UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number: 001-36404

 

INPIXON

(Exact name of registrant as specified in its charter)

 

Nevada   88-0434915
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

2479 Bayshore Road
Suite 195
Palo Alto, CA
  94303
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code:  (408) 702-2167

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

  

Common Stock, par value $0.001   43,842,968
(Class)   Outstanding at August 9, 2018

 

 

 

 

 

 

INPIXON

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS

 

  Page No.
   
Special Note Regarding Forward-Looking Statements and Other Information Contained in this Report ii
   
PART I - FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 2
     
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 4
     
  Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2018 and 2017 5
     
  Condensed Consolidated Statement of Stockholders’ (Deficit) Equity for the six months ended June 30, 2018 6
     
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 7
     
  Notes to Unaudited Condensed Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 49
     
Item 4. Controls and Procedures 49
     
PART II - OTHER INFORMATION 50
     
Item 1. Legal Proceedings 50
     
Item 1A. Risk Factors 51
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosure 53
     
Item 5. Other Information 53
     
Item 6. Exhibits 55
     
Signatures 56

 

i

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

AND OTHER INFORMATION CONTAINED IN THIS REPORT

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

  our limited cash and our history of losses;

 

  our ability to achieve profitability;

 

  our limited operating history with recent acquisitions;

 

  emerging competition and rapidly advancing technology in our industry that may outpace our technology;

 

  customer demand for the products and services we develop;

 

  the impact of competitive or alternative products, technologies and pricing;

 

  our ability to manufacture any products we develop;

 

  general economic conditions and events and the impact they may have on us and our potential customers;

 

  our ability to obtain adequate financing in the future;

 

  our ability to continue as a going concern;

 

  lawsuits and other claims by third parties;
     
  our ability to successfully complete the spin-off of Sysorex, Inc., formerly known as Inpixon USA (“Sysorex”), including the impact of the spin-off on the businesses of Inpixon and Sysorex;
     
  ●  our success at managing the risks involved in the foregoing items; and
     
  ●  other factors discussed in this Form 10-Q.

 

ii

 

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.

 

You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Unless otherwise stated or the context otherwise requires, the terms “Inpixon,” “we,” “us,” “our,” and the “Company” refer collectively to Inpixon and its subsidiaries.

 

Except where indicated, all share and per share data in this Form 10-Q, including the unaudited condensed consolidated financial statements, reflect the 1 for 15 reverse stock split of the Company’s issued and outstanding common stock effected on March 1, 2017 and the 1 for 30 reverse stock split of the Company’s issued and outstanding common stock effected on February 6, 2018.

 

iii

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information which are the accounting principles that are generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

In the opinion of management, the condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.

 

The results for the period ended June 30, 2018 are not necessarily indicative of the results of operations for the full year. These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our audited consolidated financial statements for the fiscal years ended December 31, 2017 and 2016 included in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 27, 2018.

  

  1  

 

 

INPIXON AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except number of shares and par value data)

 

 

    As of
June 30,
    As of
December 31,
 
    2018     2017  
    (Unaudited)     (Audited)  
Assets            
             
Current Assets            
Cash and cash equivalents   $ 8,336     $ 141  
Accounts receivable, net     1,364       2,310  
Notes and other receivables     167       183  
Inventory     852       790  
Prepaid licenses and maintenance contracts     12       4,638  
Assets held for sale     --       23  
Prepaid assets and other current assets     1,044       1,123  
                 
Total Current Assets     11,775       9,208  
                 
Prepaid licenses and maintenance contracts, non-current     --       2,264  
Property and equipment, net     331       520  
Software development costs, net     1,567       2,017  
Intangible assets, net     10,208       12,678  
Goodwill     636       636  
Other assets     375       368  
                 
Total Assets   $ 24,892     $ 27,691  

 

The accompanying notes are an integral part of these financial statements.

 

  2  

 

  

INPIXON AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

(In thousands, except number of shares and par value data)

 

 

    As of
June 30,
    As of
December 31,
 
    2018     2017  
    (Unaudited)     (Audited)  
Liabilities and Stockholders’ (Deficit) Equity            
             
Current Liabilities            
Accounts payable   $ 18,637     $ 25,834  
Accrued liabilities     1,434       5,421  
Deferred revenue     109       5,611  
Short-term debt     1,815       3,058  
Derivative liabilities     --       48  
Liabilities held for sale     --       2,059  
                 
Total Current Liabilities     21,995       42,031  
                 
Long Term Liabilities                
Deferred revenue, non-current     --       2,636  
Long-term debt     142       767  
Other liabilities     75       113  
Acquisition liability - Integrio     62       997  
                 
Total Liabilities     22,274       46,544  
                 
Stockholders’ (Deficit) Equity                
                 
Preferred Stock - $0.001 par value; 5,000,000 shares authorized, 0 issued and outstanding as of June 30, 2018 and December 31, 2017     --       --  
Series 4 Convertible Preferred Stock - $1,000 stated value; 10,185 shares authorized; 2,318.2933 and 0 issued and 2,318.2933 and 0 outstanding at June 30, 2018 and December 31, 2017. Liquidation preference of $0 at June 30, 2018 and December 31, 2017.     --       --  
Common Stock - $0.001 par value; 250,000,000 shares authorized; 38,252,920 and 962,200 issued and 38,252,389 and 961,669 outstanding at June 30, 2018 and December 31, 2017, respectively.     38       1  
Additional paid-in capital     108,539       78,302  
Treasury stock, at cost, 531 shares     (695 )     (695 )
Accumulated other comprehensive income     26       31  
Accumulated deficit (excluding $2,442 reclassified to additional paid in capital in quasi-reorganization)     (105,299 )     (94,486 )
                 
Stockholders’ (Deficit) Equity Attributable to Inpixon     2,609       (16,847 )
                 
Non-controlling Interest     9       (2,006 )
                 
Total Stockholders’ (Deficit) Equity     2,618       (18,853 )
                 
Total Liabilities and Stockholders’ (Deficit) Equity   $ 24,892     $ 27,691  

  

The accompanying notes are an integral part of these financial statements.

 

  3  

 

 

INPIXON AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

 

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)  
Revenues            
Products   $ 707     $ 12,210     $ 1,182     $ 21,659  
Services     1,121       2,886       2,740       6,919  
Total Revenues     1,828       15,096       3,922       28,578  
                                 
Cost of Revenues                                
Products     343       10,231       598       18,285  
Services     474       1,481       1,078       3,620  
Total Cost of Revenues     817       11,712       1,676       21,905  
                                 
Gross Profit     1,011       3,384       2,246       6,673  
                                 
Operating Expenses                                
Research and development     321       454       681       1,012  
Sales and marketing     975       2,181       1,944       4,221  
General and administrative     4,841       4,595       9,017       9,255  
Acquisition related costs     --       2       16       5  
Amortization of intangibles     1,323       1,382       2,645       2,767  
                                 
Total Operating Expenses     7,460       8,614       14,303       17,260  
                                 
Loss from Operations     (6,449 )     (5,230 )     (12,057 )     (10,587 )
                                 
Other Income (Expense)                                
Interest expense     (356 )     (1,344 )     (1,638 )     (2,027 )
Change in fair value of derivative liability     --       152       48       208  
Gain on the sale of Sysorex Arabia     --       --       23       --  
Gain on the settlement of obligations     1       --       1       --  
Other income/(expense)     949       --       1,524       (65 )
                                 
Total Other Income (Expense)     594       (1,192 )     (42 )     (1,884 )
                                 
Net Loss from Continuing Operations     (5,855 )     (6,422 )     (12,099 )     (12,471 )
                                 
Loss from Discontinued Operations, Net of Tax     --       (9 )     --       (17 )
                                 
Net Loss     (5,855 )     (6,431 )     (12,099 )     (12,488 )
                                 
Net Gain (Loss) Attributable to Non-controlling Interest     3       (4 )     2       (9 )
                                 
Net Loss Attributable to Stockholders of Inpixon   $ (5,858 )   $ (6,427 )   $ (12,101 )   $ (12,479 )
                                 
Deemed dividend to preferred stockholders     (9,727 )     --       (11,235 )     --  
Net Loss Attributable to Common Stockholders     (15,585 )     (6,427 )     (23,336 )     (12,479 )
                                 
Net Loss Per Basic and Diluted Common Share                                
Loss from continuing operations   $ (1.08 )   $ (81.20 )   $ (3.44 )   $ (164.63 )
Loss from discontinued operations   $ --     $ (0.11 )   $ --     $ (0.22 )
Net Loss Per Share - Basic and Diluted   $ (1.08 )   $ (81.26 )   $ (3.44 )   $ (164.74 )
                                 
Weighted Average Shares Outstanding                                
Basic and Diluted     14,482,423       79,088       6,782,169       75,750  

  

The accompanying notes are an integral part of these financial statements.

 

  4  

 

 

INPIXON AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

 

  

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)  
                         
Net Loss   $ (5,855 )   $ (6,431 )   $ (12,099 )   $ (12,488 )
                                 
Unrealized foreign exchange gain/(loss) from cumulative translation adjustments     2       (21 )     (5 )     (11 )
                                 
Comprehensive Loss   $ (5,853 )   $ (6,452 )   $ (12,104 )   $ (12,499 )

  

The accompanying notes are an integral part of these financial statements.

 

  5  

 

 

INPIXON AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY

 

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(Unaudited)

(In thousands, except per share data)

 

 

    Series 3 Convertible     Series 4 Convertible           Additional                 Accumulated
Other
          Non-     Total  
    Preferred Stock     Preferred Stock     Common Stock     Paid-In     Treasury Stock     Comprehensive     Accumulated     Controlling     Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Shares     Amount     Income (Loss)     Deficit     Interest     (Deficit) Equity  
                                                                               
Balance - January 1, 2018     --     $ --       --     $ --       962,200     $ 1     $ 78,302       (531 )   $ (695 )   $ 31     $ (94,485 )   $ (2,006 )   $ (18,852 )
Common shares issued for services     --       --       --       --       7,838       --       80       --       --       --       --       --     $ 80  
Stock options granted to employees for services     --       --       --       --       --       --       777       --       --       --       --       --     $ 777  
Fractional shares issued for stock split     --       --       --       --       9,718       --       --       --       --       --       --       --     $ --  
Common and preferred shares issued in public offering, net     10,185       --       10,115.0000       --       3,925,780       6       27,957       --       --       --       --       --     $ 27,963  
Redemption of convertible series 3 preferred stock     (10,185 )     --       --       --       4,334,032       2       (4 )     --       --       --       --       --     $ (2 )
Redemption of convertible series 4 preferred stock     --       --       (7,796.7067 )     --       28,738,093       29       (29 )     --       --       --       --       --     $ --  
Common shares issued for extinguishment of debenture liability     --       --       --       --       275,259       --       1,456       --       --       --       --       --     $ 1,456  
Sale of Sysorex Arabia     --       --       --       --       --       --       --       --       --       --       --       2,013     $ 2,013  
Adoption of accounting standards (Note 2)     --       --       --       --       --       --       --       --       --       --       1,287       --     $ 1,287  
Cumulative Translation Adjustment     --       --       --       --       --       --       --       --       --       (5 )     --       --     $ (5 )
Net loss     --       --       --       --       --       --       --       --       --       --       (12,101 )     2     $ (12,099 )
                                                                                                         
Balance - June 30, 2018     --     $ --       2,318.2933     $ --       38,252,920     $ 38     $ 108,539       (531 )   $ (695 )   $ 26     $ (105,299 )   $ 9     $ 2,618  

  

The accompanying notes are an integral part of these financial statements.

 

  6  

 

 

INPIXON AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

    For the Six Months Ended  
    June 30,  
    2018     2017  
    (Unaudited)  
Cash Flows from Operating Activities            
Net loss   $ (12,099 )   $ (12,488 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     1,040       834  
Amortization of intangible assets     2,645       2,767  
Stock based compensation     857       993  
Amortization of technology     33       33  
Change in fair value of derivative liability     (48 )     (208 )
Amortization of debt discount     417       1,251  
Amortization of deferred financing costs     --       102  
Provision for doubtful accounts     221       --  
Gain on the settlement of liabilities     (262 )     --  
Gain on the sale of Sysorex Arabia     (23 )     --  
Other     2       41  
                 
Changes in operating assets and liabilities:                
Accounts receivable and other receivables     741       5,691  
Inventory     (62 )     267  
Other current assets     78       523  
Prepaid licenses and maintenance contracts     (12 )     5,644  
Other assets     (41 )     (106 )
Accounts payable     (6,934 )     2,839  
Accrued liabilities     (3,561 )     (515 )
Deferred revenue     52     (6,024 )
Other liabilities     (973 )     (101 )
Total Adjustments     (5,830 )     14,031  
                 
Net Cash (Used in) Provided by Operating Activities     (17,929 )     1,543  
                 
Cash Flows Used in Investing Activities                
Purchase of property and equipment     (39 )     (86 )
Investment in capitalized software     (364 )     (718 )
Investment in technology     (175 )     --  
Net Cash Flows Used in Investing Activities     (578 )     (804 )
                 
Cash Flows from Financing Activities                
Repayments to bank facility     (1,141 )     (4,345 )
Net proceeds from issuance of common stock, preferred stock and warrants     27,961       5,570  
Repayment of notes payable     (113 )     (20 )
Repayment of debenture     --       (3,050 )
Net proceeds from convertible promissory notes     --       2,000  
Repayment of convertible promissory notes     --       (2,662 )
Net Cash Provided by (Used In) Financing Activities     26,707       (2,507 )
Effect of Foreign Exchange Rate on Changes on Cash     (5 )     (11 )
Net Increase (Decrease) in Cash and Cash Equivalents     8,195       (1,779 )
Cash and Cash Equivalents - Beginning of period     141       1,821  
Cash and Cash Equivalents - End of period   $ 8,336     $ 42  
                 
Supplemental Disclosure of cash flow information:                
Cash paid for:                
Interest   $ 695     $ 468  
Income Taxes   $ --     $ --  
                 
Supplemental disclosures of non-cash investing and financing activities:                
Reclassification of warrants to derivative liabilities   $ --     $ 3,773  
Issuance of shares for acquisition   $ --     $ 567  
Issuance of shares for settlement of accrued interest   $ --     $ 316  
Common shares issued for extinguishment of debenture liability   $ 1,456     $ --  
Adjustments to opening retained earnings for adoption of ASC 606   $ 1,287     $ --  

 

The accompanying notes are an integral part of these financial statements.

 

  7  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

  

Note 1 - Organization and Nature of Business and Going Concern

 

Inpixon, through its wholly-owned subsidiaries, Sysorex, Inc., formerly known as (f/k/a) Inpixon USA (“Sysorex”), Sysorex Government Services, Inc., f/k/a Inpixon Federal, Inc. (“SGS”), Inpixon Canada, Inc. (“Inpixon Canada”), and its majority-owned subsidiary Sysorex India Limited (“Sysorex India”) (unless otherwise stated or the context otherwise requires, the terms “Inpixon” “we,” “us,” “our” and the “Company” refer collectively to Inpixon and the above subsidiaries), provides Big Data analytics and location based products and related services for the cyber-security and Internet of Things markets. The Company is headquartered in California, and has sales and subsidiary offices in Virginia, California, Hyderabad, India and Vancouver, Canada.

 

On December 31, 2017, and as more fully described in Note 4, the Company acquired approximately 82.5% of the outstanding equity securities of Sysorex India which is in the business of IT Services including software application and development, quality assurance (“QA”) and testing and graphical user interface (“GUI”) development.

 

On May 18, 2018 Inpixon Federal, Inc. formerly changed its name with the State of Virginia to Sysorex Government Services, Inc. On July 26, 2018, and as more fully described in Note 17, Inpixon USA was part of a reorganization whereby the surviving entity was named Sysorex, Inc. 

 

Going Concern and Management’s Plans

 

As of June 30, 2018, the Company has a working capital deficiency of approximately $10.2 million. For the six months ended June 30, 2018, the Company incurred a net loss of approximately $12.1 million. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the financial statements are issued.

 

On January 5, 2018, the Company entered into a securities purchase agreement with certain investors pursuant to which it sold an aggregate of 599,812 shares of the Company’s common stock and warrants to purchase up to 599,812 shares of common stock at a purchase price of $5.31 per share of common stock for aggregate gross proceeds of approximately $3.2 million. On February 20, 2018, the Company completed a public offering consisting of an aggregate of 3,325,968 Class A units, at a price to the public of $2.35 per Class A unit, and 10,184.9752 Class B units, at a price to the public of $1,000 per Class B unit for aggregate gross proceeds of approximately $18 million. On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the public of $1,000 per unit for aggregate net proceeds after expenses of approximately $9.2 million.

 

The Company expects its capital resources as of June 30, 2018, availability on the Payplant Facility to finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received (as described in Note 8), funds from higher margin business line expansion and credit limitation improvements should be sufficient to fund planned operations during the year ending December 31, 2018. However, the Company is pursuing strategic transactions and if the Company pursues acquisitions, other expansion plans or changes its business plan it may need to raise additional capital. The Company may raise the additional capital, if needed, through the issuance of equity, equity-linked or debt securities. The Company’s board of directors has approved the separation of the Company’s infrastructure business segment, sometimes referred to as the Value Added Reseller (“VAR”) business from the indoor positioning analytics business, pursuant to a Separation and Distribution Agreement, dated August 7, 2018 which is anticipated to reduce operating expenses and eliminate substantially all of the Company’s trade debt. In connection with such a transaction, the Company has agreed to contribute an amount equal to $2 million to Sysorex from Inpixon’s cash and cash equivalents on Inpixon’s balance sheet at the effective time of the spin-off which amount shall be reduced by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied by Inpixon from June 30, 2018 through the distribution date which will reduce the Company’s available capital resources. The Company’s condensed consolidated financial statements as of June 30, 2018 have been prepared under the assumption that we will continue as a going concern for the next twelve months from the date the financial statements are issued. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern, is dependent upon the ability to attain further operating efficiency, reduce expenditures, and, ultimately, to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. The Company’s condensed consolidated financial statements as of June 30, 2018 do not include any adjustments that might result from the outcome of this uncertainty.

 

  8  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 2 - Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, which are the accounting principles that are generally accepted in the United States of America. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the six month period ended June 30, 2018 is not necessarily indicative of the results to be expected for the year ending December 31, 2018.  These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the years ended December 31, 2017 and 2016 included in the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 27, 2018. 

 

Note 3 - Summary of Significant Accounting Policies

 

The Company’s complete accounting policies are described in Note 2 to the Company’s audited consolidated financial statements and notes for the years ended December 31, 2017 and 2016.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates consist of:

 

  the valuation of stock-based compensation;
     
  the allowance for doubtful accounts;
     
  the valuation allowance for the deferred tax asset; and
     
  impairment of long-lived assets and goodwill.

 

Revenue Recognition

 

Hardware and Software Revenue Recognition

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)”, or ASU 2016-12. This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It has replaced most existing revenue recognition guidance under GAAP. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We have adopted Topic 606 using a modified retrospective approach and will be applied prospectively in our financial statements from January 1, 2018 forward. Revenues under Topic 606 are required to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated using a five-step model. The adoption of Topic 606 did not have a material impact on our financial statements, either at initial implementation nor will it have a material impact on an ongoing basis.

 

  9  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

For sales of hardware and software products, the Company’s performance obligation is satisfied at a point in time when they are shipped to the customer. This is when the customer has title to the product and the risks and rewards of ownership. The delivery of products to our customers occurs in a variety of ways, including (i) as a physical product shipped from the Company’s warehouse, (ii) via drop-shipment by a third-party vendor, or (iii) via electronic delivery with respect to software licenses. The Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its warehouse. In such arrangements, the Company negotiates the sale price with the customer, pays the supplier directly for the product shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability of the product and ensuring that such product meets the standards and requirements of the customer. Accordingly, the Company is the principal in the transaction with the customer and records revenue on a gross basis. The Company receives fixed consideration for sales of hardware and software products. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice. The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred because the amortization period of the asset that otherwise would have been recognized is less than a year.

 

Software As A Service Revenue Recognition

 

With respect to sales of our maintenance, consulting and other service agreements including our digital advertising and electronic services, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service.

 

License and Maintenance Services Revenue Recognition

 

The Company provides a customized design and configuration solution for its customers and in this capacity resells hardware, software and other IT equipment license and maintenance services in exchange for fixed fees. The Company selects the vendors and sells the products and services, including maintenance services, that best fit the customer’s needs. For sales of maintenance services and warranties, the customer obtains control at the point in time that the services to be provided by a third party vendor are purchased by the customer and therefore the Company’s performance obligation to provide the overall systems solution is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice.

 

Typically, the Company sells maintenance contracts between the manufacturer and the customer for a separate fee with initial contractual periods ranging from one to five years with renewal for additional periods thereafter. The Company’s performance obligation is to work with customers to identify the computer maintenance and warranty services that best suit the customer’s needs and sell them those products and services however the maintenance is provided to the customer by the manufacturer. While a third party is responsible for actually performing the services for the customer, historically, in accordance with its policies and historical business practices, the Company has assumed responsibility for ensuring that the recommended services that are provided as part of the overall solution meets client expectations and therefore the Company assumes control of the services to be provided before they are performed for the benefit of the customer. In addition, the Company has full discretion in establishing the sale price to the customer which is determined based on the entire customized solution of products and services offered to the customer and bears the credit risk by paying the supplier for purchased services and collecting payment from the customer and therefore recognizes revenue from maintenance services on a gross basis, For these contracts the customer is invoiced one time and pays up front for the full term of the warranty and maintenance contract. Prior to the adoption of ASC 606 as of January 1, 2018, revenue from these contracts was recognized ratably over the contract period with the unearned revenue recorded as deferred revenue and amortized over the contract period. Adoption of Topic 606 has changed the recognition of our license and maintenance revenue as it was previously recognized over time however under the new policy it is recognized at a point in time and therefore the Company’s accumulated deferred revenue was accelerated as of January 1, 2018.

 

  10  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

Professional Services Revenue Recognition

 

The Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in Accounting Standards Codification (“ASC”) 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three and six months ended June 30, 2018 and 2017, the Company did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term contracts are derived principally with various United States government agencies and commercial customers.

  

Contract Balances

 

The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied. The Company had deferred revenue of approximately $109,000 as of June 30, 2018 related to cash received in advance for product maintenance services provided by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for these maintenance services and recognize the deferred revenue over the next twelve months.

 

Stock-Based Compensation

 

The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as an expense over the period during which the recipient is required to provide services in exchange for that award. 

 

Options and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the related vesting period.

 

  11  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Stock-Based Compensation (continued)

 

The Company incurred stock-based compensation charges, net of estimated forfeitures, of $571,000 and $710,000 for the three months ended June 30, 2018 and 2017, and $857,000 and $993,000 for the six months ended June 30, 2018 and 2017, respectively, which are included in general and administrative expenses. The following table summarizes the nature of such charges for the periods then ended (in thousands): 

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2018     2017     2018     2017  
Compensation and related benefits   $ 571     $ 250     $ 777     $ 512  
Professional and legal fees     --       145       80       159  
Acquisition transaction costs     --       --       --       7  
Interest expense     --       315       --       315  
Totals   $ 571     $ 710     $ 857     $ 993  

 

Net Loss Per Share

 

The Company computes basic and diluted earnings per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant to the exercise of options and warrants in the calculation of diluted net loss per common shares would have been anti-dilutive.

 

The following table summarizes the number of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the six months ended June 30, 2018 and 2017:

 

    For the Six Months Ended
June 30,
 
    2018     2017  
Options     2,722,309       12,228  
Warrants     64,918,852       9,581  
Convertible preferred stock     32,110,791       --  
Convertible note     630,139       --  
Convertible debenture     --       3,927  
Reserved for service providers     44,000       --  
Totals     100,426,091       25,736  

   

Preferred Stock

 

The Company applies the accounting standards for distinguishing liabilities from equity under GAAP when determining the classification and measurement of its convertible preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity.

 

  12  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Reclassification

 

Certain accounts in the prior year’s financial statements have been reclassified for comparative purposes to conform to the presentation in the current year’s financial statements. These reclassifications have no effect on previously reported earnings.

 

Derivative Liabilities

 

During the year ended December 31, 2016, the Company issued a convertible debenture that included reset provisions considered to be down-round protection. In addition, the Company issued warrants that include a fundamental transaction clause which provide for the warrant holders to be paid in cash the fair value of the warrants as computed under a Black Scholes valuation model. The Company determined that the conversion feature and warrants are derivative instruments pursuant to ASC 815 “Derivatives and Hedging” issued by the FASB. The accounting treatment of derivative financial instruments requires that the Company bifurcate the conversion feature and record it as a liability at fair value and the fair value of the warrants were computed as defined in the agreement. The instruments are marked-to-market at fair value as of each balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period. The fair value of the conversion feature was determined using the Binomial Lattice model. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification. As of June 30, 2018, the fair value of the derivative liability was $0.

 

Software Development Costs

 

The Company develops and utilizes internal software for the processing of data provided by its customers. Costs incurred in this effort are accounted for under the provisions of FASB ASC 350-40, Internal Use Software and ASC 985-20, Software – Cost of Software to be Sold, Leased or Marketed, whereby direct costs related to development and enhancement of internal use software is capitalized, and costs related to maintenance are expensed as incurred. The Company capitalizes its direct internal costs of labor and associated employee benefits that qualify as development or enhancement. These software development costs are amortized over the estimated useful life which management has determined ranges from one to five years.

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of its long-lived assets, including property and equipment and intangible assets, when there are indications that the assets might be impaired. When evaluating assets for potential impairment, the Company compares the carrying value of the asset to its estimated undiscounted future cash flows. If an asset’s carrying value exceeds such estimated cash flows (undiscounted and with interest charges), the Company records an impairment charge for the difference.

 

Based on its assessments, the Company did not record any impairment charges for the six months ended June 30, 2018 and 2017.

 

Recent Accounting Standards

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued ASU 2015-17 as part of its ongoing Simplification Initiative, with the objective of reducing complexity in accounting standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in ASU 2015-17 align the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1, Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2015-17 did not have a material impact on its financial statements. 

 

  13  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Recent Accounting Standards (continued)

  

In September 2017, the FASB issued ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” that enhances the guidance surrounding sale leaseback transactions, accounting for taxes on leveraged leases and leases with third party value. The related amendments to the Topics described above become effective on the same schedule as Topics 605, 606, 840 and 842. 

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number of specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

 

  14  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Recent Accounting Standards (continued)

 

The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which was applied to all contracts at the date of initial application. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, Revenue - Revenue from Contracts with Customers were as follows (in millions): 

 

    Balance at December 31, 2017     Adjustments due to ASU 2014-09     Balance at January 1, 2018  
Balance Sheet:            
Assets                  
Prepaid licenses & maintenance contracts, current   $ 4,638     $ (4,638 )   $ --  
Prepaid licenses & maintenance contracts, non-current   $ 2,264     $ (2,264 )   $ --  
                         
Liabilities   $ 5,611     $ (5,553 )   $ 58  
Deferred revenue, current   $ 2,636     $ (2,636 )   $ --  
Deferred revenue, non-current                        
                         
Equity                        
Accumulated deficit   $ (94,486 )   $ 1,287     $ (93,199 )

 

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated income statement and balance sheet was as follows (in millions): 

  

    For the Three Months Ended June 30, 2018  
    As Reported    

Balances Without
Adoption of ASC 606

    Effect of Change Higher/(Lower)  
Income Statement                  
Revenues                  
Products (A)     707       2,345       (1,638 )
Services     1,121       1,121       --  
                         
Cost and expenses                        
Cost of Revenues                        
Products (A)     343       1,728       (1,385 )
Services     474       474       --  
                         
Gross Profit     1,011       1,264       (253 )
Income/Loss from Operations     (6,449 )     (6,196 )     (253 )
Net Income (Loss)     (5,855 )     (5,602 )     (253 )

   

  15  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Recent Accounting Standards (continued)

 

    For the Six Months Ended June 30, 2018  
    As Reported    

Balances Without

Adoption of ASC 606

    Effect of Change Higher/(Lower)  
Income Statement                  
Revenues                  
Products (A)     1,182       4,852       (3,670 )
Services     2,740       2,740       --  
                         
Cost and expenses                        
Cost of Revenues                        
Products (A)     598       3,700       (3,102 )
Services     1,078       1,078       --  
                         
Gross Profit     2,246       2,814       (568 )
Income/Loss from Operations     (12,057 )     (11,489 )     (568 )
Net Income (Loss)     (12,099 )     (11,531 )     (568 )

  

    As of June 30, 2018  
    As Reported     Balances Without Adoption of ASC 606     Effect of Change Higher/(Lower)  
Balance Sheet                  
Assets                  
Prepaid Licenses & Maintenance Contracts, current     12       1,548       (1,536 )
Prepaid Licenses & Maintenance Contracts, non-Current     --       2,264       (2,264 )
                         
Liabilities                        
Deferred Revenue , current     109       1,994       (1,885 )
Deferred Revenue, non-current     --       2,636       (2,636 )
                         
Equity                        
Accumulated Deficit     (105,299 )     (106,019 )     720  

 

(A) Product revenues and cost of revenues include maintenance/licenses contracts that are sold by the company but performed by third parties.

  

Reverse Stock Split

 

On March 1, 2017, the Company effectuated a 1-for-15 reverse stock split of its outstanding common stock. In addition, on February 6, 2018, the Company effectuated a 1-for-30 reverse stock split of its outstanding common stock.  The financial statements and accompanying notes give effect to both of the reverse stock splits as if they occurred at the beginning of the first period presented.  

 

Subsequent Events

 

The Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the condensed consolidated financial statements to determine if any of those events and/or transactions requires adjustment to or disclosure in the consolidated financial statements. 

 

  16  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 4 - Sysorex India Acquisition

 

Effective as of December 31, 2017, the Company acquired approximately 82.5% of the outstanding equity securities of Sysorex India from Sysorex Consulting, Inc. (“SCI”) pursuant to that certain Stock Purchase Agreement, dated as of December 31, 2017, by and among the Company, SCI and Sysorex India, in exchange for the assignment by the Company of $37,000 of outstanding receivables. 

 

The Company acquired Sysorex India to pursue sales and business development opportunities in India. In addition, the Company is looking to potentially expand its engineering and development teams in India. Sysorex India is in the business of IT Services including software application and development, QA and testing and GUI development.

   

The purchase price is allocated as follows (in thousands):      
       
Assets Acquired:      
Cash   $ 1  
Fixed assets     14  
Other assets     32  
Total Assets Acquired     47  
         
Liabilities Assumed:        
Other current liabilities     10  
Total Liabilities Assumed     10  
         
Total Purchase Price   $ 37  

 

Note 5 - Inventory

 

Inventory as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

    As of
June 30,
2018
    As of December 31,
2017
 
Raw materials   $ 220     $ 220  
Work in process     --       7  
Finished goods     632       563  
Total Inventory   $ 852     $ 790  

 

Note 6 - Goodwill

 

The Company has recorded goodwill and other indefinite-lived assets in connection with its acquisitions of Lilien LLC, including all of the outstanding capital stock of Lilien Systems (collectively, “Lilien”), Shoom Inc. (“Shoom”), AirPatrol Corporation (“Airpatrol”), LightMiner Systems, Inc. (“Lightminer”) and Integrio, LLC (“Integrio”). Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of the acquired company, is not amortized. Indefinite-lived intangible assets are stated at fair value as of the date acquired in a business combination. The Company’s goodwill balance and other assets with indefinite lives were evaluated for potential impairment during the six months ended June 30, 2018 and 2017 and it was determined that there was no impairment. 

 

  17  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 7 - Discontinued Operations

 

As of December 31, 2015, the Company’s management decided to close its Saudi Arabia legal entity as business activities and operations have been strategically shifted according to the business plan of the Company. On January 18, 2018, the Company sold its 50.2% interest in Sysorex Arabia to SCI in consideration for SCI’s assumption of 50.2% of the assets and liabilities of Sysorex Arabia, totaling approximately $11,500 and $1 million, respectively.

 

In accordance with ASC topic 360 “Property, Plant and Equipment”, the Company had classified the assets and liabilities as available for sale assets and liabilities as of December 31, 2017 in the accompanying condensed consolidated financial statements.

 

The major categories of assets and liabilities held for sale in the condensed consolidated balance sheets as of December 31, 2017 (in thousands):

 

    As of December 31,
2017
 
Assets:      
Accounts receivable, net   $ 1  
Notes and other receivables     8  
Other assets     14  
Total Current Assets     23  
         
Other assets     --  
Total Assets   $ 23  
         
Liabilities:        
         
Current Liabilities:        
Accounts payable   $ 178  
Accrued liabilities     918  
Deferred revenue     236  
Due to related party     5  
Short term debt     722  
Total Current Liabilities     2,059  
         
Long Term Liabilities     --  
         
Total Liabilities   $ 2,059  

 

The Company has entered into surety bonds with a financial institution in Saudi Arabia which guaranteed performance on certain contracts. Deposits for surety bonds amounted to $0 as of December 31, 2017, as a reserve was placed against the deposit balance during the year ended December 31, 2016 due to the uncertainty of when the bond will be released.

 

The Company did not recognize any depreciation or amortization expense related to discontinued operations during the six months ended June 30, 2018 or 2017. There were no significant capital expenditures or non-cash operating or investing activities of discontinued operations during the periods presented. The operations of Sysorex Arabia were insignificant for the year ended December 31, 2017. On January 18, 2018, the Company sold its 50.2% interest in Sysorex Arabia to SCI in consideration for SCI’s assumption of 50.2% of the assets and liabilities of Sysorex Arabia.

 

  18  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 7 - Discontinued Operations (continued)

 

End of Service Indemnity Provision

 

In accordance with local labor laws, Sysorex Arabia is required to accrue benefits payable to its employees at the end of their services with Sysorex Arabia. For the six months ended June 30, 2018 and 2017, no amounts were required to be accrued under this provision.

 

Note 8 - Debt

 

Debt as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

    As of
June 30,
2018
   

As of
December 31,

2017

 
Short-Term Debt            
Notes payable (A)   $ 1,815     $ 1,917  
Revolving line of credit (B)     --       1,141  
Total Short-Term Debt   $ 1,815     $ 3,058  
                 
Long-Term Debt                
Notes payable   $ 142     $ 175  
Senior secured convertible debenture, less debt discount of $417 (C)     --       592  
Total Long-Term Debt   $ 142     $ 767  

 

  (A) Convertible Notes Payable

 

On November 17, 2017, the Company issued a $1.745 million principal face amount convertible promissory note (the “November Note”) to an accredited investor (the “November Noteholder”) which yielded net proceeds of $1.5 million to the Company pursuant to that certain Securities Purchase Agreement, dated as of November 17, 2017, by and between the Company and the November Noteholder (the “November Note SPA” and together with the November Note, the “November Transaction Documents”). On January 5, 2018, the November Transaction Documents were amended pursuant to a Waiver and First Amendment Agreement (the “Waiver and Amendment Agreement”). The November Note, as amended, bears interest at the rate of 10% per year and is due 10 months after the date of issuance. In accordance with the Waiver and Amendment Agreement, the Conversion Price (as defined in the November Note) was amended to be equal to 70% of the closing bid price reported by the Nasdaq Stock Market as of the date immediately prior to each applicable conversion, subject to a floor of $3.00 (subject to adjustment). The approval of the issuance of the shares of common stock pursuant to the Waiver and Amendment Agreement was obtained at a meeting of stockholders held on February 2, 2018.

 

Redemptions may occur at any time after the 6 month anniversary of the date of issuance of the November Note with a minimum redemption price equal to the Conversion Price. If the conversion rate is less than the market price, then the redemptions must be made in cash. The November Note contains standard events of default and a schedule of redemption premiums and a most favored nations provision which allows for adjustments upon dilutive issuances which is subject to a floor of $3.00. 

 

On May 23, 2018, the Company and the November Noteholder entered into a Standstill Agreement whereby the November Noteholder agreed to delay for a period of nine months following the Purchase Price Date its right to make redemptions under the November Note. In exchange for the agreement and for reimbursement of the fees incurred by the November Noteholder in having the Standstill Agreement prepared, the Company paid the November Noteholder $68,000 upon execution of the agreement which is included as a part of interest expense in the statement of operations.

 

  19  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 8 - Debt (continued)

 

  (B) Revolving Lines of Credit

  

Payplant Accounts Receivable Bank Line

 

Pursuant to the terms of that certain Commercial Loan Purchase Agreement, dated as of August 14, 2017 (the “Purchase Agreement”), Gemcap Lending I, LLC (“GemCap”) sold and assigned to Payplant LLC, as agent for Payplant Alternatives Fund LLC (“Payplant” or “Lender”), all of its right, title and interest to that certain revolving Secured Promissory Note in an aggregate principal amount of up to $10,000,000 (the “GemCap Note”) issued in accordance with that certain Loan and Security Agreement, dated as of November 14, 2016 (the “GemCap Loan”), by and among Gemcap and the Company and its wholly-owned subsidiaries, Sysorex and SGS for an aggregate purchase price of $1,402,770.16.

 

In connection with the purchase and assignment of the Gemcap Loan in accordance with the Purchase Agreement, the GemCap Loan was amended and restated in accordance with the terms and conditions of the Payplant Loan and Security Agreement, dated as of August 14, 2017, between the Company and Payplant (the “Loan Agreement”). The Loan Agreement allows the Company to request loans (each a “Loan” and collectively the “Loans”) from the Lender (in the manner provided therein) with a term of no greater than 360 days in amounts that are equivalent to 80% of the face value of purchase orders received (“Aggregate Loan Amount”). The Lender is not obligated to make the requested loan, however, if the Lender agrees to make the requested loan, before the loan is made, the Company must provide Lender with (i) one or more promissory notes (“Notes”) for the amount being loaned in favor of Lender, (ii) one or more guaranties executed in favor of Lender and (iii) other documents and evidence of the completion of such other matters as Lender may request. The principal amount of each Loan shall accrue interest at a 30 day rate of 2% (the “Interest Rate”), calculated per day on the basis of a year of 360 days and, when combined with all fees that may be characterized as interest will not exceed the maximum rate allowed by law Upon the occurrence and during the continuance of any event of default, interest shall accrue at a rate equal to the Interest Rate plus 0.42% per 30 days. All computations of interest shall be made on the basis of a year of 360 days. The promissory note is subject to the interest rates described in the Loan Agreement and is secured by the assets of the Company pursuant to the Loan Agreement and will be satisfied in accordance with the terms of the Payplant Client Agreement.  

 

  (C) Senior Secured Debenture

 

Debenture Amendment

 

On January 5, 2018, the then holder of that certain 8% Original Issue Discount Note (the “Debenture”) of which an aggregate principal amount of $1,004,719 plus interest and the Company agreed to amend the Debenture to:

 

(i) cause an event of default in the event of the failure by the Company to amend its Articles of Incorporation in order to increase its authorized shares (the “Authorized Share Amendment”) or otherwise reserve a sufficient number of shares of common stock for issuance upon conversion of the Debenture on or prior to February 15, 2018; and

 

(ii) require a reserve of at least 150% of the number of shares into which the Debenture is convertible upon the effectiveness of the Authorized Share Amendment.

 

On February 5, 2018, the holder of the Debenture delivered a conversion notice to the Company pursuant to which it converted $300,000 of principal of the Debenture into 50,143 shares of the Company’s common stock. Such shares of common stock were issued on February 6, 2018.

 

On February 7, 2018, the holder of the Debenture delivered a conversion notice to the Company pursuant to which it converted $400,000 of principal of the Debenture into 119,296 shares of the Company’s common stock.

 

  20  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 8 - Debt (continued)

 

  (C) Senior Secured Debenture (continued)

 

Debenture Amendment (continued)

 

On February 9, 2018, the holder of the Debenture delivered a final conversion notice to the Company pursuant to which it converted $317,000 of principal of the Debenture into 105,820 shares of the Company’s common stock, which satisfied the debenture in full.

 

The Company analyzed the conversions of the Debenture and determined there was a beneficial conversion feature which has a value of $439,000. The Company recorded this amount as interest expense-debt discount on the condensed consolidated statement of operations and as an increase to additional paid in capital on the condensed consolidated balance sheet.

 

Note 9 - Capital Raise

 

January 2018 Capital Raise

 

On January 5, 2018, the Company entered into that certain Securities Purchase Agreement (the “January 2018 SPA”) with certain investors (the “January 2018 Investors”) pursuant to which the Company agreed to sell an aggregate of 599,812 shares (the “January 2018 Shares”) of the Company’s common stock, at a purchase price of $5.31 per share (the “January 2018 Offering”) and warrants to purchase up to 599,812 shares (the “January 2018 Warrant Shares”) of common stock (the “January 2018 Warrants”). The aggregate gross proceeds for the sale of the January 2018 Shares and January 2018 Warrants was approximately $3.2 million. The January 2018 Warrants were initially exercisable at an exercise price per share equal to $6.60, subject to certain adjustments, and will expire on the five year anniversary of the initial exercise date. Following the February offering described below, the exercise price of the January 2018 Warrants was reduced to $3.00 per share. 

 

February 2018 Public Offering

 

On February 20, 2018, the Company completed a public offering for approximately $18 million in securities, consisting of an aggregate of 3,325,968 Class A units, at a price to the public of $2.35 per Class A unit, each consisting of one share of the Company’s common stock and a five-year warrant to purchase one share of common stock at an exercise price of $3.50 per share (“February 2018 Warrants”), and 10,184.9752 Class B units, at a price to the public of $1,000 per Class B unit, each consisting of one share of the Company’s newly designated Series 3 convertible preferred stock (“Series 3 Preferred”) with a stated value of $1,000 and initially convertible into approximately 426 shares of our common stock at a conversion price of $2.35 per share for up to an aggregate of 4,334,032 shares of common stock and February 2018 Warrants exercisable for the number of shares of common stock into which the shares of Series 3 Preferred were initially convertible. 

 

The Company received approximately $18 million in gross proceeds from the offering, including $1 million in amounts payable to service providers that participated in the offering, and before placement agent fees and offering expenses payable by the Company. After satisfying the amounts due to service providers and deducting placement agent fees, the net proceeds from the offering were approximately $15.4 million.

 

The embedded conversion option associated with the Series 3 Preferred shares has a beneficial conversion feature which has a value of $1,508,000. The Company recorded this amount as a deemed dividend on the condensed consolidated statement of operations for these beneficial conversion features.

 

April 2018 Public Offering

 

On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the public of $1,000 per unit, each consisting of (i) one share of our newly designated Series 4 convertible preferred stock (the “Series 4 Preferred”) with a stated value of $1,000 and initially convertible into approximately 2,174 shares of common stock, at a conversion price of $0.46 per share (subject to adjustment) and (ii) one warrant to purchase such number of shares of common stock as each share of Series 4 Preferred is convertible into. The warrants are immediately exercisable at an exercise price of $0.67 per share (subject to adjustment). The Company received approximately $10.1 million in gross proceeds from this offering, before deducting placement agent fees and offering expenses payable by the Company. After deducting placement agent fees and expenses, the net proceeds from this offering were approximately $9.2 million.

 

  21  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 9 - Capital Raise (continued)

 

April 2018 Public Offering (continued)

 

The embedded conversion option associated with the Series 4 Preferred shares has a beneficial conversion feature which has a value of $673,000. Additionally, the embedded conversion option had a price reset feature which resulted in the reduction of the conversion price from $0.46 to $0.1779 on June 25, 2018 which has a value of $4,226,000. The Company recorded $4,899,000 as a deemed dividend on the condensed consolidated statement of operations for these beneficial conversion features.

 

The April 2018 capital raise reset the price of the February 2018 Warrants to the floor price of $0.634 and increased the number of shares issuable upon exercise of such warrants to 42,287,102 shares of common stock. The Company has presented a deemed dividend of $4,828,000 on the condensed consolidated statement of operations for this price reset.

 

Note 10 - Common Stock

 

On January 5, 2018 the Company issued 7,838 shares of common stock pursuant to a subscription agreement with a service provider at a purchase price of $10.20 per share, in satisfaction of $80,000 payable to the provider.

 

On January 5, 2018, the Company entered into a securities purchase agreement with certain investors pursuant to which the Company agreed to sell an aggregate of 599,812 shares of the Company’s common stock, at a purchase price of $5.31 per share (see Note 9).

 

On February 5, 2018, the holder of the Debenture delivered a conversion notice to the Company pursuant to which it converted $300,000 of principal of the Debenture into 50,143 shares of the Company’s common stock. Such shares of common stock were issued on February 6, 2018.

 

On February 7, 2018, the holder of the Debenture delivered a conversion notice to the Company pursuant to which it converted $400,000 of principal of the Debenture into 119,296 shares of the Company’s common stock.

 

On February 9, 2018, the holder of the Debenture delivered a final conversion notice to the Company pursuant to which it converted $317,000 of principal of the Debenture into 105,820 shares of the Company’s common stock, which paid the Debenture in full.

 

On February 20, 2018, the Company completed a public offering including an aggregate of 3,325,968 Class A units, at a price to the public of $2.35 per Class A unit, each consisting of one share of the Company’s common stock and a five-year warrant to purchase one share of common stock (see Note 9).

 

During the three months ended March 31, 2018, 9773.7252 shares of Series 3 Preferred were converted into 4,159,032 shares of the Company’s common stock.

 

During the three months ended March 31, 2018, the Company issued 9,718 shares of common stock for fractional shares due to the reverse stock split effective February 6, 2018.

 

During the three months ended June 30, 2018, 411.25 shares of Series 3 Preferred were converted into 175,000 shares of the Company’s common stock.

 

During the three months ended June 30, 2018, 7,796.7067 shares of Series 4 Preferred were converted into 28,738,093 shares of the Company’s common stock.

 

  22  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 11 - Preferred Stock

 

Series 3 Preferred

 

On February 15, 2018, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 3 Preferred, authorized 10,184.9752 shares of Series 3 Preferred and designated the preferences, rights and limitations of the Series 3 Preferred. The Series 3 Preferred is non-voting (except to the extent required by law). The Series 3 Preferred is convertible into the number of shares of Common Stock, determined by dividing the aggregate stated value of the Series 3 Preferred of $1,000 per share to be converted by $2.35.

 

On February 20, 2018, the Company completed a public offering including an aggregate of 10,184.9752 Class B units, at a price to the public of $1,000 per Class B unit, each consisting of one share of the Company’s newly designated Series 3 Preferred with a stated value of $1,000 and initially convertible into approximately 426 shares of our common stock at a conversion price of $2.35 per share (see Note 9).

 

During the three months ended March 31, 2018, 9773.7252 shares of Series 3 Preferred were converted into 4,159,032 shares of the Company’s common stock. During the three months ended June 30, 2018, 411.25 shares of Series 3 Preferred were converted into 175,000 shares of the Company’s common stock. As of June 30, 2018 there are no Series 3 Preferred shares outstanding.

 

Series 4 Preferred

 

On April 20, 2018, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 4 Preferred, authorized 10,415 shares of Series 4 Preferred and designated the preferences, rights and limitations of the Series 4 Preferred. The Series 4 Preferred is non-voting (except to the extent required by law) and was convertible into the number of shares of common stock, determined by dividing the aggregate stated value of the Series 4 Preferred of $1,000 per share to be converted by $0.46 (the “Conversion Price”). On June 25, 2018, in accordance with the terms of the price reset provisions described in the Certificate of Designations the Conversion Price of the Series 4 Preferred was adjusted to $0.1779.

 

On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the public of $1,000 per unit, each consisting of (i) one share of our newly designated Series 4 Preferred and (ii) one warrant to purchase such number of shares of common stock as each share of Series 4 Preferred is convertible into (see Note 9).

 

During the three months ended June 30, 2018, 7,796.7067 shares of Series 4 Preferred were converted into 28,738,093 shares of the Company’s common stock. As of June 30, 2018 there were 2,318.2933 of Series 4 Preferred shares outstanding.

 

Note 12 - Authorized Share Increase and Reverse Stock Split

 

On February 2, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to increase the total number of authorized shares of common stock from 50,000,000 to 250,000,000, as approved by the Company’s stockholders at a special meeting held on February 2, 2018.

 

On February 2, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to effect a 1-for-30 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of February 6, 2018.

 

The financial statements and accompanying notes give effect to the 1-for-30 reverse stock split and increase in authorized shares as if they occurred at the first period presented.

 

  23  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 13 - Stock Options

 

In September 2011, the Company adopted the 2011 Employee Stock Incentive Plan (the “2011 Plan”) which provides for the granting of incentive and non-statutory common stock options and stock based incentive awards to employees, non-employee directors, consultants and independent contractors. The plan was amended and restated in May 2014. Unless terminated sooner by the Board of Directors, this plan will terminate on August 31, 2021.

 

In February 2018, the Company adopted the 2018 Employee Stock Incentive Plan (the “2018 Plan”) and in conjunction with the 2011 Plan, the “Option Plans”, which will be utilized with the 2011 Plan for employees, corporate officers, directors, consultants and other key persons employed. The 2018 Plan will provide for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards, including Restricted Stock and Restricted Stock Units (as defined in the 2018 Plan).

 

Incentive stock options granted under the Option Plans are granted at exercise prices not less than 100% of the estimated fair market value of the underlying common stock at date of grant. The exercise price per share for incentive stock options may not be less than 110% of the estimated fair value of the underlying common stock on the grant date for any individual possessing more that 10% of the total outstanding common stock of the Company. Options granted under the Option Plans vest over periods ranging from immediately to four years and are exercisable over periods not exceeding ten years.

 

The aggregate number of shares that may be awarded under the 2011 Plan as of December 31, 2017 is 16,629 and awarded under the 2018 Plan is 4,000,000. As of June 30, 2018, 2,722,309 of options were granted to employees, directors and consultants of the Company (including 1,389 shares outside of our plan) and 295,709 options were available for future grant under the Option Plans.

 

During the six months ended June 30, 2018, the Company granted options under the 2018 Plan for the purchase of 2,714,500 shares of common stock to employees and consultants of the Company. These options are 100% vested or vest pro-rata over 48 months, have a life of ten years and an exercise price between $0.18 and $0.36 per share. The Company valued the stock options using the Black-Scholes option valuation model and the fair value of the awards was determined to be $428,000. The fair value of the common stock as of the grant date was determined to be between $0.18 and $0.36 per share.

 

The Company recorded a stock-based compensation charge of $571,000 and $710,000 for the three months ended June 30, 2018 and 2017, and $857,000 and $993,000 for the six months ended June 30, 2018 and 2017, respectively. 

 

As of June 30, 2018, the fair value of non-vested options totaled $418,245 which will be amortized to expense over the weighted average remaining term of 0.76 years.

 

The fair value of each employee option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Key weighted-average assumptions used to apply this pricing model during the six months ended June 30, 2018 and 2017 were as follows:

 

    For the Six Months Ended
June 30,
    2018   2017
Risk-free interest rate   2.79-3.01%   2.27%
Expected life of option grants   5-6 years   7 years
Expected volatility of underlying stock   45.64-46.18%   47.34%
Dividends assumption   $--   $--

 

The expected stock price volatility for the Company’s stock options was determined by the historical volatilities for industry peers and used an average of those volatilities. The Company attributes the value of stock-based compensation to operations on the straight-line single option method. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods. The dividends assumptions was $0 as the Company historically has not declared any dividends and does not expect to.

 

  24  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 14 - Credit Risk and Concentrations

 

Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents. The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently, believes that its accounts receivable credit risk exposure beyond such allowances is limited.

 

The Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. Cash is also maintained at foreign financial institutions for its Canadian subsidiary and its majority-owned Saudi Arabia subsidiary. Cash in foreign financial institutions as of June 30, 2018 and December 31, 2017 was immaterial. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash.

 

The following table sets forth the percentages of revenue derived by the Company from those customers which accounted for at least 10% of revenues during the six months ended June 30, 2018 and 2017 (in thousands):

 

    For the Six Months Ended
June 30, 2018
 

For the Six Months Ended

June 30, 2017

    $   %   $   %
Customer A   644   16%   --   --
Customer B   512   13%   --   --
Customer C   422   11%   --   --
Customer D   --   --   5,264   18%

 

The following table sets forth the percentages of revenue derived by the Company from those customers which accounted for at least 10% of revenues during the three months ended June 30, 2018 and 2017 (in thousands):

 

    For the Three Months Ended
June 30,
2018
  For the Three Months Ended
June 30,
2017
    $   %   $   %
Customer A   319   17%   --   --
Customer B   211   12%   --   --
Customer C   195   11%   --   --
Customer D   --   --   3,648   24%

  

As of June 30, 2018, Customer A represented approximately 22%, Customer B represented approximately 17%, and Customer C represented approximately 15% of total accounts receivable. As of June 30, 2017, there were no customer concentrations greater than 10% of total accounts receivable.

 

As of June 30, 2018, two vendors represented approximately 36% and 20% of total gross accounts payable. There were no purchases from these vendors during the three and six months ended June 30, 2018.  As of June 30, 2017, one vendor represented approximately 40% of total gross accounts payable. Purchases from this vendor during the three months ended June 30, 2017 were $4.1 million. Purchases from this vendor during the six months ended June 30, 2017 were $5.8 million.

 

Note 15 - Segment Reporting and Foreign Operations

 

Effective January 1, 2017 the Company has changed the way it analyzes and assesses divisional performance of the Company. The Company has therefore re-aligned its operating segments along those division business lines and has created the following operating segments. The Company has retroactively applied these new segment categories to the prior periods presented below for comparative purposes.

 

  Indoor Positioning Analytics:  This segment includes Inpixon’s proprietary products and services delivered on premise or in the Cloud as well as our hosted Software-as-a-Service (SaaS) based solutions. Our Indoor Positioning Analytics product is based on a unique and patented sensor technology that detects and locates accessible cellular, Wi-Fi and Bluetooth devices and then uses a lightning fast data-analytics engine to deliver actionable insights and intelligent reports for security, marketing, asset management, etc.
     
  Infrastructure: This segment includes third party hardware, software and related maintenance/warranty products and services that Inpixon resells to commercial and government customers. It includes but is not limited to products for enterprise computing; storage; virtualization; networking; etc. as well as services including custom application/software design; architecture and development; staff augmentation and project management.

 

  25  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 15 - Segment Reporting and Foreign Operations (continued)

 

The following tables present key financial information of the Company’s reportable segments before unallocated corporate expenses (in thousands):

 

    Indoor Positioning  
Analytics
    Infrastructure     Consolidated  
                   
For the Three Months Ended June 30, 2018:      
       
Net revenues   $ 1,274     $ 554     $ 1,828  
Cost of net revenues   $ (369 )   $ (448 )   $ (817 )
Gross profit   $ 905     $ 106     $ 1,011  
Gross margin %     71 %     19 %     55 %
Depreciation and amortization   $ 120     $ 406     $ 526  
Amortization of intangibles   $ 804     $ 519     $ 1,323  
                         
For the Three Months Ended June 30, 2017:                        
                         
Net revenues   $ 1,156     $ 13,940     $ 15,096  
Cost of net revenues   $ (380 )   $ (11,332 )   $ (11,712 )
Gross profit   $ 776     $ 2,608     $ 3,384  
Gross margin %     67 %     19 %     22 %
Depreciation and amortization   $ 93     $ 340     $ 433  
Amortization of intangibles   $ 863     $ 519     $ 1,382  
                         
For the Six Months Ended June 30, 2018:                        
                         
Net revenues   $ 2,121     $ 1,801     $ 3,922  
Cost of net revenues   $ (604 )   $ (1,072 )   $ (1,676 )
Gross profit   $ 1,517     $ 729     $ 2,246  
Gross margin %     72 %     40 %     57 %
Depreciation and amortization   $ 279     $ 761     $ 1,040  
Amortization of intangibles   $ 1,607     $ 1,038     $ 2,645  
                         
For the Six Months Ended June 30, 2017:                        
                         
Net revenues   $ 2,137     $ 26,441     $ 28,578  
Cost of net revenues   $ (723 )   $ (21,182 )   $ (21,905 )
Gross profit   $ 1,414     $ 5,259     $ 6,673  
Gross margin %     66 %     20 %     23 %
Depreciation and amortization   $ 168     $ 665     $ 833  
Amortization of intangibles   $ 1,729     $ 1,038     $ 2,767  

 

  26  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 15 - Segment Reporting and Foreign Operations (continued)

 

Reconciliation of reportable segments’ combined income from operations to the consolidated loss before income taxes is as follows (in thousands):

 

    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2018     2017     2018     2017  
Income from operations of reportable segments   $ 1,011     $ 3,384     $ 2,246     $ 6,673  
Unallocated operating expenses     (7,460 )     (8,614 )     (14,303 )     (17,260 )
Interest expense     (356 )     (1,344 )     (1,638 )     (2,027 )
Other income (expense)     950       152       1,596       143  
Loss from discontinued operations     --       (9 )     --       (17 )
Consolidated loss before income taxes   $ (5,855 )   $ (6,431 )   $ (12,099 )   $ (12,488 )

 

The Company’s operations are located primarily in the United States, Canada and Saudi Arabia. Revenues by geographic area are attributed by country of domicile of our subsidiaries. The financial data by geographic area are as follows (in thousands):

 

    United           Saudi                    
    States     Canada     Arabia     India     Eliminations     Total  
For the Three Months Ended June 30, 2018:                                    
Revenues by geographic area   $ 1,823     $ 5     $ --     $ 74     $ (74 )   $ 1,828  
Operating income (loss) by geographic area   $ (6,078 )   $ (387 )   $ --     $ 16     $ --     $ (6,449 )
Net income (loss) by geographic area   $ (5,484 )   $ (387 )   $ --     $ 16     $ --     $ (5,855 )
                                                 
For the Three Months Ended June 30, 2017:                                                
Revenues by geographic area   $ 15,025     $ 70     $ --     $ --     $ --     $ 15,096  
Operating loss by geographic area   $ (4,784 )   $ (447 )   $ --     $ --     $ --     $ (5,230 )
Net loss by geographic area   $ (5,975 )   $ (447 )   $ (9 )   $ --     $ --     $ (6,431 )
                                                 
For the Six Months Ended June 30, 2018:                                                
Revenues by geographic area   $ 3,911     $ 11     $ --     $ 126     $ (126 )   $ 3,922  
Operating income (loss) by geographic area   $ (11,195 )   $ (876 )   $ --     $ 14     $ --     $ (12,057 )
Net income (loss) by geographic area   $ (11,233 )   $ (880 )   $ --     $ 14     $ --     $ (12,099 )
                                                 
For the Six Months Ended June 30, 2017:                                                
Revenues by geographic area   $ 28,452     $ 126     $ --     $ --     $ --     $ 28,578  
Operating loss by geographic area   $ (9,739 )   $ (848 )   $ --     $ --     $ --     $ (10,587 )
Net loss by geographic area   $ (11,623 )   $ (848 )   $ (17 )   $ --     $ --     $ (12,488 )
                                                 
As of June 30, 2018:                                                
Identifiable assets by geographic area   $ 24,557     $ 269     $ --     $ 66     $ --     $ 24,892  
Long lived assets by geographic area   $ 11,964     $ 133     $ --     $ 9     $ --     $ 12,106  
                                                 
As of December 31, 2017:                                                
Identifiable assets by geographic area   $ 27,189     $ 432     $ 23     $ 47     $ --     $ 27,691  
Long lived assets by geographic area   $ 14,883     $ 318     $ --     $ 14     $ --     $ 15,215  

 

  27  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 16 - Commitments and Contingencies

 

Litigation

 

Certain conditions may exist as of the date the condensed consolidated financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed. 

 

Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. 

 

On August 10, 2017, Embarcadero Technologies, Inc. (“Embarcadero”) and Idera, Inc. (“Idera”) filed a complaint in the U.S. Federal District Court for the Western District of Texas against SGS and Integrio for failure to pay for purchased software and services pursuant to certain reseller agreements. The complaint alleges that SGS entered into an agreement with Integrio to acquire certain assets and assume certain liabilities of Integrio and are therefore responsible for any amounts due. In the complaint, Embarcadero and Idera demand that SGS and Integrio pay $1,100,000.00 in damages. On April 26, 2018, the parties filed a stipulation of dismissal to dismiss this case with prejudice following entry into a settlement agreement pursuant to which the Company agreed to satisfy the outstanding payables. On April 28, 2018, the court rendered the final judgment to approve this stipulation. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets. 

 

On August 11, 2017, Micro Focus (US) Inc. (“Micro Focus”), filed a complaint in the Circuit Court of Fairfax County, Virginia against SGS for failure to pay a debt settlement entered into on March 13, 2017 for a principal amount of approximately $246,000 plus accrued interest. The complaint demands full payment of the principal amount of approximately $246,000 plus accrued interest. On October 31, 2017, Micro Focus filed a motion for summary judgment against SGS. The Company consented to the court entering summary judgment in favor of Micro Focus in the amount of approximately $246,000, with interest accruing at 10% per annum from June 13, 2017 until payment is completed. On April 19, 2018, the Company signed a settlement agreement with Microfocus for $200,000 which has been paid as of the date of this filing.

 

On December 7, 2017, the principal of Objective Equity filed a claim in Superior Court of California, County of Santa Clara for $7,500 against Sysorex, claiming non-payment under a settlement agreement. The hearing was held on January 31, 2018 and the case was dismissed in favor of Sysorex.

 

  28  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 16 - Commitments and Contingencies (continued)

 

Litigation (continued)

 

On March 1, 2017, VersionOne, Inc. filed a complaint in the United States District Court, Eastern District of Virginia, against Inpixon, Sysorex and SGS (collectively, “Defendants”). The complaint alleges that VersionOne provided services to Integrio having a value of approximately $486,000, that in settlement of this amount Integrio and VersionOne entered into an agreement (the “Settlement Agreement”) whereby Integrio agreed to pay, and VersionOne agreed to accept as full payment, approximately $243,000 (the “Settlement Amount”), and that as a result of the Defendants’ acquisition of the assets of Integrio, Defendants assumed the Settlement Amount but failed to pay amounts owed to VersionOne. The complaint also alleges that, subsequent to closing of the acquisition, VersionOne provided additional services to Defendants having a value of approximately $145,000, for which it has not been paid. VersionOne alleges that, Defendants have an obligation to pay both the Settlement Amount and the cost of the additional services. On Dec. 8, 2017, the court entered judgment against Inpixon, SGS, and Sysorex, jointly and severally, in the amount of approximately $334,000. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets.  

 

On September 5, 2017 Dell Marketing threatened legal action against Sysorex and demanded approximately $1.8 million for payment of unpaid invoices. On or about January 29, 2018 the parties executed a settlement agreement resolving the matter. No court action was filed. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets. 

 

On December 28, 2017, Virtual Imaging, Inc. (“Virtual Imaging”) filed a complaint in the United States District Court, Eastern District of Virginia, against Sysorex, and SGS (collectively, the “Defendants”). The complaint alleges that Virtual Imaging provided products to the Defendants having an aggregate value of approximately $3,938,000, of which approximately $3,688,000 remains outstanding and overdue. Virtual Imaging has demanded compensation for the unpaid amount of approximately $3,688,000. The parties have settled this matter and agreed to a settlement payment schedule. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets. 

 

On January 2, 2018 VMS, Inc. sent a demand letter claiming Sysorex owes approximately $1.2 million in unpaid invoices. The parties have settled this matter and agreed to a settlement payment schedule. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets. 

 

On January 22, 2018, Deque Systems, Inc. filed a motion for entry of default judgment (the “Motion”) against SGS in the Circuit Court of Fairfax County, Virginia. The Motion alleges that SGS failed to respond to a complaint served on November 22, 2017. The Motion requests a default judgment in the amount of $336,000 plus $20,000 in legal fees. A trial is currently scheduled for September 12, 2018, however, the parties are currently finalizing a settlement agreement. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets. 

 

On February 16, 2018 the Versata Companies submitted a notice of mediation to the WIPO Arbitration and Mediation Center claiming that SGS owes approximately $421,000 in unpaid invoices and late fees. Approximately $176,000 of that amount is under dispute by SGS. The parties are currently negotiating a settlement agreement and payment plan to pay the outstanding liability. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets. 

 

On April 6, 2018, AVT Technology Solutions, LLC, filed a complaint in the United States District Court Middle District of Florida Tamp Division against Inpixon and Sysorex alleging breach of contract, breach of corporate guaranty and unjust enrichment in connection with non-payment for goods received and requesting a judgment in an amount of not less than $9,152,698.71. The Company has filed a motion to dismiss this complaint and is currently finalizing a settlement agreement with AVT. The liability has been accrued and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets.

 

  29  

 

 

INPIXON AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

 

Note 16 - Commitments and Contingencies (continued)

 

Litigation (continued)

 

On March 19, 2018, Inpixon was notified by a consultant for advisory services (the “Consultant”) that it believes the Company is required to pay a minimum project fee in an amount equal to $1 million less certain amounts previously paid as a result of the Company’s completion of certain financing transactions. On April 18, 2018, the Consultant filed a demand for arbitration with the American Arbitration Association. The Company disputes such claims and intends to defend these matters vigorously and no amounts have been accrued.

 

Investment in Technology

 

On May 29, 2018 the Company acquired $175,000 of technology which was capitalized in intangible assets and has an estimated life of three to five years. 

 

Compliance with Nasdaq Continued Listing Requirement

 

On May 19, 2017, the Company received written notice from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that it no longer complied with Nasdaq Listing Rule 5550(b)(1) due to our failure to maintain a minimum of $2,500,000 in stockholders’ equity or to demonstrate compliance with any alternative to such requirement. On October 24, 2017, the Company received notification from Nasdaq that the Company had not regained compliance with the Minimum Stockholders’ Equity Requirement. The Company appealed the Staff Delisting Determination and requested a hearing that was held on December 7, 2017. As a result, the suspension and delisting was stayed pending the issuance of a written decision by the Nasdaq Hearings Panel. By decision dated December 14, 2017, the Panel granted the Company’s request for a further extension, through April 23, 2018, to evidence compliance with the $2,500,000 stockholders’ equity requirement. Following the closing of a public offering on April 24, 2018, on May 2, 2018, the Company received a letter from Nasdaq notifying the Company that it has regained compliance with the $2.5 million minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(b)(1).

 

On May 17, 2018, a letter from the Listing Qualifications Staff of Nasdaq indicating that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days beginning on April 5, 2018 and ending on May 16, 2018, the Company no longer meets the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).

 

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until November 13, 2018, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of the Company’s common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance period of 180 calendar days if it meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provides written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice to the Company that its common stock will be subject to delisting.

  

  30  

 

 

Note 17 - Subsequent Events

 

Series 4 Preferred Share Conversions

 

Subsequent to June 30, 2018, 994.5624 shares of Series 4 Preferred were converted into 5,590,570 shares of the Company’s common stock.

 

Inpixon USA Reorganization and Name Change

 

On July 26, 2018, solely for the purpose of reincorporating the Company into the State of Nevada, Inpixon formed a wholly owned subsidiary in the State of Nevada named “Sysorex, Inc.” which was merged with Inpixon USA and resulted in the Company being reincorporated in the State of Nevada under the name “Sysorex, Inc.” (“Reincorporation”). At the effective time of the Reincorporation, all of the 3,950,000 issued and outstanding shares of common stock, no par value per share, of Inpixon USA were converted into and exchanged for an aggregate of 39,999,000 fully-paid and non-assessable shares of common stock, par value $0.00001 per share, of Sysorex.

 

Separation Agreement

 

On August 7, 2018, the Company entered into a Separation and Distribution Agreement (the “Separation Agreement”) with its wholly-owned subsidiary, Sysorex, governing the proposed separation (the “Spin-off”) of the Company’s IT consulting and value-added reseller business (the “VAR business”).

 

The Separation Agreement incorporates a step plan which provides for the transfer of entities, assets and liabilities at the effective time on the date of the Spin-off pursuant to which (i) the Company will contribute to Sysorex all of the outstanding equity interests of the Sysorex subsidiary entities, (ii) the Company will contribute to Sysorex the “Contributed Cash”, as such term is defined in the Separation Agreement, which includes $2 million in cash held by the Company that will be contributed to Sysorex before the Spin-off (which amount shall be reduced by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied by the Company from June 30, 2018 through the date of the Spin-off), (iii) the Company will transfer certain assets to Sysorex and Sysorex will assume certain of the Company’s liabilities and (iv) Sysorex will contribute to the Company certain assets and liabilities related to the Company’s indoor positioning analytics business.

 

One share of Sysorex common stock for every three shares of the Company’s common stock outstanding or issuable upon complete conversion of the preferred stock or exercise of certain warrants outstanding as of the record date will be distributed as a stock dividend to holders of the Company’s common stock, preferred stock and certain warrants of record as of August 21, 2018. Holders of stock options and other awards under the Company’s equity plans will participate in the Spin-off in accordance with an employee matters agreement and the terms of such securities. 

 

  31  

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

 

Except where indicated, all share and per share data in this section, as well as the condensed consolidated financial statements, reflect the 1 for 15 reverse stock split of the Company’s common stock effected on March 1, 2017 and the 1 for 30 reverse stock split effected on February 6, 2018.

 

Overview of our Business

 

We provide a number of different technology products and services to private and public sector customers. Effective January 1, 2017 the Company has changed the way it analyzes and assesses divisional performance of the Company. The Company has therefore re-aligned its operating segments along those division business lines and now operates in two segments, namely Indoor Positioning Analytics and Infrastructure. Our premier proprietary product secures, digitizes and optimizes the interior of any premises with indoor positioning and data analytics that provide rich positional information, similar to a global positioning system, and browser-like intelligence for the indoors. Other products and services that we provide include enterprise computing and storage, virtualization, business continuity, data migration, custom application development, networking and information technology, and business consulting services.

 

Indoor Positioning Analytics Segment

 

Revenues from our Indoor Positioning Analytics (“IPA”) segment were $2.1 for the six months ended June 30, 2018. Our IPA segment does have long sales cycles which are a result from customer related issues such as budget and procurement processes but also because of the early stages of indoor-positioning technology and the learning curve required for customers to implement such solutions. Customers also engage in a pilot program first which prolongs sales cycles and is typical of most emerging technology adoption curves. We anticipate sales cycles to improve in 2018 as our customer base moves from innovators to mainstream customer adoption. The sales cycle is also improving with the increased presence and awareness of beacon and Wi-Fi locationing technologies in the market. IPA segment sales can be licensed based with government customers but are primarily on a SaaS model with commercial customers. Our other SaaS products include cloud-based applications for media customers, which allow us to generate industry analytics that complement our indoor-positioning solutions.

 

Approximately 95% of our IPA segment purchase orders are recurring SaaS contracts and 4% are license based. We find that our public sector customers prefer the licensing model approach while private sector companies are opting for the SaaS model. However, the sales mix can fluctuate significantly from quarter to quarter.

 

Infrastructure Segment

 

Our professional services group provides consulting services ranging from enterprise architecture design to custom application development to data modeling. We offer a full scope of information technology development and implementation services with expertise in a broad range of IT practices including project design and management, systems integration, outsourcing, independent validation and verification, cyber security and more. 

 

Inpixon has many key vendor, technology, wholesale distribution and strategic partner relationships. These relationships are critical for us to deliver solutions to our customers. We have a variety of vendors and also products that we provide to our customers, and most of these products are purchased through the distribution partners. We also have partnerships and teaming agreements with various technology and service providers for this segment as well as our other business segments. These relationships range from joint-selling activities to product integration efforts. We have been facing serious credit challenges with these vendors given our financial circumstances but are working on solving these issues as we move forward and improve our liquidity.

 

In addition our business is required to meet certain regulatory requirements. Our federal government customers in particular have a range of regulatory requirements including ITAR certifications, DCAA compliancy in our government contracts and other technical or security clearance requirements as may be required from time to time.

 

  32  

 

 

We experienced a net loss of approximately $12.1 million for the six months ended June 30, 2018. We cannot assure that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we have supplemented the revenues we earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. The Company has raised an aggregate of gross proceeds of $31.3 million in equity capital so far in 2018 to support its operations and also has availability on its Payplant facility. However, we cannot assure that we will be able to raise money in the future if and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our business operations by reducing expenditures for employees, consultants, business development and marketing efforts, selling assets or one or more segments of our business, or otherwise severely curtailing our operations.

 

In order to streamline our business our board of directors has approved the separation of our Infrastructure segment or value-added reseller (“VAR”) business from our IPA segment, in accordance with the terms of a Separation and Distribution Agreement, dated August 7, 2018, by and between the Company and Sysorex, In 2017, the VAR business represented approximately 92% of our total revenues for 2017, therefore, the spin-off of this business segment would significantly reduce our total revenues as compared to prior years on a consolidated basis, however, such a spin-off would also significantly reduce our total operating expenses and eliminate substantially all of our trade debt. For the six months ended June 30, 2018, revenue from the VAR segment was significantly lower as compared to the same period from prior years as a result of credit limitations with vendors that the Company continues to work on improving. For the six months ended June 30, 2018, revenues from the VAR segment represented approximately 46% of our total revenues and revenues from the IPA segment represented approximately 54% of our total revenues. The spin-off of this segment would allow Inpixon to solely focus on the Indoor Positioning Analytics business for which we have historically recognized lower revenues, but which we believe has greater growth potential and substantially better gross margins than the infrastructure segment. The spin-off would be beneficial to Sysorex and SGS as well because they could focus their resources on their core business without the diversion of resources that would be allocated to the development of the IPA segment and therefore may reach profitability sooner. (See the description under the header “Spin-off of VAR Business” described below for additional information about the spin-off).

 

Recent Events

 

January 2018 Capital Raise

 

On January 5, 2018, the Company entered into a securities purchase agreement (the “January 2018 SPA”) with certain investors pursuant to which the Company agreed to sell, in a registered direct offering, an aggregate of 599,812 shares (the “January 2018 Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”), at a purchase price of $5.31 per share for aggregate gross proceeds of approximately $3,185,000. Concurrently with the sale of the January 2018 Shares, pursuant to the January 2018 SPA the Company also sold warrants to purchase up to 599,812 shares of Common Stock (the “January 2018 Warrants”). The aggregate gross proceeds for the sale of the January 2018 Shares and January 2018 Warrants was approximately $3.2 million. This offering closed on January 8, 2018.

 

The January 2018 Warrants became exercisable on February 2, 2018 (the “January 2018 Warrant Initial Exercise Date”), at an exercise price per share equal to $6.60, subject to certain adjustments pursuant to the terms of the January 2018 Warrants (the “January 2018 Warrant Exercise Price”), and will expire on the fifth anniversary of the January 2018 Warrant Initial Exercise Date. As a result of a Dilutive Issuance (as defined in the January 2018 Warrants) as of February 20, 2018, the January 2018 Warrant Exercise Price was adjusted to the floor price of $3.00 per share pursuant to the January 2018 Warrants.

 

Reverse Stock Split

 

At a meeting of our stockholders held on February 2, 2018, our stockholders holding a majority of our outstanding voting power approved an amendment to our Articles of Incorporation to effect a reverse stock split of our Common Stock at an exchange ratio between 1-for -5 and 1-for-60 with our Board of Directors retaining the discretion as to whether to implement the reverse stock split and the exact exchange ratio to implement. The Board of Directors approved the implementation of a reverse stock split at a ratio of 1 for 30 effective as of February 6, 2018.

 

  33  

 

 

February 2018 Public Offering

 

On February 20, 2018, the Company completed a public offering for approximately $18 million in securities, consisting of (i) an aggregate of 3,325,968 Class A units, at a price to the public of $2.35 per Class A unit, each consisting of one share of Common Stock, and a five-year warrant to purchase one share of Common Stock, and (ii) 10,184.9752 Class B units, at a price to the public of $1,000 per Class B unit, each consisting of one share of the Company’s newly designated Series 3 convertible preferred stock, par value $0.001 per share (“Series 3 Preferred”), with a stated value of $1,000 and initially convertible into approximately 426 shares of Common Stock at a conversion price of $2.35 per share for up to an aggregate of 4,334,032 shares of Common Stock and warrants exercisable for the number of shares of Common Stock into which the shares of Series 3 Preferred is initially convertible. The warrants (“February 2018 Warrant”) were immediately exercisable at an exercise price of $3.50 per share (subject to adjustment).

 

The Company received approximately $18 million in gross proceeds from this offering, including the satisfaction of approximately $1 million in amounts payable to service providers. After satisfying the amounts due to service providers and deducting placement agent fees, the net cash proceeds from this offering was approximately $15.4 million. The Company used the net proceeds from the transactions for working capital and general corporate purposes, including research and development and sales and marketing.

 

The shares of Series 3 Preferred issued in this offering have all been converted into Common Stock. As a result of the April 2018 offering described below as of April 24, 2018, the exercise price of the February 2018 Warrants was adjusted to the floor price of $0.634 per share and the number of shares of Common Stock underlying the February 2018 Warrants was increased to an aggregate of 42,287,102 shares of Common Stock.

 

April 2018 Public Offering

 

On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the public of $1,000 per unit, each consisting of (i) one share of our newly designated Series 4 convertible preferred stock, par value $0.001 per share (the “Series 4 Preferred”), with a stated value of $1,000 and initially convertible into approximately 2,174 shares of Common Stock, at a conversion price of $0.46 per share (subject to adjustment) and (ii) one warrant to purchase such number of shares of Common Stock as each share of Series 4 Preferred is convertible into. The warrants are immediately exercisable at an exercise price of $0.67 per share (subject to adjustment).

 

The Series 4 Preferred contain an anti-dilution protection feature, to adjust the conversion price if shares of Common Stock are sold or issued for a consideration per share less than the conversion price then in effect (subject to certain exemptions), provided, that the conversion price will not be less than $0.124. In addition, on the 60th day following the original issuance date of the Series 4 Preferred, the conversion price will be reduced, and only reduced, to the lesser of (x) the then conversion price, as may be adjusted, and (y) 80% of the VWAP (as defined in the certificate of designation filed for the Series 4 Preferred) on the trading day immediately prior to the 60th day, provided that the conversion price will not be less than $0.124.

 

The Company received approximately $10.1 million in gross proceeds from this offering, before deducting placement agent fees and offering expenses payable by the Company. After deducting placement agent fees and expenses, the net proceeds from this offering were approximately $9.2 million. The Company intends to use the net proceeds from this offering for working capital, general corporate purposes (including research and development, sales and marketing and the satisfaction of outstanding amounts payable to our vendors in connection with trade payables). Additionally, the Company may use a portion of the net proceeds of this offering to finance acquisitions of, or investments in, competitive and complementary businesses, products or services as a part of our growth strategy. However, the Company does not have any current commitments with respect to any such acquisitions or investments.

 

Non-Compliance with Nasdaq Continued Listing Requirement

 

As previously reported, on May 17, 2018, a letter from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s Common Stock for the last 30 consecutive business days beginning on April 5, 2018 and ending on May 16, 2018, the Company no longer meets the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).

 

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until November 13, 2018, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of the Company’s Common Stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible to seek an additional compliance period of 180 calendar days if it meets the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provides written notice to Nasdaq of its intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice to the Company that its Common Stock will be subject to delisting.

 

The Notice does not result in the immediate delisting of the Company’s Common Stock from the Nasdaq Capital Market. The Company intends to monitor the closing bid price of the Company’ s Common Stock and consider its available options in the event that the closing bid price of the Company’s Common Stock remains below $1 per share. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements.

 

  34  

 

 

Spin-off of VAR Business

 

On April 23, 2018, the Company issued a press release announcing the filing of a Form 10 registration statement with the SEC in connection with the planned spin-off of its wholly-owned subsidiary, Sysorex (including its subsidiary, SGS), which is expected to be renamed “Sysorex, Inc.” (“Sysorex”) following the consummation of the spin-off transaction. The Form 10 will be effective automatically on August 14, 2018.

 

In preparation for the Spin-off, on July 26, 2018, solely for the purpose of reincorporating the Company into the State of Nevada, Inpixon formed a wholly owned subsidiary in the State of Nevada named “Sysorex, Inc.” which was merged with Inpixon USA and resulted in the Company being reincorporated in the State of Nevada under the name “Sysorex, Inc.” (“Reincorporation”). At the effective time of the Reincorporation, all of the 3,950,000 issued and outstanding shares of common stock, no par value per share, of Inpixon USA were converted into and exchanged for an aggregate of 39,999,000 fully-paid and non-assessable shares of common stock, par value $0.00001 per share, of Sysorex.

 

On August 7, 2018, the Company entered into a Separation and Distribution Agreement (the “Separation Agreement”) with its wholly-owned subsidiary, Sysorex, governing the previously discussed separation (the “Spin-off”) of the Company’s VAR business.

 

The Separation Agreement incorporates a step plan which provides for the transfer of entities, assets and liabilities at the effective time on the date of the Spin-off, which is anticipated to be August 31, 2018, pursuant to which (i) the Company will contribute to Sysorex all of the outstanding equity interests of the Sysorex subsidiary entities, (ii) the Company will contribute to Sysorex the “Contributed Cash”, as such term is defined in the Separation Agreement, which includes $2 million in cash held by the Company that will be contributed to Sysorex before the Spin-off (which amount shall be reduced by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied by the Company from June 30, 2018 through the date of the Spin-off), (iii) the Company will transfer certain assets to Sysorex and Sysorex will assume certain of the Company’s liabilities and (iv) Sysorex will contribute to the Company certain assets and liabilities related to the Company’s indoor positioning analytics business.

 

 One share of Sysorex common stock for every three shares of the Company’s common stock outstanding or issuable upon complete conversion of the preferred stock or exercise of certain warrants outstanding as of the record date will be distributed pro rata as a stock dividend on or about August 31, 2018 to holders of the Company’s common stock, preferred stock and certain warrants of record as of August 21, 2018. Holders of stock options and other awards under the Company’s equity plans will participate in the Spin-off in accordance with an employee matters agreement and the terms of such securities. 

 

The Company believes that the separation from Sysorex and the VAR business will separately provide each entity with greater flexibility to focus on and pursue their respective growth strategies with the Company solely focused on the IPA business and Sysorex focused on leveraging the strength of its brand and reputation in order to rebuild and grow its value-added reseller and integration business with federal government and commercial customers. The separation will provide stockholders with an equity ownership in two separate public companies, but we believe that it will also (i) create two sharper, stronger, more focused companies by enabling the management of each company to concentrate efforts on the unique needs of each business and the pursuit of distinct opportunities for long-term growth and profitability, (ii) allow each business to more effectively pursue its own distinct capital structures and capital allocation strategies and design more effective equity compensation programs, and (iii) enable our investors to better evaluate the financial performance, strategies, and other characteristics of each business and company separately, which will permit investors to make investment decisions based on each company’s individual performance and potential, enhancing the likelihood that the market will value each company appropriately.  As a result, the Company believes that following the separation, each of Inpixon and Sysorex will be better positioned to achieve profitability and long-term shareholder value.

 

Following the spin-off, the Company will not own any shares of Sysorex common stock and Sysorex will be an independent public reporting company that is anticipated to trade on the OTCQB platform of the OTC Markets Group following the completion of the distribution, subject to the approval of a Form 211 by FINRA and the approval of Sysorex’s application on the OTCQB. The completion of the distribution of the Sysorex shares by Inpixon is subject to the satisfaction or waiver of a number of conditions, including, but not limited to the effectiveness of the Registration Statement on Form 10, as amended, for Sysorex’s common stock which will occur automatically on August 14, 2018. An Information Statement describing the spin-off and information concerning Sysorex, including the risks of owning Sysorex common stock and other details regarding the distribution must be mailed to participating holders prior to the distribution, the delivery by an independent appraisal firm acceptable to the Company confirming the solvency and financial viability of the Company before the completion of the distribution and each of Inpixon and Sysorex after completion of the distribution.

 

No assurance can be provided as to the timing of the completion of the spin-off or that all conditions to the spin-off will be met. Furthermore, until the distribution has occurred, the Company will have the right to terminate the distribution, even if all of the conditions are satisfied.

 

JOBS Act

 

Pursuant to Section 107 of the Jumpstart Our Business Startups Act of 2012, emerging growth companies may delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to opt out of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

  35  

 

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

 

Our significant accounting policies are discussed in Note 3 of the condensed consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. There have been no changes to estimates during the periods presented in the filing. Historically, changes in management estimates have not been material.

 

Revenue Recognition

 

We provide IT solutions and services to customers with revenues currently derived primarily from the sale of third-party hardware and software products, software, assurance, licenses and other consulting services, including maintenance services. The products and services we sell, and the manner in which they are bundled, are technologically complex and the characterization of these products and services requires judgment in order to apply revenue recognition policies. For all of these revenue sources, we determine whether we are the principal or the agent in accordance with Accounting Standards Codification Topic, 605-45 Principal Agent Considerations.

 

Hardware and Software Revenue Recognition

 

For sales of hardware and software products, the Company’s performance obligation is satisfied at a point in time when they are shipped to the customer. This is when the customer has title to the product and the risks and rewards of ownership. The delivery of products to our customers occurs in a variety of ways, including (i) as a physical product shipped from the Company’s warehouse, (ii) via drop-shipment by a third-party vendor, or (iii) via electronic delivery with respect to software licenses. The Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its warehouse. In such arrangements, the Company negotiates the sale price with the customer, pays the supplier directly for the product shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability of the product and ensuring that such product meets the standards and requirements of the customer. Accordingly, the Company is the principal in the transaction with the customer and records revenue on a gross basis. The Company receives fixed consideration for sales of hardware and software products. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice. The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred because the amortization period of the asset that otherwise would have been recognized is less than a year. 

 

Software As A Service Revenue Recognition

 

With respect to sales of our maintenance, consulting and other service agreements including our digital advertising and electronic services, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service.

 

  36  

 

 

Third Party License and Maintenance Services Revenue Recognition

 

The Company provides a customized design and configuration solution for its customers and in this capacity resells hardware, software and other IT equipment license and maintenance services in exchange for fixed fees. The Company selects the vendors and sells the products and services, including maintenance services, that best fit the customer’s needs. For sales of maintenance services and warranties, the customer obtains control at the point in time that the services to be provided by a third party vendor are purchased by the customer and therefore the Company’s performance obligation to provide the overall systems solution is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice.

 

Typically, the Company sells maintenance contracts between the manufacturer and the customer for a separate fee with initial contractual periods ranging from one to five years with renewal for additional periods thereafter. The Company’s performance obligation is to work with customers to identify the computer maintenance and warranty services that best suit the customer’s needs and sell them those products and services however the maintenance is provided to the customer by the manufacturer. While a third party is responsible for actually performing the services for the customer, historically, in accordance with its policies and historical business practices, the Company has assumed responsibility for ensuring that the recommended services that are provided as part of the overall solution meets client expectations and therefore the Company assumes control of the services to be provided before they are performed for the benefit of the customer. In addition, the Company has full discretion in establishing the sale price to the customer which is determined based on the entire customized solution of products and services offered to the customer and bears the credit risk by paying the supplier for purchased services and collecting payment from the customer and therefore recognizes revenue from maintenance services on a gross basis, For these contracts the customer is invoiced one time and pays up front for the full term of the warranty and maintenance contract. Prior to the adoption of ASC 606 as of January 1, 2018, revenue from these contracts was recognized ratably over the contract period with the unearned revenue recorded as deferred revenue and amortized over the contract period. Adoption of Topic 606 has changed the recognition of our license and maintenance revenue as it was previously recognized over time however under the new policy it is recognized at a point in time and therefore the Company’s accumulated deferred revenue was accelerated as of January 1, 2018.

 

Professional Services Revenue Recognition

 

The Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the six months ended June 30, 2018 and 2017, the Company did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term contracts are derived principally with various United States government agencies and commercial customers. 

  

Long-lived Assets

 

We account for our long-lived assets in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

 

  significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows for two consecutive years);
     
  significant negative industry or economic trends;

 

  knowledge of transactions involving the sale of similar property at amounts below our carrying value; or
     
  our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.”

 

Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value. 

 

When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and the residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Based on our evaluation, we did not record a charge for impairment for the six months ended June 30, 2018 and 2017.

 

  37  

 

 

The benefits to be derived from our acquired intangibles, will take additional financial resources to continue the development of our technology. Management believes our technology has significant long-term profit potential, and to date, management continues to allocate existing resources to the develop products and services to seek returns on its investment. We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, as part of our continued efforts.  Although there can be no assurance that these efforts will be successful, we intend to allocate financial and personnel resources when deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, the related development of our technology (resulting in our lack of ability to expand our business), may be subject to significant impairment.

 

As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. The Company will continue to monitor these uncertainties in future periods, to determine the impact.

 

We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the six months ended June 30, 2018 and 2017 which would indicate a revision to the remaining amortization period related to any of our long lived assets. Accordingly, we believe that the current estimated useful lives of long-lived assets reflect the period over which they are expected to contribute to future cash flows and are therefore deemed appropriate.

  

Goodwill and Indefinite-lived Assets

 

We have recorded goodwill and other indefinite-lived assets in connection with our acquisitions of Lilien LLC (“Lilien”), Shoom, Inc. (“Shoom”), AirPatrol Corporation (“AirPatrol”), LightMiner Systems, Inc. (“LightMiner”) and Integrio, LLC (“Integrio”). Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of the acquired company, is not amortized. Indefinite-lived intangible assets are stated at fair value as of the date acquired in a business combination. We review our goodwill during the fourth quarter of each year, but may need to review goodwill more frequently, if facts and circumstances warrant a review. The evaluation of impairment involves comparing the current fair value of the business to the recorded value, including goodwill. To determine the fair value of the business, we utilize both the income approach, which is based on estimates of future net cash flows, and the market approach, which observes transactional evidence involving similar businesses. There was no goodwill impairment for the six months ended June 30, 2018 or 2017.

  

We analyze goodwill first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a detailed goodwill impairment test as required. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.

  

Events and circumstances for an entity to consider in conducting the qualitative assessment are:

 

  Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets.

 

  Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development.

 

  Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows.

  

  Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.

 

  Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation.

 

  Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

 

  If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers).

 

  38  

 

 

As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans.  We also require significant funds to operate and continue to experience losses.  If these conditions continue, it may necessitate a requirement to record a goodwill impairment charges.  The Company will continue to monitor these uncertainties in future periods.  

 

Software Development Costs

 

The Company develops and utilizes internal software for the processing of data provided by its customers. Costs incurred in this effort are accounted for under the provisions of FASB ASC 350-40, Internal Use Software and ASC 985-20, Software – Cost of Software to be Sold, Leased or Marketed, whereby direct costs related to development and enhancement of internal use software is capitalized, and costs related to maintenance are expensed as incurred. The Company capitalizes its direct internal costs of labor and associated employee benefits that qualify as development or enhancement. These software development costs are amortized over the estimated useful life which management has determined ranges from one to five years.

 

Allowance for Doubtful Accounts

 

We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management’s determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors.

 

As of June 30, 2018 and December 31, 2017, allowance for credit losses included an allowance for doubtful accounts of approximately $1.3 million and approximately $1.1 million, respectively, due to the aging of the items greater than 120 days outstanding and other potential non-collections.

 

Business Combinations

 

We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to our consolidated financial results will be adjusted. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.

 

Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date and are included in our Consolidated Financial Statements from the acquisition date.

 

Stock-Based Compensation

 

We account for equity instruments issued to non-employees in accordance with accounting guidance which requires that such equity instruments are recorded at their fair value on the measurement date, which is typically the date the services are performed.

 

We account for equity instruments issued to employees in accordance with accounting guidance that requires that awards are recorded at their fair value on the date of grant and are amortized over the vesting period of the award. We recognize compensation costs over the requisite service period of the award, which is generally the vesting term of the equity instrument issued.

  

The Black-Scholes option valuation model is used to estimate the fair value of the options or the equivalent security granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the average of historical volatilities for industry peers.

 

The Company incurred stock-based compensation charges, net of estimated forfeitures, of $571,000 and $710,000 for the three months ended June 30, 2018 and 2017, and $857,000 and $993,000 for the six months ended June 30, 2018 and 2017, respectively, which are included in general and administrative expenses. 

 

  39  

 

 

The fair value of each employee option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Key weighted-average assumptions used to apply this pricing model for the six months ended June 30, 2018 and 2017 were as follows:

 

    For the Six Months Ended
June 30,
    2018   2017
Risk-free interest rate   2.79-3.01%   2.27%
Expected life of option grants   5-6 years   7 years
Expected volatility of underlying stock   45.64-46.18%   47.34%
Dividends assumption   $--   $--

 

Operating Segments

 

Effective January 1, 2017, the Company has changed the way it analyzes and assesses divisional performance of the Company. The Company has therefore re-aligned its operating segments along those division business lines and has created the following operating segments. The Company has retroactively applied these new segment categories to the prior periods presented below for comparative purposes.

 

  Indoor Positioning Analytics:  This segment includes Inpixon’s proprietary products and services delivered on premise or in the Cloud as well as our hosted SaaS based solutions. Our Indoor Positioning Analytics product is based on a unique and patented sensor technology that detects and locates accessible cellular, Wi-Fi and Bluetooth devices and then uses a lightning fast data-analytics engine to deliver actionable insights and intelligent reports for security, marketing, asset management, etc.
     
  Infrastructure: This segment includes third party hardware, software and related maintenance/warranty products and services that Inpixon resells to commercial and government customers. It includes but is not limited to products for enterprise computing; storage; virtualization; networking; etc. as well as services including custom application/software design; architecture and development; staff augmentation and project management.

 

Rounding

 

All dollar amounts in this section have been rounded to the nearest thousand.

  

Results of Operations

 

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

 

The following table sets forth selected unaudited condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:

 

    For the Three Months Ended        
    June 30,
2018
    June 30,
2017
       
(in thousands, except percentages)   Amount     % of Revenues     Amount     % of Revenues    
Change
 
                               
Product revenues   $ 707       39 %   $ 12,210       81 %     (94 %)
Services revenues   $ 1,121       61 %   $ 2,886       19 %     (61 %)
Cost of net revenues - products   $ 343       19 %   $ 10,231       68 %     (97 %)
Cost of net revenues - services   $ 474       26 %   $ 1,481       10 %     (68 %)
Gross profit   $ 1,011       55 %   $ 3,384       22 %     (70 %)
Operating expenses   $ 7,460       408 %   $ 8,614       57 %     (13 %)
Loss from operations   $ (6,449 )     (353 %)   $ (5,230 )     (35 %)     23 %
Net loss   $ (5,855 )     (320 %)   $ (6,431 )     (43 %)     (9 %)
Net loss attributable to common stockholders   $ (5,858 )     (320 %)   $ (6,427 )     (43 %)     (9 %)

 

  40  

 

  

Net Revenues

 

Net revenues for the three months ended June 30, 2018 were $1.8 million compared to $15.1 million for the comparable period in the prior year. This $13.3 million decrease, or approximately 88%, is primarily associated with the decline in revenues earned by the Infrastructure Segment as a result of supplier credit issues and a $1.6 million decrease in revenue resulting from the adoption of the new ASC 606 revenue recognition policy beginning in January 2018. For the three months ended June 30, 2018, Indoor Positioning Analytics revenue was $1,274,000 compared to $1,156,000 for the prior year period. Infrastructure revenue was $554,000 for the three months ended June 30, 2018, and $13.9 million for the prior year period. We anticipate the Infrastructure Segment revenue (which will be part of Sysorex going forward) will start to recover in Q3 2018 and Q4 2018 as we rebuild our supplier relationships and head into the federal government busy season. 

 

Cost of Revenues

 

Cost of revenues for the three months ended June 30, 2018 was $817,000 compared to $11.7 million for the prior year period. This decrease of $10.9 million was primarily attributable to lower sales resulting from the capital constraints and supplier credit limitations and a $1.4 million decrease in prepaid maintenance amortization due to the adoption of the new ASC 606 revenue recognition policy beginning in January 2018. Indoor Positioning Analytics cost of revenues was $369,000 for the three months ended June 30, 2018 as compared to $380,000 for the prior period. Infrastructure cost of net revenues was $448,000 for the three months ended June 30, 2018 and $11.3 million for the prior period.

 

The gross profit margin for the three months ended June 30, 2018 was 55% compared to 22% during the three months ended June 30, 2017. This increase in gross margin is primarily due to the decrease in lower margin storage and maintenance sales. Indoor Positioning Analytics gross margins for the three months ended June 30, 2018 and 2017 were 71% and 67%, respectively. Gross margins for the Infrastructure segment for the three months ended June 30, 2018 and 2017 was 19%.

 

Operating Expenses

 

Operating expenses for the three months ended June 30, 2018 were $7.5 million compared to $8.6 million for the prior year period. This decrease of $1.1 million is primarily attributable to a decrease in compensation and occupancy costs due to the downsizing of staff and office locations.

 

Loss from Operations

 

Loss from operations for the three months ended June 30, 2018 was $6.4 million compared to $5.2 million for the prior year period. This increase in loss of $1.2 million was primarily attributable due to the decrease in Infrastructure Segment revenues offset by the decrease in operating expenses.

 

Other Income/Expense

 

Total other income/expense for the three months ended June 30, 2018 and 2017 was $594,000 and ($1,192,000), respectively. This decrease in loss of $1.8 million in 2018 was primarily attributable to a $600,000 gain on the sale of contracts, $358,000 gain on the Integrio earn out and higher interest expense in 2017 primarily due to a higher interest on the Company’s bank credit lines and debt discount.

 

Provision for Income Taxes

 

There was no provision for income taxes for the three months ended June 30, 2018 and 2017. Deferred tax assets resulting from such losses are fully reserved as of June 30, 2018 and 2017 since, at present, we have no history of taxable income and it is more likely than not that such assets will not be realized.

   

Net Loss Attributable to Non-Controlling Interest

 

Net loss attributable to non-controlling interest for the three months ended June 30, 2018 was $3,000 compared to ($4,000) for the three months ended June 30, 2017.

 

Net Loss Attributable To Common Stockholders of Inpixon

 

Net loss attributable to common stockholders of Inpixon for the three months ended June 30, 2018 was $5.9 million compared to $6.4 million for the prior year period. This decrease in loss of $500,000 was attributable to the changes described for the various reporting captions discussed above.

 

  41  

 

 

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

 

The following table sets forth selected unaudited condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:

 

    For the Six Months Ended        
    June 30,
2018
    June 30,
2017
       
(in thousands, except percentages)   Amount     % of Revenues     Amount     % of Revenues    
Change
 
                               
Product revenues   $ 1,182       30 %   $ 21,659       76 %     (95 %)
Services revenues   $ 2,740       70 %   $ 6,919       24 %     (60 %)
Cost of net revenues - products   $ 598       15 %   $ 18,285       64 %     (97 %)
Cost of net revenues - services   $ 1,078       27 %   $ 3,620       13 %     (70 %)
Gross profit   $ 2,246       57 %   $ 6,673       23 %     (66 %)
Operating expenses   $ 14,303       365 %   $ 17,260       60 %     (17 %)
Loss from operations   $ (12,057 )     (307 %)   $ (10,587 )     (37 %)     14 %
Net loss   $ (12,099 )     (308 %)   $ (12,488 )     (44 %)     (3 %)
Net loss attributable to common stockholders   $ (12,101 )     (309 %)   $ (12,479 )     (44 %)     (3 %)

 

Net Revenues

 

Net revenues for the six months ended June 30, 2018 were $3.9 million compared to $28.6 million for the comparable period in the prior year. This $24.7 million decrease, or approximately 86%, is primarily associated with the decline in revenues earned by the Infrastructure Segment as a result of supplier credit issues and a $3.7 million decrease in revenue resulting from the adoption of the new ASC 606 revenue recognition policy beginning in January 2018. For the six months ended June 30, 2018 and 2017, Indoor Positioning Analytics revenue was $2.1 million. Infrastructure revenue was $1.8 million for the six months ended June 30, 2018, and $26.4 million for the prior year period. We anticipate the Infrastructure Segment revenue (which will be part of Sysorex going forward) will start to recover in Q3 2018 and Q4 2018 as we rebuild our supplier relationships and head into the federal government busy season.

 

Cost of Revenues

 

Cost of revenues for the six months ended June 30, 2018 was $1.7 million compared to $21.9 million for the prior year period. This decrease of $20.2 million was primarily attributable to lower sales resulting from the capital constraints and supplier credit limitations and a $3.1 million decrease in prepaid maintenance amortization due to the adoption of the new ASC 606 revenue recognition policy beginning in January 2018. Indoor Positioning Analytics cost of revenues was $604,000 for the six months ended June 30, 2018 as compared to $723,000 for the prior period. Infrastructure cost of net revenues was $1.1 million for the six months ended June 30, 2018 and $21.2 million for the prior period.

 

The gross profit margin for the six months ended June 30, 2018 was 57% compared to 23% during the six months ended June 30, 2017. This increase in gross margin is primarily due to the decrease in lower margin storage and maintenance sales. Indoor Positioning Analytics gross margins for the six months ended June 30, 2018 and 2017 were 72% and 66%, respectively. Gross margins for the Infrastructure segment for the six months ended June 30, 2018 and 2017 were 40% and 20%, respectively.

 

Operating Expenses

 

Operating expenses for the six months ended June 30, 2018 were $14.3 million compared to $17.3 million for the prior year period. This decrease of $3 million is primarily attributable to a decrease in compensation and occupancy costs due to the downsizing of staff and office locations.

 

Loss from Operations

 

Loss from operations for the six months ended June 30, 2018 was $12.1 million compared to $10.6 million for the prior year period. This increase in loss of $1.5 million was primarily attributable due to the decrease in Infrastructure Segment revenues offset by the decrease in operating expenses.

 

Other Income/Expense

 

Total other income/expense for the six months ended June 30, 2018 and 2017 was ($42,000) and ($1,884,000), respectively. This decrease in loss of $1.8 million in 2018 was primarily attributable to a gain on the earn out of Integrio of $935,000 in 2018, a $600,000 gain on the sale of contracts in 2018 and higher interest expense in 2017 primarily due to a higher interest on the Company’s bank credit lines and debt discount.

 

  42  

 

 

Provision for Income Taxes

 

There was no provision for income taxes for the six months ended June 30, 2018 and 2017. Deferred tax assets resulting from such losses are fully reserved as of June 30, 2018 and 2017 since, at present, we have no history of taxable income and it is more likely than not that such assets will not be realized.

   

Net Loss Attributable to Non-Controlling Interest

 

Net loss attributable to non-controlling interest for the six months ended June 30, 2018 was $2,000 compared to ($9,000) for the six months ended June 30, 2017.

 

Net Loss Attributable To Common Stockholders of Inpixon

 

Net loss attributable to common stockholders of Inpixon for the six months ended June 30, 2018 was $12.1 million compared to $12.5 million for the prior year period. This decrease in loss of $400,000 was attributable to the changes described for the various reporting captions discussed above.

 

Non-GAAP Financial information

 

EBITDA

 

EBITDA is defined as net income (loss) before interest, provision for (benefit from) income taxes, and depreciation and amortization. Adjusted EBITDA is used by our management as the matrix in which it manages the business. It is defined as EBITDA plus adjustments for other income or expense items, non-recurring items and non-cash stock-based compensation.

 

Adjusted EBITDA for the three months ended June 30, 2018 was a loss of $4.1 million compared to a loss of $2.7 million for the prior year period. Adjusted EBITDA for the six months ended June 30, 2018 was a loss of $7.5 million compared to a loss of $6.0 million for the prior year period.

 

The following table presents a reconciliation of net income/loss attributable to stockholders of Inpixon, which is our GAAP operating performance measure, to Adjusted EBITDA for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2018     2017     2018     2017  
Net loss attributable to common stockholders   $ (5,858 )   $ (6,427 )   $ (12,101 )   $ (12,479 )
Adjustments:                                
Non-recurring one-time charges:                                
Acquisition transaction/financing costs     --       2       16       5  
Costs associated with public offering     --       --       81       --  
Gain on the settlement of obligations     (129 )     --       (262 )     --  
Gain on earnout     (358 )     --       (934 )     --  
Gain on the sale of Sysorex Arabia     --       --       (23 )     --  
Gain on the sale of contracts     (601 )     --       (601 )     --  
Change in the fair value of derivative liability     --       (152 )     (48 )     (208 )
Provision for doubtful accounts     105       --       221       --  
Severance     --       --       15       27  
Stock based compensation – acquisition costs     --       --       --       7  
Stock-based compensation - compensation and related benefits     571       711       857       986  
Interest expense     356       1,344       1,638       2,027  
Depreciation and amortization     1,850       1,816       3,685       3,601  
Adjusted EBITDA   $ (4,064 )   $ (2,706 )   $ (7,456 )   $ (6,034 )

 

  43  

 

 

We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:

 

  to review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;

 

  to compare our current operating results with corresponding periods and with the operating results of other companies in our industry;

 

  as a basis for allocating resources to various projects;

 

  as a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and

 

  to evaluate internally the performance of our personnel.

 

We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:

 

  We believe Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, and other non-operating expenses as well as depreciation and amortization which are non-cash expenses;

 

  We believe that it is useful to provide investors with a standard operating metric used by management to evaluate our operating performance; and

 

  We believe that the use of Adjusted EBITDA is helpful to compare our results to other companies.

 

Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:

 

  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

  

  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

  Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and

 

  Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure.

 

Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.

 

Proforma Non-GAAP Net Loss per Share

 

Basic and diluted net loss per share for the three months ended June 30, 2018 was ($1.08) compared to ($81.26) for the prior year period. Basic and diluted net loss per share for the six months ended June 30, 2018 was ($3.44) compared to ($164.74) for the prior year period. These decreases are attributable to the changes discussed in our results of operations. 

 

Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one time charges including acquisition costs, the costs associated with the public offering, severance costs and changes in the fair value of shares to be issued.

 

  44  

 

 

Proforma non-GAAP net loss per basic and diluted common share for the three months ended June 30, 2018 was ($0.34) compared to ($56.70) for the prior year period. Proforma non-GAAP net loss per basic and diluted common share for the six months ended June 30, 2018 was ($1.49) compared to ($117.43) for the prior year period.

 

The following table presents a reconciliation of net loss per basic and diluted share, which is our GAAP operating performance measure, to proforma non-GAAP net loss per share for the periods reflected:

 

(thousands, except per share data)   Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2018     2017     2018     2017  
Net loss attributable to common stockholders   $ (5,858 )   $ (6,427 )   $ (12,101 )   $ (12,479 )
Adjustments:                                
Non-recurring one-time charges:                                
Acquisition transaction/financing costs     --       2       16       5  
Costs associated with public offering     --       --       81       --  
Gain on the settlement of obligations     (129 )     --       (262 )     --  
Gain on earnout     (358 )     --       (934 )     --  
Gain on the sale of Sysorex Arabia     --       --       (23 )     --  
Gain on the sale of contracts     (601 )     --       (601 )     --  
Change in the fair value of derivative liability     --       (152 )     (48 )     (208 )
Provision for doubtful accounts     105       --       221       --  
Severance     --       --       15       27  
Stock based compensation – acquisition costs     --       --       --       7  
Stock-based compensation - compensation and related benefits     571       711       857       986  
Amortization of intangibles     1,323       1,382       2,645       2,767  
Proforma non-GAAP net loss   $ (4,947 )   $ (4,484 )   $ (10,134 )   $ (8,895 )
Proforma non-GAAP net loss per basic and diluted common share   $ (0.34 )   $ (56.70 )   $ (1.49 )   $ (117.43 )
Weighted average basic and diluted common shares outstanding     14,482,423       79,088       6,782,169       75,750  

 

We rely on proforma non-GAAP net loss per share, which is a non-GAAP financial measure and not a substitution for GAAP:

 

  to review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;

 

  to compare our current operating results with corresponding periods and with the operating results of other companies in our industry;

 

  45  

 

 

  as a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and

 

  to evaluate internally the performance of our personnel.

 

We have presented proforma non-GAAP net loss per share above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), and that by including this information we can provide investors with a more complete understanding of our business. Specifically, we present proforma non-GAAP net loss per share as supplemental disclosure because:

 

  we believe proforma non-GAAP net loss per share is a useful tool for investors to assess the operating performance of our business without the effect of non-cash items including stock based compensation, amortization of intangibles and one time charges including acquisition costs, costs associated with the public offering, severance costs and changes in the fair value of shares to be issued;

 

  we believe that it is useful to provide investors with a standard operating metric used by management to evaluate our operating performance; and

 

  we believe that the use of proforma non-GAAP net loss per share is helpful to compare our results to other companies.

 

Liquidity and Capital Resources as of June 30, 2018 Compared With June 30, 2017

 

The Company’s net cash flows used in operating, investing and financing activities for the six months ended June 30, 2018 and 2017 and certain balances as of the end of those periods are as follows (in thousands):

 

    For the Six Months Ended
June 30,
 
(thousands, except per share data)   2018     2017  
Net cash (used in) provided by operating activities   $ (17,929 )   $ 1,543  
Net cash used in investing activities     (578 )     (804 )
Net cash used in financing activities     26,707       (2,507 )
Effect of foreign exchange rate changes on cash     (5 )     (11 )
Net increase (decrease) in cash   $ 8,195     $ (1,779 )

 

    March 31, 2018     December 31,
2017
 
             
Cash and cash equivalents   $ 8,336     $ 141  
Working capital deficit   $ (10,220 )   $ (32,823 )

 

Operating Activities:

 

Net cash used in operating activities during the six months ended June 30, 2018 was $17.9 million. Net cash provided by operating activities during the six months ended June 30, 2017 was $1.5 million. Net cash used in operating activities during the six months ended June 30, 2018 consisted of the following (in thousands):

 

Net loss   $ (12,099 )
Non-cash income and expenses     4,882  
Net change in operating assets and liabilities     (10,712 )
Net cash used in operating activities   $ (17,929 )

 

  46  

 

  

The non-cash income and expenses of $4.9 million consisted primarily of (in thousands):

 

$ 1,040     Depreciation and amortization expense
  2,645     Amortization of intangibles primarily attributable to the Lilien, Shoom, AirPatrol, LightMiner and Integrio operations, which were acquired effective March 1, 2013, August 31, 2013, April 16, 2014, April 24, 2015 and November 21, 2016, respectively.
  857     Stock-based compensation expense attributable to warrants and options issued as part of Company operations and prior acquisitions
  417     Amortization of debt discount
  (262 )   Gain on the settlement of liabilities
  185     Other
$ 4,882     Total non-cash income and expenses

 

The net use of cash due to changes in operating assets and liabilities totaled ($10.9 million) and consisted primarily of the following (in thousands):

 

$ 741     Decrease in accounts receivable and other receivables
  (12 )   Increase in prepaid licenses and maintenance contracts
  (6,934 )   Decrease in accounts payable
  52   Increase in deferred revenue
  (4,534 )   Increase in accrued liabilities and other liabilities
  (25 )   Increase in inventory and other assets
$ (10,712 )   Net use of cash in the changes in operating assets and liabilities

 

Investing Activities:

 

Net cash used in investing activities during the six months ended June 30, 2018 was $578,000 compared to net cash used in investing activities of $804,000 for the prior year period. The net cash used in investing activities during the six months ended June 30, 2018 was comprised of approximately $39,000 for the purchase of property and equipment, $364,000 for the investment in capitalized software and $175,000 for and investment in technology.

 

Financing Activities:

 

Net cash provided by financing activities during the six months ended June 30, 2018 was approximately $26.7 million. Net cash used in financing activities for the six months ended June 30, 2017 was approximately $2.5 million. The net cash provided by financing activities during the six months ended June 30, 2018 was primarily comprised of $28.0 million from the issuance of stock and warrants, $1.1 million of net repayments to the bank facility and $113,000 of repayments of notes payable.

 

Liquidity and Capital Resources - General:

 

Our current capital resources and operating results as of June 30, 2018, as described in the preceding paragraphs, consist of:

 

  1) an overall working capital deficit of $10.2 million;

 

  2) cash of $8.3 million;

 

  3) the Payplant Credit Facility which we borrow against based on eligible assets with a maturity date of August 15, 2018 of which $0 is utilized; and

 

  4) net cash used in operating activities year-to-date of $17.9 million.

  

The breakdown of our overall working capital deficit is as follows (in thousands):

 

Working Capital   Assets     Liabilities     Net  
Cash and cash equivalents   $ 8,336     $ --     $ 8,336  
Accounts receivable, net / accounts payable     1,364       18,637       (17,273 )
Notes and other receivables     167       --       167  
Prepaid licenses and maintenance contracts / deferred revenue     12       109       (97 )
Short-term debt     --       1,815       (1,815 )
Other     1,896       1,434       462  
Total   $ 11,775     $ 21,995     $ (10,220 )

 

  47  

 

 

Accounts payable exceeds accounts receivable by $17.3 million. This deficit is expected to be funded by our anticipated cash flow from operations and financing activities, as described below, over the next twelve months.

 

Net cash used in operating activities during the six months ended June 30, 2018 of $17.9 million consists of net loss of $12.1 million less non-cash expenses of $4.9 million and net cash used in changes in operating assets and liabilities of ($10.7 million). We expect net cash from operations to increase during 2018 as a result of the following:

 

  1) We expect to increase revenue in the infrastructure segment as we resolve our supplier credit issues with the equity capital we raised in January through April 2018 and we expect the IPA segment business to grow and contribute more to operation expenses.
     
  2) Since our equity capital raises this year we have been working with our key distributors and suppliers to address our credit limitation issues. We have already settled some vendor litigations and started re-establishing working relationships with some of our suppliers. Revenues during the six months ended June 30, 2018 could have been higher but were negatively impacted by our inability to timely process orders due to past due amounts and credit limitations with various vendors.  We expect to relieve some of these issues as these credit relationships improve allowing us to build this revenue back in upcoming quarters.

 

The Company’s capital resources as of June 30, 2018, availability on the Payplant facility to finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received, funds from higher margin business line expansion and credit limitation improvements should be sufficient to fund planned operations during the year ending December 31, 2018 based on current projections. However, if the Company pursues acquisitions, other expansion plans or changes its business plan it may need to raise additional capital. The Company may raise the additional capital if needed through the issuance of equity, equity-linked or debt securities. In addition, Company has agreed to contribute up to $2 million of its capital resources to Sysorex in connection with the spin-off of the VAR business, which amount shall be reduced by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied by Inpixon from June 30, 2018 through the spin-off date, which will reduce the Company’s available capital resources; however, it is anticipated that the transaction, if completed upon the satisfaction or waiver of all conditions described in this report, will reduce operating expenses and eliminate substantially all of our trade debt. No assurance can be provided as to the timing of the completion of the spin-off or that all conditions to the spin-off will be met. Furthermore, until the distribution has occurred, the Company will have the right to terminate the distribution, even if all of the conditions are satisfied.

 

Going Concern and Management Plans

 

Our condensed consolidated financial statements as of June 30, 2018 have been prepared under the assumption that we will continue as a going concern for the next twelve months from the date the financial statements are issued. Footnote 1 to the notes to our financial statements as of June 30, 2018 include language referring to our recurring and continuing losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern, is dependent upon the ability to obtain additional equity or debt financing, attain further operating efficiency, reduce expenditures, and, ultimately, to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements as of June 30, 2018 do not include any adjustments that might result from the outcome of this uncertainty.

 

Liquidity and Capital Resources – Payplant

 

Pursuant to the terms of a Commercial Loan Purchase Agreement, dated as of August 14, 2017 (the “Purchase Agreement”), Gemcap Lending I, LLC (“GemCap”) sold and assigned to Payplant LLC, as agent for Payplant Alternatives Fund LLC (“Payplant” or “Lender”), all of its right, title and interest to that certain revolving Secured Promissory Note in an aggregate principal amount of up to $10,000,000 (the “GemCap Note”) issued in accordance with that certain Loan and Security Agreement, dated as of November 14, 2016 (the “GemCap Loan”), by and among Gemcap and the Company and its wholly-owned subsidiaries, Sysorex and SGS (together with Inpixon and Sysorex, the “Company”).

 

  48  

 

 

In connection with the purchase and assignment of the Gemcap Loan in accordance with the Purchase Agreement, the GemCap Loan was amended and restated in accordance with the terms and conditions of the Payplant Loan and Security Agreement, dated as of August 14, 2017, between the Company and Payplant (the “Loan Agreement”). The Loan Agreement allows the Company to request loans (each a “Loan” and collectively the “Loans”) from the Lender (in the manner provided therein) with a term of no greater than 360 days in amounts that are equivalent to 80% of the face value of purchase orders received (“Aggregate Loan Amount”). The Lender is not obligated to make the requested loan, however, if the Lender agrees to make the requested loan, before the loan is made, the Company must provide Lender with (i) one or more promissory notes (“Notes”) for the amount being loaned in favor of Lender, (ii) one or more guaranties executed in favor of Lender and (iii) other documents and evidence of the completion of such other matters as Lender may request. The principal amount of each Loan shall accrue interest at a 30 day rate of 2% (the “Interest Rate”), calculated per day on the basis of a year of 360 days and, when combined with all fees that may be characterized as interest will not exceed the maximum rate allowed by law Upon the occurrence and during the continuance of any event of default, interest shall accrue at a rate equal to the Interest Rate plus 0.42% per 30 days. All computations of interest shall be made on the basis of a year of 360 days. The promissory note is subject to the interest rates described in the Loan Agreement and is secured by the assets of the Company pursuant to the Loan Agreement and will be satisfied in accordance with the terms of the Client Agreement.

 

As of June 30, 2018, the principal amount outstanding under the Loan Agreement was $0.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

 

Recently Issued Accounting Standards 

 

For a discussion of recently issued accounting pronouncements, please see the Recent Accounting Standards section of Note 3 to our condensed consolidated financial statements, which is included in this Form 10-Q in Item 1.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with GAAP.

 

In connection with the preparation of this Form 10-Q, management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective.

 

Changes in Internal Controls

 

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations of the Effectiveness of Control

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

 

  49  

 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Embarcadero

 

As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 filed with the SEC on May 15, 2018 (the “March 2018 Form 10-Q”), on August 10, 2017, Embarcadero Technologies, Inc. (“Embarcadero”) and Idera, Inc. (“Idera”) filed a complaint in the U.S. Federal District Court for the Western District of Texas against SGS and Integrio Technologies, LLC (“Integrio”) for failure to pay for purchased software and services pursuant to certain reseller agreements. The complaint alleges that SGS entered into an agreement with Integrio to acquire certain assets and assume certain liabilities of Integrio and are therefore responsible for any amounts due. In the complaint, Embarcadero and Idera demand that SGS and Integrio pay $1,100,000 in damages. On April 26, 2018, the parties filed a stipulation of dismissal to dismiss this case with prejudice following entry into a settlement agreement pursuant to which the Company agreed to satisfy the outstanding payables. On April 28, 2018, the court rendered the final judgment to approve this stipulation.

 

Micro Focus

 

As previously reported in the March 2018 Form 10-Q, on August 11, 2017, Micro Focus (US) Inc. (“Micro Focus”), filed a complaint in the Circuit Court of Fairfax County, Virginia against SGS for failure to pay a debt settlement entered into on March 13, 2017 for a principal amount of $245,538.33 plus accrued interest. The complaint demands full payment of the principal amount of $245,538.33 plus accrued interest. On October 31, 2017, Micro Focus filed a motion for summary judgment against SGS. The Company consented to the court entering summary judgment in favor of Micro Focus in the amount of $245,538.33, with interest accruing at 10% per annum from June 13, 2017 until payment is completed and the parties are currently in settlement negotiations regarding a payment plan. On April 19, 2018, a settlement agreement with Microfocus for $200,000 which has been satisfied as of the date of this Form 10-Q.

 

Virtual Imaging

 

As previously reported in the March 2018 Form 10-Q, on December 28, 2017, Virtual Imaging, Inc. (“Virtual Imaging”) filed a complaint in the United States District Court, Eastern District of Virginia, against Sysorex and SGS. The complaint alleges that Virtual Imaging provided products to the defendants having an aggregate value of $3,938,390.28, of which $3,688,390.88 remains outstanding and overdue. Virtual Imaging has demanded compensation for the unpaid amount. The parties have agreed to a settlement payment schedule in connection with this matter.

 

Deque

 

On January 22, 2018, Deque Systems, Inc. filed a motion for entry of default judgment (the “Motion”) against SGS in the Circuit Court of Fairfax County, Virginia. The Motion alleges that SGS failed to respond to a complaint served on November 22, 2017. The Motion requests a default judgment in the amount of $336,000. A trial is currently scheduled for September 12, 2018, however, the parties are currently finalizing a settlement agreement.

 

AVT Technology Solutions

 

On April 6, 2018, AVT Technology Solutions, LLC, filed a complaint in the United States District Court Middle District of Florida Tamp Division against Inpixon and Sysorex alleging breach of contract, breach of corporate guaranty and unjust enrichment in connection with non-payment for goods received and requesting a judgment in an amount of not less than $9,152,698.71. The Company has filed a motion to dismiss this complaint and is currently finalizing a settlement agreement with AVT.

 

Consultant for Advisory Services

 

On March 19, 2018, Inpixon was notified by a consultant for advisory services (the “Consultant”) that it believes the Company is required to pay a minimum project fee in an amount equal to $1 million less certain amounts previously paid as a result of the Company’s completion of certain financing transactions. On April 18, 2018, the Consultant filed a demand for arbitration with the American Arbitration Association against Sysorex (formerly Inpixon USA). Sysorex intends to contest the case vigorously.

 

There are no other material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.

 

There are no proceedings in which any of the directors, officers or affiliates of the Company, or any registered or beneficial holder of more than 5% of the Company’s voting securities, is an adverse party or has a material interest adverse to that of the Company. 

 

In connection with the spin-off and in accordance with the terms and conditions of the Separation and Distribution Agreement, all liabilities resulting from the pending litigation matters described above and related to the Sysorex business will be assumed by Sysorex and Sysorex will indemnify the Company in connection with any such liabilities, except in connection with the arbitration matter with the Consultant described above, the costs and liabilities of which are anticipated to be shared by Sysorex and the Company following the spin-off.

 

  50  

 

 

Item 1A. Risk Factors

 

We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by these risks. Except as disclosed below, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Risks Related to Our Consolidated Operations

 

We have completed five acquisitions since 2013, including Lilien, Shoom, AirPatrol, LightMiner and Integrio, and plan to pursue a spin-off of our VAR business which includes the businesses acquired from Lilien and Integrio, which may make it difficult for potential investors to evaluate our future consolidated business. Furthermore, due to the risks and uncertainties related to the acquisition of new businesses, any such acquisition does not guarantee that we will be able to attain profitability.

 

Between March 2013 and November 2016, we completed five acquisitions and are currently contemplating a divesture of our VAR business. Our limited combined operating history makes it difficult for potential investors to evaluate our business or prospective operations or the merits of an investment in our securities. We are subject to the risks inherent in the financing, expenditures, complications and delays characteristic of a newly combined business. In addition, while the former affiliates of four of these businesses have indemnified the Company from any undisclosed liabilities, there may not be adequate resources to cover such indemnity. Furthermore, there are risks that the vendors, suppliers and customers of these acquired entities may not renew their relationships for which there is no indemnification. Accordingly, our business and success faces risks from uncertainties inherent to developing companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.

 

Risks Related to the Spin-Off

 

The proposed spin-off of our VAR business may not be completed on the currently contemplated timeline or terms, or at all, may be more expensive than anticipated and may not achieve the intended benefits.

 

The proposed spin-off of our VAR business via our wholly-owned subsidiary, Sysorex, is subject to final board approval of the terms of such transaction, SEC clearance, market and certain other conditions, and there can be no assurance as to whether or when such a transaction will occur. Unforeseen developments, including possible delays in obtaining various tax and regulatory approvals or clearances, could delay or prevent the proposed separation or cause the proposed separation to occur on terms or conditions that are less favorable and/or different than expected. We expect the process of completing such transaction will be time-consuming and involve significant costs and expenses, which may be significantly higher than what we currently anticipate, may increase in the event that the timing of the transaction is delayed and may not yield a benefit if the transaction is not completed. Executing the proposed transaction, as well as performing our obligations under any transition services agreement entered into with Sysorex for a period of time after the separation, will require significant time and attention from our senior management and employees, which could adversely affect our business, financial results and results of operations.

 

Separating the businesses may also result in dis-synergies post-separation that could negatively impact the balance sheet, income statement and cash flows of each business. Moreover, we may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation, which could materially and adversely affect our business, financial condition and results of operations and lead to increased volatility in the price of our Common Stock.

 

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, the Company, our stockholders, Sysorex and Sysorex stockholders could be subject to significant tax liabilities, and, in certain circumstances, the Company could be required to indemnify Sysorex for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

 

We believe that the spin-off may qualify as a transaction that is generally tax-free to our stockholders for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). We anticipate that a corporate level gain is likely to be triggered as a result of both pre- and post-spin-off financings and potentially as a result of certain internal restructurings contemplated in anticipation of the spin-off, but this gain should be largely or entirely offset by existing net operating losses. There are no assurances, however, that the Internal Revenue Service will not challenge such conclusion or that a court would sustain such a challenge.

 

If the spin-off, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, we and our stockholders could be subject to significant tax liabilities, and, in certain circumstances, the Company could be required to indemnify Sysorex for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

 

  51  

 

 

If the spin-off, together with certain related transactions, fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, in general, the Company would recognize taxable gain as if it had sold the Company’s Common Stock in a taxable sale for its fair market value, and Inpixon stockholders who receive Sysorex shares in the spin-off would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

 

Under a tax matters agreement we expect to enter into with SGS in connection with the spin-off, we may be required to indemnify Sysorex for any taxes resulting from the spin-off (and any related costs and other damages) to the extent such amounts resulted from (i) actions or failures to act by us or (ii) any of the representations or undertakings made by us and contained in any of the spin-off -related agreements being incorrect or violated. Any such indemnity obligations could be material.

 

The Company may not be able to preserve the tax-free treatment if it engages in desirable strategic or capital-raising transactions following the separation.

 

Under current law, a spin-off can be rendered taxable to the parent corporation and its stockholders as a result of certain post-spin-off acquisitions of shares or assets of the spun-off corporation. Therefore if we consummate certain strategic or capital raising transactions following the spin-off it is possible that we may not be able to preserve the tax-free treatment of the separation and distribution. For example, if we (i) enter into any transaction pursuant to which all or a portion of the shares of our Common Stock would be acquired, whether by merger or otherwise, (ii) issue equity securities beyond certain thresholds, (iii) repurchase shares of our Common Stock other than in certain open-market transactions, or (iv) cease to actively conduct certain of our businesses, the separation and distribution may fail to qualify for tax-free treatment.

 

Risks Related to Our Securities

 

Our Common Stock may be delisted from the Nasdaq Capital Market if we cannot satisfy Nasdaq’s continued listing requirements in the future.

 

On May 17, 2018, we received a deficiency letter from Nasdaq indicating that, based on our closing bid price for the last 30 consecutive business days, we do not comply with the minimum bid price requirement of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).

 

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until November 13, 2018, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our Common Stock must be at least $1.00 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that our Common Stock will be subject to delisting.

 

The notice does not result in the immediate delisting of the Company’s Common Stock from the Nasdaq Capital Market. The Company intends to monitor the closing bid price of the Company’s Common Stock and consider its available options in the event that the closing bid price of the Company’s Common Stock remains below $1.00 per share. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements. As of the date of this report we have not regained compliance. There can be no assurance that we would pursue a reverse stock split or be able to obtain the approvals necessary to effect a reverse stock split. In addition, there can be no assurance that, following any reverse stock split, the per share trading price of our Common Stock would remain above $1.00 per share or that we would be able to continue to meet other listing requirements. If our Common Stock is delisted, market liquidity for our Common Stock could be severely affected and our stockholders’ ability to sell their shares of our Common Stock could be limited. A delisting of our Common Stock from Nasdaq would negatively affect the value of our Common Stock. A delisting of our Common Stock could also adversely affect our ability to obtain financing for our operations and could result in the loss of confidence in our company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

a) Sales of Unregistered Securities

 

None.

 

  52  

 

 

c) Issuer Purchases of Equity Securities

 

None.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosure

 

Not applicable.

 

Item 5. Other Information

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 1.01 – Entry into a Material Definitive Agreement” of Form 8-K.

 

Entry into Agreements Related to the Spin-off of Sysorex, Inc.

 

On August 7, 2018, Inpixon (the “Company”) entered into a Separation and Distribution Agreement (the “Separation Agreement”) with its wholly-owned subsidiary, Sysorex, Inc. (“Sysorex”) governing the proposed separation (the “Spin-off”) of the VAR business from its IPA business. The Spin-off will also governed by a Tax Matters Agreement, an Employee Matters Agreement and a Transition Services Agreement, each between the Company and Sysorex to be entered into prior to completion of the Spin-off (collectively with the Separation Agreement, the “Spin-off Documents”).

 

The Separation Agreement

 

The Separation Agreement incorporates a step plan which provides for the transfer of entities, assets and liabilities at the effective time on the date of the Spin-off pursuant to which (i) the Company will contribute to Sysorex all of the outstanding equity interests of the Sysorex subsidiary entities, (ii) the Company will contribute to Sysorex $2 million in cash (which amount shall be reduced by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied by the Company from June 30, 2018 through the date of the Spin-off), (iii) the Company will transfer certain assets to Sysorex and Sysorex will assume certain of the Company’s liabilities and (iv) Sysorex will contribute to the Company certain assets and liabilities related to the Company’s indoor positioning analytics business.

 

One share of Sysorex common stock for every three shares of the Company’s common stock outstanding or issuable upon complete conversion of the preferred stock or exercise of certain warrants outstanding as of the record date will be distributed as a stock dividend to holders of the Company’s common stock, preferred stock and certain warrants of record as of August 21, 2018 (the “Record Date”). Holders of stock options and other awards under the Company’s equity plans will participate in the Spin-off in accordance with the Employee Matters Agreement (described below) and the terms of such securities. At the election of the Company, fractional shares of Sysorex common stock that you would have received after application of the above ratio will be either rounded up to the nearest whole share or, assuming a trading market exists for Sysorex’s common stock, the fractional shares will be aggregated into whole shares, the whole shares will be sold in the open market at prevailing market prices and the aggregate net cash proceeds of the sales will be distributed pro rata to each holder who otherwise would have been entitled to receive a fractional share in the distribution.

 

The Separation Agreement provides for the transfer by the Company to Sysorex of assets relating to the VAR business and the assumption by Sysorex of liabilities relating to the VAR business at the effective time of the Spin-off.

 

Conditions to the Spin-off

 

The obligation of the Company to complete the Spin-off is conditioned upon the fulfillment at or prior to the Spin-off of the following conditions:

 

  the transfer of assets and liabilities to Sysorex and the Company, respectively, in accordance with the Separation Agreement will have been completed;

 

  an independent appraisal firm acceptable to the Company shall have delivered one or more opinions to the Company’s board of directors confirming the solvency and financial viability of the Company before the completion of the Spin-off and each of the Company and Sysorex after completion of the Spin-off, and such opinions shall have been acceptable to the Company in form and substance and such opinions shall not have been withdrawn or rescinded;

 

  the registration statement of which the information statement forms a part will be declared effective, no stop order suspending the effectiveness of the registration statement will be in effect, no proceedings for such purpose will be pending before or threatened by the SEC and the information statement will have been mailed to the Company’s stockholders;

 

  the Spin-off Documents will have been duly executed and delivered by the parties;

 

  53  

 

 

  all actions and filings necessary or appropriate under applicable U.S. federal, state or other securities laws will have been taken and, where applicable, will have become effective or been accepted by the applicable governmental authority;

 

  no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Spin-off will be in effect;
     
  no other event or development will have occurred or exist that, in the judgment of the Company’s board of directors, in its sole discretion, makes it inadvisable to effect the Spin-off.

 

Mutual Releases and Indemnification

 

The Separation Agreement provides that Sysorex and its affiliates will release and discharge the Company and its affiliates from all liabilities assumed by Sysorex as part of the Spin-off, from all acts and events occurring or failing to occur, and all conditions existing, on or before the distribution date relating to Sysorex’s business, and from all liabilities existing or arising in connection with the implementation of the Spin-off, except as expressly set forth in the Separation Agreement. The Company and its affiliates will release and discharge Sysorex and its affiliates from all liabilities retained by the Company and its affiliates as part of the Spin-off and from all liabilities existing or arising in connection with the implementation of the Spin-off, except as expressly set forth in the Separation Agreement.

 

These releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the Spin-off, which agreements include, but are not limited to, the Spin-off Documents.

 

Expenses

 

Except as expressly set forth in the Spin-off Documents, the Company will be responsible for payment of all out-of-pocket fees, costs and expenses incurred in connection with the Spin-off prior to the effective time of the Spin-off, including costs and expenses relating to legal and tax counsel, financial advisors and accounting advisory work related to the Spin-off. Except as expressly set forth in the Spin-off Documents, or as otherwise agreed in writing by the Company and Sysorex, all such fees, costs and expenses incurred in connection with the Spin-off after the effective time of the Spin-off will be paid by the party incurring such fee, cost or expense.

 

Other Matters

 

Other matters governed by the Separation Agreement include access to financial and other information, confidentiality, access to and provision of witnesses and records and treatment of outstanding guarantees.

 

Termination

 

The Separation Agreement provides that it may be terminated, and the Spin-off may be abandoned, at any time prior to the effective time of the Spin-off in the sole discretion of the Company without the approval of any person, including the stockholders of the Company or Sysorex. In the event of a termination of the Separation Agreement, no party, nor any of its directors or officers, will have any liability of any kind to the other party or any other person. After the effective time of the Spin-off, the Separation Agreement may not be terminated except by an agreement in writing signed by both the Company and Sysorex.

 

The Tax Matters Agreement

 

Prior to the distribution, the Company and Sysorex will enter into a Tax Matters Agreement which sets out the respective rights, responsibilities, and obligations of the Company and Sysorex with respect to taxes (including taxes arising in the ordinary course of business and taxes incurred as a result of the Spin-off), tax attributes, tax returns, tax contests and certain other related tax matters.

 

The Tax Matters Agreement allocates responsibility for the preparation and filing of certain tax returns (and the payment of taxes reflected thereon), including the Company’s consolidated federal income tax return, tax returns associated with both the indoor positioning analytics business and the VAR business, and provides for certain reimbursements by the parties.

 

Under the Tax Matters Agreement, the Company will generally be liable for its own taxes and taxes of all of its subsidiaries (other than Sysorex and any Sysorex subsidiary, the taxes for which Sysorex shall be liable) for all tax periods (or portion thereof) ending on the date of the completion of the Spin-off. Sysorex, however, will be responsible for its taxes and for taxes of its subsidiaries, for taxes attributable to the VAR business (taking into account the availability of net operating losses to offset taxable income from the Spin-off and such related transactions). Sysorex will bear liability for any transfer taxes incurred in the Spin-off and certain related transactions.

 

  54  

 

 

Employee Matters Agreement

 

Prior to the distribution, the Company and Sysorex will enter into an Employee Matters Agreement to allocate liabilities and responsibilities relating to employment matters, employee compensation and benefits arrangements and other related matters in connection with the Spin-off.

 

The Employee Matters Agreement provides that, unless otherwise specified, the Company will be responsible for liabilities associated with employees who will be employed by the Company following the Spin-off, and former employees of the Company whose liabilities are not allocated to Sysorex (collectively, the “Inpixon allocated employees”), and Sysorex will be responsible for liabilities associated with employees who will be employed by Sysorex following the Spin-off, former employees of the Company whose last employment was with the VAR business and certain specified former employees (collectively, the “Sysorex allocated employees”).

 

Sysorex allocated employees will be eligible to participate in Sysorex benefit plans in accordance with the terms and conditions of the Sysorex plans as in effect from time to time. Since many of the existing welfare benefit arrangements are offered by Sysorex, the Company will agree to offer to employees that it will retain welfare benefits that are substantially the same as those provided by Sysorex to Inpixon allocated employees immediately prior to the distribution. The Company also provides its employees with a 401(k) retirement plan. Sysorex intends to provide its employees with a 401(k) retirement plan, although the terms of any such plan may vary from the plan provided by the Company. Generally and subject to certain exceptions, the Company will credit each Inpixon allocated employee with his or her service prior to the distribution for all purposes under the Company’s benefit plans to the same extent such service was recognized by Sysorex for similar purposes and so long as such crediting does not result in a duplication of benefits.

 

The Employee Matters Agreement will also include provisions relating to cooperation between the two companies on matters relating to employees and employee benefits and other administrative provisions.

 

Transition Services Agreement

 

Prior to the distribution, the Company and Sysorex will enter into a Transition Services Agreement which sets out the respective rights, responsibilities, and obligations of each party with respect to certain support services to be provided by each other to one another after the Spin-off, as may be necessary to ensure the orderly transition under the Separation Agreement. The Company will provide various hosting and support services to Sysorex for up to 30 users at a price of $3,680 per month. These services include user authentication and permissions control through Active Directory, access to email and office productivity tools through an Office365 Enterprise 3 plan, hosting and access to Quotewerks, Great Plains and Unanet servers through a Remote Desktop Protocol gateway. The Company will also provide helpdesk support including remote support tools, system imaging and management, antivirus tools and basic network support. The pricing includes monthly subscription based licenses.

 

Any services provided beyond the services covered will be billed at a negotiated rate, which will not be less favorable than the rate the Company or Sysorex would have received for such service from a third party.

 

Under the Transition Services Agreement, the Company and Sysorex will agree to promptly take all steps to internalize the services being provided by acquiring their own staff or outsourcing such services to third parties.

 

The Transition Services Agreement will be effective upon the Spin-Off and will continue for a minimum term of one year, provided that the Company or Sysorex may terminate the Transition Services Agreement with respect to any or all services provided thereunder at any time upon 30 days prior written notice to the other party. Additionally, either party may renew or extend the term of the Transition Services Agreement with respect to the provision of any service which have not been previously terminated.

 

The descriptions of the Separation Agreement, the Tax Matters Agreement, the Employee Matters Agreement and the Transition Services Agreement contained in this Form 10-Q does not purport to be complete and is qualified in its entirety by reference to these agreements, which are filed as Exhibits 2.1, 10.10, 10.11 and 10.12 to this Form 10-Q and are incorporated herein by reference.

 

Item 6. Exhibits

 

See the Exhibit Index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

  55  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 13, 2018 INPIXON
   
  By: /s/ Nadir Ali
   

Nadir Ali

Chief Executive Officer

(Principal Executive Officer)

     
  By: /s/ Wendy Loundermon
    Wendy Loundermon
   

VP of Finance

(Principal Financial Officer)

 

  56  

 

EXHIBIT INDEX

 

Exhibit
Number
  Exhibit Description   Form   File No.   Exhibit   Filing Date   Filed
Herewith
2.1   Separation and Distribution Agreement, dated as of August 7, 2018, by and between the Company and Sysorex, Inc.                   X
                         
4.1   Form of Certificate of Designation of Preferences, Rights and Limitations of Series 4 Convertible Preferred Stock   8-K   001-36404    3.1    April 24, 2018    
                         
4.2   Form of Warrant   8-K   001-36404   4.1   April 24, 2018    
                         
4.3   Amendment No. 1 to the 2018 Employee Stock Incentive Plan   8-K   001-36404   4.1   May 18, 2018    
                         
10.1   Form of Securities Purchase Agreement   8-K   001-36404   10.1   April 24, 2018    
                         
10.2   Disclosure Schedules to Form of Securities Purchase Agreement    10-Q   001-36404   10.11   May 15, 2018    
                         
10.3   Placement Agency Agreement, dated April 20, 2018, by and between Inpixon and ROTH Capital Partners, LLC   8-K   001-36404   10.2   April 24, 2018    
                         
10.4   Form of Lock-Up Agreement   8-K   001-36404   10.3   April 24, 2018    
                         
10.5   Amended and Restated Employment Agreement by and between the Company and Nadir Ali   10-Q   001-36404   10.14   May 15, 2018    
                         
10.6   Form of Incentive Stock Option Agreement   8-K   001-36404   10.1   May 18, 2018    
                         
10.7   Form of Non-Qualified Stock Option Agreement   8-K   001-36404   10.2   May 18, 2018    
                         
10.8   Standstill Agreement   8-K   001-36404   10.1   May 25, 2018    
                         
10.9   Amended Compensation Terms for Soumya Das   X
         
10.10   Form of Employee Matters Agreement to be entered into by and between the Company and Sysorex, Inc.   X
         
10.11   Form of Tax Matters Agreement to be entered into by and between the Company and Sysorex, Inc.   X
         

10.12

  Form of Transition Services Agreement to be entered into by and between the Company and Sysorex, Inc.   X

         

31.1   Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018   X
         
31.2   Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018   X
         
32.1#   Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X
         
101.INS   XBRL Instant Document   X