Triterras: Future Blue Chip Or Bust?

Summary

• Triterras (TRIT) is a fintech company out of Singapore that operates Kratos, a blockchain-based commodity and trade finance platform.
• The company is targeting a nearly $1.5 trillion market gap in trade finance with a blockchain-based solution.
• Kratos' trading volume and revenue is expected to grow 5x over the next several years.
• Is Triterras too good to be true?

When I first heard of Triterras, Inc. (NASDAQ:TRIT), I was incredibly excited. Every once in a while, you come across opportunities that just seem perfect. And this was that opportunity.

TRIT is a fintech company out of Singapore that operates Kratos, a blockchain-based commodity and trade finance platform. The company recently went public via a SPAC and looked unstoppable. On paper, the company had rapidly growing top and bottom lines, massive market potential, and a long runway that some were comparing to giants like Amazon. The future looked evermore promising for the then two-year-old company, that was until the facade started to unravel.

Over the past two months, the company has faced a host of problems ranging from suspect allegations to bold legal action. The stock is down nearly 40% from its highs of last year and is anxiously awaiting what comes of the current situation. While opinions vary, I strongly believe that TRIT’s early growth is too good to be true and caution anyone looking to take a gamble on the stock’s near-term performance. But before diving into the nitty-gritty, I want to first explain what exactly Triterras does and why I was initially ecstatic.

Trade Finance Industry

Trade finance facilitates international trade between importers and exporters by introducing a third-party (ex. banks) to mitigate payment and supply risk. This institution provides the necessary credit to facilitate the purchase, exporting, shipping, and importing, in Kratos’ case, commodities. It protects against international trade’s inherent risks, such as currency fluctuations, political instability, and issues of non-payment.

Trade finance is vitally important to world trade and a growing industry. According to the World Trade Organization, some 80 to 90% of world trade relies on trade finance and according to Allied Market Research, the space is expected to grow to $56 trillion by 2026 from $40 trillion today. Despite its importance, trade finance is an archaic business that has not changed in over two hundred years. It involves a highly complex process across multiple intermediaries and many places for things to go wrong, as seen in the diagrams below.

Source: company presentation

The inefficiencies of trade finance have especially hurt small- and medium-sized enterprises (SMEs), as its logistical complexity and high-fixed-cost nature have discouraged lenders from financing smaller transactions. And even for SMEs who find external financing, typical transfers can take 150 to 180 days, causing significant strain on balance sheets and limiting deal sizes. Forgone deals have left a nearly $1.5 trillion gap, of which Kratos is poised to exploit.

Side Note: What is Blockchain?

To understand Kratos, you need to first understand the technology that underpins it. If you are familiar with blockchain, I recommend skipping this section. If not, I highly recommend checking out Don Tapscott’s June 2016 TED Talk titled “How the blockchain is changing money and business.” It’s a fantastic crash course on the subject and further explains concepts I’m about to touch briefly on.

If you’ve been following cryptocurrency over the past few years, then odds are you’ve heard the term “blockchain.” At its highest level, blockchain is a record-keeping technology that allows transactions to take place without the need for intermediaries. Modern society relies almost entirely on powerful intermediaries like banks, governments, credit card companies, and other institutions to establish trust in the economy. These intermediaries perform the business and transaction logic of every kind of commerce, including steps like authentication, settling, and record-keeping. But this centralized model hosts growing problems, including slow speeds, high costs, exclusion of certain demographics, and hacking.

Blockchain remedies these issues by eliminating the need for intermediaries. It allows users to perform intermediary functions (recording transactions, tracking assets, and securing data) on decentralized networks without powerful overseers. These functions are faster, simpler, cheaper, and more secure than traditional systems. Blockchain is often used to create smart contracts, which are programmed to execute upon completion of certain criteria.

While this was a high-level overview, it’s obvious to see why many believe blockchain will revolutionize industries like trade finance and explains the sky-high valuations of any company even remotely related to it.

Kratos and Competition

Kratos is designed to fix the problems of trade finance using blockchain technology. It took Triterras three years to develop Kratos using Ethereum blockchain architecture. The platform affords essential services like fraud mitigation, traceability, dispute avoidance, and security, as well as bank-grade third-party KYC and AML. Kratos provides automatic execution of trade deals using smart contracts that then automatically embed themselves within their immutable ledger. In other words, Kratos is cheaper, faster, simpler, and more secure than traditional trade finance systems currently in use.

That being said, Kratos is not without competition. There are several live platforms using related blockchain technology to target global trade and even more in development. I’d say Kratos’ two major competitors are Komgo out of Switzerland and CIC Trading out of Miami, both live blockchain solution providers targeting the trade finance space. However, according to company presentations (diagram below), Kratos is the only platform with > $5 billion in trade.

Source: company presentation

It’s also important to note that Kratos is targeting a specific segment of the trade finance market: SMEs. According to company reports, Kratos is the only current platform catering specifically to smaller transactions, focuses on non-consortium bank lenders, is expanding into multiple ecosystems (such as credit insurance and logistics marketplaces), and not focusing on petroleum that has an $80 million transaction minimum. It’s clear the platform is attempting to stand out amongst peers by offering services specifically to the little guy, at least initially.

Overall, it seems Kratos is in the lead. It has first-mover advantage, reportedly handles more trading volume than other platforms, and specifically targets SMEs. However, a major concern is that there isn’t much about the platform that’s proprietary; while it took Triterras three years to get the platform running, there isn’t much stopping a larger competitor from developing a similar system and stealing market share. Kratos has these advantages, but it will need to move quickly to capitalize on this immense opportunity. Because of this, I think it’s vital we examine the company’s growth strategy.

Growth Strategy

Triterras has been very transparent on their intended growth strategy, which will come in “modules.” The first step in their strategy included building out the “Trade Discovery and Risk Assessment Modules,” which is a fancy way of saying their secure trading architecture. This module affords commodity buyers and sellers to trade via Kratos with fraud protection, transparency, speed, analytics, efficiency, and a 0.3% fee on the value of goods traded. This serves as the foundation for modules that will come later, as I demonstrate in the diagram below.

Source: company presentation

The diagram above explains Triterras’ modular approach to growth starting with the foundational Trade Discovery and Risk Assessment Module. From there, the company has stated that its goal is to keep adding modules, which they hope will drive more users to the platform as functionality increases. All of these modules will be connected using the same blockchain architecture but will offer a variety of services that will hopefully result in a well-rounded and organized platform.

• Late September 2020: launched the insurance module with the help of Marsh, one of the world’s largest insurance brokers

• Early January 2021: launched the logistics module through a partnership with Seven Oceans, a maritime shipping software company

• Late 2020 to Early 2021: a mobile app was published

Management indicated that they would publish their Supply Chain Finance Module in February, but given everything that has been going on at the company, it’s reasonable to expect this to be delayed. This module will help platform users find funding, which the company plans to collect a 1.3% fee charged on the amount financed. Then, in the last two modules, the company is focusing on expansion, both into new continents like Europe and the Americas and into new trading communities.

While this growth strategy is organized and management has been effective in delivering on release-date projections, I see a minor hurdle; because Kratos and its competition are able to scale rapidly, the platform able to focus heavily on expansion first will have a major advantage. Kratos will not be complete until Triterras launches the Supply Chain Finance Module, which is likely to be delayed in light of the current situation. If the module is delayed, it leaves the company’s expansion goals vulnerable. However, I expect that, because of Kratos’ unique focus on SMEs, this will not pose too much of a problem.

Triterras’ Reported Statistics

Next, I’ll walk through the company’s reported financials and other statistics. Triterras really started to excite during its October 2020 investor presentation. For reference, Triterras has an odd fiscal calendar designed so that auditor filing deadlines do not overlap with periods likely with high levels of new client interest. At the time, the company reported 4,871 transactions amassing $8.8 billion in transaction volume. For fiscal 2020, the company expected $10.3 billion in transaction volume with $56.6 million in revenue, nearly 3x their 2019 figures of $3.7 billion in volume with $16.9 million in revenue. By year-end 2023, they reported expected transaction volume to grow 5x to almost $50 billion with revenues growing similarly to $250 million, all while EBITDA margins held steady around 70%.

Source: company presentation

While these estimates are certainly sky-high, they are believable. A highly scalable platform like Kratos with low operating expenses and wide functionality could reasonably be able to grow at this rate assuming everything aligns with management’s plan. Unfortunately, this is where Triterras goes sour. Not only is the company likely being delayed by potential allegations and legal problems, but there is evidence to suggest the company’s existing numbers are inflated.

Excitement to Disappointment

After the company went public in November 2020, Triterras’ reported numbers were surprising when compared to their early valuation. The company was trading around a market cap of $1 billion with an earnings multiple around 30x. This is an exceptional setup given the company’s expected hyper-growth and long runway. However, this is also where I started to ask myself: is Triterras too good to be true?

My first concern about TRIT is the way in which the company went public, via a SPAC. Triterras was highly profitable and growing when it went public, which makes me wonder why a self-financing company with seemingly little need for capital would engage in such an odd activity. For $257 million, management gave away nearly 40% of the company, representing an extremely low valuation (see diagram below). Either management is incompetent at determining the value of their company, or they have a relationship with Netfin Acquisition Corp. and wanted to make a deal.

Source: company presentation

When diving into the CEOs of both Triterras and Netfin Acquisition, we see multiple connections spanning several decades. Triterras CEO, Srinivas Koneru, and Netfin CEO, Rick Maurer, showed evidence of a connection in 2004 when they founded a company together called Davis Landscape Company LLC. In 2005, they co-founded a company called Exxova, which they “sold” in 2010 but showed signs of involvement until around 2012. Surprisingly, this company was highly criticized for being “illegitimate” and a “Ponzi Scheme,” explaining why Srinivas and Rick were jointly named in a lawsuit due to failure and refusal to pay Exxova contractors. This relationship most notably continued throughout the 2010s after Srinivas co-founded a company called Rhodium, which will be highly discussed below. It’s safe to say that these two are friends and the deal between Netfin and Triterras was likely set up. While this does not completely turn me off from the company, it’s a major point of concern that Triterras was not more explicit about this.

Source: Phase 2 Partners LLC

The next major source of concern centers around how the company was able to grow the Kratos platform so fast. Kratos was launched in summer 2019, yet reported nearly $10 billion in trading volume nearly a year later. This was ridiculous and made me question whether the company’s growth was natural. When looking at company statements, however, we find that Srinivas’ company, Rhodium, referred a massive number of their customers to Kratos: “Substantially all of the users of our Kratos platform during the year ended February 29, 2020 were referred to the platform by Rhodium Resources Pte. Ltd. and its subsidiaries (“Rhodium”), an entity controlled by Mr. Srinivas Koneru.” It’s clear that much of the platform’s early growth was centered around this connection and the company more heavily relied upon Rhodium than disclosed.

This became a major issue on December 17, 2020, when Triterras announced that Rhodium had filed for bankruptcy protection. The likely cause of the bankruptcy was due to a large uninsured trade amount that the company did not want to pay back and start a chain reaction of creditors demanding repayment. In other words, the company may have been able to avoid bankruptcy, but chose not to. This obviously hurt Triterras and shares traded down significantly. In response, the company announced: “While the relationship with Rhodium was instrumental to the initial launch of the Kratos platform and the platform’s attractiveness to the commodities trading and trade financings communities, the Company has become less dependent on Rhodium’s business as the platform achieves a growing mass of users, other than Rhodium and its subsidiaries.”

This sounded like a reasonable claim; the company relied upon Rhodium heavily for the launch of the company, but as Kratos grew, it relied less and less on the platform. However, I assert that Kratos’ following is not as robust as investors once thought, and I fear the company’s future expected growth may be fractions of current estimates.

The Final Nail

Because Triterras operates its platform through Ethereum, transactions are publicly available. Through August 2020, evidence has shown that the majority of transactions on the Kratos platform involved two key parties: Rhodium and Longview Resources (founded by Rick Maurer). Below, we see 63 of the company’s reported customers, nearly half of which are or seem to be connected to Srinivas or Rick (highlighted in yellow):

Source: Ethereum Blockchain adapted by Phase 2 Partners

We also see red flags when looking at trading volume patterns.

Source: Ethereum Blockchain adapted by Phase 2 Partners

As you can see, in both Q3 2019 and 2020, Kratos saw massive trading volume in the weeks leading up to quarter-end. Then, after quarter-end, there was no volume until after a week at the least. This is incredibly concerning and makes me think that, while Kratos may have many “customers” trading lots of “volume,” these figures are inflated. Instead, it appears that Triterras’ early exponential growth (giving way to astronomical estimates), is fabricated.

Conclusion

Overall, I believe that Triterras screams fraud. The company went public with an exciting service in an exciting market with exciting capabilities but has become a massive disappointment thus far. The problems I listed above are some of many that can be linked to the company. And even if the company is not fraudulent, recent legal troubles are likely to delay management's plans, which, in a highly competitive and scalable space like this, is death.

Let me say that, while I believe Kratos is still a great platform and may very well be massively successful in the future, I do not believe this potential is worth the near-term risk, especially as these legal cases develop. In this case, I believe it is the management, not the business itself, that strongly deters me from TRIT. I will definitely be keeping Triterras on my radar in the short- to medium-term future and will continue keeping up on news, but I cannot recommend that anyone involves themselves in something that just seems too uncertain.