Intellicheck Mobilisa: A $0.40 Stock That Should Be Trading At $2
The markets for mobile software and anything else wireless related are very big, and become bigger each year. Estimates differ, but size and scope are certainly in the billions of dollars. With it comes security, which is nowadays a hot debated issue. Companies operating in any of these markets are generally awarded high valuations by Wall Street, trading at high multiples. M&A activity is running high, and takeovers at 10X revenue or higher are not uncommon. With the still intact long Nasdaq bull market in mind, one might expect any mobile software or wireless tech company to be fully valued, but we discovered a very interesting case; a small company that has completely flown under the radar but in fact is developing the next generation technology in wireless infrastructure and security and mobile software, Intellicheck Mobilisa (IDN).
Intellicheck Mobilisa is extremely undervalued
IDN is a $15 million sized micro-cap listed on the AMEX. You probably never heard of this company; in fact no one on Seeking Alpha ever covered this company, and there’s no research on similar websites. We initiated a long position because the company’s valuation is ridiculously low, and even if the stock price would double, it still would be trading below fair valuation. For the buy and hold investor, the potential return is even greater, as the company’s valuation could be soon 5X-10X what it is today. While the markets are heading south this year, our latest stock picks return investors substantial gains, outperforming any benchmark:
Lightbridge (LTBR): +435% annualized gain
Cel-Sci (CVM): +180% annualized gain
Bioanalytical Systems (BASI): +165% annualized gain
Aeterna Zentaris (AEZS): +120% annualized gain
In case you missed those, IDN offers similar potential.
Intellicheck Mobilisa is amidst the inflection point of explosive growth
IDN is a rapidly growing company, check out the next revenue numbers:
Q4 2012: $0.53 million
Q1 2013: $1.63 million
Q2 2013: $1.72 million
Q3 2013: $2.58 million
In twelve months time, revenue rose 400%. The fact that the rollout of its technology and innovation has just begun, the fact that IDN is targeting multi-billion dollar markets, and the fact that IDN recently became, in a key segment, the first company in the world to get TSA approval, make us believe revenue is to multiply again throughout the year. As one can imagine, the share price could balloon to a whole new level, especially because the financial statements show sales margins are improving. In essence, IDN is transforming into a fast-growing cash generator, a development Wall Street seems to be completely unaware of.
Business overview
Currently, IDN has three different next generation technology and software innovations in place, each addressing multi-billion dollar large markets. Some products are already on the market, and customers range from the Fortune 500 (Wal-Mart, AT&T, JPMorgan, etc) to several departments within the government, like military bases and airport security. The list of customers is impressive as well as important, as it validates the technology. Here’s an overview:
Number 1: Wireless infrastructure
First, the company is developing a technology called Floating Area Network that augments current technology and provides a cost effective and efficient way of providing network connectivity within line of sight. This is groundbreaking, as it alleviates the dependence on satellite communication systems. For example, ships at sea can communicate line of sight without utilizing satellite communications. Video and data can be transmitted simultaneously in a fraction of the normal communications time. Ships configured with floating area network are able to join and leave the network with other ships within line of sight of their antennas. Such a solution is a cost effective and an efficient way of communicating between vessels that are in close proximity of each other.
The next product in line is Aegeus, a wireless buoy system, is intended for environmental and security applications. This multi-purpose system is capable of wirelessly connecting to buoys deployed throughout the coastal waters, and has networking capabilities designed to allow the upload and monitoring of data back on shore. Outfitted with a variety of available environmental sensors, this complex network of buoys communicates in real time current water conditions, marine weather, ship traffic and the presence of any number of environmental contaminants. The Aegeus buoy project is a fully scalable multi-purpose system with environmental and security applications. It uses IDN’s exclusive technology, and is an anti-terrorism asset for Homeland Defense, a deployable asset for providing fleet support and an environmental asset that meets requirements for environmental protection.
The third product in development is AIRchitect. It aims to reduce costs in design, acquisition and installation of WLAN implementation. This custom wireless system design program uses engineering-level drawings and network requirements to design the ideal wireless network for a facility.
According to the company’s website, AIRchitect is ideally suited for designing wireless networks for passenger ships, office buildings, schools, hospitals, depots, hangars and manufacturing plants.
Number 2: Wireless security
The company offers the most advanced wireless security applications available. Why is wireless security so important? Wireless networks are vulnerable in a myriad of ways; some of the most likely problems include rogue access points and employee use of mobile devices without appropriate security precautions, but malicious hacking attempts and denial-of-service attacks are certainly possible as well. Unlike traditional wired networks in which communications travel along a shielded copper wire pair or optical cable, wireless radio frequency signals literally traverse the open air. As a result, these signals are completely exposed to anybody within range and subject to fluctuating environmental factors that can degrade performance and make management an administrative nightmare. Whether authorized or not, wireless access points and their users are subject to malicious activity and employee misuse. IDN addresses them all, and is able to design, develop and install the most secure wireless system requested.
Number 3: Mobile software
IDN’s software as a service applications operate on a variety of mobile platforms.
ID Check. ID Check is a patented software application that works by scanning the bar code or magnetic strip on the back of a driver’s license or government ID. Financial institutions have implemented this technology for new account set up, and also at the teller stations, which has proven to dramatically reduce fraudulent check cashing. A simple scan replaces over 200 key strokes on a keyboard and eliminates all of the potential undetected errors. Statistics show that an undetected error occurs every 500 keystrokes. This equals one undetected error in every two new accounts that are set up. The total available market is $90 million a year for the software alone.BarZapp. Utilizing the ID Check software, the age verification products have transformed the industry, allowing customers to be more responsive and proactive in following age verification laws and regulations. The products have been implemented in a wide array of industries, from bars and nightclubs, to retail stores and casinos. Just new is the barZapp app: you can aim your smartphone at the barcode on a driver license to instantly read, verify, parse and display the results: Underage, Expired ID, Alerts, etc. The barZapp app comes with IDN’s patented ID Check software that verifies the authenticity of an ID by reading and verifying the format of the information encoded in the bar codes on state and provincial driver licenses, identification cards, military and government IDs. It keeps track of who was scanned and when. The addressable market totals about $1.4 billion a year.ScanINN. ScanINN also builds upon IDN’s patented ID Check technology, by streamlining and automating the hotel guest check-in process. With a quick swipe of the guest’s ID, forms are automatically populated, the credential is verified and authenticated, all in under a second. A simple scan of the ID replaces over 200 key strokes on a keyboard and will eliminate all of the potential undetected errors. Tests have shown using ScanINN with existing property management systems reduce check in times by up to 43%. For properties with high levels of airline distressed passengers, tour groups, conventions or high volumes of people in a very short time, this technology nearly doubles the productivity of your staff.Transportation Worker ID Card (TWIC). TSA or the group within Homeland Security asked this year that all the manufacturers of these TWIC card readers that they be certified by Homeland Security. Homeland Security can perform up to 140 tests at a third-party independent lab, and its up to the company to prove what they have been selling. According to the Coast Guard and TSA, approximately 550 locations will require a Homeland Security tested TWIC reader, and approximately 1500 other locations are on the recommended list to have TWIC readers. This equates to a total available market of $160 million in sales and $17 million reoccurring yearly, and with an unique TSA approval, IDN is able to capture a large share in this market.
Summary: Experts tell us IDN is at the forefront of mobile software and wireless technology. Its technology has been validated and TSA approved, and some products are already on the market. We hold the same view and estimate the total market potential is enormous. Why Wall Street is putting the enterprise value of all this at a mere $10 million boggles the mind, but we guess it goes to show, once again, how extremely irrational the stock market can be.
Valuable patent portfolio
Another reason we bought shares is that IDN’s patent portfolio alone is worth two thirds of the company’s current market cap. It is estimated the average value of a patent is $0.50 million. That puts a total value of $10 million on IDN’s patent portfolio which consists of 9 US, 2 Canadian, 1 UK patent, and 11 patents pending. What we further like:
Number 1: All patents are in-house developed.
This greatly reduces any legislative risk other companies face when they buy or use patents they did not develop themselves. As a matter of fact, they could sue other companies using the same technology.
Number 2: The patents cover multi-billion dollar large markets
All patents cover multi-billion dollar large markets like ID checks, security and other mobile software applications. This technology is widespread, in use at government facilities such as military bases, as well as Fortune 500 retailers, including financial institutions, cell phone retailers, and hotels. Even you might be using IDN’s technology already.
Number 3: The company continues to expand its patent core
IDN continues to expand its patent portfolio. For example, two weeks ago, the company announced it has obtained a US patent for a technology that reads the information encoded on an ID card, authenticates and displays the bearer’s birth date, and also displays a sample reference image of the ID just scanned to assist in the authentication process. The new patent builds on the company’s existing ID Check technology that can instantly read, parse, compare and display encoded data from the barcodes on government-issued IDs. Intended to prevent the sale of age-restricted items to underage buyers, it provides the user with a readout that displays the age of the ID card bearer and verifies the card’s expiration date. A license background graphic shows the user a sample image of what the ID just scanned should look like. The technology currently includes sample images of driver licenses from every US state and Canadian province. And just yesterday, the company obtained another US patent for enhanced ID check technology that assesses ID bearers by criminal history and threat level. For example, threats generated by the Department of Homeland Security impact the level of detail of the search applied in reviewing a person’s ID card and can assist in ranking individuals whose identities are displayed. Individuals with relevant criminal activity may be assigned a higher score and displayed more prominently. Furthermore, the patent allows the use of redress information where a previous match has been demonstrated to not belong to an individual, thus allowing the software matching algorithms to improve over time.
Solid financials limit downside risk
We estimate IDN currently has $4 million in cash, and with only $0.38 million in deferred long term liability charges in the books, the balance sheet appears solid. The company has never entered into any off-balance sheet financing arrangements and has never established any special purpose entities. Since the company has no net cash burn – last quarter was cash flow positive – we do not expect future dilution.
Furthermore, management has cut labor costs about 35%. As a matter of fact, the company is doing more now with about 1/3 less people than they have before. But they did not cut back on research and development. Rightly so, because sales are up and innovation is thriving. IDN is a much financially leaner and tougher company than ever before.
Insider interests are clearly aligned with shareholders
What really sealed the deal for us, is the level of insider ownership.
44% is remarkably high. Remember, insider ownership is an excellent indicator of a good buy. The people running the business understand its complexities, and can have an excellent feel for its prospects. But that’s not all. There has been consistent insider buying last year, including purchasing shares up to $1.04, which is more than twice today’s share price. On top of that, the Board of Directors deferred their board fees in Q1 and again in Q2. The CEO deferred all his salary in Q2 as well, which all prove the directors and management are acting responsibly in times of making the company financially leaner.
Also, institutional ownership is low, but that could change the moment mutual funds (small-cap funds, etc) discover this story. Fund managers accumulating sizeable amounts of shares could amplify the share price appreciation.
Clean share structure
Let’s analyze the share structure:
There is a limited number of classes of common shares being used for equity issuances and stock option grants. Pursuant to SEC rules, the company may only sell up to one-third of the market cap held by non-affiliate stockholders in any 12-month period. Current shares outstanding totals about 35 million, of which half is owned by insiders and institutions. There are no separate voting or non-voting common-shares at play.There are only a few shareholders – the insiders – holding stock options.Management has implemented a stock option plan that provides potential financial advantage to all key employees who continue to work with the business to build shareholder value.There are rules in place that force the company to obtain shareholder approval to issue new investor shares in exchange for cash investment, nor to obtain amendments to any legal documents or the capital structure accordingly.The share structure does not have toxic convertible notes or warrant overhead that is very common in this type of companies.
The share structure appears to be very clean. Obviously, this is beneficial to shareholders, as it puts risk off the table.
Metrics underline undervaluation
A good way to pinpoint the relative valuation is to analyze some key valuation multiples and compare them with other companies operating in the same industry:
The table shows vast differences. You could argue the other companies are overvalued, and while that may be true to some degree, we think the opposite view holds up: IDN is greatly undervalued.
What should this company be worth?
For a company operating in such hot markets, with state-of-the-art technology, niche products, valuable patents, pristine financials and bright outlook, we would expect a $70 million market cap at least, which is still way lower than most comparable companies on Wall Street.
For example, NQ Mobile (NQ) is growing less fast, is breaking even, but it has a market cap 55X greater than IDN. ETAK Communications (ETAK) loses money, its revenue is declining year by year but yet that company has a market cap 13X IDN.
Thus far, Wall Street seems to be completely oblivious of IDN’s potential. If you happen to know a similar stock that sports the same features and level of undervaluation, please inform us, and we’ll perform due diligence. Opportunities like this are very hard to come by.
Stock is trading at strong technical bottom
Also from a technical perspective (double bottom), downside risk appears minimal. Even the recent broad micro-cap sell-off – the Russell Micro-cap Index plummeted 10% – did not push shares significantly lower.
What’s the risk?
Given the company’s extreme undervaluation, solid financials, 400% annual growth, TSA approval, valuable patents and niche product portfolio, downside risk appears very limited.
A risk we can come up with is execution risk. Do we expect management to fail? No. Could it happen? Yes. Anything is possible with stock investing, and as always, do your own due diligence before making an investment.
Further, there is $12 million goodwill sitting on the balance sheet. But management has not indicated to do an impairment of goodwill or any of its definite-lived intangible assets. We therefore do not expect an impairment, but it cannot fully be ruled out either.
Conclusion
We believe Intellicheck Mobilisa is one of the most undervalued micro-caps on the market. The share price could double the moment Wall Street realizes the level of undervaluation. Throughout the year, we expect the rapid growth to continue, which should propel shares to higher levels. Remember, this is not some loss incurring pinksheet stock, but an AMEX stock with pristine financials, that provides investors good downside protection. Intellicheck Mobilisa is a very rare trade opportunity: little downside risk, tremendous upside potential.
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Intellicheck Mobilisa: A $0.40 Stock That Should Be Trading At $2
Disclosure: I am long IDN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)
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Intellicheck Mobilisa: A $0.40 Stock That Should Be Trading At $2
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