ID8 is passing around the hat!

Today I accept that this company is going nowhere and I am heading for the hills, with a capital loss after selling.

Managements continued failure to allocate capital despite having regtech software that is in need!

The dillution alone of this cap raise is assounding, at 1:2, that is a 50% dillution if holders do not subscribe.

Goodbye dog stock ID8, thanks for the penny stock punt, it was fun. Glad I kept the holding size minimal. Looking back, I applied some previous lessons and ignored other lessons with this stock.

My thesis is always giving ID8 “more time” so I thought I would start the latest 4C notes with a timeline revisit.

 Timeline revisit.

 Reserve Bank of Australia (RBA) and the Australian Payments Council (APC) and the Australian Payments Network (AusPayNet) know of the ISO20022 change problem for several years now. And continue to work through the policy and frameworks to support the change in Australia. ISO20022 is decided and it is coming. Industry timeline as follows:

 SWIFT is commencing implementation from November 2022, and expects its to be finalised by 2025. As AUSTRAC currently accepts reports in SWIFT MT message format and currently does not accept ISO20022 message formats, AUSTRAC will seek to change by November 2022. ID8 offers software to make this happen for AUSTRAC reporting entities today. This change across all payment networks is transformational, as the ISO 20022 standard contains more rich, enhanced, and structured data in the message than ever before.

 A good simple 3 minute summary of the whole situation is here.

 We know any financial intuition that reports to AUSTRAC has been watching and waiting and will have to take action this year, by November. Will they develop a reporting solution in-house, or pay someone like ID8? ID8 management commentary often talks to significant interest … but minimal enterprise contracts to date (1s of vs 10s of). Maybe this is jawboning or maybe it is a timing issue.

 4C observations

 1.     Will ID8 still be here to be paid in November 2022 when everyone starts their changeover? … with 4 quarters to go (3 this calendar year and 1 next calendar year), ID8 will be solvent in Nov 2022 with 1.9 quarters left in November 2022, but only just.

 2.     Receipts from customers continues to improve each quarter since overlay+ launched in 2021. $196k, then $384k and this quarter $702k. If this doubling continues, ID8 will be cash flow neutral by December. It is hard to say without a breakdown of the receipts whether this is enterprise or non-enterprise customers, whether it is SaaS ARR (paying for overlay+) or other previously announced revenue hitting the books. The EoFY report will be telling.

3.     Across the last three quarters staff costs are coming down, R&D and admin/corporate costs are steady. John can’t shave or buy a collared shirt… but maybe he can run a business… maybe (still lots of doubt).

 Conclusion

Therefore, I think one of two things will happen.

ID8 will announce significant contracts, or volume in overlay+ sales in the next two 4C’s due to the confluence of the timeline and the entities that dictate standards, and it will be enough revenue to avoid a cap raise. This is what success looks like. Or, ID8 will cap raise (again…) and claim further time is needed for contracts with large institutions or sales staff to advertise overlay+ to the smaller institutions due to the extended timeline rollout, i.e. the several years where MT and 20022 messages coexist, and this will be thesis busted.

This ISO change is transformational. ID8 has the right tech right now. But can it make money from it in time? I’m willing to accept risk and will remain a holder until Jan 2023. Patience costs me nothing… well there is opportunity cost … but I think the word transformational sums it up for me.

 And the coincidence of ISO20022 coming into effect in Australia in the year 2022. That’s two too many two’s. hahahahahaha

ID8 recently released its interim or half year report.

Reminder, this is what ID8 is trying to achieve:

////////////Good things:

but... they has been very little uptake of this product by the target TAM as per the table is note 5 (SaaS fees) :

but.... the next part is good. You want a SaaS company to derive revenue internationally... afterall, it is just 1s and 0s, no factories needed.

///////////not-so-good (bad) things:

and... that's the last of two founders no longer involved with the board/leadership of ID8.

and... that's a critical position you do not want to see turn-over on.

and... Payable was a side-hustle that was potentially going to generate income while the main Phase 2 was executed, meaning less revenue short term for working capital.

and... more board appointments for more salaries... for more empty promises? (added in from more recent reporting)

Bonus minor detail. I watched the AGM in late Janurary... the CEO, John Rayment didn't even shave or wear a collared shirt for the video conference... maybe I'm old fashioned, or maybe he is rockin' a silicon valley appeal? To me, he loses more and more credibility when ever I observe him in action.

In summary. The thesis is weakened considerably. This may turn out to be a company with great tech for a simple problem, but poor execution and poor timing. Its now on my watch list to take out the back and *ahem* be "lead poisoned".

Quarterly Investor Webinar

 Observations:

1.     CEO John is more articulate then previously, talking with more confidence on the business, what it does and where he wants it to go. This is good, as previously he seemed lost and confused (but perhaps was just learning the business)

2.     Mostly there was nothing new in the presentation per se, but there was new information provided during his speaking parts. A lesson for newer investors, take the time to join these calls.

3.     Selling product. ID8 is looking to leverage partnerships to sell (ie via auditors) vs using their own salesforce of personnel. They re-iterated that it takes 6-12 months to sign an enterprise customer.

4.     ID8’s patent and blockchain. John talked though the company goals for this tech and patent. I don’t want to poo-poo them, but I think it’s a pretty lofty goal given the blockchain space and all the others competing in this space. I won’t factor this into my share price valuations at this time.

5.     ID8 could also be a bit early to the race (early bird gets the worm) as an interesting observation was made, that while trying to sell their product to enterprise customers on needing to update to ISO20022, that AUSTRAC itself is trying to update its systems to accept ISO20022 format messages. So, the banks won’t rush any decision to change until the regulator does!

 Questions asked and answered:

1.     I asked about meaningful take up of Overlay+. As per my previous straws, ID8 has yet to achieve meaningful take-up within their TAM for non-enterprise customers. However, Clair did state that they have seen an increase in inbound enquires, and they think they’ll have meaningful customer numbers on Overlay+ by June 2022.

2.     Their progression on execution of their blockchain patent. John described a situation where they are developing the strategy on how to proceed commercially. So, I assume the tech is not fully developed or tested as they don’t have the strategy to align it to.

3.     Another question about revenue targets over the years – which would help my DCF model. But the meeting ran out of time, so we’ll see if they get back to me or not.

ID8 recently released their 4C quarterly. Dismal numbers as usual, low receipts, creeping staff costs, and a preamble full of promises.

I was expecting better. But then revised my maths on my 8 fingers. My thesis is primarily based on their overlay+ platform and the take up by multiple non-enterprise customers, with the enterprise customers as extra cream. This quarterly is for the 90 days; July, August and September. Overlay+ was launched in early September. Therefore 30 days is not a lot of time to materially sell to customers (covid or no-covid).

 Two things, I assess:

1.     I’ve never been great at maths.

2.     I need to not be impatient and give ID8 time. With Mr Market looking for any reason to be a bear, now is the time for logic and patience. The half year results in December 2021 will provide 4 months of sale people ‘selling’, and the expected cap raise will be out of the way (it takes up time in the head office for sure!) – this will be first reasonable review point. I also expect to see improvements in March 2022, but the real tell will be June 2022. Post reopening, post-Christmas holidays, post cap raise, post EoFY budget spending. No excuses left.

ID8 recently released an update covering how many dollars in JobKeeper payments the company received from the federal government over FY20 and FY21.

My observations:

1.     ID8 is getting ahead of any “S” in ESG. If there is social licence blowback across the Australia business community regarding payments of JobKeeper, then declaring what they received shows they are not embarrassed.

2.     My thesis doesn’t care how much JobKeeper they received. Frankly I think it is market noise. The federal government wanted to inject money into the economy and they did just that. At the national level, who cares where the money goes as it still ends up in, and flows through the financial ecosystem.

ID8 recently announced the resignation of a director, and a follow on announcement stating how many shares the director still has in the company.

Directors departing should always be scrutinised. In this case Nick Armstrong is a co-founder of ID8 (the other is Erik Knight – already departed).

Nick still has indirect interests of 8,840,044 shares and 2,350,000 unlisted options that expire in 2024. Noting there is ~200,000,000 shares/options outstanding, Nick owns ~5.5% of the company. 7 million of these shares are held by HSBC as collateral for a loan, so it is likely these will stay in play unless Nick discharges or settles the loan.

Nick was the CEO of ID8 for 6 years (2014-2020), handing over to current CEO John Rayment.

My opinion: A co-founder leaving in my thesis is a red flag and sell-out criteria. However, as this is not entirely unexpected and Nick’s departure is not sudden, I am less concerned. Nick stepped down as CEO to bring in a new CEO and has remained on the board for 18 months to assist the handover. Nick retains a reasonable interest in the business so if he continues to hold that interest, then I don’t think he is a rat fleeing a sinking ship.

With Overlay+ launched, I am less concerned that the last co-founder has departed. But my eyes remain open, and recognise truly great and prosperous companies are often helmed by a founder well into profitability. I await the next quarterly and half year results to show signs of strength, and that will show the following stated by Nick to be true:

“A number-one priority over the gradual wind-back of my role in the Company was ensuring it built a high calibre executive team and board. One year on from my re-election as a director at the Company’s last AGM, I am now of the view that this task is complete. With the business now in great hands, the time is right for me to focus on something new”.

ID8 released an update on the asx here.

It reveals that Standard Chartered Australia (SCB) was one of the almost-deal-finalised customers from their recent announcement presentations – with another customer to be announced to meet their goal of ‘two more global correspondent networks’ by the end of FY22.

Based on the contract duration of 3 years, we can assume that SCB have an Enterprise / Custom pricing plan. The first activity and revenue are laid out in Order Forms is worth $300k or $0.3mil to ID8. By comparison, Novatti was worth $180k or $0.18mil. I assume this is a combination of Licence Fee, Usage Fee and Professional Services (as per revenue Note 8 in the FY21 Annual Report).

What is says to me, is that ID8 is executing on its plan as briefed to the market. While the potential for more is still there, I will be waiting for the next quarterly before updating my valuation – looking for sign up of other AUSTRAC entities, and the other global correspondent network customer.

Joe Higginson is the Chief Commercial Officer of ID8, and did an interview for the  thefintechtimes.com here.

Nothing new or surprising. I think it articulates clearly why businesses would want to sign on with ID8. Particularly also the impact of legacy systems. I think many people today forget how non-digital the world was in 2001 or even 2010! I think we believe because we have laptops and cloud email, and on-demand streaming music, banking and shares in an app today that everyone has it, even business … and they don’t. So many processes were manual or are still manual in nature!

The part I didn’t like, but is a very minor detail I suppose, is referring to their product as CaaS, or Compliance as a Service. I get it marketing guy or gal, you went to uni and need to articulate the product better to justify your next pay rise… but it is still just SaaS.

This video here, sourced via HC.

The video shows that through the lodging of a patent in August 2021 by ID8, future iterations of software or products from ID8 will use blockchain aka DLT.

The patent refers directly to XRP aka Ripple Coin as the example used in the patent.

My opinion:

Sooooo.... I posted previously on Stawman that ID8 doesn't use blockchain anymore based on a CEO interview in May 2021, but the recent patent lodgement suggests otherwise. Nanocaps change, and change fast!

I knew Ripple and R3 Corda were in talks with ID8, but my analysis was that ID8 wanted their software to interface to be able to produce reports if a customer used XRP or R3 Corda...not use the underlying blockchain tech to facilitate the payments. Off to do more reseach....

Always fun watching Kochie on Ausbiz. Saw ID8 mentioned on the The Call on 02 September at 17:08 mins.

Just a clarification of fact based on responses from all three participants in the conversion, that ID8 uses blockchain in their products, when research suggests that ID8 do not use blockchain anymore.

CEO John Rayment did an interview with Alan Kohler here in May 2021. Assuming the CEO is right (always possible this guy is wrong), here are quotes from the interview as follows:

Alan. What do you mean by tokenised, how do you use blockchain?

John. You said to me, what does it look like, what’s the story like going back to 2014-2015? We don’t use blockchain in our technology today, that was the genesis of the company or that was the idea that originally gave birth to the company. But you fast-forward to today and as with most businesses, listening to our customers and listening to the market and listening to what people want, we’re not using blockchain in our technology today.

My opinion. Blockchain technology will change financial products the world over, absolutely, zero doubt, 100% conviction. But ID8’s current plan for a revenue stream based on Overlay+ doesn’t use blockchain at this time.

I think it’s also interesting to observe how the narrative or direction of a company can changes over time, and how investors anchor to what they think the company does or is. Probably a good example of how the research required to part-own or “invest” in a company is an ongoing commitment.