Ideanomics (IDEX) launched a gross revenue margin of 96% in 2019 and seems to have a rising electrical car (“EV”) enterprise unit. With a current 2020 gross sales estimate, I get an EV/income ratio of three.2x-1.42x 2020 gross sales. It isn’t costly. Nonetheless, with out constructive internet earnings per share, if the corporate doesn’t obtain further financing quickly, it could need to cease its actions, which makes the inventory a bit dangerous. Like most events, the upper the chance, the bigger the inventory returns. In lower than one yr, the share worth elevated from $0.Three to greater than $1.9.
Enterprise Historical past, Present Enterprise Mannequin And Intangible Property
Integrated in Nevada in 2004, Ideanomics is engaged in a number of enterprise ventures in several industries.
Supply: IR Presentation
Ideanomics’ first enterprise mannequin was providing premium content material video on demand providers in China. The primary enterprise initiative was discontinued in 2019 as a result of the administration discovered extra profitable actions.
In 2017, IDEX determined to commerce petroleum merchandise and digital parts via the utilization of blockchain and Synthetic Intelligence applied sciences. Whereas the funding concept appeared, in my view, very engaging, in 2018, IDEX determined once more to cease its actions.
Supply: IR Presentation
Lastly, very not too long ago, the corporate determined to make use of its amassed know-how of deploying blockchain and AI applied sciences to enter the Chinese language Electrical Car trade. What appears to be essentially the most engaging enterprise initiative is the Cell Power World enterprise unit:
Because the Firm appeared to deploy fintech options in late 2018 and into 2019, administration discovered a singular alternative within the Chinese language Electrical Car (“EV”) trade to facilitate giant scale conversion of fleet automobiles from inside combustion engines to EV. This led the Firm to ascertain its Cell Power World (“MEG”) enterprise unit. Supply: 10-Q
In accordance with the company’s website, the MEG enterprise unit seems to be promoting power simply due to robotic know-how, revolutionary electrical automobiles, and Web of Issues (IoT) amongst different improvements. I couldn’t discover a vital quantity of details about patents and the corporate’s know-how.
Supply: Firm’s Web site
In accordance with the newest annual report, the web stability of the corporate’s lived intangible property is value $52 million. Nonetheless, lots of the firm’s intangible property will not be associated to the corporate’s know-how. The influencer community is value $1.7 million, land use rights are value $27 million, and a advertising and distribution settlement seems to be valued at $11 million. Apart from, a unbroken membership settlement is valued at $Eight million. The corporate solely disclosed one patent, which is value $28,000.
Let’s Perceive Some Of The Firm’s Acquisitions
Most of the firm’s intangible property had been acquired from different firms. Thus, I believed that traders would recognize attending to know the companies acquired.
Among the many firms acquired, there’s Grapevine Logic, Inc., which was acquired for $2.Eight million together with goodwill of $0.7 million and the influencer community value $1.98 million.
I can’t choose whether or not the acquisition of Grapevine was helpful or not. Nonetheless, let’s level out that I do not recognize that the corporate didn’t supply professional forma outcomes of operations for Grapevine. I haven’t got the monetary data to evaluate the worth of the acquisition. Additionally, I can’t perceive why the influencer community, which has a helpful lifetime of 10 years, may very well be that costly:
Professional forma outcomes of operations for Grapevine haven’t been introduced as a result of it’s not materials to the consolidated outcomes of operations. For all intangible property acquired and bought through the yr ended December 31, 2018, the influencer community has a weighted-average helpful lifetime of 10 years, buyer contracts have a weighted-average helpful life of three years, the commerce identify has a weighted-average helpful lifetime of 15 years and know-how platform has a weighted-average helpful life of seven years. Supply: 10-k
I’m additionally not joyful about the truth that the proprietor of 34.4% of Grapevine is an offshore firm and an affiliate of Dr. Wu, chairman of IDEX. With that, let me level out that I do consider within the honorability of the Board of Administrators.
Fomalhaut Restricted (“Fomalhaut”), a British Virgin Islands firm and an affiliate of Dr. Wu, is the non-controlling fairness holder of 34.4% in Grapevine (the “Fomalhaut Curiosity”). Fomalhaut entered into an choice settlement, efficient as of August 31, 2018 (the “Choice Settlement”), with the Firm pursuant to which the Firm supplied Fomalhaut with the choice to promote the Fomalhaut Curiosity to the Firm. Supply: 10-k
As of March 31, 2020, the corporate owns $5.9 million in money and $114 million in whole property. As talked about earlier, essentially the most related property owned by IDEX are intangible property, patents, and goodwill amassed from earlier acquisitions. Intangible property are value $51 million, and goodwill is valued at $10 million. If IDEX can extract worth from its mental property and know-how, gross sales will go up, which can result in a rise within the firm’s valuation.
As of March 31, 2020, the corporate’s asset/legal responsibility ratio equals 1.8x. Nonetheless, I do consider that traders have to get to know among the most related contractual obligations. Particularly, the corporate’s short-term convertible notes are value roughly $7.5 million. The present amount of money is lower than $7.5 million, so I might expect conversion of debt or a capital enhance. In consequence, the intrinsic valuation of every share would decline, which can drive the market worth down. For my part, if the market believes that the know-how and the corporate’s know-how are helpful, fairness dilution is probably not a problem.
Let’s check out the corporate’s promissory notes. The notes will attain closing maturity between 2020 and 2022. As of March 31, 2020, the entire quantity was equal to $19 million. Within the subsequent two years, if the corporate can’t monetize its mental property, I might anticipate a lower within the firm’s valuation. Let me remind you that the holders of the corporate’s senior secured convertible notes require fee of 10% rate of interest. In the US, with a non-risk rate of interest near zero, 10% rate of interest seems to be costly.
2018 Gross sales Have been Equal To $377 million, However They Declined
From 2018 to 2019, the corporate’s enterprise mannequin modified a number of instances. I have to state this very clear, in order that traders perceive the corporate’s earnings assertion. In 2018, the gross sales had been equal to $377 million as a result of the corporate offered crude oil value $266 million, and client electronics of $114 million. When the corporate determined to cease promoting crude oil and electronics, the corporate’s gross sales declined. If we check out the oil enterprise at this time, IDEX was clearly proper. The corporate offered oil when the oil worth was increased than $60. As of at this time, in 2020, the oil worth went to damaging territory. Clearly, IDEX was sensible when the administration determined to discontinue its oil enterprise unit.
In 2019, gross sales decreased to $44 million, however the gross revenue margin elevated from 0.8% to 96%. The corporate reworked its enterprise mannequin, so the margins had been increased than these in 2018. I do recognize this truth.
With that, discover that in 2019, the corporate needed to report a major quantity of impairment of property. It normally occurs when firms discontinue certainly one of their enterprise items. The full quantity was equal to $73 million, which results in whole working bills of $111 million and losses from operations of $68 million. In 2019, internet loss was equal to $96 million.
The yr 2020 seems to be extraordinarily difficult for the corporate. Within the first quarter, the corporate reported gross sales, in China, of lower than $0.1 million. Observe that the financial situation in China was not helpful. IDEX expects to make most of its EV gross sales in China:
On account of the general financial situation in China within the first quarter of 2020, minimal gross sales of EV’s occurred throughout that time-frame. Ideanomics’ recorded whole gross sales in China of $0.1 million throughout this time-frame. The Firm’s expectation is that its gross sales would enhance as China’s financial system continues to enhance, though the Firm is a current entrant within the EV market in China and might present no assurances on future gross sales. Supply: 10-Q
RMB 1 Billion gross sales goal in 2020
On June 9, 2020, the corporate famous that the corporate’s subsidiaries offered 2,139 automobiles value $33 million. That is not all. The corporate gave very spectacular monetary numbers for the remaining interval of yr 2020. The corporate has a goal of RMB 1 Billion gross sales.
Ideanomics is happy to announce that auto sellers working in its subsidiary, Cell Power World’s expo heart in Qingdao, have offered 2,139 automobiles for a complete worth of RMB 235 Million, or USD 33 Million. As a reminder, the MEG Heart in Qingdao started operations on Could 1. Primarily based on the extent of gross sales exercise within the first week of June, this month’s gross sales are anticipated to exceed Could ranges. In China, the excessive season for automotive shopping for is from October to January. In its first 5 weeks of being operational, the sellers on the MEG Heart have acquired excessive ranges of curiosity, and administration is optimistic that it could obtain its beforehand acknowledged RMB 1 Billion gross sales goal in 2020. Supply: Press Release
The share worth of IDEX is kind of volatile. In consequence, in a interval of only one month, the enterprise worth ranged between $450 million and $200 million. If we assume gross sales of RMB 1 Billion or $140 million, the EV/income ratio primarily based on the present worth is the same as 3.2x-1.42x. If the corporate continues to ship a gross revenue margin of 96%, like in 2019, the EV/income ratio of three.2x-1.42x gross sales shouldn’t be costly. I might say that traders believing that the expansion will proceed will purchase shares.
Shares Excellent And Institutional Cash
For my part, the current enhance within the quantity of shares excellent is probably not a dangerous function. In lower than 5 years, the share rely elevated from 50 million to greater than 167 million shares. Theoretically, a share rely enhance results in a lower within the intrinsic valuation of every share. Nonetheless, it additionally implies that the corporate is receiving further cash to have interaction in new ventures. Do not forget that it is a development inventory. For my part, what issues is whether or not gross revenue margin will keep on the identical degree.
Observe that the corporate not too long ago issued a prospectus to lift as a lot as $250 million. The corporate might use the proceeds to repay its excellent debt, which I do not absolutely recognize. Additionally, vital dilution would lead to a decrease inventory worth. Having mentioned so, if the corporate raises that sum of money, it can have funds to promote extra EVs. In consequence, gross sales would almost certainly creep up, which can result in a rise in fairness worth:
We intend to make use of the web proceeds from the sale of the securities below this prospectus for common company functions, together with for common working capital functions, which can embody the reimbursement of excellent debt. Supply: Prospectus
Supply: Issuance Of Shares
If we check out the corporate’s fairness possession, we discover that institutional traders personal 6.8% of the entire share rely. Properly, let me level out that institutional traders normally take many months to amass shares of any firm. If establishments did due diligence and purchased shares, many retail traders will almost certainly observe:
Supply: IR Presentation
Dangers: Associated Occasion Transactions And Extra Funds Required
I do consider that the corporate’s transactions with associated events do not look good. Each institutional and retail traders have to know concerning the transactions. On Could 10, 2012, IDEX acquired cash from the corporate’s Vice Chairman. In whole, the corporate acquired $Three million, for which IDEX would pay a 4% curiosity.
On February 8, 2019, the corporate signed a $2.5 million convertible notice with an affiliate of IDEX. The holder of the notes has the appropriate to amass shares at $1.83 per share. Within the final quarterly report, the corporate famous that it was negotiating for an prolonged due date. Just like the earlier case, I do not recognize the deal. I do not suppose that the market will prefer it.
Once more, on November 25, 2019, IDEX signed a take care of one other affiliate of one of many administrators of IDEX. The deal included a notice, which will be transformed at a worth of $1.25. In accordance with the final quarterly report, the corporate had not paid the curiosity on this notice, which I do not recognize.
For my part, the corporate wants further funds to function as a result of the era of free money circulate is damaging. If IDEX can’t acquire further financing within the type of fairness, convertible notes, or another sort of financing, the corporate’s operations could also be discontinued. In consequence, the share worth would clearly decline. IDEX has disclosed this clear danger in its most up-to-date annual report:
If we’re unable to lift further capital when required or on acceptable phrases, we could also be required to cut back or to discontinue sure operations, cut back or discontinue the event of latest enterprise strains, scale back headcount, promote property, file for chapter, reorganize, merge with one other entity, or stop operations. Supply: 10-k
IDEX begins and stops enterprise fashions each time the administration finds good gross revenue margins. Within the final annual report, the corporate launched a gross revenue margin of 96%. It is extremely spectacular and will clarify the EV/income ratio primarily based on the present worth of three.2x-1.42x 2020 gross sales. With that, IDEX doesn’t report constructive money circulate, so it wants further financing to pursue its operations. Buyers want to know that with out new money, the corporate’s operations will almost certainly be discontinued.
Disclosure: I/we’ve got no positions in any shares talked about, however might provoke a protracted place in IDEX over the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
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