December 11, 2005 - 5:06am EST by
2005 2006
Price: 2.22 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 61 P/FCF
Net Debt (in $M): 0 EBIT 0 0
Borrow Cost: NA

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DISCLOSURE: We and our affiliates are short Ipix (IPIX), and may short additional shares or cover some or all of our shares, at any time. We have no obligation to inform you of any changes in our views of IPIX. This is not a recommendation to buy or sell shares.

We think Ipix represents a compelling short. Ipix is a company with defeated technologies that will burn through its remaining cash in roughly two to three quarters at the current burn rates and needs at least 7x the current revenue stream before it will stop burning cash. If you don’t like shorting to zero, the last puff of a dying business, this isn’t the idea for you.

Ipix has two main products including Infomedia and Ipix Security Cameras.

The infomedia division licenses software that allows 360 degree viewing manipulation for picture placement/advertising online. This technology was unique when it came to market a number of years ago but today it is ubiquitous. The technology was originally used for Homestore.com to tour homes with a 360 degree view and for simple picture placement on eBay, before Ebay bought out the license for a one time payment. In essence, it is software that patches together multiple digital images taken with a rotating fisheye lens and creates a seamless 360 degree view that can be manipulated by the viewer for placement on websites. We do not expect this business to deviate much from its current state of lumpy to flat revenue at very low levels.

Ebay had been 90% of their revenue prior to the license buy-out. The revenues of the company having largely vanished, the company reinvented itself from a internet flame out to the hottest new thing….a homeland defense/security play, by using this technology to create a camera that can see in all directions at once. Clever, huh?

The Security division sells Ipix digital security cameras that it markets to nuclear facilities, dams, electrical utilities, rail roads, and other high risk facilities. The Ipix camera was developed in early 2003 and is unique in that it allows the user to view 360 degrees from one camera vs. using 4 ninety degree view cameras to achieve the same field of vision. The technology is fairly simple and combines two 180 degree fish eye lenses back to back that greatly distort the image but provide a wide viewing angle. Proprietary software then takes the distorted 180 degree image from each fish eye lens and de-warps it. The two de-warped 180 degree images are then patched together for seamless 360 degree viewing. The camera always records the entire 360 degrees but the user view matches where the user drags the controls. The Ipix website has a good demonstration. By moving a mouse on the control screen, the user can pan through the image, while the camera remains still. The value proposition to the consumer is 360 degree view from one camera, no moving parts (PTZ- pan, tilt, zoom cameras often need replacement parts such as motors after 3-4 years), and always recording the entire image vs. only recording where the camera is being pointed.

Revenues for Ipix cameras for the last 8 quarters have been:

1Q04 3Q04 3Q04 4Q04 1Q05 2Q05 3Q05
2 404 725 443 317 1024 534

Though a unique technology that works as claimed, there are a number of hurdles that have limited the rate of adoption and will continue to curb demand.

-It’s tremendously expensive, costing 3-5x current systems that can mimic a 360 view with multiple cameras
-The 360 view quickly loses quality at viewing depths greater than 20 feet
-The targeted market is not a large as company projects

The Ipix camera has two basic models: A $2500-3000 Dome camera that mounts to the ceiling and can see downward at a 360 degree view and a $20,000-25,000 Pillar camera called the commando that combines a 360 degree view with a Pan Tilt Zoom Camera on top that allows for long distance zooming. We spoke with a number of security professionals and managers in charge of purchasing security equipment for their facility and the majority thought it was egregiously expensive. Stationary, color, cameras have come down in price significantly over the past few years and cost $200-300 each. A system that is capable of viewing 360 degrees (4 cams) can be had for around $1000 for a basic system with monitor, and the image quality of that package is far greater than the ipix camera. A customer at a foreign railroad company who Ipix said was highly interested commented to us that “they better be gold plated for that price.” Even buyers at nuclear facilities thought the cost didn’t justify the benefit. Even in the event of a major security hike at nuclear facilities, which he did not see on the horizon, he could only see there being 4 commando cameras needed at every US nuclear facility, best case scenario. There are about 100 nuclear plants in the US, or enough for one breakeven quarter at 10m in revenue. To top off the cost being too high and the market being smaller than company projections, the image quality of the 360 degree view is not detailed enough for even basic security purposes past 20 feet. A stationary license plate for example, might be difficult to read from certain angles, a moving license plate, would be even harder to read. One site commented that, “The camera is useless if I can’t tell that the object approaching is a deer or an armed intruder.”

In addition to lackluster product demand, the termination of an exclusive relationship with an important UK distributor in the 3Q 2005 could reduce sales and increase cash burn. A UK distributor who IPIX has had a relationship with for the last 8 quarters and represented 40-50% of sales (and almost all of their security sales) for the last 4 quarters no longer operates under an exclusive relationship but will continue to sell Ipix products.

All in, we do not have high hopes for the Ipix camera business or the infomedia business going forward.

Note: There was a recent press release from a casino customer touting the technology, but we don't think this perspective will be adopted by others.

Needs at least 10m in revenue a quarter to breakeven, or 7x current levels
Currently generating about 1.5m in revenue per quarter split:
.5m Security
1m Infomedia
Burning through roughly 4.5m a quarter on operations before capital expenditures of roughly .5m
Cash available is 11.2m
Current assets less cash stand at 3m vs. Current liabilities of 5.5m

-Out of cash in 2-3 quarters
-End of exclusive UK relationship in 3Q 05 could accelerate cash burn rates

-Always pops after a terrorist attack or suspicion thereof
-Silly pipe investors continue to pump in capital
-Major company interested in buying the IP portfolio


cashed out, provided they don't get another financing
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