IDBA: Making Progress Gradually, Then All at Once
NASDAQ:IDBA
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IDEX Biometrics (NASDAQ:IDBA) has worked through 2021 with little to show for revenues other than mostly sales to Bloomberg, but just recently a flurry of news has landed. Today the company announced that China UnionPay certified its partner Hengbao’s latest biometric smart card. China UnionPay is the largest payment network in the world, with 9.4 billion cards in circulation. Last week both VISA and Mastercard fully certified IDEMIA Group's F.CODETM biometric smart card platform, that uses IDEX's TrustedBio® fingerprint authentication solution. IDEMIA is one of the top two largest card makers in the world and after this certification, it placed a mass production order with IDEX for its TrustedBio fingerprint sensor. IDEMIA uses IDEX in its F.CODE payment card. This was the largest production order for TrustedBio to date and represents a material increase to backlog. Deliveries against this new order are scheduled to begin shipping in Q1 2022. These certifications are what many bank customers have been waiting for, and now they will start to announce pilots and rollouts of fingerprint cards.
According to the Nilson Report, VISA currently has approximately 3.6 billion cards in circulation and is expected to grow that by 18% by 2026, while Mastercard has about 2.5 billion cards in current circulation, with growth of 29% expected over the same time period.
There are five billion smart cards issued per year worldwide, of which three billion are payment cards and 1.9 billion of them are contactless. The market for contactless cards is growing 8% per year. It is expected that 18% of the market will be using biometric cards by 2025 or 500 million cards. IDEX is one of only two fingerprint solution providers for this market and it believes it has the superior solution due to among other things, its cost and ability to do transactions in half a second. In the future, when Asian manufacturers may enter the market, IDEX believes it will be protected, as Western banks would not be inclined to trust their cards to those low cost providers.
The outlook in China is also gaining steam and IDEX expects rollouts late in 2022. IDEX is the sole supplier for the sensors to be used in the e-CNY wallet tests at the Olympics in February 2022, but given that it is November and we are not sure any orders have been placed, the trial is looking to be less than robust. During the third quarter, IDEX announced a design win with Union Smart Card for a cold wallet card in collaboration with the six state-owned banks. This product, with a screen and a keyboard, is an alternative to mobile wallets on smartphones. A physical card is a must with digital currency as evidenced by the recent Coinbase hacks. The fingerprint card, which is never connected to the Internet, can give an extra layer of security to any transaction that originates from a phone. For an example of a Phaeton Technology using IDEX in its card for cryptocurrency security see this link https://youtu.be/qEtfr3W14nM. China is also testing adding more applications using these digital wallets including paying for transit and health records.
Zwipe has also announced a number of customers all of whom will result in orders for IDEX. Redeye is predicting Zwipe will generate US$7.6 million in 2022 ramping to $54 million in 2023. We believe that at least 25% of Zwipe’s cost of goods sold will go to IDEX, so on $54 million, at Redeye’s 28% gross margin estimate that would be between $10 and $15 million in sales to IDEX. It recently announced it was under evaluation by a Global Tier 1 Smartcard Manufacturer; it received two commercial orders from Beautiful Cards Corporation and Inkript, and it has also announced pilots with MEPS, Reltime, Credit Lebanaise, and a Global Tier-1 Bank.
Progress has accelerated recently and production ramp forecasts are now supported by orders coming in. Investors must also be aware that given its cash burn the company will need to do a capital raise soon. We expect that to happen before year-end. Clearly management was waiting for the Mastercard and VISA certification and the IDEMIA order before launching its efforts. The company is still burning about $5.5-6.5 million a quarter and had $12.9 million in cash on September 30, 2021.
Q3 Earnings Results
In Q3 of 2021 the company generated $732,000 in revenues sequentially up again from $697,000 in Q2 and compared to $248,000 in Q3 2020. Product sales were $731,000 in Q3 2021 compared to $246,000 in 2020, again reflecting primarily production shipments to Bloomberg as well as an increasing ramp of sample and pilot shipments to card manufacturers. The majority of sales were still to Bloomberg for its new keyboards against its $6 million minimum contract.
Q3 sales yielded a gross margin of 59.0% versus 81.9% due to product mix. Operating expenses increased to $7.9 million in Q3 2021 versus $7.0 million in Q3 2020. Payroll costs increased $769,000 while other expense increased $359,000. R&D spending was again down from last year, this time by $271,000. The company believes expenses will start to decline as a percentage of sales and possible only increase slightly as far as marketing costs, but the big R&D spending is behind them. This year the company received government grants of $134,000 versus only $12,000 last year. Other income increased primarily due to the costs associated with being listed on NASDAQ.
The operating loss and net loss for the quarter were $7.5 million compared to a loss of $6.8 million last year. The non-GAAP loss was $6.9 million versus $5.1 million, an increase of $1.8 million. The non-GAAP loss takes out stock-based compensation.
GAAP loss per share was $0.008 versus $0.009, and non-GAAP was a loss of $0.007 versus a loss of $0.006. The share count increased 14.5% to 902 million average primary shares and 923 million fully diluted.
GAAP loss per ADS was $0.62 versus a loss of $0.65 last year. The non-GAAP loss per ADS was $0.56 versus a loss of $0.46. EBITDA loss in this quarter was $6.5 million compared to $5.3 million in Q3 2020. Cash flow (not including changes in working capital) was a negative $6.5 million compared to a negative $5.3 million. Free cash flow was a negative $6.3 million compared to a negative $5.4 million.
Balance Sheet
At the end of September IDEX had $12.9 million in cash, $13.7 million in working capital and no debt. It is still burning about $5.5-6.5 million a quarter.
As of November 2nd, the company had 919.5 primary shares outstanding or 12.3 million ADSs.
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