We are offering up
to 10,415 units (the “Units”), with each Unit consisting of one share of our newly designated Series 4 convertible
preferred stock (the “Series 4 Preferred”) with a stated value of $1,000 and convertible into a number of shares of
our common stock equal to $1,000 divided by $0.46 and (ii) one warrant to purchase common stock in an aggregate amount equal to
the number of shares of common stock into which the share of Series 4 Preferred is initially convertible (each a “Warrant”,
and collectively, the “Warrants”).
The Warrants will have
an exercise price per whole share of $0.67, will be exercisable upon issuance and will expire five years from the date of issuance.
The shares of Series
4 Preferred do not generally having any voting rights but are convertible into shares of common stock. The shares of Series 4 Preferred
and Warrants that are part of the Units are immediately separable and will be issued separately in this offering.
We are issuing in this
offering up to an aggregate of 10,415 shares of our Series 4 Preferred and 10,415 Warrants to purchase shares of common stock as
components of the Units. The Series 4 Preferred included in the Units will be convertible into an aggregate of up to approximately
22,641,305 shares of common stock (subject to rounding adjustments) and the Warrants included in the Units will initially be exercisable
for up to 22,641,305 shares of common stock (subject to rounding adjustments).
The Units, the Series
4 Preferred, the Warrants and the common stock underlying each such security are being registered pursuant to the registration
statement of which this prospectus supplement is a part. This offering is being made on a best efforts basis and there is no minimum
amount of proceeds that is a condition of closing.
For a more detailed
description of the Units, see the section entitled “Description of the Securities We Are Offering” beginning on page
S-45. We refer to the Units, the Series 4 Preferred, the Warrants issued hereunder and the shares of common stock issuable upon
conversion of the Series 4 Preferred and upon exercise of the Warrants issued hereunder, collectively, as the securities.
Our common stock is
listed on the Nasdaq Capital Market under the symbol “INPX.” None of the Units, the Series 4 Preferred or the Warrants
will be listed on any national securities exchange or other trading market. Without an active trading market, the liquidity of
these securities will be limited.
In addition, this prospectus
supplement relates to the registration of up to an additional 34,627,066 shares of our common stock (the “Anti-Dilution Shares”),
issuable upon the exercise of those certain warrants, at the applicable floor price of $0.634, issued by the Company on February
20, 2018 (the “February 2018 Warrants”) as a result of the anti-dilution protection contained therein to the holders
of the February 2018 Warrants (the “February 2018 Warrant Holders”). This offering constitutes a dilutive issuance
under the February 2018 Warrants and as a result the exercise price of the February 2018 Warrants shall be reduced to $0.634 (subject
to adjustment for reverse and forward stock splits, recapitalizations and similar transactions) and result in an increase in the
number of shares of common stock underlying the February 2018 Warrants from 7,660,000 to up to 42,287,066.
The Company has previously
disclosed its intention to sell or divest the infrastructure of the value added reseller (“VAR”) part of its business
from the indoor positioning analytics (“IPA”) business. This separation will be accomplished through a spin-off in
which the Company intends to contribute its VAR business to Inpixon USA, Inpixon USA will contribute any portion of the IPA business
to the Company and then the Company will distribute its entire interest in Inpixon USA to its stockholders and certain warrant
holders. While the revenues from the VAR business account for approximately 93% of our total revenues, the Company believes the
separation of the two entities will allow the Company to invest its capital and resources towards enhancing and developing its
IPA technology in order to deliver faster innovations and grow its customer base. In addition, the spin-off of the VAR business
segment will significantly reduce our operating expenses and eliminate substantially all of our trade debt allowing us to
solely focus on the IPA business for which we have historically recognized lower revenues, but which we believe has greater
growth potential and substantially better gross margins than the VAR business.
On April 19, 2018,
the closing price of our common stock as reported by the Nasdaq Capital Market was $0.61 per share.
We have retained Roth
Capital Partners, LLC to act as exclusive placement agent in connection with the offering to use its “reasonable best-efforts”
to solicit offers to purchase the securities. The placement agent is not purchasing or selling any securities offered pursuant
to this prospectus supplement or the accompanying prospectus. The placement agent may engage one or more brokers, dealers, or sub-agents
in connection with the offering of the securities. See “Plan of Distribution” beginning on page S-48 of this prospectus
supplement for more information regarding these arrangements.
We anticipate delivery
of the Units will be made on or about April 24, 2018, subject to customary closing conditions.
RISK FACTORS
We are subject
to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment
in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock,
you should carefully consider the risks described below, together with the other information included in this prospectus supplement.
If any of the events
described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not
presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition
could be materially adversely affected. In that event, the trading price of our common stock could decline, and investors in our
common stock may lose all or part of their investment in our shares. The risks discussed below include forward-looking statements,
and our actual results may differ substantially from those discussed in these forward-looking statements.
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. These risks are described below under the risk factor titled
“Any
future acquisitions that we may make could disrupt our business, cause dilution to our stockholders and harm our business, financial
condition or operating results.”
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.
We may not be able to successfully
integrate the business and operations of entities that we have acquired or may acquire in the future into our ongoing business
operations, which may result in our inability to fully realize the intended benefits of these acquisitions, or may disrupt our
current operations, which could have a material adverse effect on our business, financial position and/or results of operations.
We continue to integrate
the operations of AirPatrol and LightMiner, and Integrio into Inpixon Federal (effective January 1, 2016, Shoom and AirPatrol were
merged into Lilien, which changed its name to Sysorex USA and then to Inpixon USA on March 1, 2017) and this process involves complex
operational, technological and personnel-related challenges, which are time-consuming and expensive and may disrupt our ongoing
business operations. Furthermore, integration involves a number of risks, including, but not limited to:
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difficulties or complications in combining the companies’ operations;
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differences in controls, procedures and policies, regulatory standards and business cultures among the combined companies;
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the diversion of management’s attention from our ongoing core business operations;
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increased exposure to certain governmental regulations and compliance requirements;
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the potential loss of key personnel;
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the potential loss of key customers or suppliers who choose not to do business with the combined business;
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difficulties or delays in consolidating the acquired companies’ technology platforms, including implementing systems designed to continue to ensure that the Company maintains effective disclosure controls and procedures and internal control over financial reporting for the combined company and enable the Company to continue to comply with U.S. GAAP and applicable U.S. securities laws and regulations;
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unanticipated costs and other assumed contingent liabilities;
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difficulty comparing financial reports due to differing financial and/or internal reporting systems;
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making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; and/or
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possible tax costs or inefficiencies associated with integrating the operations of the combined company.
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These factors could
cause us to not fully realize the anticipated financial and/or strategic benefits of the acquisitions and the recent reorganization,
which could have a material adverse effect on our business, financial condition and/or results of operations.
Even if we are able
to successfully operate the businesses of AirPatrol and LightMiner and, to the extent that a sale or divesture of Inpixon USA is
not consummated, Integrio within Inpixon Federal, we may not be able to realize the revenue and other synergies and growth that
we anticipated from these acquisitions in the time frame that we currently expect, and the costs of achieving these benefits may
be higher than what we currently expect, because of a number of risks, including, but not limited to:
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the possibility that the acquisition may not further our business strategy as we expected;
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the possibility that we may not be able to expand the reach and customer base for the acquired companies current and future products as expected; and
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the possibility that the carrying amounts of goodwill and other purchased intangible assets may not be recoverable.
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As a result of these
risks, the acquisitions and integration may not contribute to our earnings as expected, we may not achieve expected revenue synergies
or our return on invested capital targets when expected, or at all, and we may not achieve the other anticipated strategic and
financial benefits of the acquisitions and the reorganization.
The risks arising with respect to
the historic business and operations of our recent acquisition targets may be different from what we anticipate, which could significantly
increase the costs and decrease the benefits of the acquisition and materially and adversely affect our operations going forward.
Although we performed
significant financial, legal, technological and business due diligence with respect to our recent acquisition targets, we may not
have appreciated, understood or fully anticipated the extent of the risks associated with the acquisitions. We have secured indemnification
for certain matters from the former equity holders of Lilien, Shoom, AirPatrol and Integrio in order to mitigate the consequences
of breaches of representations, warranties and covenants under the merger agreements and the risks associated with historic operations,
including those with respect to compliance with laws, accuracy of financial statements, financial reporting controls and procedures,
tax matters and undisclosed liabilities, and certain matters known to us. We believe that the indemnification provisions of the
merger agreements, together with any applicable holdback escrows (in the case of AirPatrol, Shoom and LightMiner) and insurance
policies that we have in place will limit the economic consequences of the issues we have identified in our due diligence to acceptable
levels. Notwithstanding our exercise of due diligence and risk mitigation strategies, the risks of the acquisition and the costs
associated with these risks may be greater than we anticipate. We may not be able to contain or control the costs associated with
unanticipated risks or liabilities, which could materially and adversely affect our business, liquidity, capital resources or results
of operations.
A significant portion of the purchase
price for our acquisition of Lilien, Shoom, AirPatrol, LightMiner and Integrio is allocated to goodwill and intangible assets that
are subject to periodic impairment evaluations. An impairment loss could have a material adverse impact on our financial condition
and results of operations.
The Company acquired
$4.5 million of goodwill and $5.4 million of intangible assets relating to our acquisition of Lilien, $1.2 million of goodwill
and $2.8 million of intangible assets relating to our acquisition of Shoom, $7.4 million of goodwill and $13.3 million of intangible
assets relating to our acquisition of AirPatrol, $3.5 million of intangible assets relating to our acquisition of LightMiner and
$3.3 million of goodwill and $4.9 million of intangible assets relating to our acquisition of Integrio. As required by current
accounting standards, we review intangible assets for impairment either annually or whenever changes in circumstances indicate
that the carrying value may not be recoverable. The risk of impairment to goodwill is higher during the early years following an
acquisition. This is because the fair values of these assets align very closely with what we paid to acquire the reporting units
to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value
(typically referred to as “headroom”) is smaller at the time of acquisition. Until this headroom grows over time, due
to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can
trigger impairment charges. When impairment charges are triggered, they tend to be material due to the size of the assets involved.
Our business would be adversely affected, and impairment of goodwill could be triggered, if any of the following were to occur:
higher attrition rates than planned as a result of the competitive environment or our inability to provide products and services
that are competitive in the marketplace, lower-than-planned adoption rates by customers, higher-than-expected expense levels to
provide services to clients, and changes in our business model that may impact one or more of these variables. During the year
ended December 31, 2016, we recorded an impairment charge for goodwill in the amount of $7.4 million. During the year ended December
31, 2017, we recorded an impairment charge for goodwill of $8.4 million.
Our acquisitions may expose us to
additional liabilities, and insurance and indemnification coverage may not fully protect us from these liabilities.
Upon completion of
acquisitions, we may be exposed to unknown or contingent liabilities associated with the acquired entity, and if these liabilities
exceed our estimates, our results of operations and financial condition may be materially and negatively affected.
Our ability to successfully execute
our business plan may require additional debt or equity financing, which may otherwise not be available on reasonable terms or
at all.
According to our business
plan we may need additional debt or equity financing. Future financings through equity offerings by us will be dilutive to existing
stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable to new investors
than our current investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or
other derivative securities. We may also issue incentive awards under employee equity incentive plans, which may have additional
dilutive effects. We may also be required to recognize non-cash expenses in connection with certain securities we may issue in
the future such as convertible notes and warrants, which would adversely impact our financial condition and results of operations.
Our ability to obtain needed financing may be impaired by factors, including the condition of the economy and capital markets,
both generally and specifically in our industry, and the fact that we are not profitable, which could impact the availability or
cost of future financing. If the amount of capital we are able to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs, we may need to reduce our operations by, for example, selling certain
assets or business segments.
Failure to manage or protect growth
may be detrimental to our business because our infrastructure may not be adequate for expansion.
Our recent acquisitions
require a substantial expansion of the Company’s systems, workforce and facilities and we anticipate that we may need to
consummate additional acquisitions in connection with the expansion of our indoor positioning business. We may fail to adequately
manage our anticipated future growth. The substantial growth in our operations as a result of our acquisitions has, and is expected
to continue to, place a significant strain on our administrative, financial and operational resources, and increase demands on
our management and on our operational and administrative systems, controls and other resources. There can be no assurance that
our systems, procedures and controls will be adequate to support our operations as they expand. We cannot assure you that our existing
personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to
successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement
new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close
coordination among our staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able
to effectively integrate them into our existing staff and systems.
To the extent we acquire
other businesses, we will also need to integrate and assimilate new operations, technologies and personnel. The integration of
new personnel will continue to result in some disruption to ongoing operations. The ability to effectively manage growth in a rapidly
evolving market requires effective planning and management processes. We will need to continue to improve operational, financial
and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force.
There can be no assurance that the Company would be able to accomplish such an expansion on a timely basis. If the Company is unable
to effect any required expansion and is unable to perform its contracts on a timely and satisfactory basis, its reputation and
eligibility to secure additional contracts in the future could be damaged. The failure to perform could also result in contract
terminations and significant liability. Any such result would adversely affect the Company’s business and financial condition.
Our financial status raises doubt
about our ability to continue as a going concern.
Our cash and cash equivalents
were $141,000 at December 31, 2017, compared with $1.8 million at December 31, 2016. We continue to incur significant operating
losses, and management expects that significant on-going operating expenditures will be necessary to successfully implement our
business plan and develop and market our products. These circumstances raise substantial doubt about our ability to continue as
a going concern within one year after the date that the financial statements incorporated by reference herein from our Annual Report
on Form 10-K for the year ended December 31, 2017 are issued. Implementation of our plans and our ability to continue as a going
concern will depend upon our ability to market our technology and raise additional capital.
Management believes
that we have access to capital resources through possible public or private equity offerings, exchange offers, debt financings,
corporate collaborations or other means. In addition, we continue to explore opportunities to strategically monetize our technology
and our services, although there can be no assurance that we will be successful with such plans. We have historically been able
to raise capital through equity offerings, although no assurance can be provided that we will continue to be successful in the
future. If we are unable to raise sufficient capital through 2018 or otherwise, we will not be able to pay our obligations as they
become due.
We previously identified a material
weakness in our internal control over financial reporting, and if we are unable to achieve and maintain effective internal control
over financial reporting, this could have a material adverse effect on our business.
We produce our consolidated
financial statements in accordance with the requirements of accounting principles generally accepted in the United States, or U.S.
GAAP. Effective internal controls are necessary for us to provide reliable financial reports to help mitigate the risk of fraud
and to operate as a publicly traded company. We, in consultation with our accounting personnel, identified a material weakness
in our internal controls over financial reporting in connection with the audit of our financial statements for the year ended December
31, 2017. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements
will not be prevented or detected on a timely basis.
We identified a
material weakness in our internal control over financial reporting because we have not devoted substantial time to evaluating
our process for implementing controls and identifying the impact to our consolidated financial statements of adopting ASU No.
2014-09, Revenue from Contracts with Customers as a result of limited personnel and capital resources available to devote to
these efforts. We are required to adopt ASU No. 2014-09 for periods beginning as of January 1, 2018, which provides for a
single five-step model to be applied to all revenue contracts with customers, and also requires substantial additional
financial statement disclosures. As of the date of this filing the Company has not completed its ASC 606 implementation and
as a result, cannot disclose the quantitative impact of adoption on its consolidated financial statements. Without having
devoted significant time to evaluating the impact of the new standard on our consolidated financial statements, there may be
more than a remote likelihood that a material misstatement and/or disclosure omission will not be prevented or detected in
our interim or annual financial statements for periods beginning January 1, 2018.
We cannot be certain
that we will be able to sufficiently address this material weakness or that additional material weaknesses and control deficiencies
will not be discovered in the future. If the existing material weakness persists or material weaknesses or control deficiencies
occur in the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which
could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting
and cause the market price of our common stock to decline, which could affect the financial results that we report or create a
perception that those financial results do not fairly state our financial position or results of operations. Either of those events
could have an adverse effect on the value of our common stock.
Further, even if we
conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, because of its inherent
limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required
new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us
to fail to meet our future reporting obligations.
We will need to increase the size
of our organization, and we may experience difficulties in managing growth, which could hurt our financial performance.
In addition to employees
hired in connection with our recent acquisitions and any other companies which we may acquire in the future, we anticipate that
we will need to expand our employee infrastructure for managerial, operational, financial and other resources at the parent company
level. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit,
maintain and integrate additional employees. Our future financial performance and our ability to commercialize our product candidates
and to compete effectively will depend, in part, on our ability to manage any future growth effectively.
In order to manage
our future growth, we will need to continue to improve our management, operational and financial controls and our reporting systems
and procedures. All of these measures will require significant expenditures and will demand the attention of management. If we
do not continue to enhance our management personnel and our operational and financial systems and controls in response to growth
in our business, we could experience operating inefficiencies that could impair our competitive position and could increase our
costs more than we had planned. If we are unable to manage growth effectively, our business, financial condition and operating
results could be adversely affected.
We have a history of operating losses
and working capital deficiency and there is no assurance that we will be able to achieve profitability or raise additional financing.
We have a history of
operating losses and working capital deficiency. We have incurred recurring net losses of approximately $27.5 million and $35.0
million for the fiscal years ended 2016 and 2017, respectively. We had a working capital deficiency of approximately $21.0 million
and $32.8 million as of December 31, 2016 and December 31, 2017, respectively. The continuation of our Company is dependent upon
attaining and maintaining profitable operations and raising additional capital as needed, but there can be no assurance that we
will be able to raise any further financing.
Our ability to generate
positive cash flow from operations is dependent upon sustaining certain cost reductions and generating sufficient revenues. In
that regard, our revenues have declined by approximately 75% and 15% for the quarter ended December 31, 2017 and the year ended
December 31 2017, respectively, as compared to the same periods for the prior fiscal year as a result of our credit limitations
with vendors and suppliers limiting our ability to process orders in our Infrastructure/VAR segment. Our management is evaluating
options and strategic transactions including possibly divesting our infrastructure segment and continuing to market and promote
our new products and technologies, however, there is no guarantee that these efforts will be successful or that any such transaction
will be consummated or that or that we will be able to achieve or sustain profitability. We have funded our operations primarily
with proceeds from public and private offerings of our common stock and secured and unsecured debt instruments. Our history of
operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability,
and the terms of the financing transactions that we completed in the past, may impair our ability to raise capital on terms that
we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we
will be able to secure additional funding from public or private offerings or debt financings on terms acceptable to us, if at
all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material
adverse effect on our business and ability to continue as a going concern, and we may have to curtail, or even to cease, certain
operations. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be
dilutive to our stockholders and could result in a decrease in our stock price.
The reorganization transactions we carried out in 2015
and the name change completed in 2017 may cause us to be in a technical breach of certain third-party agreements.
In 2015, we carried
out a series of reorganization transactions to streamline the organizational structure within the Company and both its direct and
indirect subsidiaries. In addition, in February 2017, we changed our corporate name. Although these transactions occurred solely
within the Company and its subsidiaries, there still may have been an obligation to either provide notice and/or seek consent from
certain third parties pursuant to the contracts we have with these parties. We have reviewed and addressed these requirements;
however, our failure to comply with any of these notice or consent requirements may have left us in a technical breach, thus possibly
subjecting us to potential liabilities or an early termination under the applicable contracts. As of the date of this filing there
are no known breaches.
Our business depends on experienced
and skilled personnel, and if we are unable to attract and integrate skilled personnel, it will be more difficult for us to manage
our business and complete contracts.
The success of our
business depends on the skill of our personnel. Accordingly, it is critical that we maintain, and continue to build, a highly experienced
management team and specialized workforce, including those who create software programs and sales professionals. Competition for
personnel, particularly those with expertise in government consulting and a security clearance, is high, and identifying candidates
with the appropriate qualifications can be costly and difficult. We may not be able to hire the necessary personnel to implement
our business strategy given our anticipated hiring needs, or we may need to provide higher compensation or more training to our
personnel than we currently anticipate. In addition, our ability to recruit, hire and indirectly deploy former employees of the
U.S. Government is subject to complex laws and regulations, which may serve as an impediment to our ability to attract such former
employees.
Our business is labor
intensive and our success depends on our ability to attract, retain, train and motivate highly skilled employees, including employees
who may become part of our organization in connection with our acquisitions. The increase in demand for consulting, technology
integration and managed services has further increased the need for employees with specialized skills or significant experience
in these areas. Our ability to expand our operations will be highly dependent on our ability to attract a sufficient number of
highly skilled employees and to retain our employees and the employees of companies that we have acquired. We may not be successful
in attracting and retaining enough employees to achieve our desired expansion or staffing plans. Furthermore, the industry turnover
rates for these types of employees are high and we may not be successful in retaining, training or motivating our employees. Any
inability to attract, retain, train and motivate employees could impair our ability to adequately manage and complete existing
projects and to accept new client engagements. Such inability may also force us to increase our hiring of independent contractors,
which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and
financial resources to monitoring and managing our workforce. Our future success will depend on our ability to manage the levels
and related costs of our workforce.
In the event we are
unable to attract, hire and retain the requisite personnel and subcontractors, we may experience delays in completing contracts
in accordance with project schedules and budgets, which may have an adverse effect on our financial results, harm our reputation
and cause us to curtail our pursuit of new contracts. Further, any increase in demand for personnel may result in higher costs,
causing us to exceed the budget on a contract, which in turn may have an adverse effect on our business, financial condition and
operating results and harm our relationships with our customers.
Any future acquisitions that we may
make could disrupt our business, cause dilution to our stockholders and harm our business, financial condition or operating results.
If we are successful
in consummating acquisitions, those acquisitions could subject us to a number of risks, including, but not limited to:
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the purchase price we pay and/or unanticipated costs could significantly deplete our cash reserves or result in dilution to our existing stockholders;
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we may find that the acquired company or technologies do not improve our market position as planned;
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we may have difficulty integrating the operations and personnel of the acquired company, as the combined operations will place significant demands on the Company’s management, technical, financial and other resources;
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key personnel and customers of the acquired company may terminate their relationships with the acquired company as a result of the acquisition;
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we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;
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we may assume or be held liable for risks and liabilities (including environmental-related costs) as a result of our acquisitions, some of which we may not be able to discover during our due diligence investigation or adequately adjust for in our acquisition arrangements;
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our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
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we may incur one-time write-offs or restructuring charges in connection with the acquisition;
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we may acquire goodwill and other intangible assets that are subject to amortization or impairment tests, which could result in future charges to earnings; and
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we may not be able to realize the cost savings or other financial benefits we anticipated.
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We cannot assure you
that, following any acquisition, our continued business will achieve sales levels, profitability, efficiencies or synergies that
justify the acquisition or that the acquisition will result in increased earnings for us in any future period. These factors could
have a material adverse effect on our business, financial condition and operating results.
Insurance and contractual protections
may not always cover lost revenue, increased expenses or liquidated damages payments, which could adversely affect our financial
results.
Although we maintain
insurance and intend to obtain warranties from suppliers, obligate subcontractors to meet certain performance levels and attempt,
where feasible, to pass risks we cannot control to our customers, the proceeds of such insurance or the warranties, performance
guarantees or risk sharing arrangements may not be adequate to cover lost revenue, increased expenses or liquidated damages payments
that may be required in the future.
Our obligations to our senior secured
lender, Payplant LLC (“PayPlant”), are secured by a security interest in substantially all of our assets, so if we
default on those obligations, the lenders could foreclose on, liquidate and/or take possession of our assets. If that were to happen,
we could be forced to curtail, or even to cease, our operations.
We issued a revolving
Secured Promissory Note to GemCap Lending I, LLC dated as of November 14, 2016 which was assigned to Payplant on August 14, 2017
together with the Amended and Restated GemCap Loan and Security Agreement: Payplant Loan and Security Agreement, dated as of August
14, 2017 (the “Payplant Loan Agreement”). As of December 31, 2017, we had approximately $1.1 million in outstanding
revolving credit loans. All amounts due under the Secured Promissory Note and Debenture are secured by our assets. As a result,
if we default on our obligations under the Secured Promissory Note, Payplant could foreclose on its security interest and liquidate
or take possession of some or all of these assets, which would harm our business, financial condition and results of operations
and could require us to curtail, or even to cease our operations.
Payplant, and the holders of convertible
promissory notes (the “November 2017 Notes”) issued in November 2017 (the “November Noteholders”) have
certain rights upon an event of default under their respective agreements that could harm our business, financial condition and
results of operations and could require us to curtail or cease our operations.
Payplant, and the November
Noteholders have certain rights upon an event of default. With respect to Payplant, such rights include an increase in the interest
rate on any advances made pursuant to the Payplant Loan Agreement, the right to accelerate the payment of any outstanding advances
made pursuant to the Payplant Loan Agreement, the right to directly receive payments made by account debtors and the right to foreclose
on our assets, among other rights. The Payplant Loan Agreement includes in its definition of an event of default, among other occurrences,
the failure to pay any principal when due within two business days, the termination, winding up, liquidation or dissolution of
any borrower, the filing of a tax lien by a governmental agency against any borrower, and any reduction in ownership of our wholly
owned subsidiaries, Inpixon USA and Inpixon Federal.
The November Holders
have the right to accelerate all amounts outstanding under the November 2017 Notes payable in cash in an amount equal to the greater
of (a) the outstanding balance divided by $13.50 (subject to adjustment as set forth in the November 2017 Notes) on the date the
note is demanded, multiplied by the VWAP on such date, or (b) the outstanding balance following multiplying the outstanding balance
as of the date the applicable default occurred by (a) 15% for each occurrence of any Major Default (as defined in the November
2017 Notes), or (b) 5% for each occurrence of any Minor Default (as defined in the November 2017 Notes), and then adding the resulting
product to the outstanding balance as of the date the applicable default occurred, with the sum of the foregoing then becoming
the outstanding balance under the November 2017 Notes as of the date the applicable default occurred; provided that the Default
Effect (as defined in the November 2017 Notes) may only be applied three (3) times with respect to Major Defaults and three (3)
times with respect to Minor Defaults; and provided further that the Default Effect shall not apply to any default pursuant to Section
4.1(b) of the November 2017 Notes. Each of the following events shall constitute an event of default: failure to pay any principal,
interest, fees, charges, or any other amount when due and payable under the November 2017 Notes; (b) failure to deliver any Lender
Conversion Shares (as defined in the November 2017 Notes); (c) failure to deliver any Redemption Conversion Shares (as defined
below); (d) a receiver, trustee or other similar official shall be appointed over the Company or a material part of its assets
and such appointment shall remain uncontested for twenty (20) days or shall not be dismissed or discharged within sixty (60) days;
(e) Company becomes insolvent or generally fails to pay, or admits in writing its inability to pay, its debts as they become due,
subject to applicable grace periods, if any; (f) Company makes a general assignment for the benefit of creditors; (g) Company files
a petition for relief under any bankruptcy, insolvency or similar law (domestic or foreign); (h) an involuntary bankruptcy proceeding
is commenced or filed against Company; (i) Company defaults or otherwise fails to observe or perform any covenant, obligation,
condition or agreement of the Company, with certain limitations; (j) any representation, warranty or other statement made or furnished
by or on behalf of the Company in connection with the issuance of the November 2017 Notes is false, incorrect, incomplete or misleading
in any material respect when made or furnished; (k) the occurrence of a Fundamental Transaction (as defined in the November 2017
Notes) without lender’s prior written consent; (l) the Company fails to maintain the Share Reserve (as defined in the November
2017 Notes); (m) the Company effectuates a reverse split of its common stock without twenty (20) trading days prior written notice
to lender; (n) any money judgment, writ or similar process is entered or filed against the Company or any subsidiary or any of
its property or other assets for more than $600,000.00, and shall remain unvacated, unbonded or unstayed for a period of twenty
(20) calendar days unless otherwise consented to by lender; (o) the Company fails to be DWAC eligible; (p) the Company fails to
observe or perform any covenant set forth in the purchase agreement; and (q) the Company breaches any covenant or other term or
condition contained in any Other Agreements (as defined in the November 2017 Notes).
The exercise of any
of these rights upon an event of default could substantially harm our financial condition and force us to curtail, or even to
cease, our operations.
If we are unable to comply with certain
financial and operating restrictions required by the Payplant Loan Agreement, we may be limited in our business activities and
access to credit or may default under the Payplant Loan Agreement.
Provisions in the Payplant
Loan Agreement impose restrictions or require prior approval on our ability, and the ability of certain of our subsidiaries to,
among other things:
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sell, lease, transfer, convey, or otherwise dispose of any or all of our assets or collateral, except in the ordinary course of business;
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make any loans to any person, as that term is defined in the Payplant Loan Agreement, with the exception of employee loans made in the ordinary course of business;
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declare or pay cash dividends, make any distribution on, redeem, retire or otherwise acquire directly or indirectly, any of our Equity Interests, as defined in the Payplant Loan Agreement;
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guarantee the indebtedness of any person;
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compromise, settle or adjust any claims in any amount relating to any of the collateral;
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incur, create or permit to exist any lien on any of our property or assets;
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engage in new lines of business;
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change, alter or modify, or permit any change, alteration or modification of our organizational documents in any manner that might adversely affect Payplant’s rights;
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sell, assign, transfer, discount or otherwise dispose of any accounts or any promissory note payable to us, with or without recourse;
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incur, create, assume, or permit to exist, any indebtedness or liability on account of either borrowed money or the deferred purchase price of property; and
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make any payments of cash or other property to any affiliate.
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The Payplant Loan Agreement
also contains other customary covenants. We may not be able to comply with these covenants in the future. Our failure to comply
with these covenants may result in the declaration of an event of default and cause us to be unable to borrow under the Payplant
Loan Agreement. In addition to preventing additional borrowings under the Payplant Loan Agreement, an event of default, if not
cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the Payplant Loan Agreement,
which would require us to pay all amounts outstanding. If the maturity of our indebtedness is accelerated, we may not have sufficient
funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness
on terms acceptable to us or at all. Our failure to repay the indebtedness would result in Payplant foreclosing on all or a portion
of our assets and force us to curtail, or even to cease, our operations.
We may be subject to damages resulting
from claims that the Company or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Upon completion of
any acquisitions by the Company, we may be subject to claims that our acquired companies and their employees may have inadvertently
or otherwise used or disclosed trade secrets or other proprietary information of former employers or competitors. Litigation may
be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result
in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims,
we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper
or prevent our ability to commercialize certain products, which could severely harm our business.
Adverse judgments or settlements
in legal proceedings could materially harm our business, financial condition, operating results and cash flows.
We are currently subject
to pending claims for non-payment by certain vendors in an aggregate amount of approximately $13.3 million, which is approximately
144% of our total current assets. In addition, as of the date of this prospectus supplement, we have received a notice to cure
in connection with the failure to pay charges of approximately $154,000 in connection with certain property lease agreements. We
may also be a party to other claims that arise from time to time in the ordinary course of our business, which may include those
related to, for example, contracts, sub-contracts, protection of confidential information or trade secrets, adversary proceedings
arising from customer bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array
of state and federal statutes, rules and regulations that pertain to different aspects of our business. We may also be required
to initiate expensive litigation or other proceedings to protect our business interests. There is a risk that we will not be successful
or otherwise be able to satisfactorily resolve any pending or future litigation. In addition, litigation and other legal claims
are subject to inherent uncertainties and management’s view of currently pending legal matters may change in the future.
Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable judicial or jury
decisions and the differing laws and judicial proclivities regarding damage awards among the states in which we operate. Unexpected
outcomes in such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings
(possibly resulting in changes in established reserves), could have a material adverse effect on our business, financial condition,
results of operations and cash flows. Due to recurring losses and net capital deficiency, our current financial status may increase
our default and litigation risks and may make us more financially vulnerable in the face of pending or threatened litigation.
The loss of our Chief Executive Officer
or other key personnel may adversely affect our operations.
The Company’s
success depends to a significant extent upon the operation, experience, and continued services of certain of its officers, including
our CEO, as well as other key personnel. While our CEO and key personnel are employed under employment contracts, there is no assurance
we will be able to retain their services. The loss of our CEO or several of the other key personnel could have an adverse effect
on the Company. If our CEO or other executive officers were to leave we would face substantial difficulty in hiring a qualified
successor and could experience a loss in productivity while any successor obtains the necessary training and experience. Furthermore,
we do not maintain “key person” life insurance on the lives of any executive officer and their death or incapacity
would have a material adverse effect on us. The competition for qualified personnel is intense, and the loss of services of certain
key personnel could adversely affect our business.
Internal system or service failures
could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could
damage our reputation and adversely affect our revenues and profitability.
Any system or service
disruptions, on our hosted Cloud infrastructure or those caused by ongoing projects to improve our information technology systems
and the delivery of services, if not anticipated and appropriately mitigated, could have a material adverse effect on our business
including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect
the amounts that have been billed and produce accurate financial statements in a timely manner. We are also subject to systems
failures, including network, software or hardware failures, whether caused by us, third-party service providers, cyber security
threats, natural disasters, power shortages, terrorist attacks or other events, which could cause loss of data and interruptions
or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the
failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely
affect our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may
occur as a result of any system or operational failure or disruption and, as a result, our future results could be adversely affected.
Customer systems failures could damage
our reputation and adversely affect our revenues and profitability.
Many of the systems
and networks that we develop, install and maintain for our customers on premise or host on our infrastructure involve managing
and protecting personal information and information relating to national security and other sensitive government functions. While
we have programs designed to comply with relevant privacy and security laws and restrictions, if a system or network that we develop,
install or maintain were to fail or experience a security breach or service interruption, whether caused by us, third-party service
providers, cyber security threats or other events, we may experience loss of revenue, remediation costs or face claims for damages
or contract termination. Any such event could cause serious harm to our reputation and prevent us from having access to or being
eligible for further work on such systems and networks. Our errors and omissions liability insurance may be inadequate to compensate
us for all of the damages that we may incur and, as a result, our future results could be adversely affected.
Our financial performance could be
adversely affected by decreases in spending on technology products and services by our public sector customers.
Our sales to our public
sector customers are impacted by government spending policies, budget priorities and revenue levels. Although our sales to federal,
state and local government are diversified across multiple agencies and departments, they collectively accounted for approximately
37% and 13% of 2017 and 2016 net sales, respectively. An adverse change in government spending policies (including budget cuts
at the federal level), budget priorities or revenue levels could cause our public sector customers to reduce their purchases or
to terminate or not renew their contracts with us, which could adversely affect our business, results of operations or cash flows.
Our business could be adversely affected
by the loss of certain vendor partner relationships and the availability of their products.
We purchase products
for resale from vendor partners, which include OEMs, software publishers, and wholesale distributors. For the year ended December
31, 2017, approximately 75% of our revenue was from purchases from vendor partners as defined above. We are authorized by vendor
partners to sell all or some of their products via direct marketing activities. Our authorization with each vendor partner is subject
to specific terms and conditions regarding such things as sales channel restrictions, product return privileges, price protection
policies and purchase discounts. In the event we were to lose one of our significant vendor partners, our business could be adversely
affected. If we complete the spin-off of our VAR Business, as described herein, we anticipate that our revenues levels will decrease
by approximately 90% of our historical revenue levels.
We have entered, and expect to continue
to enter, into joint venture, teaming and other arrangements, and these activities involve risks and uncertainties. A failure of
any such relationship could have material adverse results on our business and results of operations.
We have entered, and
expect to continue to enter, into joint venture, teaming and other arrangements. These activities involve risks and uncertainties,
including the risk of the joint venture or applicable entity failing to satisfy its obligations, which may result in certain liabilities
to us for guarantees and other commitments, the challenges in achieving strategic objectives and expected benefits of the business
arrangement, the risk of conflicts arising between us and our partners and the difficulty of managing and resolving such conflicts,
and the difficulty of managing or otherwise monitoring such business arrangements. A failure of our business relationships could
have a material adverse effect on our business and results of operations.
Our business and operations expose
us to numerous legal and regulatory requirements and any violation of these requirements could harm our business.
We are subject to numerous
federal, state and foreign legal requirements on matters as diverse as data privacy and protection, employment and labor relations,
immigration, taxation, anticorruption, import/export controls, trade restrictions, internal control and disclosure control obligations,
securities regulation and anti-competition. Compliance with diverse and changing legal requirements is costly, time-consuming and
requires significant resources. We are also focused on expanding our business in certain identified growth areas, such as health
information technology, energy and environment, which are highly regulated and may expose us to increased compliance risk. Violations
of one or more of these diverse legal requirements in the conduct of our business could result in significant fines and other damages,
criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these
regulations or contractual obligations related to regulatory compliance in connection with the performance of customer contracts
could also result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other
reputational damage, restrictions on our ability to compete for certain work and allegations by our customers that we have not
performed our contractual obligations.
If we do not adequately protect our
intellectual property rights, we may experience a loss of revenue and our operations and growth prospects may be materially harmed.
We have not registered
copyrights on any of the software we have developed. We rely upon confidentiality agreements signed by our employees, consultants
and third parties to protect our intellectual property. We cannot assure you that we can adequately protect our intellectual property
or successfully prosecute actual or potential infringement of our intellectual property rights. Also, we cannot assure you that
others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully
resolve these types of conflicts to our satisfaction. Our failure to protect our intellectual property rights may result in a loss
of revenue and could materially adversely affect our operations and financial condition.
Our proprietary software
is protected by common law copyright laws, as opposed to registration under copyright statutes. We have not registered copyrights
on any of the software we have developed. Our performance and ability to compete are dependent to a significant degree on our proprietary
technology. Our proprietary software is protected by common law copyright laws, as opposed to registration under copyright statutes.
Common law protection may be narrower than that which we could obtain under registered copyrights. As a result, we may experience
difficulty in enforcing our copyrights against certain third party infringements. As part of our confidentiality-protection procedures,
we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation
and other proprietary information. There can be no assurance that the steps we have taken will prevent misappropriation of our
technology or that agreements entered into for that purpose will be enforceable. The laws of other countries may afford us little
or no protection of our intellectual property. We also rely on a variety of technology that we license from third parties. There
can be no assurance that these third party technology licenses will continue to be available to us on commercially reasonable terms,
if at all. The loss of or inability to maintain or obtain upgrades to any of these technology licenses could result in delays in
completing software enhancements and new development until equivalent technology could be identified, licensed or developed and
integrated. Any such delays would materially and adversely affect our business.
The growth of our business is dependent
on increasing sales to our existing clients and obtaining new clients, which, if unsuccessful, could limit our financial performance.
Our ability to increase
revenues from existing clients by identifying additional opportunities to sell more of our products and services and our ability
to obtain new clients depends on a number of factors, including our ability to offer high quality products and services at competitive
prices, the strength of our competitors and the capabilities of our sales and marketing departments. If we are not able to continue
to increase sales of our products and services to existing clients or to obtain new clients in the future, we may not be able to
increase our revenues and could suffer a decrease in revenues as well.
Our business depends on the continued
growth of the market for IT products and services, which is uncertain.
The storage and computing
and professional services segments of our business include IT products and services solutions that are designed to address the
growing markets for on and off-premises services (including migrations, consolidations, Cloud computing and disaster recovery),
technology integration services (including storage and data protection services and the implementation of virtualization solutions)
and managed services (including operational support and client support). These markets are continuously changing. Competing technologies
and services, reduction in technology refreshes or reductions in corporate spending may reduce the demand for our products and
services.
Decreases, or slow growth, in the
newspaper publishing industry may negatively impact our results from operation as it relates to our Cloud based applications and
analytics for media and publishing.
The newspaper industry
as a whole is experiencing challenges to maintain and grow print circulation and revenues. This results from, among other factors,
increased competition from other media, particularly the growth of electronic media, and shifting preferences among some consumers
to receive all or a portion of their news other than from a newspaper. The customer base for our Cloud based applications and analytics
for media and publishing is focused on the newspaper publishing industry and therefore sales from this operating sector will be
subject to the future of the newspaper industry.
Our competitiveness depends significantly
on our ability to keep pace with the rapid changes in IT. Failure by us to anticipate and meet our clients’ technological
needs could adversely affect our competitiveness and growth prospects.
We operate and compete
in an industry characterized by rapid technological innovation, changing client needs, evolving industry standards and frequent
introductions of new products, product enhancements, services and distribution methods. Our success depends on our ability to develop
expertise with these new products, product enhancements, services and distribution methods and to implement IT solutions that anticipate
and respond to rapid changes in technology, the IT industry, and client needs. The introduction of new products, product enhancements
and distribution methods could decrease demand for current products or render them obsolete. Sales of products and services can
be dependent on demand for specific product categories, and any change in demand for or supply of such products could have a material
adverse effect on our net sales if we fail to adapt to such changes in a timely manner.
We operate in a highly competitive
market and we may be required to reduce the prices for some of our products and services to remain competitive, which could adversely
affect our results of operations.
Our industry is developing
rapidly and related technology trends are constantly evolving. In this environment, we face significant price competition from
our competitors. We may be unable to offset the effect of declining average sales prices through increased sales volumes and/or
reductions in our costs. Furthermore, we may be forced to reduce the prices of the products and services we sell in response to
offerings made by our competitors. Finally, we may not be able to maintain the level of bargaining power that we have enjoyed in
the past when negotiating the prices of our services.
We face substantial
competition from other national, multi-regional, regional and local value-added resellers and IT service providers, some of which
may have greater financial and other resources than we do or that may have more fully developed business relationships with clients
or prospective clients than we do. Many of our competitors compete principally on the basis of price and may have lower costs or
accept lower selling prices than we do and, therefore, we may need to reduce our prices. In addition, manufacturers may choose
to market their products directly to end-users, rather than through IT solutions providers such as us, and this could adversely
affect our business, financial condition and results of operations.
Our profitability is
dependent on the rates we are able to charge for our products and services. The rates we are able to charge for our products and
services are affected by a number of factors, including:
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our clients’ perceptions of our ability to add value through our services;
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introduction of new services or products by us or our competitors;
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our competitors’ pricing policies;
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our ability to charge higher prices where market demand or the value of our services justifies it;
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procurement practices of our clients; and
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general economic and political conditions.
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If we are not able
to maintain favorable pricing for our products and services, our results of operations could be adversely affected.
Sales of our IT products and services
are subject to quarterly and seasonal variations that may cause significant fluctuations in our operating results, therefore period-to-period
comparisons of our operating results may not be reliable predictors of future performance.
The timing of our revenues
can be difficult to predict. Our sales efforts involve educating our clients about the use and benefit of the products we sell
and our services and solutions, including their technical capabilities and potential cost savings to an organization. Clients typically
undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle, which typically lasts several
months, and may last a year or longer. We spend substantial time, effort and money on our sales efforts without any assurance that
our efforts will produce any sales during a given period.
In addition, many of
our clients spend a substantial portion of their IT budgets in the second half of the year. Other factors that may cause our quarterly
operating results to fluctuate include changes in general economic conditions and the impact of unforeseen events. We believe that
our revenues will continue to be affected in the future by cyclical trends. As a result, you may not be able to rely on period-to-period
comparisons of our operating results as an indication of our future performance.
A delay in the completion of our
clients’ budget processes could delay purchases of our products and services and have an adverse effect on our business,
operating results and financial condition.
We rely on our clients
to purchase products and services from us to maintain and increase our earnings, and client purchases are frequently subject to
budget constraints, multiple approvals and unplanned administrative, processing and other delays. If sales expected from a specific
client are not realized when anticipated or at all, our results could fall short of public expectations and our business, operating
results and financial condition could be materially adversely affected.
The profit margins from our IT products
and services depend, in part, on the volume of products and services sold. A failure to achieve increases in our profit margins
in the future could have a material adverse effect on our financial condition and results of operations.
Given the significant
levels of competition that characterize the IT reseller market, it is unlikely that we will be able to increase gross profit margins
through increases in sales of IT products alone. Any increase in gross profit margins from this operating sector, if we choose
to continue this sector, will depend, in part, on the growth of our higher margin businesses such as IT consulting and professional
services. In addition, low margins increase the sensitivity of our results of operations to increases in costs of financing. Any
failure by us to maintain or increase our gross profit margins could have a material adverse effect on our financial condition
and results of operations.
Any failures or interruptions in
our services or systems could damage our reputation and substantially harm our business and results of operations.
Our success depends
in part on our ability to provide reliable remote services, technology integration and managed services to our clients. The operations
of our IT products and services as well as our Cloud based applications and analytics are susceptible to damage or interruption
from human error, fire, flood, power loss, telecommunications failure, terrorist attacks and similar events. We could also experience
failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of:
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damage to or failure of our computer software or hardware or our connections;
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errors in the processing of data by our systems;
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computer viruses or software defects;
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physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;
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increased capacity demands or changes in systems requirements of our clients; and
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errors by our employees or third-party service providers.
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Our inventory management
systems and related supply chain tools may not be able to forecast accurately and effectively manage supply of our products. If
we ultimately determine that we have excess supply, we may have to reduce our prices and write-down inventory, which in turn could
result in lower gross margins. If actual component usage and product demand are lower than the forecast, losses on manufacturing
commitments in excess of forecasted demand may be accrued.
Any production interruptions
for any reason, such as a natural disaster, epidemic, capacity shortages, or quality problems, at one of our manufacturing partners
would negatively affect sales of product lines manufactured by that manufacturing partner and adversely affect our business and
operating results.
Any interruptions in
our systems or services could damage our reputation and substantially harm our business and results of operations. While we maintain
disaster recovery plans and insurance with coverage we believe to be adequate, claims may exceed insurance coverage limits, may
not be covered by insurance or insurance may not continue to be available on commercially reasonable terms.
Some of our services and solutions
involve storing and replicating mission-critical data for our clients and are highly technical in nature. If client data is lost
or corrupted, our reputation and business could be harmed.
Our IT data center
and technology integration services and Software-as-a-Service solutions include storing and replicating mission-critical data for
our clients. The process of storing and replicating that data within their data centers or at our facilities is highly technical
and complex. If any data is lost or corrupted in connection with the use of our products and services, our reputation could be
seriously harmed and market acceptance of our IT solutions could suffer. In addition, our solutions have contained, and may in
the future contain, undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered
after a solution has been in use by clients. Any errors, defects or security vulnerabilities discovered in our solutions after
use by clients could result in loss of revenues, loss of clients, increased service and warranty cost and diversion of attention
of our management and technical personnel, any of which could significantly harm our business. In addition, we could face claims
for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s
attention and adversely affect the market’s perception of us and our service offerings and solutions.
We do not have long-term recurring
revenue generating contracts with our clients that utilize our IT products and services, and such clients may cease providing new
purchase orders at any time or reduce the amount of purchases they make that would depress the revenues we receive from our IT
products and services and harm our results of operations.
Our operations depend
upon our relationships with our clients. Revenues from out IT products and services are typically driven by purchase orders received
every month. The majority of revenues from our IT products and services come from one time purchase orders that do not guarantee
any future recurring revenues. Approximately 24% of such revenues are recurring and based on contracts that range from 1-5 years
for warranty and maintenance support. For these contracts the customer is invoiced one time and pays up front for the full term
of the warranty and maintenance contract. Revenue from these contracts is determinable ratably over the contract period with the
unearned revenue recorded as deferred revenue and amortized over the contract period. Clients with these types of contracts may
cease providing new purchase orders at any time, may elect not to renew such contracts, cancel and request a refund of maintenance/warranty
services that have not yet been provided (upon 30 days advance written notice) or reschedule purchases. If clients cease providing
us with new purchase orders, diminish the services purchased from us, cancel executed purchase orders or delay future purchase
orders, revenues received from the sale of our IT products and services would be negatively impacted, which could have a material
adverse effect on our business and results of operations. There is no guarantee that we will be able to retain or generate future
revenue from our existing clients or develop relationships with new clients.
We rely on a limited number of key
customers, the importance of which may vary dramatically from year to year, and a loss of one or more of these key customers may
adversely affect our operating results.
Our top three customers
accounted for approximately 26% and 40% of our gross revenue during the years ended December 31, 2017 and 2016, respectively. One
customer accounted for 28% of our gross revenue in 2016, was a significant contributor in 2017 however this customer may or may
not continue to be a significant contributor to revenue in 2018. The loss of a significant amount of business from one of our major
customers would materially and adversely affect our results of operations until such time, if ever, as we are able to replace the
lost business. Significant clients or projects in any one period may not continue to be significant clients or projects in other
periods. To the extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the
extent that such risks impede the customer’s ability to stay in business and make timely payments to us.
Consolidation in the industries that
we serve or from which we purchase could adversely affect our business.
Some of the clients
we serve may seek to achieve economies of scale by combining with or acquiring other companies. If two or more of our current clients
combine their operations, it may decrease the amount of work that we perform for these clients. If one of our current clients merges
or consolidates with a company that relies on another provider for its consulting, systems integration and technology, or outsourcing
services, we may lose work from that client or lose the opportunity to gain additional work. If two or more of our suppliers merge
or consolidate operations, the increased market power of the larger company could also increase our product costs and place competitive
pressures on us. Any of these possible results of industry consolidation could adversely affect our business.
The loss of any key manufacturer
or distributor relationships, or related industry certifications, could have an adverse effect on our business.
As part of our end-to-end
IT solutions, we are authorized resellers of the products and services of leading IT manufacturers and distributors. In many cases,
we have achieved the highest level of relationship the manufacturer or distributor offers. In addition, our employees hold certifications
issued by these manufacturers and by industry associations relating to the configuration, installation and servicing of these products.
We differentiate ourselves from our competitors by the range of manufacturers and distributors we represent, the relationship level
we have achieved with these manufacturers and distributors and the scope of the manufacturer and industry certifications our employees
hold. There can be no assurance that we will be able to retain these relationships with our manufacturers and distributors, that
we will be able to retain the employees holding these manufacturer and industry certifications, or that our employees will maintain
their manufacturer or industry certifications. The loss of any of these relationships or certifications could have a material adverse
effect on our business.
We may experience a reduction in
the incentive programs offered to us by our vendors. Any such reduction could have a material adverse effect on our business, results
of operations and financial condition.
We receive payments
and credits from vendors, including consideration pursuant to volume sales incentive programs and marketing development funding
programs. These programs are usually of finite terms and may not be renewed or may be changed in a way that has an adverse effect
on us. Vendor funding is used to offset, among other things, inventory costs, cost of goods sold, marketing costs and other operating
expenses. Certain of these funds are based on our volume of net sales or purchases, growth rate of net sales or purchases and marketing
programs. If we do not grow our net sales or if we are not in compliance with the terms of these programs, there could be a material
negative effect on the amount of incentives offered or paid to us by vendors. No assurance can be given that we will continue to
receive such incentives or that we will be able to collect outstanding amounts relating to these incentives in a timely manner,
or at all. Any sizeable reduction in, the discontinuance of, or a significant delay in receiving or the inability to collect such
incentives, particularly related to incentive programs with one of our largest partners, Hewlett-Packard Company, could have a
material adverse effect on our business, results of operations and financial condition. If we are unable to react timely to any
fundamental changes in the programs of vendors, including the elimination of funding for some of the activities for which we have
been compensated in the past, such changes would have a material adverse effect on our business, results of operations and financial
condition.
We may need additional cash financing
and any failure to obtain cash financing, could limit our ability to grow our business and develop or enhance our service offerings
to respond to market demand or competitive challenges.
We expect that we will
need to raise funds in order to continue our operations and implement our plans to grow our business. However, if we decide to
seek additional capital, we may be unable to obtain financing on terms that are acceptable to us or at all. If we are unable to
raise the required cash, our ability to grow our business and develop or enhance our service offerings to respond to market demand
or competitive challenges could be limited.
We rely on inventory financing and
vendor credit arrangements for our daily working capital and certain operational functions, the loss of which could have a material
adverse effect on our future results.
We rely on inventory
financing and vendor financing arrangements for daily working capital and to fund equipment purchases for our technology sales
business. The loss of any of our inventory financing or vendor credit financing arrangements, a reduction in the amount of credit
granted to us by our vendors, or a change in any of the material terms of these arrangements could increase our need for and the
cost of working capital and have a material adverse effect on our future results. These credit arrangements are discretionary on
the part of our creditors and require the performance of certain operational covenants. There can be no assurance that we will
continue to meet those covenants and failure to do so may limit availability of, or cause us to lose, such financing. There can
be no assurance that such financing will continue to be available to us in the future on acceptable terms.
If we cannot collect our receivables
or if payment is delayed, our business may be adversely affected by our inability to generate cash flow, provide working capital
or continue our business operations.
Our business depends
on our ability to successfully obtain payment from our clients of the amounts they owe us for products received from us and any
work performed by us. The timely collection of our receivables allows us to generate cash flow, provide working capital and continue
our business operations. Our clients may fail to pay or delay the payment of invoices for a number of reasons, including financial
difficulties resulting from macroeconomic conditions or lack of an approved budget. An extended delay or default in payment relating
to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable.
If we are unable to timely collect our receivables from our clients for any reason, our business and financial condition could
be adversely affected.
If our location based security and
detection and context aware marketing products fail to satisfy customer demands or to achieve increased market acceptance our results
of operations, financial condition and growth prospects could be materially adversely affected.
The market acceptance
of our products, particularly our location based security and detection and context aware marketing products are critical to our
continued success. Demand for these products is affected by a number of factors beyond our control, including continued market
acceptance, the timing of development and release of new products by competitors, technological change, and growth or decline in
the mobile device management market. We expect the proliferation of mobile devices to lead to an increase in the data security
demands of our customers, and our products may not be able to scale and perform to meet those demands. If we are unable to continue
to meet customer demands or to achieve more widespread market acceptance of these products, our business operations, financial
results and growth prospects will be materially and adversely affected.
Defects, errors, or vulnerabilities
in our location based security and detection products or services or the failure of such products or services to prevent a security
breach, could harm our reputation and adversely impact our results of operations.
Because our location
based security products and services are complex, they have contained and may contain design or manufacturing defects or errors
that are not detected until after their commercial release and deployment by customers. Defects may cause such products to be vulnerable
to advanced persistent threats (“APTs”) or security attacks, cause them to fail to help secure information or temporarily
interrupt customers’ networking traffic. Because the techniques used by hackers to access sensitive information change frequently
and generally are not recognized until launched against a target, we may be unable to anticipate these techniques and provide a
solution in time to protect customers’ data. In addition, defects or errors in our subscription updates or products could
result in a failure to effectively update customers’ hardware products and thereby leave customers vulnerable to APTs or
security attacks.
Any defects, errors or vulnerabilities in
our products could result in:
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Expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate, or work-around errors or defects or to address and eliminate vulnerabilities;
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Delayed or lost revenue;
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Loss of existing or potential customers or partners;
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Increased warranty claims compared with historical experience, or increased cost of servicing warranty claims, either of which would adversely affect gross margins; and
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Litigation, regulatory inquiries, or investigations that may be costly and harm our reputation
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Our Cloud strategy, including our
Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS) and Data as a Service (DaaS) offerings,
may adversely affect our revenues and profitability.
We offer customers
a full range of consumption models including the deployment of our products via our Cloud based SaaS, PaaS, IaaS and DaaS offerings.
These business models continue to evolve, and we may not be able to compete effectively, generate significant revenues or maintain
the profitability of our Cloud offerings. Additionally, the increasing prevalence of Cloud and SaaS delivery models offered by
us and our competitors may unfavorably impact the pricing of our on-premises enterprise software offerings and our Cloud offerings,
and has a dampening impact on overall demand for our on-premises software product and service offerings, which could reduce our
revenues and profitability, at least in the near-term. If we do not successfully execute our Cloud computing strategy or anticipate
the Cloud computing needs of our customers, our reputation as a cloud services provider could be harmed and our revenues and profitability
could decline.
Our Cloud offerings
are generally purchased by customers on a subscription basis and revenues from these offerings are generally recognized ratably
over the term of the subscriptions. The deferred revenue that results from sales of our Cloud offerings may prevent any deterioration
in sales activity associated with our Cloud offerings from becoming immediately observable in our consolidated statement of operations.
This is in contrast to revenues associated with our new software licenses arrangements whereby new software licenses revenues are
generally recognized in full at the time of delivery of the related software licenses. We incur certain expenses associated with
the infrastructures and marketing of our Cloud offerings in advance of our ability to recognize the revenues associated with these
offerings. As customer demand for our Cloud offerings increases, we experience volatility in our reported revenues and operating
results due to the differences in timing of revenue recognition between our new software licenses arrangements and Cloud offering
arrangements.
Our current research and development
efforts may not produce successful products or features that result in significant revenue, cost savings or other benefits in the
near future. If we do not realize significant revenue from our research and development efforts, our business and operating results
could be adversely affected.
Developing products
and related enhancements in our field is expensive. Investments in research and development may not result in significant design
improvements, marketable products or features or may result in products that are more expensive than anticipated. We may not achieve
the cost savings or the anticipated performance improvements expected, and we may take longer to generate revenue from products
in development, or generate less revenue than expected.
Our future plans include
significant investments in research and development and related product opportunities. Our management believes that we must continue
to dedicate a significant amount of resources to research and development efforts to maintain a competitive position. However,
we may not receive significant revenue from these investments in the near future, or these investments may not yield the expected
benefits, either of which could adversely affect our business and operating results.
Misuse of our products could harm
our reputation.
Our products, particularly
our location based security and detection and context aware marketing may be misused by customers or third parties that obtain
access to such products. For example, these products could be used to protect information kept by criminals from government agencies.
Such use of these products for censorship could result in negative press coverage and negatively affect our reputation.
If the general level of advanced
attacks declines, or is perceived by current or potential customers to have declined, this could harm our location based security
and detection operating segment, and our financial condition, operating results and growth prospects.
Our location based
security and detection operating segment is substantially dependent upon enterprises and governments recognizing that APTs and
other security attacks are pervasive and are not effectively prevented by legacy security solutions. High visibility attacks on
prominent enterprises and governments have increased market awareness of the problem of APTs and security attacks and help to provide
an impetus for enterprises and governments to devote resources to protecting against attacks, such as testing our platform, purchasing
it, and broadly deploying it within their organizations. If APTs and other security attacks were to decline, or enterprises or
governments perceived that the general level of attacks has declined, our ability to attract new customers and expand its offerings
for existing customers could be materially and adversely affected, which would, in turn, have a material adverse effect on our
financial condition, results of operations and growth prospects.
If our location based security and
detection products do not effectively interoperate with our customers’ IT infrastructure, installations could be delayed
or cancelled, which would harm our financial condition, operating results and growth prospects.
Our products must effectively
interoperate with our customers’ existing or future IT infrastructure, which often has different specifications, utilizes
multiple protocol standards, deploys products from multiple vendors, and contains multiple generations of products that have been
added over time. As a result, when problems occur in a company’s infrastructure, it may be difficult to identify the sources
of these problems. If we find errors in the existing software or defects in the hardware used in our customers’ infrastructure,
we may have to modify its software or hardware so that our products will interoperate with the infrastructure of our customers.
In such cases, our products may be unable to provide significant performance improvements for applications deployed in the infrastructure
of our customers. These issues could cause longer installation times for our products and could cause order cancellations, either
of which would adversely affect our business, results of operations and financial condition. In addition, other customers may require
products to comply with certain security or other certifications and standards. If our products are late in achieving or fail to
achieve compliance with these certifications and standards, or competitors sooner achieve compliance with these certifications
and standards, we may be disqualified from selling our products to such customers, or may otherwise be at a competitive disadvantage,
either of which would harm our business, results of operations, and financial condition.
Failure to protect our intellectual
property rights could adversely affect our financial condition, operating results and growth prospects.
The success of our
business depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other
intellectual property laws of the United States so that we can prevent others from using our inventions and proprietary information.
If we or our subsidiaries fail to protect intellectual property rights adequately, competitors might gain access to our technology,
and our business might be adversely affected. However, defending our intellectual property rights might entail significant expenses.
Any patents issued in the future may not provide us with any competitive advantages, and our patent applications may never be granted.
The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or
desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these
patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and
scope of protection of patent and other intellectual property rights are complex and often uncertain. Our inability to protect
our property rights could adversely affect our financial condition, operating results and growth prospects.
We depend on the U.S. government
for a substantial portion of our business and government budget impasses together with changes in government defense spending could
have adverse consequences on our financial position, results of operations and business.
A substantial portion
of our U.S. revenues from our operations have been from and will continue to be from sales and services rendered directly or indirectly
to the U.S. Government. Consequently, our revenues are highly dependent on the Government’s demand for computer systems and
related services. Our revenues from the U.S. Government largely result from contracts awarded to us under various U.S. Government
programs, primarily defense-related programs with the Department of Defense (DoD), as well as a broad range of programs with the
Federal Bureau of Investigation (FBI), Bureau of Prisons, National Institute of Health (NIH), National Aeronautics and Space Administration
(NASA), Department of Homeland Security, the Intelligence Community and other departments and agencies. Cost cutting including
through consolidation and elimination of duplicative organizations and insurance has become a major initiative for DoD. The funding
of our programs is subject to the overall U.S. Government budget and appropriation decisions and processes which are driven by
numerous factors, including geo-political events and macroeconomic conditions. It is expected that U.S. Government spending on
IT will decrease from 6% Compound Annual Growth Rate (CAGR) during the first decade of the 21st Century to 3%. (Source: Market
Research Media — U.S. Federal IT Market Forecast 2013-2018). The overall level of U.S. defense spending increased in recent
years for numerous reasons, including increases in funding of operations in Iraq and Afghanistan. However, with the winding down
of both wars, defense spending levels are becoming increasingly difficult to predict and are expected to be affected by numerous
factors. Such factors include priorities of the Administration and the Congress, and the overall health of the U.S. and world economies
and the state of governmental finances.
The Budget Control
Act of 2011 enacted 10-year discretionary spending caps which are expected to generate over $1 trillion in savings for the U.S.
Government, a substantial portion of which comes from DoD baseline spending reductions. In addition, the Budget Control Act of
2011 provides for additional automatic spending cuts (referred to as “sequestration”) totaling $1.2 trillion over nine
years which were implemented beginning in the U.S. Government fiscal year ending September 30, 2013 (GFY13). These reduction targets
will further reduce DoD and other federal agency budgets. Although the Office of Management and Budget has provided guidance to
agencies on implementing sequestration cuts, there remains much uncertainty about how exactly sequestration cuts will be implemented
and the impact those cuts will have on contractors supporting the government. We are not able to predict the impact of future budget
cuts, including sequestration, on our Company or our financial results. However, we expect that budgetary constraints and concerns
related to the national debt will continue to place downward pressure on DoD spending levels and that implementation of the automatic
spending cuts without change will reduce, delay or cancel funding for certain of our contracts - particularly those with unobligated
balances - and programs and could adversely impact our operations, financial results and growth prospects.
A significant reduction
in defense spending could have long-term consequences for our size and structure. In addition, reduction in government priorities
and requirements could impact the funding, or the timing of funding, of our programs, which could negatively impact our results
of operations and financial condition. In addition, we are involved in U.S. Government programs which are classified by the U.S.
Government and our ability to discuss these programs, including any risks and disputes and claims associated with and our performance
under such programs, could be limited due to applicable security restrictions.
The U.S. government systems integration
business is intensely competitive and we may not be able to win government bids when competing against much larger companies, which
could reduce our revenues.
Large computer systems
integration contracts awarded by the U.S. Government are few in number and are awarded through a formal competitive bidding process,
including indefinite delivery/indefinite quantity (IDIQ), GSA Schedule and other multi-award contracts. Bids are awarded on the
basis of price, compliance with technical bidding specifications, technical expertise and, in some cases, demonstrated management
ability to perform the contract. There can be no assurance that the Company will win and/or fulfill additional contracts. Moreover,
the award of these contracts is subject to protest procedures and there can be no assurance that the Company will prevail in any
ensuing legal protest. The Company’s failure to secure a significant dollar volume of U.S. Government contracts in the future
would adversely affect our Inpixon Federal subsidiary.
The U.S. Government
systems integration business is intensely competitive and subject to rapid change. The Company competes with a large number of
systems integrators, hardware and software manufacturers, and other large and diverse companies attempting to enter or expand their
presence in the U.S. Government market. Many of the existing and potential competitors have greater financial, operating and technological
resources than the Company. The competitive environment may require us to make changes in our pricing, services or marketing. The
competitive bidding process involves substantial costs and a number of risks, including significant cost and managerial time to
prepare bids and proposals for contracts that may not be awarded to us, or that may be awarded, but for which we do not receive
meaningful revenues. Accordingly, our success depends on our ability to develop services and products that address changing needs
and to provide people and technology needed to deliver these services and products. To remain competitive, we must consistently
provide superior service, technology and performance on a cost-effective basis to our customers. Our response to competition could
cause us to expend significant financial and other resources, disrupt our operations and strain relationships with partners, any
of which could harm our business and/or financial condition.
Inpixon Federal’s financial
performance is dependent on our ability to perform on our U.S. government contracts, which are subject to termination for convenience,
which could harm our results of operations and financial condition.
Inpixon Federal’s
financial performance is dependent on our performance under our U.S. Government contracts. With the Integrio acquisition the Company’s
government contract revenue has increased significantly and represents approximately 67% of its revenue during the year ended December
31, 2017. Government customers have the right to cancel any contract at their convenience. An unanticipated termination of, or
reduced purchases under, one of the Company’s major contracts whether due to lack of funding, for convenience or otherwise,
or the occurrence of delays, cost overruns and product failures could adversely impact our results of operations and financial
condition. If one of our contracts were terminated for convenience, we would generally be entitled to payments for our allowable
costs and would receive some allowance for profit on the work performed. If one of our contracts were terminated for default, we
would generally be entitled to payments for our work that has been accepted by the government. A termination arising out of our
default could expose us to liability and have a negative impact on our ability to obtain future contracts and orders. Furthermore,
on contracts for which we are a subcontractor and not the prime contractor, the U.S. Government could terminate the prime contract
for convenience or otherwise, irrespective of our performance as a subcontractor. The termination or cancellation of U.S. Government
contracts, no matter what the reason, could harm our results of operations and financial condition.
Our failure to comply with a variety
of complex procurement rules and regulations could result in our being liable for penalties, including termination of our U.S.
government contracts, disqualification from bidding on future U.S. government contracts and suspension or debarment from U.S. government
contracting that could adversely affect our financial condition
.
We must comply with
laws and regulations relating to the formation, administration and performance of U.S. Government contracts, which affect how we
do business with our customers and may impose added costs on our business. U.S. Government contracts generally are subject to:
(i) the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods
and services by the U.S. Government; (ii) department-specific regulations that implement or supplement FAR, such as the DoD’s
Defense Federal Acquisition Regulation Supplement (DFARS); and (iii) other applicable laws and regulations. We are also subject
to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain
contract negotiations; the Procurement Integrity Act, which regulates access to competitor bid and proposal information and government
source selection information, and our ability to provide compensation to certain former government officials; the Civil False Claims
Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to
the U.S. Government for payment or approval; and the U.S. Government Cost Accounting Standards, which impose accounting requirements
that govern our right to reimbursement under certain cost-based U.S. Government contracts. These regulations impose a broad range
of requirements, many of which are unique to government contracting, including various procurement, import and export, security,
contract pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply
with these regulations and requirements could result in reductions to the value of contracts, contract modifications or termination,
and the assessment of penalties and fines and lead to suspension or debarment, for cause, from government contracting or subcontracting
for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. Government
agencies such as the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA). These agencies review
a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.
The DCAA also reviews the adequacy of and a contractor’s compliance with its internal control systems and policies, including
the contractor’s purchasing, property, estimating, compensation and management information systems. During the term of any
suspension or debarment by any U.S. Government agency, contractors can be prohibited from competing for or being awarded contracts
by U.S. Government agencies. The termination of any of the Company’s significant government contracts or the imposition of
fines, damages, suspensions or debarment would adversely affect the Company’s business and financial condition.
The U.S. government may adopt new
contract rules and regulations or revise its procurement practices in a manner adverse to us at any time.
Our industry has experienced,
and we expect it will continue to experience, significant changes to business practices as a result of an increased focus on affordability,
efficiencies, and recovery of costs, among other items. U.S. Government agencies may face restrictions or pressure regarding the
type and amount of services that they may obtain from private contractors. Legislation, regulations and initiatives dealing with
procurement reform, mitigation of potential conflicts of interest and environmental responsibility or sustainability, as well as
any resulting shifts in the buying practices of U.S. Government agencies, such as increased usage of fixed price contracts, multiple
award contracts and small business set-aside contracts, could have adverse effects on government contractors, including us. Any
of these changes could impair our ability to obtain new contracts or renew our existing contracts when those contracts expire and
are subject to a renewed bidding process. Any new contracting requirements or procurement methods could be costly or administratively
difficult for us to implement and could adversely affect our future revenues, profitability and prospects.
We may incur cost overruns as a result
of fixed priced government contracts, which would have a negative impact on our operations.
Most of our U.S. Government
contracts are multi-award, multi-year IDIQ task order based contracts, which generally provide for fixed price schedules for products
and services, have no pre-set delivery schedules, have very low minimum purchase requirements, are typically competed over among
multiple awardees and force us to carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently
have more risk than cost reimbursable contracts. If we are unable to control costs or if our initial cost estimates are incorrect,
we can lose money on these contracts. In addition, some of our contracts have provisions relating to cost controls and audit rights,
and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Lower earnings caused by
cost overruns and cost controls would have a negative impact on our results of operations. The U.S. Government has the right to
enter into contract with other suppliers, which may be competitive with the Company’s IDIQ contracts. The Company also performs
fixed priced contracts under which the Company agrees to provide specific quantities of products and services over time for a fixed
price. Since the price competition to win both IDIQ and fixed price contracts is intense and the costs of future contract performance
cannot be predicted with certainty, there can be no assurance as to the profits, if any, that the Company will realize over the
term of such contracts.
Misconduct of employees, subcontractors,
agents and business partners could cause us to lose existing contracts or customers and adversely affect our ability to obtain
new contracts and customers and could have a significant adverse impact on our business and reputation.
Misconduct could include
fraud or other improper activities such as falsifying time or other records and violations of laws, including the Anti-Kickback
Act. Other examples could include the failure to comply with our policies and procedures or with federal, state or local government
procurement regulations, regulations regarding the use and safeguarding of classified or other protected information, legislation
regarding the pricing of labor and other costs in government contracts, laws and regulations relating to environmental, health
or safety matters, bribery of foreign government officials, import-export control, lobbying or similar activities, and any other
applicable laws or regulations. Any data loss or information security lapses resulting in the compromise of personal information
or the improper use or disclosure of sensitive or classified information could result in claims, remediation costs, regulatory
sanctions against us, loss of current and future contracts and serious harm to our reputation. Although we have implemented policies,
procedures and controls to prevent and detect these activities, these precautions may not prevent all misconduct, and as a result,
we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees,
subcontractors, agents or business partners could damage our reputation and subject us to fines and penalties, restitution or other
damages, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting
with federal, state or local government agencies, any of which would adversely affect our business, reputation and our future results.
We may fail to obtain and maintain
necessary security clearances, which may adversely affect our ability to perform on certain U.S. government contracts and depress
our potential revenues.
Many U.S. Government
programs require contractors to have security clearances. Depending on the level of required clearance, security clearances can
be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain necessary security clearances,
we may not be able to win new business, and our existing clients could terminate their contracts with us or decide not to renew
them. To the extent we are not able to obtain and maintain facility security clearances or engage employees with the required security
clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts,
as well as lose existing contracts, which may adversely affect our operating results and inhibit the execution of our growth strategy.
Our future revenues and growth prospects
could be adversely affected by our dependence on other contractors.
If other contractors
with whom we have contractual relationships either as a prime contractor or subcontractor eliminate or reduce their work with us,
or if the U.S. Government terminates or reduces these other contractors’ programs, does not award them new contracts or refuses
to pay under a contract our financial and business condition may be adversely affected. Companies that do not have access to U.S.
Government contracts may perform services as our subcontractor and that exposure could enhance such companies’ prospect of
securing a future position as a prime U.S. Government contractor which could increase competition for future contracts and impair
our ability to perform on contracts.
We may have disputes
with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer
concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, our
hiring of a subcontractor’s personnel or the subcontractor’s failure to comply with applicable law. Current uncertain
economic conditions heighten the risk of financial stress of our subcontractors, which could adversely impact their ability to
meet their contractual requirements to us. If any of our subcontractors fail to timely meet their contractual obligations or have
regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor or higher tier subcontractor
may be jeopardized. Significant losses could arise in future periods and subcontractor performance deficiencies could result in
our termination for default. A termination for default could eliminate a revenue source, expose us to liability and have an adverse
effect on our ability to compete for future contracts and task orders, especially if the customer is an agency of the U.S. Government.
Our international business exposes
us to geo-political and economic factors, regulatory requirements and other risks associated with doing business in foreign countries
.
Our foreign operations
pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address. We have foreign
operations in the Middle East which we are winding down. At the same time, we provide our products and services to customers worldwide
and expect to do business in South Asia. These risks differ from and potentially may be greater than those associated with our
domestic business.
Our international business
is sensitive to changes in the priorities and budgets of international customers and geo-political uncertainties, which may be
driven by changes in threat environments and potentially volatile worldwide economic conditions, various regional and local economic
and political factors, risks and uncertainties, as well as U.S. foreign policy. Our international sales are subject to U.S. laws,
regulations and policies, including the International Traffic in Arms Regulations (ITAR) and the Foreign Corrupt Practices Act
(see below) and other export laws and regulations. Due to the nature of our products, we must first obtain licenses and authorizations
from various U.S. Government agencies before we are permitted to sell our products outside of the U.S. We can give no assurance
that we will continue to be successful in obtaining the necessary licenses or authorizations or that certain sales will not be
prevented or delayed. Any significant impairment of our ability to sell products outside of the U.S. could negatively impact our
results of operations and financial condition.
Our international sales
are also subject to local government laws, regulations and procurement policies and practices which may differ from U.S. Government
regulations, including regulations relating to import-export control, investments, exchange controls and repatriation of earnings,
as well as to varying currency, geo-political and economic risks. Our international contracts may include industrial cooperation
agreements requiring specific in-country purchases, manufacturing agreements or financial support obligations, known as offset
obligations, and provide for penalties if we fail to meet such requirements. Our international contracts may also be subject to
termination at the customer’s convenience or for default based on performance, and may be subject to funding risks. We also
are exposed to risks associated with using foreign representatives and consultants for international sales and operations and teaming
with international subcontractors, partners and suppliers in connection with international programs. As a result of these factors,
we could experience award and funding delays on international programs and could incur losses on such programs, which could negatively
impact our results of operations and financial condition.
We are also subject to a number of other
risks including:
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the absence in some jurisdictions of effective laws to protect our intellectual property rights;
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multiple and possibly overlapping and conflicting tax laws;
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restrictions on movement of cash;
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the burdens of complying with a variety of national and local laws;
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political instability;
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currency fluctuations;
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longer payment cycles;
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restrictions on the import and export of certain technologies;
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price controls or restrictions on exchange of foreign currencies; and
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trade barriers.
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Our international operations are
subject to special U.S. government laws and regulations, such as the Foreign Corrupt Practices Act, and regulations and procurement
policies and practices, including regulations to import-export control, which may expose us to liability or impair our ability
to compete in international markets.
Our international operations
are subject to the U.S. Foreign Corrupt Practices Act (FCPA), and other laws that prohibit improper payments or offers of payments
to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining
or retaining business. We have operations and deal with governmental customers in countries known to experience corruption, including
certain countries in the Middle East and in the future, the Far East. Our activities in these countries create the risk of unauthorized
payments or offers of payments by one of our employees, consultants or contractors that could be in violation of various laws including
the FCPA, even though these parties are not always subject to our control. We are also subject to import-export control regulations
restricting the use and dissemination of information classified for national security purposes and the export of certain products,
services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work.
As a U.S. defense contractor we are
vulnerable to security threats and other disruptions that could negatively impact our business.
As a U.S. defense contractor,
we face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our
proprietary or classified information, and threats to physical security. These types of events could disrupt our operations, require
significant management attention and resources, and could negatively impact our reputation among our customers and the public,
which could have a negative impact on our financial condition, results of operations and liquidity. We are continuously exposed
to cyber-attacks and other security threats, including physical break-ins. Any electronic or physical break-in or other security
breach or compromise may jeopardize security of information stored or transmitted through our information technology systems and
networks. This could lead to disruptions in mission-critical systems, unauthorized release of confidential or otherwise protected
information and corruption of data. Although we have implemented policies, procedures and controls to protect against, detect and
mitigate these threats, we face advanced and persistent attacks on our information systems and attempts by others to gain unauthorized
access to our information technology systems are becoming more sophisticated. These attempts include covertly introducing malware
to our computers and networks and impersonating authorized users, among others, and may be perpetrated by well-funded organized
crime or state sponsored efforts. We seek to detect and investigate all security incidents and to prevent their occurrence or recurrence.
We continue to invest in and improve our threat protection, detection and mitigation policies, procedures and controls. In addition,
we work with other companies in the industry and government participants on increased awareness and enhanced protections against
cyber security threats. However, because of the evolving nature and sophistication of these security threats, which can be difficult
to detect, there can be no assurance that our policies, procedures and controls have or will detect or prevent any of these threats
and we cannot predict the full impact of any such past or future incident. We may experience similar security threats to the information
and technology systems that we develop, install or maintain under customer contracts. Although we work cooperatively with our customers
and other business partners to seek to minimize the impacts of cyber and other security threats, we must rely on the safeguards
put in place by those entities. Any remedial costs or other liabilities related to cyber or other security threats may not be fully
insured or indemnified by other means. Occurrence of any of these security threats could expose us to claims, contract terminations
and damages and could adversely affect our reputation, ability to work on sensitive U.S. Government contracts, business operations
and financial results.
Difficult conditions in the global
capital markets and the economy generally may materially adversely affect our business and results of operations, and we do not
expect these conditions to improve in the near future.
Our
results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the
U.S. and elsewhere around the world. Weak economic conditions generally, sustained uncertainty about global economic
conditions, concerns about future U.S. government budget impasses or a prolonged or further tightening of credit markets could
cause our customers and potential customers to postpone or reduce spending on technology products or services or put downward pressure
on prices, which could have an adverse effect on our business, results of operations or cash flows. Concerns over inflation,
energy costs, geopolitical issues and the availability of credit, in the U.S. have contributed to increased volatility and diminished
expectations for the economy and the markets going forward. These factors, combined with volatile oil prices and wavering business
and consumer confidence, have precipitated an economic slowdown and a global recession. Domestic and international equity markets
have been experiencing heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse
effect on our business. In the event of extreme prolonged market events, such as the global economic recovery, we could incur significant
losses.
The Company intends to use open source
blockchain technology in its IPA platform. This technology has been scrutinized by regulatory agencies and therefore we may
be impacted by unfavorable
regulatory action in one or more jurisdictions.
The Company intends
to use open source blockchain technology as a secure repository for “device reputation” acquired by its IPA platform.
Blockchain technologies have been the subject of scrutiny by various regulatory bodies around the world. The Company could be impacted
by one or more regulatory inquiries or actions, including but not limited to restrictions on the use of blockchain technology,
which could impede or limit the use of this technology within our product offerings.
We intend to use and leverage open
source technology in our IPA platform which may create risks of security weaknesses.
Some parts of our technology
may be based on open-source technology, including the blockchain technology that we intend to use in our IPA platform, There is
a risk that the development team, or other third parties may intentionally or unintentionally introduce weaknesses or bugs into
the core infrastructure elements of our technology solutions interfering with the use of such technology or causing loss to the
Company.
The use of new and untested technologies,
including blockchain technology, may result in risks that we may not be able to currently anticipate.
Blockchain technology
is a relatively new and untested technology. In addition to the risks set forth here, there are risks with the use of this technology
that the Company cannot anticipate. Risks may further materialize as unanticipated combinations or variations from the risks set
forth here.
We may not be able to develop new
products or
enhance our product to keep
pace with our industry’s rapidly changing technology
and customer requirements.
The industry in which
we operate is characterized by rapid technological changes, new product introductions, enhancements, and evolving industry standards.
Our business prospects depend on our ability to develop new products and applications for our technology in new markets that develop
as a result of technological and scientific advances, while improving performance and cost-effectiveness. New technologies, techniques
or products could emerge that might offer better combinations of price and performance than the blockchain technology solutions
that are being developed by the Company. It is important that we anticipate changes in technology and market demand. If we do not
successfully innovate and introduce new technology into our anticipated technology solutions or effectively manage the transitions
of our technology to new product offerings, our business, financial condition and results of operations could be harmed.
Risks Associated with
this Offering
You will experience immediate dilution
in the book value per share of common stock as a result of this offering.
Investors in this offering
will experience immediate dilution in their net tangible book value per share to the extent of the difference between the conversion
price per share of the Series 4 Preferred and the “adjusted” net tangible book value per share after giving effect
to the offering. Our net tangible book value as of December 31, 2017 was approximately ($34.2 million), or $(35.55) per share of
our common stock based on shares outstanding. Giving effect to the sale of 10,415 Units at a price of $1,000 per Unit, and assuming
the conversion of all the shares of Series 4 Preferred sold in the offering, after deducting placement agent fees and estimated
offering expenses payable by us, our net tangible book value as of December 31, 2017 would have been approximately ($26.1 million),
or ($1.11) per share of our common stock. This calculation excludes the proceeds, if any, from the exercise of the Warrants issued
in this offering. This amount represents an increase in net tangible book value of $34.44 per share to our existing stockholders
and an immediate dilution in net tangible book value of $1.57 per share to investors in this offering. If outstanding options and
warrants to purchase our common stock are exercised, you will experience additional dilution. See the section entitled “Dilution”
below.
Our management might not use the
proceeds of this offering effectively and regardless, we may be required to seek additional financing.
Our management has
broad discretion over the use of proceeds of this offering. In addition, our management has not designated a specific use for a
substantial portion of the proceeds of this offering. Accordingly, it is possible that our management may allocate the proceeds
in ways that do not improve our operating results. Accordingly, we may need to obtain additional funding in connection with our
continuing operations. We may raise this additional funding through the sale of equity, debt financings or other capital sources,
including potential collaborations with other companies or other strategic transactions and funding under government or other contracts.
In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe
we have sufficient funds for our current or future operating plans. Any additional fundraising efforts may divert our management
from their day-to-day activities, which may adversely affect our ability to pursue our business plan. We cannot guarantee that
future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Our issuance of additional securities,
whether equity or debt, or the possibility of such issuance, may cause the market price of our common stock to decline, and our
stockholders may not agree with our financing plans or the terms of such financings.
There is no established public market
for the Series 4 Preferred or the Warrants to purchase shares of our common stock being offered by us in this offering.
There is no established
public trading market for the Series 4 Preferred or the Warrants being offered in this offering, and we do not expect a market
to develop. In addition, we do not intend to apply to list either the Series 4 Preferred or the Warrants on any national securities
exchange or other nationally recognized trading system, including the Nasdaq Capital Market. Without an active market, the liquidity
of the Series 4 Preferred and the Warrants will be limited.
The Warrants may not have any
value.
The Warrants issued
in this offering will be immediately exercisable and expire on the fifth anniversary of the date of issuance. The Warrants will
have an initial exercise price per share equal to $0.67. In the event that our common stock price does not exceed the exercise
price of the Warrants during the period when the Warrants are exercisable, the Warrants may not have any value.
Holders of our Warrants will have
no rights as a common stockholder until they acquire our common stock.
Until you acquire shares
of our common stock upon exercise of your Warrants, you will have no rights with respect to our common stock. Upon exercise of
your Warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date
occurs after the exercise date.
Risks Related to Our Securities
We are eligible to be treated as
an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and we cannot be certain
if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging
growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue
to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to
other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, (2) reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements
and two years of selected financial data in this annual report. We could be an emerging growth company for up to five years, although
circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates
exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.07 billion or more during
any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December
31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease
to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify
as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure
requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot
predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find
our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price
may be more volatile.
Our independent registered
public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting
until the later of our second annual report or the first annual report required to be filed with the Commission following the date
we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure you that there will not
be material weaknesses or significant deficiencies in our internal controls in the future.
Under the JOBS Act,
emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply
to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards
and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies.
We do not intend to pay cash dividends
to our stockholders, so it is unlikely that stockholders will receive any return on their investment in our Company prior to selling
stock in the Company.
We have never paid
any dividends to our common stockholders as a public company. We currently intend to retain any future earnings for funding growth
and, therefore, do not expect to pay any cash dividends in the foreseeable future. If we determine that we will pay cash dividends
to the holders of our common stock, we cannot assure that such cash dividends will be paid on a timely basis. The success of your
investment in the Company will likely depend entirely upon any future appreciation. As a result, you will not receive any return
on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors”
section, you may not receive any return on your investment even when you sell your shares in our Company.
Anti-Takeover, Limited Liability
and Indemnification Provisions
Some provisions of our Articles of
Incorporation and Bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit
the opportunity of our stockholders to sell their shares at a favorable price.
Under our Articles
of Incorporation, our Board of Directors may issue additional shares of common or preferred stock. Our Board of Directors has the
ability to authorize “blank check” preferred stock without future shareholder approval. This makes it possible for
our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any
attempt to acquire us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders
would receive a premium over the market price for their shares and/or any other transaction that might otherwise be deemed to be
in their best interests, and thereby protects the continuity of our management and limits an investor’s opportunity to profit
by their investment in the Company. Specifically, if in the due exercise of its fiduciary obligations, the Board of Directors were
to determine that a takeover proposal was not in our best interest, shares could be issued by our Board of Directors without stockholder
approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:
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diluting the voting or other rights of the proposed acquirer or insurgent stockholder group,
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putting a substantial voting bloc in institutional or other hands that might undertake to support the incumbent Board of Directors, or
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effecting an acquisition that might complicate or preclude the takeover.
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Nevada Anti-Takeover Law may discourage
acquirers and eliminate a potentially beneficial sale for our stockholders.
We are subject to the
provisions of Section 78.438 of the Nevada Revised Statutes concerning corporate takeovers. This section prevents many Nevada corporations
from engaging in a business combination with any interested stockholder, under specified circumstances. For these purposes, a business
combination includes a merger or sale of more than 5% of our assets, and an interested stockholder includes a stockholder who owns
10% or more of our outstanding voting stock, as well as affiliates and associates of these persons. Under these provisions, this
type of business combination is prohibited for three years following the date that the stockholder became an interested stockholder
unless:
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the transaction in which the stockholder became an interested stockholder is approved by the Board of Directors prior to the date the interested stockholder attained that status;
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on consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, the interested stockholder owned at least 90% of the voting stock of the corporation outstanding at the time the transaction was commenced, excluding those shares owned by persons who are directors and also officers; or
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on or subsequent to that date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least a majority of the outstanding voting stock that is not owned by the interested stockholder.
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This statute could
prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire
us.
Our indemnification of our officers
and directors may cause us to use corporate resources to the detriment of our stockholders.
Our Articles of Incorporation
eliminate the personal liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors
to the fullest extent permitted by Nevada law. This limitation does not affect the availability of equitable remedies, such as
injunctive relief or rescission. Our Articles of Incorporation require us to indemnify our directors and officers to the fullest
extent permitted by Nevada law, including in circumstances in which indemnification is otherwise discretionary under Nevada law.
Under Nevada law, we
may indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant or respondent
in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the person:
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conducted himself or herself in good faith, reasonably believed, in the case of conduct in his or her official capacity as our director or officer, that his or her conduct was in our best interests, and, in all other cases, that his or her conduct was at least not opposed to our best interests; and
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in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful.
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These persons may be
indemnified against expenses, including attorneys’ fees, judgments, fines, including excise taxes, and amounts paid in settlement,
actually and reasonably incurred by the person in connection with the proceeding. If the person is found liable to the corporation,
no indemnification will be made unless the court in which the action was brought determines that the person is fairly and reasonably
entitled to indemnity in an amount that the court will establish.
Insofar as indemnification
for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions,
we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
The obligations associated with being
a public company require significant resources and management attention, which may divert from our business operations.
Following consummation
of our initial public offering, we became subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act
of 2002 or the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports, proxy statements,
and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls
and procedures for financial reporting. Our Chief Executive Officer and Chief Financial Officer are required to certify that our
disclosure controls and procedures are effective in ensuring that material information we are required to disclose in reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. We will need to hire additional financial reporting, internal controls and other financial personnel
in order to enhance appropriate internal controls and reporting procedures. As a result, we will incur significant legal, accounting
and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s
attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and
financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting
and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient
to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may
incur in order to comply with these requirements. We anticipate that these costs will materially increase our selling, general
and administrative expenses.
Section 404 of the
Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting.
In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting,
we may identify deficiencies. Additionally, in the event we are no longer a smaller reporting company, as defined under the Exchange
Act, and we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act of 2002, then we may not be
able to obtain the independent registered public accountants’ certifications required by that act, which may preclude us
from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares
to continue to be listed on The Nasdaq Capital Market.
If we fail to establish and maintain
an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability
to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price
of our common stock.
Effective internal
controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment
existed, and our business and reputation with investors may be harmed. With each prospective acquisition we may make we will conduct
whatever due diligence is necessary or prudent to assure us that the acquisition target can comply with the internal controls requirements
of the Sarbanes-Oxley Act. Notwithstanding our diligence, certain internal controls deficiencies may not be detected. As a result,
any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. We
have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in
the future discover areas of our internal controls that need improvement.
Public company compliance may make it more difficult to
attract and retain officers and directors.
The Sarbanes-Oxley
Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company,
these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public
company, these rules and regulations may make it more difficult and expensive for us to maintain our director and officer liability
insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our
Board of Directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our stock price may be volatile.
The market price of
our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which
are beyond our control, including the following:
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our ability to execute our business plan and complete prospective acquisitions;
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changes in our industry;
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competitive pricing pressures;
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our ability to obtain working capital financing;
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additions or departures of key personnel;
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limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock;
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sales of our common stock (particularly following effectiveness of this registration statement);
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operating results that fall below expectations;
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regulatory developments;
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economic and other external factors;
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period-to-period fluctuations in our financial results;
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our inability to develop or acquire new or needed technologies;
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the public’s response to press releases or other public announcements by us or third parties, including filings with the SEC;
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changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
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the development and sustainability of an active trading market for our common stock; and
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any future sales of our common stock by our officers, directors and significant stockholders.
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In addition, the securities
markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance
of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Our shares of common stock may be
thinly traded, and the price may not reflect our value, and there can be no assurance that there will be an active market for our
shares of common stock either now or in the future.
Our shares of common
stock are thinly traded, our common stock is available to be traded and is held by a small number of holders, and the price may
not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common
stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other
things. We will take certain steps including utilizing investor awareness campaigns, investor relations firms, press releases,
road shows and conferences to increase awareness of our business. Any steps that we might take to bring us to the awareness of
investors may require that we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness
generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able
to liquidate their investment or liquidate it at a price that reflects the value of the business, and trading may be at an inflated
price relative to the performance of the Company due to, among other things, the availability of sellers of our shares. If an active
market should develop, the price may be highly volatile. Because there is currently a relatively low per-share price for our common
stock, many brokerage firms or clearing firms are not willing to effect transactions in the securities or accept our shares for
deposit in an account. Many lending institutions will not permit the use of low priced shares of common stock as collateral for
any loans.
Offers or availability for sale of
a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders
sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule
144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to
as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an
overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing
through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
In general, a non-affiliated
person who has held restricted shares for a period of six months, under Rule 144, may sell into the market our common stock all
of their shares, subject to the Company being current in its periodic reports filed with the SEC. As of March 20, 2018, approximately
9,316,320 shares of common stock of the 9,339,291 shares outstanding were free trading.
Sales of substantial
amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price
of our common stock and could impair our ability to raise capital through the sale of additional shares.
In addition, as of
April 20, 2018, there were 8,302,590 shares subject to outstanding warrants, 6,933 shares subject to outstanding options under
the 2011 Employee Stock Incentive Plan, 1,389 shares subject to options not under any of the Company’s equity plans, 630,139
shares issuable upon the conversion of the November Note, 44,000 shares of common stock reserved for issuance to service providers,
an additional 98,673 shares reserved for future issuance under the 2011 Employee Stock Incentive Plan, up to 34,627,066 additional
shares of common stock underlying the February 2018 Warrants as a result of the anti-dilution protection provisions that will be
triggered upon consummation of this offering and up to an additional 3,000,000 shares of common stock which may be issued under
the 2018 Employee Stock Incentive Plan that will become, or have already become, eligible for sale in the public market to the
extent permitted by any applicable vesting requirements, the lock-up agreements and Rule 144 under the Securities Act.
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 19, 2017, we
received written notice from the Listing Qualifications Staff of Nasdaq notifying us that we no longer comply with Nasdaq Listing
Rule 5550(b)(1) due to our failure to maintain a minimum of $2,500,000 in stockholders’ equity (the “Minimum Stockholders’
Equity Requirement”) or any alternatives to such requirement.
On October 24, 2017,
the Company received notification (the “Staff Delisting Determination”) from Nasdaq that it has 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 (the “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. The Company’s continued listing on Nasdaq through April 23, 2018
and thereafter is subject to the Company’s compliance with certain interim milestones, which, if not timely satisfied, may
result in the delisting of the Company’s common stock from Nasdaq.
As of December
31, 2017, we had a stockholder’s deficit equal to $18,853,000 and therefore, were not compliant with the
stockholder’s equity requirement as of such date. While we have raised net proceeds of approximately $18 million since
December 31, 2018 prior to taking into account the securities issued in this Offering, we are pursuing actions to cure the
deficiency including, but not limited to the contemplated spin-off of our Infrastructure segment and the consummation of this
offering, but there are no assurances that any such transaction will be consummated or that the transaction will be
sufficient to satisfy Nasdaq or that the Company will be able to sustain compliance in the long term. If we are unable to
complete such transactions in an amount that will be sufficient to satisfy our stockholders’ equity requirement and
ensure the Nasdaq panel that we will be able to maintain compliance with the Minimum Stockholders’ Equity Requirement
by April 23, 2018, our common stock may be immediately delisted, which could make trading our common stock more difficult for
investors, potentially leading to declines in our share price and liquidity. Without a Nasdaq listing, stockholders may have
a difficult time getting a quote for the sale or purchase of our stock, the sale or purchase of our stock would likely be
made more difficult and the trading volume and liquidity of our stock could decline. Delisting from Nasdaq could also result
in negative publicity and could also make it more difficult for us to raise additional capital. Further, if we are delisted,
we would also incur additional costs under state blue sky laws in connection with any sales of our securities. These
requirements could severely limit the market liquidity of our common stock and the ability of our stockholders to sell
our common stock in the secondary market. If our common stock is delisted by Nasdaq, our common stock may be eligible to
trade on an over-the-counter quotation system, such as the OTCQB market, where an investor may find it more difficult to sell
our stock or obtain accurate quotations as to the market value of our common stock. We cannot assure you that our common
stock, if delisted from Nasdaq, will be listed on another national securities exchange or quoted on an over-the counter
quotation system.
On August 14, 2017,
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 had a grace period of 180 calendar days, or until February 12, 2018, to
regain compliance with the minimum closing bid price requirement for continued listing. We effected a 1-for-30 reverse stock split
on February 6, 2018 in response to our non-compliance with the minimum bid price requirement and as of the date of this filing
we have achieved compliance with the minimum bid price requirement, however, since then market price for or common stock has declined
to less than $1.00. Therefore there are no assurances that we will be able to continue to maintain such compliance.
There may be future sales or other
dilution of our equity, which may adversely affect the market price of our common stock.
We are generally not
restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock. The market price of our common stock could decline as a result of sales of common
stock or securities that are convertible into or exchangeable for, or that represent the right to receive common stock or the perception
that such sales could occur.
If securities or industry analysts
do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our
stock price and trading volume could decline.
The
trading market for our common stock relies in part on the research and reports that equity research analysts publish about us
and our business. We do not control these analysts. The price of our common stock could decline if one or more equity research
analysts downgrade our common stock or if they issue other unfavorable commentary or cease publishing reports about us or our
business.
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, Inpixon USA, 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 Inpixon USA 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, Inpixon USA and Inpixon USA stockholders could be subject to significant tax liabilities, and, in
certain circumstances, the Company could be required to indemnify Inpixon USA 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. We anticipates that a corporate level gain
is likely to be triggered as a result of both pre and post-spin 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 Inpixon USA for material taxes and other related amounts pursuant to indemnification obligations under the tax matters
agreement.
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 Inpixon USA 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 Inpixon Federal in connection with the spin-off, we may be required to
indemnify Inpixon USA 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.
After the
spin-off, certain members of management and directors may hold stock in both Inpixon and Inpixon USA, and as a result may face
actual or potential conflicts of interest.
After
the spin-off, certain of the management and directors of each of Inpixon and Inpixon USA may own both Inpixon common stock and
Inpixon USA common stock. This ownership overlap could create, or appear to create, potential conflicts of interest when Inpixon
USA management and directors and Inpixon’s management and directors face decisions that could have different implications
for Inpixon USA and Inpixon. For example, potential conflicts of interest could arise in connection with the resolution of any
dispute between Inpixon USA and Inpixon regarding the terms of the agreements governing the spin-off and Inpixon USA relationship
with Inpixon thereafter. Potential conflicts of interest may also arise out of any commercial arrangements that Inpixon USA or
Inpixon may enter into in the future.