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".

ID8 has completed the retail part of its capital raise.

ID8 offered up to 18.96 million new shares at $0.16 per share, which equals $3.033 million.

ID8 has announced today that only 8.77 million new shares were taken up under the retail offer, so $1.4 million worth.

This is a shortfall of ~50%.

Questions to ask.

Do retail holders not believe in their holding, noting that this raise was dilutive in number of new shares issued?

Do retail holders believe they can get a better price on market and can top up their holding to match?

Are holders impatient or adopting 'a wait and see' attitude?

Did retail holders simply not have funds available to invest?

Does this type of response to a capital raise weaken the thesis?

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 released the formal docs related to the capital raise – all can be found on the ASX. The insto placement is already complete, all $6mil.

 The good news is retail holders get to participate! At a rate of 1:10, 1x new share for every 10x existing shares. And at the same price as the insto’s! This is a big tick for management in my thesis.

 One thing I always fail to comprehend is why the raises are at a discount. Is that simply a mind-trick for the investors to create a perceived bargin? Or is it what the company values itself as?

 Not much new information in the accompanying presentation. Perhaps a better jazzed up presso that better articulates the ID8 value proposition.

 The TAM appears legit after looking through their references, so far as ID8 has done calculations on the number of and size of reporting entities in each country. Of course, it assumes 100% domination, which is always unlikely. Success on that scale would breed instant disrupters… that’s how capitalism works! Against my current simplified model and thesis, means I requires a ~25% market penetration of this TAM. Bring on that 4C of proof (or to disprove)

Also one of the red flags in my thesis is if ID8 jump into international expansion too quickly. I understand the need to strike while the iron is hot, regarding ISO 20022 globally and the gap in reporting entities manual processes, however I remain cautious that ID8 may over extend themselves, hire too many or too few and end up over promising and under delivering. I continue to watch and wait with some concern, but not eough to consider the thesis at serious risk… yet.

[edit: play with inserting images]

ID8 requested a trading halt for a capital raise announcement and the AFR (paywall) has posted the details.

This will include a $6mil placement (new shareholders) and a $2.4mil rights issue (existing shareholders) for a total of $8.4mil at $0.16 per share. A total of 52,500,000 new shares. My calcualtions show, including options, there is ~204,000,000 shares on issue now, so with the new shares it will be a ~22% dilution.

The 4C in July 2021 shows operating the company costs $1.8mil per quarter, and ID8 had $4.4mil in the bank, so not being cash flow positive, means it had two quarters or 6 months of runway left (love the symbolism of a fiery plane that failed take-off at the end of a runway).

 My thoughts:

1.      My thesis accounted for the remaining “runway” and included the expectation of capital raise. It could have been avoided if a magical hail mary pass meant all the AUSTRAC entities were waiting for a solution like Overlay+ to launch and immediately created revenue, which I doubt has happened. Assuming costs only increase reasonably, this $8.4mil will extend the runway to December 2022, which is enough time to market and sell overlay+. Material thesis changes will be obvious by this time next CY.

2.      My thesis also planned for dilution. Up to 50%. So, 25% is acceptable to my models. I won’t change the DCF models until I see a quarterly or equivalent update.

3.      I haven't seen the formal offer on the ASX yet, but hopefully us peasant retail holders being included (in the form of the rights issue) and assuming the AFR is correct, at the same price too. A tick for management there if so. Not a tick if they leave me (the retail holder) out of the cap raise.

4.      The wonderfully diverse forums of HC, have been suggesting an insto or private money have been holding/controlling the share price low in expectation for the capital raise to influence a lower raise price and ‘get in on a sure thing’ before it ahem, ‘to the moon’ etc etc. If it was true, and a big money player becomes a significant shareholder, then good for them, but it doesn’t change my thesis, yet. And it doesn’t change my hold duration.

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.

ID8's SaaS product, Overaly+ is live on the ID8 website here and pricing is here.

ASX announcement here.

Observations:

Overlay+ is ISO20022 compliant. This means it meets the new international standard for cross border payments. This also enables the Social is ESG for ID8, as AUSTRAC seeks to stop anti-money laundering and counter terrorism financing (AML/CTF), and what company wants it announced publicly that they support the bad guys? Companies using the software could also ride the coat-tails in their own ESG reporting.

It also flags the potential for overseas expansion as a RegTech SaaS product into other western nations. I don’t expect that to be before 2024, and I would be disappointed if they tried too early vs consolidating their sales and revenue here.

Like most pricing models, the cheapest will not meet the needs of most and the upper end will be for a smaller number of custom large-scale customers. That leaves the two middle options of “Plus” and “Pro”, with the upper being “Pro” offering customisation and additional data validation above the lower called “Pus”. Although in reality, a customer’s plan will be dictated at a minimum by their organisation’s transaction volume.

Some numbers to show the scale of SaaS:

Using the lower-middle tier option of “Plus” at the discounted price of $20.4k per year, ID8 needs ~50 customers per $1mil of revenue. This reduces with each customer that chooses a higher tier.

ID8 assess there at 15,000 AUSTRAC reporting entities.

A 1% penetration is 150 customers, multiplied by the lower-middle-tier and that is $3m revenue.

A 10% penetration is 1500 customers, multiplied by the lower-middle-tier and that is $30m revenue.

The question is, do smaller companies need it?

Is the AUSTRAC reporting onerous for smaller, lower-transactions-than-the-bank type organisations?

Will the fear of fines or loss of social licence inspire directors to mitigate risk and sign their organisations up for Overlay+?

Even if a smaller AUSTRAC entity doesn’t need it, will it use it as a means of being ISO20022 compliant? Or controlling their story for the S in ESG?

FY21 presentation (ASX)

FY21 presentation webinar (requires provision of an email address to access)

Some red flags, some amber flags – but that’s the journey of nano-cap investing!

1.      A concern for me, is that I find the CEO very un-inspiring when presenting. This webinar is the second time I have found him wanting at the end of the presentation. He says the right words about the right topics, but I just don’t see the sincerity. Also, his ability for attention to detail seems incredibly lacking as he asks Clare, the marketing person, 3x for details on important company aspects. All concerns I am willing to forgive at this stage and accept the risk, as a poor leader can be offset if he or she is surrounded by excellent people (like Clare the Articulate).

2.      Payable appears to me to a distraction to their overall vision, and I hope X15 buys it out.

3.      Probable that more cap raises will be required – and my DCF models account for up to 40% dilution of shares. CEO John dodged a question about capital requirements like a politician.

Some go-fast-green flags for me (not a complete list)

1.      SaaS version is about to be live for customers. i.e. About to be released in September and has its first customer (Citibank).

2.      CEO knows that FY22 is the year to prove revenue can happen!! And it looks probable it will happen (there looks to be already $1m of non-applied revenue in the financial report, and presentation slides that indicate at least two pending customer announcements)

3.      All AUSTRAC reporting entities can use Overlay+, not just large slow banks/ADIs. This means smaller entities that are faster to bring onboard value adding software can be targeted by sales peoples.

4.      It is possible that cryptos like XRP and R3’s Corda are in early customer discussions, as one of the question/answers got real awkward.

So, ID8 has a product, looks like they have customers, and they solve a genuine regulatory problem.

DISC: Hold in SM and IRL