By Brad Sorensen, CFA
OTC:INXDF
READ THE FULL INXDF RESEARCH REPORT
INX (OTC:INXDF) is a company that provides regulated trading platforms for digital securities and cryptocurrencies and that we believe has an excellent chance to grow market share due to its regulatory structure and prudent management. The company reported 2Q earnings today, the highlights of which follow:
• Cash and cash equivalents remained steady at approximately $15.5 million, with another $7.6 million invested in investment grade bonds and Treasuries.
• The company revealed its Reserve Fund set aside for the protection of customer funds stood at $36.0 million.
• Q2 revenues were inline with our expectations and up 161% over the same quarter a year ago at $1.6 million.
• The company announced that new customer registrations increased 50.1% compared to last quarter.
• Customer funds held by INX Digital increased 36% compared to 1Q2023.
• 2Q earnings came in at -$0.08 per share, but that includes a $0.06 loss due to INX tokens having an unrealized loss. Excluding that loss, the company would have lost $0.02 per share—inline with our estimates.
The total market opportunity for INX in the growing cryptocurrency trading market is expected to grow to between $5-11 billion, depending on the cryptocurrency research firm you look at, by 2030. We view the 2Q earnings release as evidence that the INX strategy of having a regulated environment to trade and hold these instruments, as well as becoming a leader in the issuing of security tokens, is gaining traction. Revenues and customer acquisition numbers continue to grow at a rapid rate and the adoption of security tokens as a means to obtain needed capital is growing, all of which speak to the upside potential we see in INXDF.
We also continue to follow and want to remind investors of the INX recent announcement that Republic Group, described as “a global financial firm operating a digital merchant bank and a network of investment platforms,” is investing $5.25 million into the company in exchange for approximately 9.5% of outstanding shares. The deal, according to INX, values INX at approximately $50 million before the transaction. INX has also entered into collaboration agreement with Republic in which “the parties will seek to expand the breadth and depth of tokenization infrastructure and access to digital assets for investors worldwide.” Among the items that we believe will benefit INX in the collaboration are:
• Republic’s token will be listed on the INX exchange. And discussions will take place to integrate the INX and Republic tokens.
• Republic will introduce potential cryptocurrency investors to INX platforms.
• Republic will refer clients currently with Republic to INX for services that INX provides.
We believe this collaboration will benefit INX but the company does have to pay 75% of the net revenues of the new issuers gained from Republic to Republic—a reasonable agreement in our view.
Additionally, and this is what we continue to watch closely, the two parties have committed to enter a non-binding term sheet once the above transaction closes, in which Republic would acquire 100% of INX at a valuation up to $120 million. The company made sure to note that this announcement does not guarantee that an acquisition will occur under those terms or be completed at all.
INX is in a state of flux where investors don’t know if the company will continue as a public entity but we believe the investment in the company by Republic, combined with potential business impact from recent events, makes INXDF a very attractive investment alternative for investors with a modestly higher risk tolerance.
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