abaxx had C$25 million in net working capital. So, since I’m writing this in November, removing share-based comp, the cash burn of the company’s operations is running around $7.5 million…

If they still need around C$18 to C$20 million for regulatory requirements, then the company is running quite low on funds, at this point.

With that said, they’ve raised some extra capital in a few ways. They recently raised around
C$2 million with a strategic investor. Abaxx took another temporary loan from Base Carbon for an additional C1.4 million.

And the company also has options expiring on December 13th, 2024, that will give the company another C$4.5 million in proceeds if they’re all exercised at a price of $10.95. Those are still in the money at the moment.

The additional capital they’ve raised, and will likely receive from options, should give them until towards the end of Q1. So, another couple months of runway left before they need to raise more funds.

As I mentioned, Abaxx is exploring different ways to fund the tech side of the business… and Abaxx is still in negotiations for another strategic financing at the exchange, subsidiary level.

Meaning Abaxx plans to bring in additional strategic investors and give them some equity in the exchange, instead of diluting the public company’s stock.

It’s also worth noting that Abaxx has prolonged its close on the potential increased in ownership of MineHub to 19.99%. Abaxx will either pay $3 million for shares, or issue an additional 237,000 shares to MineHub by December 31st, 2024.

That will likely end up getting settled through share dilution, probably, but we’ll see if the company raises additional funds by then and wants to buy MineHub shares with cash instead.

As far as the next catalysts coming up for Abaxx…

Getting Mizuho clients onboarded was a big deal. With that said, even with Mizuho allowed to trade on the exchange now, that doesn’t necessarily mean all of the infrastructure is ready. So, it’s a time consuming process, but progress is being made.

In 2025, we should get more market participants onboarded with liquidity ramping up, more contracts, and expansion into additional markets with things like the CFTC FBOT license. In addition to getting more details about their plans for the tech side of the business. So, 2025 is when things really start to ramp up for Abaxx.