By: Nick Chen
(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long ID.V)
A note today from our very own Nick Chen:
I had the chance to catch-up with Todd Sexton of Identillect Technologies (ID.V, last at $0.20) a couple of weeks ago, as he made his way over to Toronto to receive an award for being one of the top 50 Venture stocks on the TSX and shoot a related video. I took that opportunity to arrange a few meetings for Todd with some of my favorite brokerage firms. This is still a relatively unknown name to Canadian institutions, so getting a few firms to hear the Identillect story was my focus.
Identillect is a publicly-listed company which produces an award-winning email encryption platform delivering end-to-end encryption across all email platforms (Outlook, O365, Gmail, Hotmail, mobile, etc.); one of the few providers enabling cross platform encryption. In addition, they are a new entrant in the blockchain application space, with their first commercial product aimed at eliminating man-in-the-middle attacks, wire fraud, and provide audit capabilities across many industries but none hit harder than the real estate industry.
I’m glad I walked around with Todd and his assistant Camelia to a few broker meetings, in addition to hosting an investor lunch for the company. It gave me a deeper understanding of the opportunities and distribution process in selling its email encryption solution. I started investing in this company in October of 2016, and for me that’s a long time to be involved in a small cap company. Only a few companies in my portfolio are considered long-term investments and this is one of them. I’ve had numerous calls with Todd over that timespan, visited his office in California and met him in person a bunch of other times. I feel I have a good handle on what’s going on at the company, and always feel better about my investment after talking to Todd.
Here are a few things that I learned: - Identillect’s competitive advantage is its ease of use for the recipient (near-instant login process, no registration needed), ease of install (hours to install vs weeks for competitors) and low subscription price.
- They should reach profitability in 2018, but this will depend on the company’s approach to managing growth versus achieving profitability. What is more important? ID is in a land-grab situation in the email encryption business, so spending to attain a larger subscriber base (with very low churn, i.e. 5%) with high recurring revenue is not the worst idea.
- Net cash burn to the company is roughly $55,000 US per month.
- The reseller channel is where I think the company could make its greatest gains. Providing 20% of margin to resellers is not a problem when all sales from this channel only costs the company very little just support. Remember, Identillect just signed a JV agreement with Qubechain, which is training its 100 salespeople to sell Delivery Trust. I expect more reseller deals to be signed.
- The company has begun white-labelling its Delivery Trust platform and has at least one client using this version. This is a good sales pitch to potential customers wanting to offer their clients a personalized email encryption solution.
- The incoming General Data Protection Regulation (GDPR) will affect all companies in the 27 nations of the EU, as well as all companies doing business with these firms. This is slated to come into effect in May of 2018, so we should see increased data protection spending right now (which the company is currently seeing). ID has a small percentage of users in Europe but plans see a expansion in the EU as ID will market more aggressively in this area going forward.
- Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) is due to change, and many believe this will be as stringent as GDPR; yet another catalyst for Identillect and the sector.
- Identillect was endorsed by the Arkansas Bar Association in January, which has 7,000-member firms. They are the only encryption company to be endorsed by a state bar, and they plan to follow up with a marketing plan to the other 49 state bar associations.
- Next step is to translate the website into 9 more languages to open sales to new regions
- I believe one of the greatest challenges they face is getting the message out to consumers about their product as they are competing with companies with larger marketing budgets. It will take time and money to change this and create more awareness.
- I believe they are on the cusp of landing larger orders. I am not sure when we should expect these as I think they are not sure as to the length of time it takes to land deals north of 5,000 as they have not done it at this point. However, seeing one of these deals would be a nice surprise.
Let’s discuss Identillect’s foray into the blockchain space; they are building solutions for real world problems. Identillect with the help of Qubechain, has created a private Ethereum-based blockchain application which eliminates wire fraud in the real-estate transaction industry. Real-estate wire fraud was a $19 million US dollar problem in 2016. This number grew to almost $1 billion just a year later. The problem has to do with man-in-the-middle attacks, which can trick escrow agents into sending money to a hackers account instead of the account of the home seller. This is a big enough problem even the FBI is looking for a solution. With the help of his two employed PhD cryptographers (of which there are only 50 in the United States not working for the government) Todd was able to solve this problem. Hashing the email data in the blockchain, adding in two-factor authentication, and ensuring the sending data exactly matches the receiving data eliminates the way hackers are getting in-between transactions. There was a good discussion at the lunch presentation on private keys and public keys, and who controls what keys, but I don’t want to mis-speak so I won’t get into any details on that. I will follow up with Todd though and make sure I understand how they are keeping the keys safe and keeping hackers out.
The company announced last week the product is now commercial ready, so after an initial marketing period we should start seeing sales. Todd has spoken at multiple escrow agent conferences in the past, so another speaking engagement should be in the works to stimulate interest. Identillect has a multiple real-estate clients using Delivery Trust (such as Century 21); logical first adopters of this new technology.
Identillect is in a good spot to create blockchain applications related to audit trail and email transmissions. Todd had mentioned 90% of business transactions are happening over email. If that is indeed the case, I think Identillect’s approach to finding email focused blockchain applications could be it’s ultimate calling card.
Given the company’s small size ($20M mkt cap) with multiple growing lines of sales, and profitability just around the corner, I think this is a small cap stock worth owning. As always, I’m open to receive feedback and criticism. That’s how we all get smarter and become better investors!