Identitii launches $11m blockchain IPO – but are we still sweet on crypto?

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Fintech Identitii has launched the first ASX blockchain IPO in two years, aiming to raise $11 million ahead of a September listing.

Identitii will join Kyckr as the ASX’s only other blockchain IPO, launched back in September 2016. Both companies follow similar strategies of making blockchain-based technology that checks the bonafides of businesses involved in financial transactions.

Blockchain first hit the spotlight a few years ago as the technology used to underpin transactions in cryptocurrencies such as bitcoin. But it’s increasingly seen as having broader applications such as securing online data.

Since Kyckr floated, more than 30 other ASX stocks have added blockchain to their repertoire via reverse takeovers, acquisitions or new products.

The jury is still out on whether any of those efforts have created shareholder value, however.

Kyckr, which raised $5.2 million at 20c, is now trading at 13.5c.

About half of ASX blockchain stocks have made gains over the past year (see our table below).

>> Scroll down for a table showing how ASX-listed stocks with exposure to blockchain have fared over the past 12 months and six months

But measured over the past six months it’s a different story. Only a handful of these stocks have made gains this calendar year — and blockchain is not a core product for many of them.

Animoca Brands (ASX:AB1) which recently started integrating crypto into its mobile games, is up 777 per cent to 7.9c compared to a year ago. (That’s still down from the 20c its shares were fetching after its move from mining to mobile games in 2014, however.)

Sport social network Sportshero (ASX:SHO) is up 450 per cent for the year — but like Animoca it only dabbles in crypto.

Blockchain consultant DigitalX (ASX:DCC) is a more serious player. It’s up 278 per cent over 12 months but has lost ground this year partly due to the drop in value of its own cryptocurrency assets.

Crypto weighs down blockchain stocks

The fall in bitcoin has weighed heavily on blockchain stocks — somewhat unfairly.

A shake-out of cryptocurrency projects — TechCrunch estimates 1000 crypto projects have failed this year alone — has clearly affected the broader blockchain market.

That’s despite a move to differentiate between cryptocurrency plays and businesses using blockchain for more mainstream purposes such as securing supply chain data or combating counterfeiting.

That’s where the likes of Indentitii and Kyckr are hoping to gain investor recognition.

In May, consultant Deloitte surveyed 1000 tech-savvy executives and found three-quarters believed there was a “compelling case” to use blockchain technology in their businesses.

Last month McKinsey predicted widespread use of blockchain technology could happen in three to five years if a series of critical issues were sorted out.

If the technology continues to get support from mainstream businesses, the global market could grow quickly from an estimated $US670 million last year to as much as $US10.5 billion by 2023.

Identitii’s private blockchain strategy

Widespread public use of blockchain may be a fair way off, but small, private blockchain networks are a more immediate way forward for the technology.

McKinsey points to the example of the ASX using a blockchain system for equities clearing to reduce back-office work for brokers within a limited network.

McKinsey calls this “permissioned blockchain” operating with controlled access.

This is what Identitii is spruiking in its prospectus.

Sydney-based Indentitii is a four-year old financial software maker that has developed a blockchain-based system called Serra that protects data — especially in international money transfers.

Indentitii aims to tap demand for stronger data security to support so-called “Know Your Transaction” requirements to combat “terrorist financing, politically exposed persons and anti-money laundering”.

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“Know Your Transaction” and “Know Your Customer” have become buzz phrases particularly since the Commonwealth Bank got caught out with breaches of anti-money laundering and counter-terrorism laws earlier ths year.

“Know Your Transaction” refers to a financial institution’s need to track detailed information about transactions.

This can be a painful and expensive process — which Identitii’s Serra product aims to solve using blockchain technology.

Blockchain creates an immutable transaction record that can be used to “verify the audit trail of changes that have been made to the information”, says Identitii.

The Identitii IPO

Serra was only launched in September — but it’s already in use by HSBC, initially in India, Identitii says.

The IPO aims to sell 14.6 million shares at 75c to raise $11 million for further development of the product.

About $4 million will go towards Serra development and commercialisation and another $4.1 million to working capital.

The rest will go into research and development ($1 million), paying for the IPO ($1 million), office fit-out ($640,000) and intellectual property protection ($120,000).

Identitii is not yet profitable and is “reliant on raising funds from investors in order to continue its operations”, the prospectus says.

The company reported a $1.9 million loss on $1.2 million revenue last year. It’s forecasting a $3.2 million loss from $1.4 million revenue this year.

The prospectus says Identitii has 45 potential opportunities in the pipeline “two of which are at an advanced stage”.

But it’s “unable to provide potential investors with reliable revenue, profit or cash flow projections or forecasts beyond the 2018 financial year”.

It hopes to make money through software licence fees and support services — though all cashflows will be invested back into development and there wil be no dividends “in the forseeable future”.

About a quarter of the company’s shares will be publicly traded after listing — for a total market cap of about $41 million.

Co-founder and chief executive Nicholas Armstrong will emerge with the biggest stake at 17.2 per cent plus a $160,000 salary.

Another co-founder, Eric Knight will hold 8.5 per cent and a third executive Thomas Roche will have 5.6 per cent.

The offer opens Thursday (August 16) and is due to close at the end of the month.

An ASX listing date has been set for September 19.

KTM Capital is underwriting the IPO. Canaccord Genuity and KTM are joint lead managers.

Here’s a table showing how ASX-listed stocks with exposure to blockchain have fared over the past 12 months and six months:

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