Intellicheck, Inc. (IDN), a developer and marketer of threat identification products for the retail, hospitality, law enforcement, defense, and transportation industries, has raised nearly $50M through stock sales to outside investors since becoming a public company in 1999. This is in spite of the fact that, in its 19-year history as a public company, Intellicheck has never earned a profit and has accumulated net losses of almost $70M. The repeated pattern of IDN issuing stock and investing the proceeds in a money-losing operation has destroyed virtually all of the company’s market value, yet management has averted these losses thanks to a compensation structure that incentivizes aggressive investment while at the same time shielding managers from any downside. Intellicheck has very little to show for all the money it has spent, but until the interests of management and owners are properly aligned the losses are likely to continue.
Since its IPO in 1999, IDN has raised approximately $45.9M through stock sales to outside investors. The following table shows the total amount of money raised (before fees) from all of IDN’s stock offerings, including secondary offerings, shelf registrations and purchase rights agreements.
* Funds from the exercise of rights offerings and warrants were received at various dates throughout the year. The amounts listed in the table reflect the sum of all funds received from warrants and rights offerings during the fiscal year.
Figure 1: Dates and Sizes of Funding Events Since IPO
IDN has been able to raise funds despite a track record of poor performance. The company has never earned a profit in its near 20-year history as a public company, losing an average of $3.8M per year since 2000 and accumulating total adjusted net losses of nearly $68.5M. Despite a 50% drop in revenues and an increase in the size of the firm’s net losses over the last 5 years, IDN raised more than $26M from stock sales to outside investors between 2013 and 2017.
Figure 2: Annual Revenue Since IPO
Figure 3: Annual Net Loss Since IPO
Figure 4: Accumulated Net Losses Since IPO
Figure 5: Funding Events and Annual Losses
Total Return Since IPO
IDN’s long history of unprofitable operations has destroyed its market value. Between 11/26/99 and 11/21/2018, the value of an investment to an investor who purchased shares of IDN at the IPO price of $7.50 declined 97.4% (adjusted for the 1-8 reverse stock split in 2014), compared to a total return of 85% for the S&P 500.
Figure 6: IDN Stock Performance Chart
Sources of Financing
In each of IDN’s last three stock offerings, one of First Eagle Investment Management (“FEIM”) or AWM Investment Company (“AWM”) accounted for a disproportionate share of the financing. FEIM and AWM, both US-based investment advisors, invested in IDN and other securities on behalf of various private equity and hedge fund clients located in the Cayman Islands.
- 8/4/17: IDN sells 4,168,750 shares at $2.25/share for $9,379,688
First Eagle Investment Management acquired approximately 1,150,000 shares of IDN for $2.6M, based on the net change in size of FEIM’s position between Q2 and Q3 FY17 as reported in the company’s 13F-HR filings. As of August 8, 2017,FEIM was the beneficial owner of 2,719,636 shares or 18.84% of the common stock outstanding as a result of acting as an investment advisor to various clients, including 21 April Fund, Ltd. (“21 April”), a Cayman Islands company with beneficial ownership of 1,241,844 or 8.6% of the common stock outstanding.
- 6/15/16: IDN sells 1,200,000 shares at $1.75/share for $2,100,000
First Eagle Investment Management acquired approximately 1,050,000 shares of IDN for $1.8M, based on the net change in size of FEIM’s position between Q2 and Q4 FY16 as reported in the company’s 13F-HR filings. As of February 6, 2017, FEIM was the beneficial owner of 1,050,000 shares or 9.94% of the common stock believed to be outstanding as a result of acting as an investment advisor to various clients.
- 1/14/15: IDN sells 4,857,143 shares at $1.75/share for $8,500,000.
AWM Investment Company acquired approximately 1,985,022 shares of IDN for $3.5M, based on the net change in size of AWM’s position between Q4 FY14 and Q1 FY15 as reported in the company’s 13F-HR filings. As of February 10, 2015, AWM was the beneficial owner of 1,985,022 shares or 20.3% of the common stock outstanding as a result of acting as an investment advisor to various clients, including Special Situations Cayman Fund, L.P. (“CAYMAN”), Special Situations Fund III QP, L.P. (“SSFQP”), and Special Situations Private Equity Fund, L.P. (“SSPE”). CAYMAN, SSFQP, and SSPE had beneficial ownership of 407,354, 1,170,316, and 407,352 shares respectively.
The practice of pooling funds in a tax haven such as the Cayman Islands and investing the proceeds in a diversified basket of stocks is extremely common. Both FEIM and AWM are diversified funds with over 100 holdings and their positions in IDN at the time of purchase were negligible (less than 1% of assets under management). Their investments in IDN therefore cannot be viewed as conviction buys and were most likely made to lower the cost bases of the funds after the shares had fallen below $3. Since the buy dates listed above, both FEIM and AWM have significantly reduced their holdings of IDN (AWM no longer has a position in the stock).
Other Insights and Analysis
IDN’s compensation structure does not hold managers accountable for poor performance. Key executives earned a total of $265,556 in bonuses over the last four years, despite a 150% drop in earnings, an average ROE of -38%, and a 50% decline in market value over the period. Between 2014 and 2016, bonuses paid out to executives increased from $10,000 to $132,000.
A significant portion of executive compensation comes in the form of stock options. Over the last 5 years, key executives received a total of $1,842,002 in stock options compared to base salaries of $3,407,957. Stock options are supposed to align the interests of managers and owners, but excessive use of options can induce managers to invest aggressively in risky projects at the expense of shareholders since options protect managers from downside exposure.
In the case of IDN, the company has been using proceeds from stock sales to keep R&D spending at abnormally high levels ($2-2.5M annually), despite large decreases in revenue. Over the last 10 years, IDN spent an average of 32.4% of its sales on R&D, while the typical packaged software company usually spends 13-14%.
Figure 7: R&D Spending
Most companies adjust R&D spending in-line with revenues to protect earnings, but IDN’s stock sales have enabled the company to maintain high spending levels at the expense of shareholders. The company is pinning its hopes for the future on a technological breakthrough, but historically IDN has very little to show for these investments. Because the vast majority of executive compensation comes in the form of base salary and options, it is outside investors rather than managers that shoulder the losses from these expenditures.
Insiders have virtually no stake in the company. As of 3/15/18, managers owned a total of 2.2% of the common stock outstanding after adjusting for options exercisable within 60 days.
Intellicheck has raised funds nearly 15 times since it became a public company despite never showing a profit. The company is almost completely reliant on external capital, but the current compensation structure does not hold managers accountable to the investors upon which Intellicheck depends. IDN’s elevated spending levels have not paid off in the form of increased sales or higher returns on capital, but until the interests of owners and managers are properly aligned, the company will continue to invest aggressively, leaving shareholders to shoulder the losses.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.