Intellicheck ($IDN) - a hidden microcap gem with industry leadership & solid moat
It is ~40% up in last four weeks - and it is not a coincidence. Here is a summary of why I bought it:

SaaS revenue growing at 22%. The growth is not phenomenal but respectable, given the recession proof nature of its offerings. (IDN is transforming to a SaaS model, while moving away from its hardware, therefore diminishing impact on overall revenue should be ignored. It has also changed it business model to pay per transaction model)

New customers are being added, old contracts are being renewed at higher prices, and expansion into new geographies like Canada happening. (Strong sign that SaaS growth should
sustain).

Gross margin continues to remain high at 90% (Clearly a business which seems to be recession proof)

Balance sheet looks healthy - Zero debt, and about 12M in cash, which is good for next 12 quarters. It should be generating net positive income much before that.

Continues to bring on board a strong professional team, have invested heavily in building Sales capability – this helps limit the execution risks (New CFO, J Ishmael, New head of sales Chris Meyer, plus 6 new salespeople with cyber security / Identity exp.)

Strong moat – Only player to provide 99% accuracy of ID authentication solution in both “person-present” and “person-not-present” environments. Competitors operate at 75% accuracy. Obviously in the business of fraud and crime prevention, 99% is lot better than 75%. Also, it is the only player that has access to all the Government IDs in the DMVs of US, Canada, and Mexico. This is a result of an organic relationship that developed over 22
years, as IDN started with verifying Government issued identities for the
defense and other government departments. (This is also a risk, although of low
probability as no Government agencies would like to increase access to private
data to several players)

Business model change to “Pay per Scan” and customers to buy certain blocks of scan in advance, leading to better revenue visibility. Several key customers have already moved on to this model, rest are also transitioning upon the contract renewal. Conclusion: revenue visibility
will come in to play during 2023.

There is some skin in the game. Insiders hold roughly 8% of the common shares. While institutions hold 27% of the shares. These numbers have come down since Dec 2021 – not a good sign, but understandable given the market conditions.

Management Quality just had an overhaul. Glass door has 91% CEO approval ratings 74% would recommend it to their friends. CEO Bryan Lewis did introduce the new pay per scan business model and has clearly shown higher ambition to grow and transform into a PaaS company. So far promising. In the conference calls, Bryan Lewis does seem like someone who knows how to execute. The new CFO Jeffrey Ishmael also makes a good impression. Sales has
had a major overhaul, with Chris Meyer taking up the new Head of Sales position. Six new salespeople have been hired in Q3 2022.

What are the risks?

1) Execution risk is the biggest of all, as in case of any micro-cap with an unproven management. IDN has revised down, their earnings expectations four times in 2021, however they also have revised up their EPS estimates twice in 2022. (As an investor, one needs to keep a close watch on whether the management walks the talk).

2) Moa**t attack**. on their relationship with the AAMV/DMV is a critical but a low risk. If this
relationship is compromised in any way, or these agencies decide to increase the number of companies with access to various datasets, Intellicheck's competitive advantage could be over. This is a moderate risk, as no Govt agencies would not risk sharing private information with multiple companies. However, if this comes to pass it becomes an immediate sell.

3) Technology is relevant for bar code id checks only If the world moves to chip and pin, then that is a threat. Even though Govts are slow to change, so this risk is slightly far away in future.
4) Scaling-up looks difficult beyond North America. It would require liaising with Govt agencies in different countries. And they are not hiring outside of USA yet.

My Conclusions:

1) It is certainly an investible company with a decent upside potential in medium term. Given the risk-spectrum it will be wise to play this opportunity with a smaller allocation, say 3% of the portfolio.

2) One should wait for the Q4 2022 results – if the SaaS revenue continues to grow
above 20% CAGR and the operating expenses do not increase more than 8% CAGR, the
operating margins should improve, leading toward profitability by Q4 2023.

3) I will be especially watching the progress on business model transformation to
“Pay per Scan” model and if the increase in SG&A and R&D spend leads to
an acceleration in revenue growth.

Disclaimer - Invested | Long | Novice investor
Conor Mac's avatar
Hey, welcome to Commonstock! Great first post :)
Ashish Ranjan's avatar
@investmenttalk Thank you Conor!
Nathan Worden's avatar
I second that— great post!

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