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Ideanomics: Growth Through Electric Mobility In China

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About: Ideanomics, Inc. (IDEX)
by: John Snyder
John Snyder
Value, Deep Value, long only, contrarian
Summary

Ideanomics, Inc. reported disappointing results for Q3 2019 with lower revenues and a significant drop in value of cryptocurrency holdings.

The company’s Mobile Energy Group division provides the best opportunity for revenue growth in FY2020 with significant EV taxi orders and acquired orders from GCL.

The company’s stock is likely to face headwinds over the next two quarters, but I am holding my position due to the long-term prospects of the MEG division.

Investment Thesis

Ideanomics, Inc. (IDEX) still has an opportunity for significant growth over the next three years with the company's Mobile Energy Group ("MEG") division.

The MEG division operates as an end-to-end solutions provider for the procurement, financing, charging and energy management needs for fleet operators of commercial electric vehicles ("EVs").

The company has expanded the division to include four distinct commercial vehicle types with supporting income streams: 1) Closed-area heavy commercial, in areas such as Mining, Airports, and Sea Ports; 2) Last-mile delivery light commercial; 3) Buses and Coaches; 4) Taxis.

IDEX's MEG division generates revenues from the purchase and financing of vehicles, which provide for one-time fees and charging and energy management provides for recurring revenues.

The company reported disappointing results for Q3 2019 with lower revenues and a disclosure that the company's cryptocurrency holdings on the Asia EDX exchange cannot be converted into fiat.

The positive news is IDEX reported its first revenues from EV activities, and there are a significant amount of EV taxi orders for FY2020. I expect to see the company's revenues ramp up from the MEG division in the second half of FY2020 when previously acquired taxi and commercial vehicle orders are delivered.

I think IDEX's stock price will face headwinds over the next two quarters due to a possible impairment of the company's GTB holding in Q4 2019, and a lack of significant revenues expected in Q4 FY2019 and Q1 FY2020. I am still holding the company's stock due to the long-term prospects of the MEG division in the next three years.

Lower Revenues and Significant Drop in Cryptocurrency Values

The company earned its first revenues from the MEG business segment in Q3 2019. IDEX took over an order from a third party to deliver 4,172 EV taxis in Chengdu, China resulting in $2.9M in commission revenues.

Besides seeing the first revenues from EV activities, IDEX's performance in Q3 was very disappointing. Revenues decreased $11.4M, or 79%, from $14.5M in Q2 2019 to $3.1M in Q3 2019.

ChartData by YCharts

The decrease in revenues was mainly due to recording the EV taxis revenues on a net basis. During the Q3 earnings call, Conor McCarthy, CFO, explained the EV taxi order from a gross perspective equates to $48M in gross revenues less $45M in cost of revenues.

I was surprised there was no revenues earned from the service agreement with GT Dollar Pte. Ltd. ("GTD") during Q3. GTD disposed of its investment in IDEX and is no longer a minority shareholder as of September 30th, 2019.

In March 2019, management released an announcement that the deal would result in the company receiving $170M in equivalent of GTB tokens as initial payment for services provided under the agreement.

According to the company's 10-Q, IDEX's auditors recommended that a 76% discount should be applied to the fixed contract price agreed upon by both parties when signing the contract, and the estimated value of the GTB was calculated using a Black-Scholes valuation model.

During the Q2 earnings call, Alf Poor, CEO, said the company planned to start converting its cryptocurrency holdings in the second half of 2019. Once the conversion to fiat was completed, IDEX would recognize the portion of the coins that were previously discounted due to accounting regulations.

At the end of Q3 2019, IDEX held 7,294,555 GTB, 2,763 Bitcoins and 21,312 Ethereum. Management disclosed that these Bitcoins and Ethereum represent GTB denominated in Bitcoin and Ethereum. The company does not have direct holdings of Bitcoin and Ethereum.

A new disclosure was added in the Q3 10-Q that stated, "the Asia EDX exchange has not permitted holders of GTB, Bitcoin or Ethereum to exchange digital currencies held in accounts at the exchange for fiat. The company is unable to predict when our cryptocurrency holdings will be convertible into fiat and consequently does not consider them to be part of the company's liquid resources."

Management seemed optimistic about converting the cryptocurrency into fiat during the Q2 earnings call. It turns out the revenues recognized in Q1 and Q2 were essentially worthless to the company since they do not provide any cash flow.

In addition, management disclosed that on October 29, 2019, the GTB held by the company had a significant drop in value from $17 to $1.84. The current price of GTB can be found at the AsiaEDX website.

IDEX currently has $61M in intangible assets recorded on the balance sheet for cryptocurrency holdings. Management will need to perform an impairment analysis in Q4, and I think an impairment is likely due to the significant decrease in value.

I estimate an impairment of $36M on the low end and $60M on the high end. The low end estimate assumes no impairment of the Bitcoin and Ethereum holdings, and only the GTB holdings are impaired. For the high-end estimate, management discloses that the company does not have direct holdings of Bitcoin and Ethereum, and the GTB denominated market price is used to evaluate the fair value for all of the cryptocurrency holdings.

In the Q3 earnings call, Alf Poor said management is actively seeking investors to swap the company's cryptocurrency holdings for assets that are more liquid, and they are in discussions with at least one party who is interested. I'm not placing much reliance on investors paying for a low valued cryptocurrency that cannot be converted to fiat.

Significant EV Taxi Orders and GCL Acquired Orders Present Significant Revenues in 2020

Looking at what to expect for Q4 2019, management anticipates the delivery of another 5,000 EV taxis that will be recorded on a gross basis.

The 4,172 EV taxis delivered in Q3 2019 were recorded to revenues on a net basis since IDEX acquired the order from a third party after billing had already occurred. Recording revenues on a net basis means the gross profit of $2.9M from the order was recorded in the gross revenues line item instead of showing the gross revenues and cost of revenues in separate line items. As mentioned previously, if the Q3 2019 EV taxi order was recorded on a gross basis, IDEX's gross revenues for the quarter would have been $48M and cost of revenues would have been $45M.

The EV taxis expected to be delivered in Q4 2019 will be recorded on a gross basis; and as a result, I estimate approximately $58M in revenues and $3.5M in gross profit assuming a gross margin of 6% similar to the previous deal. I expect another net loss for Q4 2019 based on the company's quarterly expenses over the past two quarters excluding one-time charges, and especially if any impairment is made of the GTB holdings in the quarter.

The outlook for FY2020 is much better, and it is the main reason why I am still holding my position in the company.

According to a press release on November 11, 2019, IDEX's management anticipates revenues for its MEG division in the $2B range for FY2020, with operating margins in a 6% range, after costs for scaling operations. These revenues will be derived from the spread on group buying activities, as well as fees derived from lease financing and asset backed securities ("ABS") refinancing activities.

Considering IDEX's revenues for Q3 2019 were $3.1M, how can management expect $2B in revenues for FY2020?

The company announced 130,300 EV taxi orders that are scheduled to begin delivery in FY2020. If all of the EV taxis are delivered in FY2020, I estimate approximately $1.5B in gross revenues and $93.7M in gross profits assuming the same terms as previous EV taxi orders.

Fiscal Period

# of EV Taxis Ordered

Gross Revenues

Cost of Revenues

Gross Profit

Actuals

Q3 2019

4,172

$48,000,000

$45,000,000

$3,000,000

Estimates

Q4 2019

5,000

$57,526,366

$53,930,968

$3,595,398

Estimates

FY 2020

130,300

$1,499,137,105

$1,405,441,035

$93,696,069

Source: Q3 2019 actuals based on non-GAAP information provided by the CFO during the earnings call. Q4 2019 and FY 2020 estimates based on author's calculations.

The largest order of EV taxis is 93,000 for the Sichuan Province with a contractual delivery date of December 31, 2020. The second largest order of EV taxis is 35,000 for the Yunnan Province with deliveries beginning in FY2020. The most recent order is for 2,300 EV taxis for the City of Guilin with delivery expected in the first half of 2020.

The MEG division is a wholly-owned subsidiary of Ideanomics of which GCL, the largest green energy supplier in China, is a 49.9% stakeholder. IDEX acquired 500,000 commercial electric vehicle orders over the next three years from GCL. I expect some of these commercial vehicle orders to be fulfilled in the second half of FY2020, and significantly contribute to the company's revenues.

I have found that management has been overly optimistic in many press releases over the past few years; however, I think $2B in revenues can be achieved next year due to the significant amount of EV taxi orders and the commercial EV orders acquired through GCL.

Considering Cash

IDEX reported $1.7M in cash and cash equivalents as of Q3 2019. The company's current ratio has decreased to its lowest level in FY2019 as seen in the chart below.

ChartData by YCharts

Despite the low levels of cash, I'm not concerned about the company's ability to continue as a going concern. Bruno Wu, Chairman, who along with his wife Yang Lan had an estimated net worth of $1B in 2016, according to Forbes.

Wu is the company's largest stock owner, controlling nearly one-third of shareholder votes as of March. In an interview with the Hartford Business Journal, Alf Poor said Wu has kicked in millions of dollars to the company in the form of convertible notes. During the interview, Alf Poor said, "Bruno Wu is our chairman, he will capitalize the company, he has gone on record saying he will."

In the Q3 2019 10-Q, management disclosed that the company's net borrowings from Wu and his affiliates increased by $1.0 million. These borrowings are recorded in amounts due to related parties in the company's balance sheet, and these borrowings bear no interest.

The company's shares outstanding have increased steadily over the past year as seen in the chart below.

ChartData by YCharts

There is a risk of future share dilution as the company has funded the business through convertible notes and equity in the past. However, I expect the company to significantly increase cash flows in FY2020 once revenues increase from the EV taxi orders and commercial vehicle orders.

I expect a significant portion of the cash generated from revenues in FY2020 to go to the development of the company's FinTech Village in Connecticut. In the Q3 earnings call, Alf Poor said the old buildings on the property are still being demolished and new construction is expected to begin in the Spring of 2020.

Risks

Management could fail to execute on the EV deals in China, which would negatively impact expected revenues in the next three years.

There are negative news reports regarding the software used for the trading platform at the Delaware Board of Trade ("DBOT"), which the company owns. In the Q3 2019 earnings call, Alf Poor said the company invested considerable amount of time and resources into DBOT since the acquisition. However, the company's future revenue prospects would be negatively impacted if they are unable to utilize the software at DBOT.

A substantial part of the company's assets and current operations are conducted in the People's Republic of China, and the Government exerts substantial influence over the manner in which the company conducts business activities. The company's operations may be harmed by changes in the government's laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters.

The company's stock price is very volatile, leading to the possibility that the stock price could be depressed at a time when investors may want to sell their holdings.

Takeaway

IDEX reported disappointing results for Q3 2019 with lower revenues and a significant drop in cryptocurrency values. The company's Mobile Energy Group division provides the best opportunity for revenue growth in FY2020 with significant EV taxi orders and GCL acquired orders. The company's stock is likely to face headwinds over the next two quarters, but I am holding my position due to the long-term prospects of the MEG division in the next three years.

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Disclosure: I am/we are long IDEX. 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.

Additional disclosure: I am not a financial advisor, and this article is for informational purposes only. Please use your own due diligence and consult a financial professional before making any investment decision.