Investors Finding The Way with Inpixon

PRIME SERIES

“The sea is dangerous and its storms terrible, but these obstacles have never been sufficient reason to remain ashore….”

Ferdinand Magellan

It has been thirty years since the first geopositioning units were sold to map-challenged consumers.  Appropriately named after the first mariner to circumnavigate the world, the Magellan navigation device paved the way to a robust market for location services.  Now having conquered land and sea, the location and positioning industry has turned indoors for new worlds to explore and tame.

Self-described indoor data company Inpixon, Inc. (INPX: Nasdaq) is at the forefront of the endeavor.  The company has crafted a unique service line based on a proprietary geopositioning network and data analytics program.  The company was recently recognized as a ‘visionary’ in the indoor location services sector by Gartner Analytics, an industry research firm.  However, what may make Inpixon even more interesting to investors is the multiplicity of use cases that provide the company with a wide addressable market to monetize its innovations.     

Market Opportunity On Fire

The global indoor positioning and navigation (IPN) market was valued at $2.6 billion in 2017 by industry research firm Allied Market Research.  However, Allied may be unduly conservative.  Research and Markets, another market research firm, pegged the IPN market at $6.9 billion in the same year while analysis completed by yet a third firm, Market and Markets, determined a 2017 market size of $7.1 billion. 

What the research analysts all seem to agree upon is that the IPN market is expanding.  Allied projects that compound annual growth in the sector could reach an impressive 42% through the year 2025.  Market and Markets is in complete agreement on that pace at least through 2022.  Research and Markets calculated a lower compound annual growth rate of 25.8%, but has confidence that hyper growth can last well through 2026.

Altogether the research suggests Inpixon and its competitors will be vying for a share in a market that could expand dramatically over the next few years.   The various research reports suggest total revenue values ranging from $40 billion to $55 billion by the mid-2020s.  

Newly kindled interest in the retail market is a key driver.  Data from indoor positioning systems is giving brick and mortal retail a second lease on a life that has been threatened by ecommerce.  Additionally, enterprise is adopting indoor mapping to help visitors navigate large corporate, educational and health care campuses.  More conventional asset and personnel tracking remains a strong source of demand. 

USERS	APPLICATIONS	ECONOMIC BENEFITS
Retail	Customer engagement analytics Way finding Promotion and messaging	Higher sales volumes Improved customer satisfaction Increased sales tickets
Healthcare	Onsite patient navigation	Improved compliance
Government	Perimeter protection Contraband detection	Improved security Personnel protection
Public Spaces	Safety and security Way finding, route planning	Improved security, law enforcement Reduced bottlenecks, crowd issues
Hospitality	Way finding	Enhanced visitor experience
Manufacturing	Logistics	Reduced loss through efficiency
Warehousing	Asset tracking	Reduce loss from theft, mishandling

 

Technology Driven Growth

Technological innovation has been a key to the proliferation in use cases.  Indoor position systems rely on several communications technologies, beginning with cellular and wi-fi networks and extending to ultra-wide band.  However, the addition of bluetooth beacons to the mix has made it possible to make available contextual and local data to system users.  IPN systems leverage internal sensors in smartphones to deduce the device’s exact position relative to the beacon. 

System users can use that proximity information to push a notification to the smartphone owner.  Alternatively, system owners might use the location of the smartphone inside or outside a preset ‘geofence’ to deploy safety and security resources.    Icing on the cake is that bluetooth beacons are inexpensive and relatively easy to deploy alongside the other network technologies.   

Low-cost, rich information on the movement of facility visitors or shoppers is an easy pitch to make for innovative data service providers like Inpixon.  For example, retailers can economically use location data to craft a proximity marketing campaign that engages shoppers with navigation tips and promotions.  Alternatively, mobile device apps built on top of the positioning system can help guide visitors to a desired location in a large corporate or health care.  The college campus is made considerably safer when security officers can pinpoint exact incident locations through an IPN system that can determine with accuracy a particular floor and room in addition to the building location. 

Inpixon Solution

Inpixon’s indoor positioning system relies on proprietary sensor technology that locates cellular, Wi-Fi, Bluetooth, RFID, and ultra wide band signals within a defined range.  The solution also capitalizes on the company’s deep experience in data analytics.  By interfacing the IPN system with inventory, point-of-sale, security video, and other ‘big data’ sources, Inpixon can offer system owners unique and powerful business intelligence other systems overlook. 

Recent contract awards illustrate Inpixon’s market potential.  In late January 2020, the company landed a contract to provide its Jibestream indoor mapping solution to an unnamed mental healthcare facility with multiple buildings.  Patients use the system to find their way to reception areas, doctor offices and testing areas.  The healthcare customer expects the added location intelligence will help reduce missed and late appointments, increase patient compliance with required tests, and improved patient outcomes.

Inpixon recently announced new features for its Jibestream indoor mapping solution.  Among other new capabilities, there is a new interface with Google Maps that allows an outdoor/indoor mapping experience in a single app.  For example, users can begin their journey at home using the Google map and then be seamlessly guided to the correct building on that healthcare campus using the Inpixon map.

The mapping solution upgrade demonstrates that in the IPN sector where innovation is a key driver of demand, Inpixon is not to be left behind.  Indeed, the company spent $2.7 million on research and development in the first nine months of 2019.

Inpixon’s efforts to remain at the leading edge of the IPN market appear to be paying off.  The company’s indoor mapping solution was selected for the American Dream entertainment, dining and retail center in the Meadowlands Sports Complex in New Jersey.  The distinctive facility first opened to customers in late 2019.    When completed the 5 million square foot project that will be the third largest retail facility in North America.  Despite trends away from in-store shopping, American Dream owners have bet big that their high-tech, multi-dimensional design will attract as many as 30 million to 40 million visitors in the first year alone.  The Inpixon ‘way finding app’ will help deliver the intended American Dream experience by guiding visitors through more than 450 retail shops and 100 eateries as well as movie theaters, a water park, ice rink and indoor ski area.    

Financial Performance

The skies high above Inpixon appear lit up by the brilliant light of strong demand in a broad addressable market.  Unfortunately, closer to ground level and the company’s financial profile, a few low flying clouds linger on the horizon.  Inpixon has yet to deliver earnings to the bottom line and its balance sheet reflects the impact of several strategic deals. 

In the first nine months of 2019, Inpixon reported $4.4 million in revenue recognized from materials, maintenance, consulting and service agreements.  While the top line compared favorably to $2.6 million in sales in the same period of the previous year, the company has still not scaled to a large enough installed base to cover operating costs and expenses.  However, the company reported an operating loss of $15.3 million after had increased spending on sales, marketing, research and development during this period. 

Importantly, cash usage provides a perspective more encouraging to investors.  In the first nine months of 2019, Inpixon used $9.1 million in cash resources to support operations, well below the reported operating loss for the same period.   Reported operating income was weighed down by a laundry list of non-cash expenses, including stock compensation, depreciation and amortization, and changes in the value of a derivative liability.  

Growth Strategy

Over the last two years the company has embarked on a strategic plan to divest a non-core operation and invest in new technology and products that could elevate Inpixon’s position in the IPN market.  In August 2018, the completed the public spin-off of its Sysorex subsidiary, a value-added reseller of enterprise IT solutions.  Sysorex shares were distributed to Inpixon shareholders and now trade publicly under the symbol SYSX. 

Liberated from the legacy value-added reseller operation, Inpixon then embarked on a shopping spree that expanded its technology portfolio and extended its indoor positioning product offering.

·        Locality Systems  -  April 2019  -  operation focused on wireless device positioning and radio frequency augmentation of video surveillance systems

·        GTX Patented Technology  -  May 2019  -  global positioning assets, including a smartphone app and device monitoring portal used in geofencing

·        Jibestream  -  August 2019  -  indoor mapping and location platform provider

Inpixon paid a total of $4.1 million in cash and issued 6.7 million in new shares of common stock to pay for the three deals.  Accounting for the acquisitions created goodwill and intangible assets that totaled $3.1 million and $9.3 million, respectively, at the end of September 2019.  Investors can expect a drain on reported earnings from amortization expense near $900,000 to $1.0 million per quarter for the next couple of years.       

Path to Break Even

Inpixon management is confident the company can achieve the scale needed to deliver profits to shareholders  -  even with the burden of amortizing acquired intangible assets.  Management predicts achievement of break even within 2021.

A lean business model is a good start.  Inpixon’s products and services are sold through licenses or as software-as-a-service (SAAS) model.  Either way, the company could realize significant recurring revenue that drives the top line and pushes up profits as the installed base builds.  Inpixon achieved a gross margin of 75% in the first nine months of 2019. 

Operating leverage could take the company the rest of the way to profitability.  To cost-effectively reach end-users the company is building a network of value-added resellers and systems integrators.  Using their sales forces reaches deeper into the addressable market at a lower expense level than an in-house direct sales force.   

Inpixon may also gain advantage by up-selling additional services to existing customers and their affiliates.  For example, at the American Dream retail complex where Inpixon’s way finding app is already installed, the company can offer supplementary IPN services to retailers and other vendors.  The cost of acquiring these additional customers is likely nominal, demonstrating the potential for low-cost customer acquisition that is built into Inpixon’s business model.      

Boosting the Balance Sheet

Finally achieving profitability will be a boost for Inpixon’s balance sheet.  As of the end of September 2019, working capital was a negative $1.6 million.  This measure excludes $10.1 million in short-term debt.  

With such a deep working capital deficiency, Inpixon in highly dependent upon capital markets access.  In January 2019, the company raised $10.8 million through a common stock rights offering and another $4.0 million in August 2019, through the sale of common stock and convertible preferred stock.  Even after taking in $14.8 million in new capital, at the end of the September quarter the company held $494,000 in its bank account.

With breakeven still several months off, Inpixon arranged for additional capital market access after the quarter close.  In October 2019, the company set up a stock sales agreement with an investment banking firm.  Over the coming months Inpixon can sell at its own election up to $6.5 million in common stock at current market prices.   

Inpixon could eventually receive capital from repayment of a related party loan.  After the spin-off was completed Inpixon entered into a note purchase agreement with Sysorex, allowing the latter to borrow up to $10 million for working capital.  After $1.7 million in repayments in the first nine months of 2019, the outstanding balance was $10.4 million shown as a long-term asset on Inpixon’s balance sheet.  Management is confident Sysorex will be in a position to repay the debt in the near-term.

Bargain Valuation

Investors appear to have a bit more trepidation than management.  Inpixon shares have been under unrelenting selling pressure for over a year.   In early January 2020, the company even had to resort to a reverse stock split to keep its stock price in compliance with Nasdaq listing rules.  The weak pricing period provides opportunity for investors with tolerance for risk and the time to wait for broad recognition that the company is turning a corner toward higher sales and profitability. 

Financial results for the fourth quarter and year ending December 2019 are expected in the coming weeks.  The report will provide investors with the first opportunity to make year-over-year comparisons of full-quarter financial performance under Inpixon’s changed business profile.  If momentum in the September 2019 quarter carries forward the comparisons are likely to impress and the stock price could follow.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Underwriters of the Prime series may have a beneficial interest in, serve as agents of, or act as advisors to the companies mentioned herein.