The accompanying condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial
information which are the accounting principles that are generally accepted in the United States of America and in accordance
with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of
management, the condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the
interim periods presented.
The results for the
period ended June 30, 2018 are not necessarily indicative of the results of operations for the full year. These financial statements
and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our audited
consolidated financial statements for the fiscal years ended December 31, 2017 and 2016 included in the Annual Report on Form
10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 27, 2018.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
1 - Organization and Nature of Business and Going Concern
Inpixon,
through its wholly-owned subsidiaries, Sysorex, Inc., formerly known as (f/k/a) Inpixon USA (“Sysorex”), Sysorex Government Services, Inc., f/k/a Inpixon Federal,
Inc. (“SGS”), Inpixon Canada, Inc. (“Inpixon Canada”), and its majority-owned subsidiary Sysorex
India Limited (“Sysorex India”) (unless otherwise stated or the context otherwise requires, the terms
“Inpixon” “we,” “us,” “our” and the “Company” refer collectively
to Inpixon and the above subsidiaries), provides Big Data analytics and location based products and related services for the
cyber-security and Internet of Things markets. The Company is headquartered in California, and has sales and subsidiary
offices in Virginia, California, Hyderabad, India and Vancouver, Canada.
On
December 31, 2017, and as more fully described in Note 4, the Company acquired approximately 82.5% of the outstanding equity securities
of Sysorex India which is in the business of IT Services including software application and development, quality assurance (“QA”)
and testing and graphical user interface (“GUI”) development.
On May 18, 2018 Inpixon Federal, Inc.
formerly changed its name with the State of Virginia to Sysorex Government Services, Inc. On July 26, 2018, and as more fully
described in Note 17, Inpixon USA was part of a reorganization whereby the surviving entity was named Sysorex, Inc.
Going
Concern and Management’s Plans
As of June 30, 2018, the Company has a
working capital deficiency of approximately $10.2 million. For the six months ended June 30, 2018, the Company incurred a net
loss of approximately $12.1 million. The aforementioned factors raise substantial doubt about the Company’s ability to continue
as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification
of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date
the financial statements are issued.
On January 5, 2018, the Company entered
into a securities purchase agreement with certain investors pursuant to which it sold an aggregate of 599,812 shares of the Company’s
common stock and warrants to purchase up to 599,812 shares of common stock at a purchase price of $5.31 per share of common stock
for aggregate gross proceeds of approximately $3.2 million. On February 20, 2018, the Company completed a public offering consisting
of an aggregate of 3,325,968 Class A units, at a price to the public of $2.35 per Class A unit, and 10,184.9752 Class B units,
at a price to the public of $1,000 per Class B unit for aggregate gross proceeds of approximately $18 million. On April 24, 2018,
the Company completed a public offering consisting of 10,115 units at a price to the public of $1,000 per unit for aggregate net
proceeds after expenses of approximately $9.2 million.
The Company expects its capital resources
as of June 30, 2018, availability on the Payplant Facility to finance purchase orders and invoices in an amount equal to 80% of
the face value of purchase orders received (as described in Note 8), funds from higher margin business line expansion
and credit limitation improvements should be sufficient to fund planned operations during the year ending December 31, 2018. However,
the Company is pursuing strategic transactions and if the Company pursues acquisitions, other expansion plans or changes its business
plan it may need to raise additional capital. The Company may raise the additional capital, if needed, through the issuance of
equity, equity-linked or debt securities. The Company’s board of directors has approved the separation of the Company’s
infrastructure business segment, sometimes referred to as the Value Added Reseller (“VAR”) business from the indoor
positioning analytics business, pursuant to a Separation and Distribution Agreement, dated August 7, 2018 which is anticipated
to reduce operating expenses and eliminate substantially all of the Company’s trade debt. In connection with such a transaction,
the Company has agreed to contribute
an amount equal to $2 million to Sysorex from Inpixon’s
cash and cash equivalents on Inpixon’s balance sheet at the effective time of the spin-off which amount shall be reduced
by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied by Inpixon from
June 30, 2018 through the distribution date which
will reduce the Company’s available capital resources. The Company’s
condensed consolidated financial statements as of June 30, 2018 have been prepared under the assumption that we will continue as
a going concern for the next twelve months from the date the financial statements are issued. Management’s plans and assessment
of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue
as a going concern, is dependent upon the ability to attain further operating efficiency, reduce expenditures, and, ultimately,
to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial doubt about
our ability to continue as a going concern. The Company’s condensed consolidated financial statements as of June 30, 2018
do not include any adjustments that might result from the outcome of this uncertainty.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
2 - Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally
accepted accounting principles (“GAAP”) for interim financial information, which are the accounting principles that
are generally accepted in the United States of America. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the
six month period ended June 30, 2018 is not necessarily indicative of the results to be expected for the year ending December
31, 2018. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s
audited consolidated financial statements and notes for the years ended December 31, 2017 and 2016 included in the Annual Report
on Form 10-K filed with the U.S. Securities and Exchange Commission on March 27, 2018.
Note
3 - Summary of Significant Accounting Policies
The
Company’s complete accounting policies are described in Note 2 to the Company’s audited consolidated financial statements
and notes for the years ended December 31, 2017 and 2016.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ
from those estimates. The Company’s significant estimates consist of:
|
●
|
the
valuation of stock-based compensation;
|
|
|
|
|
●
|
the
allowance for doubtful accounts;
|
|
|
|
|
●
|
the
valuation allowance for the deferred tax asset; and
|
|
|
|
|
●
|
impairment
of long-lived assets and goodwill.
|
Revenue
Recognition
Hardware
and Software Revenue Recognition
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”,
in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance
Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers
(Topic 606)”, or ASU 2016-12. This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue
From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for
revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date
of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It has replaced most existing revenue
recognition guidance under GAAP. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect
adjustment as of the date of adoption. We have adopted Topic 606 using a modified retrospective approach and will be applied prospectively
in our financial statements from January 1, 2018 forward. Revenues under Topic 606 are required to be recognized either at a “point
in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated
using a five-step model. The adoption of Topic 606 did not have a material impact on our financial statements, either at initial
implementation nor will it have a material impact on an ongoing basis.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Revenue
Recognition (continued)
For sales of hardware and software products,
the Company’s performance obligation is satisfied at a point in time when they are shipped to the customer. This is when
the customer has title to the product and the risks and rewards of ownership. The delivery of products to our customers occurs
in a variety of ways, including (i) as a physical product shipped from the Company’s warehouse, (ii) via drop-shipment by
a third-party vendor, or (iii) via electronic delivery with respect to software licenses. The Company leverages drop-ship arrangements
with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its
warehouse. In such arrangements, the Company negotiates the sale price with the customer, pays the supplier directly for the product
shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability of the
product and ensuring that such product meets the standards and requirements of the customer. Accordingly, the Company is the principal
in the transaction with the customer and records revenue on a gross basis. The Company receives fixed consideration for sales
of hardware and software products. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer
approved invoice. The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred
because the amortization period of the asset that otherwise would have been recognized is less than a year.
Software
As A Service Revenue Recognition
With
respect to sales of our maintenance, consulting and other service agreements including our digital advertising and electronic
services, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation
is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period.
The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous
access to its service.
License
and Maintenance Services Revenue Recognition
The Company provides a customized design and configuration solution
for its customers and in this capacity resells hardware, software and other IT equipment license and maintenance services in exchange
for fixed fees. The Company selects the vendors and sells the products and services, including maintenance services, that best
fit the customer’s needs. For sales of maintenance services and warranties, the customer obtains control at the point in
time that the services to be provided by a third party vendor are purchased by the customer and therefore the Company’s
performance obligation to provide the overall systems solution is satisfied at that time. The Company’s customers generally
pay within 30 to 60 days from the receipt of a customer approved invoice.
Typically, the Company sells maintenance contracts
between the manufacturer and the customer for a separate fee with initial contractual periods ranging from one to five years with
renewal for additional periods thereafter. The Company’s performance obligation is to work with customers to identify the
computer maintenance and warranty services that best suit the customer’s needs and sell them those products and services
however the maintenance is provided to the customer by the manufacturer. While a third party is responsible for actually performing
the services for the customer, historically, in accordance with its policies and historical business practices, the Company has
assumed responsibility for ensuring that the recommended services that are provided as part of the overall solution meets client
expectations and therefore the Company assumes control of the services to be provided before they are performed for the benefit
of the customer. In addition, the Company has full discretion in establishing the sale price to the customer which is determined
based on the entire customized solution of products and services offered to the customer and bears the credit risk by paying the
supplier for purchased services and collecting payment from the customer and therefore recognizes revenue from maintenance services
on a gross basis, For these contracts the customer is invoiced one time and pays up front for the full term of the warranty and
maintenance contract. Prior to the adoption of ASC 606 as of January 1, 2018, revenue from these contracts was recognized ratably
over the contract period with the unearned revenue recorded as deferred revenue and amortized over the contract period. Adoption
of Topic 606 has changed the recognition of our license and maintenance revenue as it was previously recognized over time however
under the new policy it is recognized at a point in time and therefore the Company’s accumulated deferred revenue was accelerated
as of January 1, 2018.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Revenue
Recognition (continued)
Professional
Services Revenue Recognition
The
Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases,
or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours
worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended.
Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the
practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds
directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes
revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because
the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in
Accounting Standards Codification (“ASC”) 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized
as soon as they become known. For the three and six months ended June 30, 2018 and 2017, the Company did not incur any such losses.
These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term
contracts are derived principally with various United States government agencies and commercial customers.
Contract
Balances
The
timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue
is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision
of the related services, we record deferred revenue until the performance obligations are satisfied. The Company had deferred
revenue of approximately $109,000 as of June 30, 2018 related to cash received in advance for product maintenance services provided
by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for these maintenance
services and recognize the deferred revenue over the next twelve months.
Stock-Based
Compensation
The
Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity
instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized
as an expense over the period during which the recipient is required to provide services in exchange for that award.
Options
and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted
to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments,
as adjusted, is expensed over the related vesting period.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Stock-Based
Compensation (continued)
The
Company incurred stock-based compensation charges, net of estimated forfeitures, of $571,000 and $710,000 for the three months
ended June 30, 2018 and 2017, and $857,000 and $993,000 for the six months ended June 30, 2018 and 2017, respectively,
which are included in general and administrative expenses. The following table summarizes the nature of such charges for the periods
then ended (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Compensation
and related benefits
|
|
$
|
571
|
|
|
$
|
250
|
|
|
$
|
777
|
|
|
$
|
512
|
|
Professional
and legal fees
|
|
|
--
|
|
|
|
145
|
|
|
|
80
|
|
|
|
159
|
|
Acquisition
transaction costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
7
|
|
Interest
expense
|
|
|
--
|
|
|
|
315
|
|
|
|
--
|
|
|
|
315
|
|
Totals
|
|
$
|
571
|
|
|
$
|
710
|
|
|
$
|
857
|
|
|
$
|
993
|
|
Net
Loss Per Share
The
Company computes basic and diluted earnings per share by dividing net loss by the weighted average number of common shares outstanding
during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant
to the exercise of options and warrants in the calculation of diluted net loss per common shares would have been anti-dilutive.
The
following table summarizes the number of common shares and common share equivalents excluded from the calculation of diluted net
loss per common share for the six months ended June 30, 2018 and 2017:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
2,722,309
|
|
|
|
12,228
|
|
Warrants
|
|
|
64,918,852
|
|
|
|
9,581
|
|
Convertible preferred stock
|
|
|
32,110,791
|
|
|
|
--
|
|
Convertible note
|
|
|
630,139
|
|
|
|
--
|
|
Convertible debenture
|
|
|
--
|
|
|
|
3,927
|
|
Reserved for service providers
|
|
|
44,000
|
|
|
|
--
|
|
Totals
|
|
|
100,426,091
|
|
|
|
25,736
|
|
Preferred
Stock
The
Company applies the accounting standards for distinguishing liabilities from equity under GAAP when determining the classification
and measurement of its convertible preferred stock. Preferred shares subject to mandatory redemption are classified as liability
instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified
as permanent equity.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Reclassification
Certain
accounts in the prior year’s financial statements have been reclassified for comparative purposes to conform to the presentation
in the current year’s financial statements. These reclassifications have no effect on previously reported earnings.
Derivative
Liabilities
During the year ended December 31, 2016,
the Company issued a convertible debenture that included reset provisions considered to be down-round protection. In addition,
the Company issued warrants that include a fundamental transaction clause which provide for the warrant holders to be paid in cash
the fair value of the warrants as computed under a Black Scholes valuation model. The Company determined that the conversion feature
and warrants are derivative instruments pursuant to ASC 815 “Derivatives and Hedging” issued by the FASB. The accounting
treatment of derivative financial instruments requires that the Company bifurcate the conversion feature and record it as a liability
at fair value and the fair value of the warrants were computed as defined in the agreement. The instruments are marked-to-market
at fair value as of each balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities
for each reporting period. The fair value of the conversion feature was determined using the Binomial Lattice model. The Company
reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period,
the contract is reclassified as of the date of the event that caused the reclassification. As of June 30, 2018, the fair value
of the derivative liability was $0.
Software Development Costs
The Company develops and utilizes internal
software for the processing of data provided by its customers. Costs incurred in this effort are accounted for under the provisions
of FASB ASC 350-40, Internal Use Software and ASC 985-20, Software – Cost of Software to be Sold, Leased or Marketed, whereby
direct costs related to development and enhancement of internal use software is capitalized, and costs related to maintenance are
expensed as incurred. The Company capitalizes its direct internal costs of labor and associated employee benefits that qualify
as development or enhancement. These software development costs are amortized over the estimated useful life which management has
determined ranges from one to five years.
Impairment of Long-Lived Assets
The Company assesses the recoverability
of its long-lived assets, including property and equipment and intangible assets, when there are indications that the assets might
be impaired. When evaluating assets for potential impairment, the Company compares the carrying value of the asset to its estimated
undiscounted future cash flows. If an asset’s carrying value exceeds such estimated cash flows (undiscounted and with interest
charges), the Company records an impairment charge for the difference.
Based on its assessments, the Company did
not record any impairment charges for the six months ended June 30, 2018 and 2017.
Recent
Accounting Standards
In
November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
(“ASU 2015-17”). The FASB issued ASU 2015-17 as part of its ongoing Simplification Initiative, with the objective
of reducing complexity in accounting standards. The amendments in ASU 2015-17 require entities that present a classified balance
sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting
requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally,
the amendments in ASU 2015-17 align the deferred income tax presentation with the requirements in International Accounting Standards
(IAS) 1, Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for financial statements issued for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2015-17
did not have a material impact on its financial statements.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Recent
Accounting Standards (continued)
In
September 2017, the FASB issued ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers
(Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the
July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” that enhances the guidance
surrounding sale leaseback transactions, accounting for taxes on leveraged leases and leases with third party value. The related
amendments to the Topics described above become effective on the same schedule as Topics 605, 606, 840 and 842.
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”).
ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition (“ASC 605”) and most
industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification on a number of
specific issues as well as requiring additional disclosures. The core principle of ASC 606 requires that an entity recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Recent
Accounting Standards (continued)
The
Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method which was applied to all contracts at
the date of initial application. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment
to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under
the accounting standards in effect for those periods. The cumulative effect of the changes made to our consolidated January 1,
2018 balance sheet for the adoption of
ASU 2014-09, Revenue - Revenue from Contracts with Customers
were as follows (in
millions):
|
|
Balance
at December 31, 2017
|
|
|
Adjustments
due to ASU 2014-09
|
|
|
Balance
at January 1, 2018
|
|
Balance
Sheet:
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Prepaid
licenses & maintenance contracts, current
|
|
$
|
4,638
|
|
|
$
|
(4,638
|
)
|
|
$
|
--
|
|
Prepaid
licenses & maintenance contracts, non-current
|
|
$
|
2,264
|
|
|
$
|
(2,264
|
)
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
5,611
|
|
|
$
|
(5,553
|
)
|
|
$
|
58
|
|
Deferred
revenue, current
|
|
$
|
2,636
|
|
|
$
|
(2,636
|
)
|
|
$
|
--
|
|
Deferred
revenue, non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
deficit
|
|
$
|
(94,486
|
)
|
|
$
|
1,287
|
|
|
$
|
(93,199
|
)
|
In
accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated
income statement and balance sheet was as follows (in millions):
|
|
For the Three Months Ended June 30, 2018
|
|
|
|
As Reported
|
|
|
Balances Without
Adoption of ASC 606
|
|
|
Effect of Change Higher/(Lower)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Products (A)
|
|
|
707
|
|
|
|
2,345
|
|
|
|
(1,638
|
)
|
Services
|
|
|
1,121
|
|
|
|
1,121
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products (A)
|
|
|
343
|
|
|
|
1,728
|
|
|
|
(1,385
|
)
|
Services
|
|
|
474
|
|
|
|
474
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,011
|
|
|
|
1,264
|
|
|
|
(253
|
)
|
Income/Loss from Operations
|
|
|
(6,449
|
)
|
|
|
(6,196
|
)
|
|
|
(253
|
)
|
Net Income (Loss)
|
|
|
(5,855
|
)
|
|
|
(5,602
|
)
|
|
|
(253
|
)
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Recent
Accounting Standards (continued)
|
|
For the Six Months Ended
June 30, 2018
|
|
|
|
As Reported
|
|
|
Balances Without
Adoption
of ASC 606
|
|
|
Effect of Change
Higher/(Lower)
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Products (A)
|
|
|
1,182
|
|
|
|
4,852
|
|
|
|
(3,670
|
)
|
Services
|
|
|
2,740
|
|
|
|
2,740
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Products (A)
|
|
|
598
|
|
|
|
3,700
|
|
|
|
(3,102
|
)
|
Services
|
|
|
1,078
|
|
|
|
1,078
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
2,246
|
|
|
|
2,814
|
|
|
|
(568
|
)
|
Income/Loss from Operations
|
|
|
(12,057
|
)
|
|
|
(11,489
|
)
|
|
|
(568
|
)
|
Net Income (Loss)
|
|
|
(12,099
|
)
|
|
|
(11,531
|
)
|
|
|
(568
|
)
|
|
|
As of June 30, 2018
|
|
|
|
As Reported
|
|
|
Balances Without Adoption
of ASC 606
|
|
|
Effect of Change
Higher/(Lower)
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Prepaid Licenses & Maintenance Contracts, current
|
|
|
12
|
|
|
|
1,548
|
|
|
|
(1,536
|
)
|
Prepaid Licenses & Maintenance Contracts, non-Current
|
|
|
--
|
|
|
|
2,264
|
|
|
|
(2,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue , current
|
|
|
109
|
|
|
|
1,994
|
|
|
|
(1,885
|
)
|
Deferred Revenue, non-current
|
|
|
--
|
|
|
|
2,636
|
|
|
|
(2,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit
|
|
|
(105,299
|
)
|
|
|
(106,019
|
)
|
|
|
720
|
|
|
(A)
|
Product
revenues and cost of revenues include maintenance/licenses contracts that are sold by
the company but performed by third parties.
|
Reverse
Stock Split
On
March 1, 2017, the Company effectuated a 1-for-15 reverse stock split of its outstanding common stock. In addition,
on February 6, 2018, the Company effectuated a 1-for-30 reverse stock split of its outstanding common stock. The financial
statements and accompanying notes give effect to both of the reverse stock splits as if they occurred at the beginning of the
first period presented.
Subsequent
Events
The
Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the condensed
consolidated financial statements to determine if any of those events and/or transactions requires adjustment to or disclosure
in the consolidated financial statements.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
4 - Sysorex India Acquisition
Effective
as of December 31, 2017, the Company acquired approximately 82.5% of the outstanding equity securities of Sysorex India from Sysorex
Consulting, Inc. (“SCI”) pursuant to that certain Stock Purchase Agreement, dated as of December 31, 2017, by and among
the Company, SCI and Sysorex India, in exchange for the assignment by the Company of $37,000 of outstanding receivables.
The
Company acquired Sysorex India to pursue sales and business development opportunities in India. In addition, the Company is looking
to potentially expand its engineering and development teams in India. Sysorex India is in the business of IT Services including
software application and development, QA and testing and GUI development.
The
purchase price is allocated as follows (in thousands):
|
|
|
|
|
|
|
|
Assets
Acquired:
|
|
|
|
Cash
|
|
$
|
1
|
|
Fixed
assets
|
|
|
14
|
|
Other
assets
|
|
|
32
|
|
Total
Assets Acquired
|
|
|
47
|
|
|
|
|
|
|
Liabilities
Assumed:
|
|
|
|
|
Other
current liabilities
|
|
|
10
|
|
Total
Liabilities Assumed
|
|
|
10
|
|
|
|
|
|
|
Total
Purchase Price
|
|
$
|
37
|
|
Note
5 - Inventory
Inventory
as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
As
of
June 30,
2018
|
|
|
As
of December 31,
2017
|
|
Raw
materials
|
|
$
|
220
|
|
|
$
|
220
|
|
Work
in process
|
|
|
--
|
|
|
|
7
|
|
Finished
goods
|
|
|
632
|
|
|
|
563
|
|
Total
Inventory
|
|
$
|
852
|
|
|
$
|
790
|
|
Note
6 - Goodwill
The
Company has recorded goodwill and other indefinite-lived assets in connection with its acquisitions of Lilien LLC, including all
of the outstanding capital stock of Lilien Systems (collectively, “Lilien”), Shoom Inc. (“Shoom”), AirPatrol
Corporation (“Airpatrol”), LightMiner Systems, Inc. (“Lightminer”) and Integrio, LLC (“Integrio”).
Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of the
acquired company, is not amortized. Indefinite-lived intangible assets are stated at fair value as of the date acquired in a business
combination. The Company’s goodwill balance and other assets with indefinite lives were evaluated for potential impairment
during the six months ended June 30, 2018 and 2017 and it was determined that there was no impairment.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
7 - Discontinued Operations
As
of December 31, 2015, the Company’s management decided to close its Saudi Arabia legal entity as business activities and
operations have been strategically shifted according to the business plan of the Company. On January 18, 2018, the Company sold
its 50.2% interest in Sysorex Arabia to SCI in consideration for SCI’s assumption of 50.2% of the assets and liabilities
of Sysorex Arabia, totaling approximately $11,500 and $1 million, respectively.
In
accordance with ASC topic 360 “Property, Plant and Equipment”, the Company had classified the assets and liabilities
as available for sale assets and liabilities as of December 31, 2017 in the accompanying condensed consolidated financial statements.
The
major categories of assets and liabilities held for sale in the condensed consolidated balance sheets as of December 31, 2017
(in thousands):
|
|
As
of December 31,
2017
|
|
Assets:
|
|
|
|
Accounts
receivable, net
|
|
$
|
1
|
|
Notes
and other receivables
|
|
|
8
|
|
Other
assets
|
|
|
14
|
|
Total
Current Assets
|
|
|
23
|
|
|
|
|
|
|
Other
assets
|
|
|
--
|
|
Total
Assets
|
|
$
|
23
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
payable
|
|
$
|
178
|
|
Accrued
liabilities
|
|
|
918
|
|
Deferred
revenue
|
|
|
236
|
|
Due
to related party
|
|
|
5
|
|
Short
term debt
|
|
|
722
|
|
Total
Current Liabilities
|
|
|
2,059
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
--
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
2,059
|
|
The
Company has entered into surety bonds with a financial institution in Saudi Arabia which guaranteed performance on certain contracts.
Deposits for surety bonds amounted to $0 as of December 31, 2017, as a reserve was placed against the deposit balance during the
year ended December 31, 2016 due to the uncertainty of when the bond will be released.
The
Company did not recognize any depreciation or amortization expense related to discontinued operations during the six months ended
June 30, 2018 or 2017. There were no significant capital expenditures or non-cash operating or investing activities of discontinued
operations during the periods presented. The operations of Sysorex Arabia were insignificant for the year ended December 31, 2017.
On January 18, 2018, the Company sold its 50.2% interest in Sysorex Arabia to SCI in consideration for SCI’s assumption
of 50.2% of the assets and liabilities of Sysorex Arabia.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
7 - Discontinued Operations (continued)
End
of Service Indemnity Provision
In
accordance with local labor laws, Sysorex Arabia is required to accrue benefits payable to its employees at the end of their services
with Sysorex Arabia. For the six months ended June 30, 2018 and 2017, no amounts were required to be accrued under this provision.
Note
8 - Debt
Debt
as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
As
of
June 30,
2018
|
|
|
As
of
December 31,
2017
|
|
Short-Term
Debt
|
|
|
|
|
|
|
Notes
payable (A)
|
|
$
|
1,815
|
|
|
$
|
1,917
|
|
Revolving
line of credit (B)
|
|
|
--
|
|
|
|
1,141
|
|
Total
Short-Term Debt
|
|
$
|
1,815
|
|
|
$
|
3,058
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
142
|
|
|
$
|
175
|
|
Senior
secured convertible debenture, less debt discount of $417 (C)
|
|
|
--
|
|
|
|
592
|
|
Total
Long-Term Debt
|
|
$
|
142
|
|
|
$
|
767
|
|
|
(A)
|
Convertible
Notes Payable
|
On
November 17, 2017, the Company issued a $1.745 million principal face amount convertible promissory note (the
“November Note”) to an accredited investor (the “November Noteholder”) which yielded net proceeds of
$1.5 million to the Company pursuant to that certain Securities Purchase Agreement, dated as of November 17, 2017, by and
between the Company and the November Noteholder (the “November Note SPA” and together with the November Note, the
“November Transaction Documents”). On January 5, 2018, the November Transaction Documents were amended pursuant
to a Waiver and First Amendment Agreement (the “Waiver and Amendment Agreement”). The November Note, as amended,
bears interest at the rate of 10% per year and is due 10 months after the date of issuance. In accordance with the Waiver and
Amendment Agreement, the Conversion Price (as defined in the November Note) was amended to be equal to 70% of the closing bid
price reported by the Nasdaq Stock Market as of the date immediately prior to each applicable conversion, subject to a floor
of $3.00 (subject to adjustment). The approval of the issuance of the shares of common stock pursuant to the Waiver and
Amendment Agreement was obtained at a meeting of stockholders held on February 2, 2018.
Redemptions
may occur at any time after the 6 month anniversary of the date of issuance of the November Note with a minimum redemption price
equal to the Conversion Price. If the conversion rate is less than the market price, then the redemptions must be made in cash.
The November Note contains standard events of default and a schedule of redemption premiums and a most favored nations provision which allows for adjustments upon dilutive issuances which is subject to a floor of $3.00.
On
May 23, 2018, the Company and the November Noteholder entered into a Standstill Agreement whereby the November Noteholder
agreed to delay for a period of nine months following the Purchase Price Date its right to make redemptions under the
November Note. In exchange for the agreement and for reimbursement of the fees incurred by the November Noteholder in having
the Standstill Agreement prepared, the Company paid the November Noteholder $68,000 upon execution of the agreement which is
included as a part of interest expense in the statement of operations.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
8 - Debt (continued)
|
(B)
|
Revolving
Lines of Credit
|
Payplant
Accounts Receivable Bank Line
Pursuant
to the terms of that certain Commercial Loan Purchase Agreement, dated as of August 14, 2017 (the “Purchase Agreement”), Gemcap
Lending I, LLC (“GemCap”) sold and assigned to Payplant LLC, as agent for Payplant Alternatives Fund LLC (“Payplant”
or “Lender”), all of its right, title and interest to that certain revolving Secured Promissory Note in an aggregate
principal amount of up to $10,000,000 (the “GemCap Note”) issued in accordance with that certain Loan and Security
Agreement, dated as of November 14, 2016 (the “GemCap Loan”), by and among Gemcap and the Company and its wholly-owned
subsidiaries, Sysorex and SGS for an aggregate purchase price of $1,402,770.16.
In
connection with the purchase and assignment of the Gemcap Loan in accordance with the Purchase Agreement, the GemCap Loan was
amended and restated in accordance with the terms and conditions of the Payplant Loan and Security Agreement, dated as of August
14, 2017, between the Company and Payplant (the “Loan Agreement”). The Loan Agreement allows the Company to request
loans (each a “Loan” and collectively the “Loans”) from the Lender (in the manner provided therein) with
a term of no greater than 360 days in amounts that are equivalent to 80% of the face value of purchase orders received (“Aggregate
Loan Amount”). The Lender is not obligated to make the requested loan, however, if the Lender agrees to make the requested
loan, before the loan is made, the Company must provide Lender with (i) one or more promissory notes (“Notes”) for
the amount being loaned in favor of Lender, (ii) one or more guaranties executed in favor of Lender and (iii) other documents
and evidence of the completion of such other matters as Lender may request. The principal amount of each Loan shall accrue interest
at a 30 day rate of 2% (the “Interest Rate”), calculated per day on the basis of a year of 360 days and, when combined
with all fees that may be characterized as interest will not exceed the maximum rate allowed by law Upon the occurrence and during
the continuance of any event of default, interest shall accrue at a rate equal to the Interest Rate plus 0.42% per 30 days. All
computations of interest shall be made on the basis of a year of 360 days. The promissory note is subject to the interest rates
described in the Loan Agreement and is secured by the assets of the Company pursuant to the Loan Agreement and will be satisfied
in accordance with the terms of the Payplant Client Agreement.
|
(C)
|
Senior
Secured Debenture
|
Debenture
Amendment
On
January 5, 2018, the then holder of that certain 8% Original Issue Discount Note (the “Debenture”) of which an aggregate
principal amount of $1,004,719 plus interest and the Company agreed to amend the Debenture to:
(i)
cause an event of default in the event of the failure by the Company to amend its Articles of Incorporation in order to increase
its authorized shares (the “Authorized Share Amendment”) or otherwise reserve a sufficient number of shares of common
stock for issuance upon conversion of the Debenture on or prior to February 15, 2018; and
(ii)
require a reserve of at least 150% of the number of shares into which the Debenture is convertible upon the effectiveness of the
Authorized Share Amendment.
On
February 5, 2018, the holder of the Debenture delivered a conversion notice to the Company pursuant to which it converted $300,000
of principal of the Debenture into 50,143 shares of the Company’s common stock. Such shares of common stock were issued
on February 6, 2018.
On
February 7, 2018, the holder of the Debenture delivered a conversion notice to the Company pursuant to which it converted $400,000
of principal of the Debenture into 119,296 shares of the Company’s common stock.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
8 - Debt (continued)
|
(C)
|
Senior
Secured Debenture (continued)
|
Debenture
Amendment (continued)
On
February 9, 2018, the holder of the Debenture delivered a final conversion notice to the Company pursuant to which it converted
$317,000 of principal of the Debenture into 105,820 shares of the Company’s common stock, which satisfied the debenture
in full.
The Company analyzed the conversions
of the Debenture and determined there was a beneficial conversion feature which has a value of $439,000. The Company recorded this
amount as interest expense-debt discount on the condensed consolidated statement of operations and as an increase to additional
paid in capital on the condensed consolidated balance sheet.
Note
9 - Capital Raise
January
2018 Capital Raise
On January 5, 2018, the Company entered
into that certain Securities Purchase Agreement (the “January 2018 SPA”) with certain investors (the “January
2018 Investors”) pursuant to which the Company agreed to sell an aggregate of 599,812 shares (the “January 2018 Shares”)
of the Company’s common stock, at a purchase price of $5.31 per share (the “January 2018 Offering”) and warrants
to purchase up to 599,812 shares (the “January 2018 Warrant Shares”) of common stock (the “January 2018 Warrants”).
The aggregate gross proceeds for the sale of the January 2018 Shares and January 2018 Warrants was approximately $3.2 million.
The January 2018 Warrants were initially exercisable at an exercise price per share equal to $6.60, subject to certain adjustments,
and will expire on the five year anniversary of the initial exercise date. Following the February offering described below, the
exercise price of the January 2018 Warrants was reduced to $3.00 per share.
February 2018 Public Offering
On February 20, 2018, the Company completed
a public offering for approximately $18 million in securities, consisting of an aggregate of 3,325,968 Class A units, at a price
to the public of $2.35 per Class A unit, each consisting of one share of the Company’s common stock and a five-year warrant
to purchase one share of common stock at an exercise price of $3.50 per share (“February 2018 Warrants”), and 10,184.9752
Class B units, at a price to the public of $1,000 per Class B unit, each consisting of one share of the Company’s newly designated
Series 3 convertible preferred stock (“Series 3 Preferred”) with a stated value of $1,000 and initially convertible
into approximately 426 shares of our common stock at a conversion price of $2.35 per share for up to an aggregate of 4,334,032
shares of common stock and February 2018 Warrants exercisable for the number of shares of common stock into which the shares of
Series 3 Preferred were initially convertible.
The
Company received approximately $18 million in gross proceeds from the offering, including $1 million in amounts payable to service
providers that participated in the offering, and before placement agent fees and offering expenses payable by the Company. After
satisfying the amounts due to service providers and deducting placement agent fees, the net proceeds from the offering were approximately
$15.4 million.
The
embedded conversion option associated with the Series 3 Preferred shares has a beneficial conversion feature which has a value
of $1,508,000. The Company recorded this amount as a deemed dividend on the condensed consolidated statement of operations for
these beneficial conversion features.
April
2018 Public Offering
On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the
public of $1,000 per unit, each consisting of (i) one share of our newly designated Series 4 convertible preferred stock (the “Series
4 Preferred”) with a stated value of $1,000 and initially convertible into approximately 2,174 shares of common stock, at
a conversion price of $0.46 per share (subject to adjustment) and (ii) one warrant to purchase such number of shares of common
stock as each share of Series 4 Preferred is convertible into. The warrants are immediately exercisable at an exercise price of
$0.67 per share (subject to adjustment). The Company received approximately $10.1 million in gross proceeds from this offering,
before deducting placement agent fees and offering expenses payable by the Company. After deducting placement agent fees and expenses,
the net proceeds from this offering were approximately $9.2 million.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
9 - Capital Raise (continued)
April
2018 Public Offering (continued)
The
embedded conversion option associated with the Series 4 Preferred shares has a beneficial conversion feature which has a value
of $673,000. Additionally, the embedded conversion option had a price reset feature which resulted in the reduction of the conversion
price from $0.46 to $0.1779 on June 25, 2018 which has a value of $4,226,000. The Company recorded $4,899,000 as a deemed dividend
on the condensed consolidated statement of operations for these beneficial conversion features.
The April 2018 capital raise reset the
price of the February 2018 Warrants to the floor price of $0.634 and increased the number of shares issuable upon exercise of such
warrants to 42,287,102 shares of common stock. The Company has presented a deemed dividend of $4,828,000 on the condensed consolidated
statement of operations for this price reset.
Note
10 - Common Stock
On
January 5, 2018 the Company issued 7,838 shares of common stock pursuant to a subscription agreement with a service provider at
a purchase price of $10.20 per share, in satisfaction of $80,000 payable to the provider.
On January 5, 2018, the Company entered
into a securities purchase agreement with certain investors pursuant to which the Company agreed to sell an aggregate of 599,812
shares of the Company’s common stock, at a purchase price of $5.31 per share (see Note 9).
On February 5, 2018, the holder of the
Debenture delivered a conversion notice to the Company pursuant to which it converted $300,000 of principal of the Debenture into
50,143 shares of the Company’s common stock. Such shares of common stock were issued on February 6, 2018.
On February 7, 2018, the holder of the
Debenture delivered a conversion notice to the Company pursuant to which it converted $400,000 of principal of the Debenture into
119,296 shares of the Company’s common stock.
On February 9, 2018, the holder of the
Debenture delivered a final conversion notice to the Company pursuant to which it converted $317,000 of principal of the Debenture
into 105,820 shares of the Company’s common stock, which paid the Debenture in full.
On February 20, 2018, the Company completed
a public offering including an aggregate of 3,325,968 Class A units, at a price to the public of $2.35 per Class A unit, each consisting
of one share of the Company’s common stock and a five-year warrant to purchase one share of common stock (see Note 9).
During the three months ended March 31,
2018, 9773.7252 shares of Series 3 Preferred were converted into 4,159,032 shares of the Company’s common stock.
During the three months ended March 31,
2018, the Company issued 9,718 shares of common stock for fractional shares due to the reverse stock split effective February 6,
2018.
During the three months ended June 30,
2018, 411.25 shares of Series 3 Preferred were converted into 175,000 shares of the Company’s common stock.
During the three months ended June 30,
2018, 7,796.7067 shares of Series 4 Preferred were converted into 28,738,093 shares of the Company’s common stock.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
11 - Preferred Stock
Series
3 Preferred
On
February 15, 2018, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created
the Series 3 Preferred, authorized 10,184.9752 shares of Series 3 Preferred and designated the preferences, rights and limitations
of the Series 3 Preferred. The Series 3 Preferred is non-voting (except to the extent required by law). The Series 3 Preferred
is convertible into the number of shares of Common Stock, determined by dividing the aggregate stated value of the Series 3 Preferred
of $1,000 per share to be converted by $2.35.
On February 20, 2018, the Company completed
a public offering including an aggregate of 10,184.9752 Class B units, at a price to the public of $1,000 per Class B unit, each
consisting of one share of the Company’s newly designated Series 3 Preferred with a stated value of $1,000 and initially
convertible into approximately 426 shares of our common stock at a conversion price of $2.35 per share (see Note 9).
During the three months ended March 31, 2018, 9773.7252 shares of Series 3 Preferred were converted into
4,159,032 shares of the Company’s common stock. During the three months ended June 30, 2018, 411.25 shares of Series 3 Preferred
were converted into 175,000 shares of the Company’s common stock. As of June 30, 2018 there are no Series 3 Preferred shares
outstanding.
Series
4 Preferred
On April 20, 2018, the Company filed with
the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 4 Preferred, authorized 10,415
shares of Series 4 Preferred and designated the preferences, rights and limitations of the Series 4 Preferred. The Series 4 Preferred
is non-voting (except to the extent required by law) and was convertible into the number of shares of common stock, determined
by dividing the aggregate stated value of the Series 4 Preferred of $1,000 per share to be converted by $0.46 (the “Conversion
Price”). On June 25, 2018, in accordance with the terms of the price reset provisions described in the Certificate of
Designations the Conversion Price of the Series 4 Preferred was adjusted to $0.1779.
On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the
public of $1,000 per unit, each consisting of (i) one share of our newly designated Series 4 Preferred and (ii) one warrant to
purchase such number of shares of common stock as each share of Series 4 Preferred is convertible into (see Note 9).
During
the three months ended June 30, 2018, 7,796.7067 shares of Series 4 Preferred were converted into 28,738,093 shares of the Company’s
common stock. As of June 30, 2018 there were 2,318.2933 of Series 4 Preferred shares outstanding.
Note
12 - Authorized Share Increase and Reverse Stock Split
On
February 2, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of
the State of Nevada to increase the total number of authorized shares of common stock from 50,000,000 to 250,000,000, as approved
by the Company’s stockholders at a special meeting held on February 2, 2018.
On
February 2, 2018, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of
the State of Nevada to effect a 1-for-30 reverse stock split of the Company’s issued and outstanding shares of common stock,
effective as of February 6, 2018.
The
financial statements and accompanying notes give effect to the 1-for-30 reverse stock split and increase in authorized shares
as if they occurred at the first period presented.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note 13 - Stock Options
In September 2011, the Company adopted
the 2011 Employee Stock Incentive Plan (the “2011 Plan”) which provides for the granting of incentive and non-statutory
common stock options and stock based incentive awards to employees, non-employee directors, consultants and independent contractors.
The plan was amended and restated in May 2014. Unless terminated sooner by the Board of Directors, this plan will terminate on
August 31, 2021.
In February 2018, the Company adopted
the 2018 Employee Stock Incentive Plan (the “2018 Plan”) and in conjunction with the 2011 Plan, the “Option
Plans”, which will be utilized with the 2011 Plan for employees, corporate officers, directors, consultants and other key
persons employed. The 2018 Plan will provide for the granting of incentive stock options, NQSOs, stock grants and other stock-based
awards, including Restricted Stock and Restricted Stock Units (as defined in the 2018 Plan).
Incentive stock options granted under
the Option Plans are granted at exercise prices not less than 100% of the estimated fair market value of the underlying common
stock at date of grant. The exercise price per share for incentive stock options may not be less than 110% of the estimated fair
value of the underlying common stock on the grant date for any individual possessing more that 10% of the total outstanding common
stock of the Company. Options granted under the Option Plans vest over periods ranging from immediately to four years and are
exercisable over periods not exceeding ten years.
The aggregate number of shares that may
be awarded under the 2011 Plan as of December 31, 2017 is 16,629 and awarded under the 2018 Plan is 4,000,000. As of June 30, 2018,
2,722,309 of options were granted to employees, directors and consultants of the Company (including 1,389 shares outside of our
plan) and 295,709 options were available for future grant under the Option Plans.
During the six months ended June 30, 2018,
the Company granted options under the 2018 Plan for the purchase of 2,714,500 shares of common stock to employees and consultants
of the Company. These options are 100% vested or vest pro-rata over 48 months, have a life of ten years and an exercise price
between $0.18 and $0.36 per share. The Company valued the stock options using the Black-Scholes option valuation model and the
fair value of the awards was determined to be $428,000. The fair value of the common stock as of the grant date was determined
to be between $0.18 and $0.36 per share.
The Company recorded a stock-based compensation
charge of $571,000 and $710,000 for the three months ended June 30, 2018 and 2017, and $857,000 and $993,000 for the six months ended June 30, 2018 and 2017, respectively.
As of June 30, 2018, the fair value of
non-vested options totaled $418,245 which will be amortized to expense over the weighted average remaining term of 0.76 years.
The fair value of each employee option
grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Key weighted-average assumptions used
to apply this pricing model during the six months ended June 30, 2018 and 2017 were as follows:
|
|
For the Six Months Ended
June 30,
|
|
|
2018
|
|
2017
|
Risk-free interest rate
|
|
2.79-3.01%
|
|
2.27%
|
Expected life of option grants
|
|
5-6 years
|
|
7 years
|
Expected volatility of underlying stock
|
|
45.64-46.18%
|
|
47.34%
|
Dividends assumption
|
|
$--
|
|
$--
|
The expected stock price volatility for
the Company’s stock options was determined by the historical volatilities for industry peers and used an average of those
volatilities. The Company attributes the value of stock-based compensation to operations on the straight-line single option method.
Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods. The dividends assumptions was $0 as
the Company historically has not declared any dividends and does not expect to.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
14 - Credit Risk and Concentrations
Financial
instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents.
The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to
credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of
its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible
accounts and, consequently, believes that its accounts receivable credit risk exposure beyond such allowances is limited.
The
Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. Cash
is also maintained at foreign financial institutions for its Canadian subsidiary and its majority-owned Saudi Arabia subsidiary.
Cash in foreign financial institutions as of June 30, 2018 and December 31, 2017 was immaterial. The Company has not experienced
any losses and believes it is not exposed to any significant credit risk from cash.
The
following table sets forth the percentages of revenue derived by the Company from those customers which accounted for at least
10% of revenues during the six months ended June 30, 2018 and 2017 (in thousands):
|
|
For the Six Months Ended
June 30, 2018
|
|
For
the Six Months Ended
June 30,
2017
|
|
|
$
|
|
%
|
|
$
|
|
%
|
Customer A
|
|
644
|
|
16%
|
|
--
|
|
--
|
Customer B
|
|
512
|
|
13%
|
|
--
|
|
--
|
Customer C
|
|
422
|
|
11%
|
|
--
|
|
--
|
Customer D
|
|
--
|
|
--
|
|
5,264
|
|
18%
|
The
following table sets forth the percentages of revenue derived by the Company from those customers which accounted for at least
10% of revenues during the three months ended June 30, 2018 and 2017 (in thousands):
|
|
For the Three Months Ended
June 30,
2018
|
|
For the Three Months Ended
June 30,
2017
|
|
|
$
|
|
%
|
|
$
|
|
%
|
Customer A
|
|
319
|
|
17%
|
|
--
|
|
--
|
Customer B
|
|
211
|
|
12%
|
|
--
|
|
--
|
Customer C
|
|
195
|
|
11%
|
|
--
|
|
--
|
Customer D
|
|
--
|
|
--
|
|
3,648
|
|
24%
|
As
of June 30, 2018, Customer A represented approximately 22%, Customer B represented approximately 17%, and Customer C represented
approximately 15% of total accounts receivable. As of June 30, 2017, there were no customer concentrations greater than 10%
of total accounts receivable.
As of June 30, 2018, two vendors represented
approximately 36% and 20% of total gross accounts payable. There were no purchases from these vendors during the three and six
months ended June 30, 2018. As of June 30, 2017, one vendor represented approximately 40% of total gross accounts payable.
Purchases from this vendor during the three months ended June 30, 2017 were $4.1 million. Purchases from this vendor during the
six months ended June 30, 2017 were $5.8 million.
Note
15 - Segment Reporting and Foreign Operations
Effective
January 1, 2017 the Company has changed the way it analyzes and assesses divisional performance of the Company. The Company has
therefore re-aligned its operating segments along those division business lines and has created the following operating segments.
The Company has retroactively applied these new segment categories to the prior periods presented below for comparative purposes.
|
●
|
Indoor
Positioning Analytics: This segment includes Inpixon’s proprietary products and services delivered on premise
or in the Cloud as well as our hosted Software-as-a-Service (SaaS) based solutions. Our Indoor Positioning Analytics product
is based on a unique and patented sensor technology that detects and locates accessible cellular, Wi-Fi and Bluetooth devices
and then uses a lightning fast data-analytics engine to deliver actionable insights and intelligent reports for security,
marketing, asset management, etc.
|
|
|
|
|
●
|
Infrastructure:
This segment includes third party hardware, software and related maintenance/warranty products and services that Inpixon resells
to commercial and government customers. It includes but is not limited to products for enterprise computing; storage; virtualization;
networking; etc. as well as services including custom application/software design; architecture and development; staff augmentation
and project management.
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
15 - Segment Reporting and Foreign Operations (continued)
The
following tables present key financial information of the Company’s reportable segments before unallocated corporate expenses
(in thousands):
|
|
Indoor
Positioning
Analytics
|
|
|
Infrastructure
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
1,274
|
|
|
$
|
554
|
|
|
$
|
1,828
|
|
Cost
of net revenues
|
|
$
|
(369
|
)
|
|
$
|
(448
|
)
|
|
$
|
(817
|
)
|
Gross
profit
|
|
$
|
905
|
|
|
$
|
106
|
|
|
$
|
1,011
|
|
Gross
margin %
|
|
|
71
|
%
|
|
|
19
|
%
|
|
|
55
|
%
|
Depreciation
and amortization
|
|
$
|
120
|
|
|
$
|
406
|
|
|
$
|
526
|
|
Amortization
of intangibles
|
|
$
|
804
|
|
|
$
|
519
|
|
|
$
|
1,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
1,156
|
|
|
$
|
13,940
|
|
|
$
|
15,096
|
|
Cost
of net revenues
|
|
$
|
(380
|
)
|
|
$
|
(11,332
|
)
|
|
$
|
(11,712
|
)
|
Gross
profit
|
|
$
|
776
|
|
|
$
|
2,608
|
|
|
$
|
3,384
|
|
Gross
margin %
|
|
|
67
|
%
|
|
|
19
|
%
|
|
|
22
|
%
|
Depreciation
and amortization
|
|
$
|
93
|
|
|
$
|
340
|
|
|
$
|
433
|
|
Amortization
of intangibles
|
|
$
|
863
|
|
|
$
|
519
|
|
|
$
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
2,121
|
|
|
$
|
1,801
|
|
|
$
|
3,922
|
|
Cost
of net revenues
|
|
$
|
(604
|
)
|
|
$
|
(1,072
|
)
|
|
$
|
(1,676
|
)
|
Gross
profit
|
|
$
|
1,517
|
|
|
$
|
729
|
|
|
$
|
2,246
|
|
Gross
margin %
|
|
|
72
|
%
|
|
|
40
|
%
|
|
|
57
|
%
|
Depreciation
and amortization
|
|
$
|
279
|
|
|
$
|
761
|
|
|
$
|
1,040
|
|
Amortization
of intangibles
|
|
$
|
1,607
|
|
|
$
|
1,038
|
|
|
$
|
2,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
2,137
|
|
|
$
|
26,441
|
|
|
$
|
28,578
|
|
Cost
of net revenues
|
|
$
|
(723
|
)
|
|
$
|
(21,182
|
)
|
|
$
|
(21,905
|
)
|
Gross
profit
|
|
$
|
1,414
|
|
|
$
|
5,259
|
|
|
$
|
6,673
|
|
Gross
margin %
|
|
|
66
|
%
|
|
|
20
|
%
|
|
|
23
|
%
|
Depreciation
and amortization
|
|
$
|
168
|
|
|
$
|
665
|
|
|
$
|
833
|
|
Amortization
of intangibles
|
|
$
|
1,729
|
|
|
$
|
1,038
|
|
|
$
|
2,767
|
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
15 - Segment Reporting and Foreign Operations (continued)
Reconciliation
of reportable segments’ combined income from operations to the consolidated loss before income taxes is as follows (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income from operations of reportable segments
|
|
$
|
1,011
|
|
|
$
|
3,384
|
|
|
$
|
2,246
|
|
|
$
|
6,673
|
|
Unallocated operating expenses
|
|
|
(7,460
|
)
|
|
|
(8,614
|
)
|
|
|
(14,303
|
)
|
|
|
(17,260
|
)
|
Interest expense
|
|
|
(356
|
)
|
|
|
(1,344
|
)
|
|
|
(1,638
|
)
|
|
|
(2,027
|
)
|
Other income (expense)
|
|
|
950
|
|
|
|
152
|
|
|
|
1,596
|
|
|
|
143
|
|
Loss from discontinued operations
|
|
|
--
|
|
|
|
(9
|
)
|
|
|
--
|
|
|
|
(17
|
)
|
Consolidated loss before income taxes
|
|
$
|
(5,855
|
)
|
|
$
|
(6,431
|
)
|
|
$
|
(12,099
|
)
|
|
$
|
(12,488
|
)
|
The
Company’s operations are located primarily in the United States, Canada and Saudi Arabia. Revenues by geographic area are
attributed by country of domicile of our subsidiaries. The financial data by geographic area are as follows (in thousands):
|
|
United
|
|
|
|
|
|
Saudi
|
|
|
|
|
|
|
|
|
|
|
|
|
States
|
|
|
Canada
|
|
|
Arabia
|
|
|
India
|
|
|
Eliminations
|
|
|
Total
|
|
For the Three Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
1,823
|
|
|
$
|
5
|
|
|
$
|
--
|
|
|
$
|
74
|
|
|
$
|
(74
|
)
|
|
$
|
1,828
|
|
Operating income (loss) by geographic area
|
|
$
|
(6,078
|
)
|
|
$
|
(387
|
)
|
|
$
|
--
|
|
|
$
|
16
|
|
|
$
|
--
|
|
|
$
|
(6,449
|
)
|
Net income (loss) by geographic area
|
|
$
|
(5,484
|
)
|
|
$
|
(387
|
)
|
|
$
|
--
|
|
|
$
|
16
|
|
|
$
|
--
|
|
|
$
|
(5,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
15,025
|
|
|
$
|
70
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
15,096
|
|
Operating loss by geographic area
|
|
$
|
(4,784
|
)
|
|
$
|
(447
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(5,230
|
)
|
Net loss by geographic area
|
|
$
|
(5,975
|
)
|
|
$
|
(447
|
)
|
|
$
|
(9
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(6,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
3,911
|
|
|
$
|
11
|
|
|
$
|
--
|
|
|
$
|
126
|
|
|
$
|
(126
|
)
|
|
$
|
3,922
|
|
Operating income (loss) by geographic area
|
|
$
|
(11,195
|
)
|
|
$
|
(876
|
)
|
|
$
|
--
|
|
|
$
|
14
|
|
|
$
|
--
|
|
|
$
|
(12,057
|
)
|
Net income (loss) by geographic area
|
|
$
|
(11,233
|
)
|
|
$
|
(880
|
)
|
|
$
|
--
|
|
|
$
|
14
|
|
|
$
|
--
|
|
|
$
|
(12,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
28,452
|
|
|
$
|
126
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
28,578
|
|
Operating loss by geographic area
|
|
$
|
(9,739
|
)
|
|
$
|
(848
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(10,587
|
)
|
Net loss by geographic area
|
|
$
|
(11,623
|
)
|
|
$
|
(848
|
)
|
|
$
|
(17
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(12,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
24,557
|
|
|
$
|
269
|
|
|
$
|
--
|
|
|
$
|
66
|
|
|
$
|
--
|
|
|
$
|
24,892
|
|
Long lived assets by geographic area
|
|
$
|
11,964
|
|
|
$
|
133
|
|
|
$
|
--
|
|
|
$
|
9
|
|
|
$
|
--
|
|
|
$
|
12,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
27,189
|
|
|
$
|
432
|
|
|
$
|
23
|
|
|
$
|
47
|
|
|
$
|
--
|
|
|
$
|
27,691
|
|
Long lived assets by geographic area
|
|
$
|
14,883
|
|
|
$
|
318
|
|
|
$
|
--
|
|
|
$
|
14
|
|
|
$
|
--
|
|
|
$
|
15,215
|
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
16 - Commitments and Contingencies
Litigation
Certain
conditions may exist as of the date the condensed consolidated financial statements are issued which may result in a loss to the
Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent
liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal
proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates
the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought
or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable
but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would
be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business,
financial position, and results of operations or cash flows.
On August 10, 2017, Embarcadero Technologies,
Inc. (“Embarcadero”) and Idera, Inc. (“Idera”) filed a complaint in the U.S. Federal District Court for
the Western District of Texas against SGS and Integrio for failure to pay for purchased software and services pursuant to certain
reseller agreements. The complaint alleges that SGS entered into an agreement with Integrio to acquire certain assets and assume
certain liabilities of Integrio and are therefore responsible for any amounts due. In the complaint, Embarcadero and Idera demand
that SGS and Integrio pay $1,100,000.00 in damages. On April 26, 2018, the parties filed a stipulation of dismissal to dismiss
this case with prejudice following entry into a settlement agreement pursuant to which the Company agreed to satisfy the outstanding
payables. On April 28, 2018, the court rendered the final judgment to approve this stipulation. The liability has been accrued
and is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets.
On August 11, 2017, Micro Focus (US) Inc.
(“Micro Focus”), filed a complaint in the Circuit Court of Fairfax County, Virginia against SGS for failure to pay
a debt settlement entered into on March 13, 2017 for a principal amount of approximately $246,000 plus accrued interest. The complaint
demands full payment of the principal amount of approximately $246,000 plus accrued interest. On October 31, 2017, Micro Focus
filed a motion for summary judgment against SGS. The Company consented to the court entering summary judgment in favor of Micro
Focus in the amount of approximately $246,000, with interest accruing at 10% per annum from June 13, 2017 until payment is completed.
On April 19, 2018, the Company signed a settlement agreement with Microfocus for $200,000 which has been paid as of the date of
this filing.
On December 7, 2017, the principal of Objective
Equity filed a claim in Superior Court of California, County of Santa Clara for $7,500 against Sysorex, claiming non-payment under
a settlement agreement. The hearing was held on January 31, 2018 and the case was dismissed in favor of Sysorex.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
16 - Commitments and Contingencies (continued)
Litigation
(continued)
On March 1, 2017, VersionOne, Inc. filed
a complaint in the United States District Court, Eastern District of Virginia, against Inpixon, Sysorex and
SGS (collectively, “Defendants”). The complaint alleges that VersionOne provided services to Integrio having a value
of approximately $486,000, that in settlement of this amount Integrio and VersionOne entered into an agreement (the “Settlement
Agreement”) whereby Integrio agreed to pay, and VersionOne agreed to accept as full payment, approximately $243,000 (the
“Settlement Amount”), and that as a result of the Defendants’ acquisition of the assets of Integrio, Defendants
assumed the Settlement Amount but failed to pay amounts owed to VersionOne. The complaint also alleges that, subsequent to closing
of the acquisition, VersionOne provided additional services to Defendants having a value of approximately $145,000, for which it
has not been paid. VersionOne alleges that, Defendants have an obligation to pay both the Settlement Amount and the cost of the
additional services. On Dec. 8, 2017, the court entered judgment against Inpixon, SGS, and Sysorex, jointly and severally, in the
amount of approximately $334,000. The liability has been accrued and is included as a component of accounts payable as of June
30, 2018 in the condensed consolidated balance sheets.
On September 5, 2017 Dell Marketing threatened
legal action against Sysorex and demanded approximately $1.8 million for payment of unpaid invoices. On or about January 29, 2018
the parties executed a settlement agreement resolving the matter. No court action was filed. The liability has been accrued and
is included as a component of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets.
On December 28, 2017, Virtual Imaging,
Inc. (“Virtual Imaging”) filed a complaint in the United States District Court, Eastern District of Virginia, against
Sysorex, and SGS (collectively, the “Defendants”). The complaint alleges that Virtual Imaging provided products to
the Defendants having an aggregate value of approximately $3,938,000, of which approximately $3,688,000 remains outstanding and
overdue. Virtual Imaging has demanded compensation for the unpaid amount of approximately $3,688,000. The parties have settled
this matter and agreed to a settlement payment schedule. The liability has been accrued and is included as a component of accounts
payable as of June 30, 2018 in the condensed consolidated balance sheets.
On January 2, 2018 VMS, Inc. sent a demand
letter claiming Sysorex owes approximately $1.2 million in unpaid invoices. The parties have settled this matter and agreed to
a settlement payment schedule. The liability has been accrued and is included as a component of accounts payable as of June 30,
2018 in the condensed consolidated balance sheets.
On January 22, 2018, Deque Systems, Inc.
filed a motion for entry of default judgment (the “Motion”) against SGS in the Circuit Court of Fairfax County, Virginia.
The Motion alleges that SGS failed to respond to a complaint served on November 22, 2017. The Motion requests a default judgment
in the amount of $336,000 plus $20,000 in legal fees. A trial is currently scheduled for September 12, 2018, however, the parties
are currently finalizing a settlement agreement. The liability has been accrued and is included as a component of accounts payable
as of June 30, 2018 in the condensed consolidated balance sheets.
On February 16, 2018 the Versata Companies
submitted a notice of mediation to the WIPO Arbitration and Mediation Center claiming that SGS owes approximately $421,000 in unpaid
invoices and late fees. Approximately $176,000 of that amount is under dispute by SGS. The parties are currently negotiating a
settlement agreement and payment plan to pay the outstanding liability. The liability has been accrued and is included as a component
of accounts payable as of June 30, 2018 in the condensed consolidated balance sheets.
On April 6, 2018, AVT Technology Solutions,
LLC, filed a complaint in the United States District Court Middle District of Florida Tamp Division against Inpixon and Sysorex
alleging breach of contract, breach of corporate guaranty and unjust enrichment in connection with non-payment for goods received
and requesting a judgment in an amount of not less than $9,152,698.71. The Company has filed a motion to dismiss this complaint
and is currently finalizing a settlement agreement with AVT. The liability has been accrued and is included as a component of accounts
payable as of June 30, 2018 in the condensed consolidated balance sheets.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
Note
16 - Commitments and Contingencies (continued)
Litigation
(continued)
On
March 19, 2018, Inpixon was notified by a consultant for advisory services (the “Consultant”) that it believes the
Company is required to pay a minimum project fee in an amount equal to $1 million less certain amounts previously paid as a result
of the Company’s completion of certain financing transactions. On April 18, 2018, the Consultant filed a demand for arbitration
with the American Arbitration Association. The Company disputes such claims and intends to defend these matters vigorously and no
amounts have been accrued.
Investment in Technology
On May 29, 2018 the Company acquired $175,000
of technology which was capitalized in intangible assets and has an estimated life of three to five years.
Compliance
with Nasdaq Continued Listing Requirement
On
May 19, 2017, the Company received written notice from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”)
notifying the Company that it no longer complied with Nasdaq Listing Rule 5550(b)(1) due to our failure to maintain a minimum
of $2,500,000 in stockholders’ equity or to demonstrate compliance with any alternative to such requirement. On October
24, 2017, the Company received notification from Nasdaq that the Company had not regained compliance with the Minimum Stockholders’
Equity Requirement. The Company appealed the Staff Delisting Determination and requested a hearing that was held on December 7,
2017. As a result, the suspension and delisting was stayed pending the issuance of a written decision by the Nasdaq Hearings Panel.
By decision dated December 14, 2017, the Panel granted the Company’s request for a further extension, through April 23,
2018, to evidence compliance with the $2,500,000 stockholders’ equity requirement. Following the closing of a public offering
on April 24, 2018, on May 2, 2018, the Company received a letter from Nasdaq notifying the Company that it has regained compliance
with the $2.5 million minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market, as set
forth in Nasdaq Listing Rule 5550(b)(1).
On
May 17, 2018, a letter from the Listing Qualifications Staff of Nasdaq indicating
that, based upon the closing bid price of the Company’s common stock for the last 30 consecutive business days beginning
on April 5, 2018 and ending on May 16, 2018, the Company no longer meets the requirement to maintain a minimum bid price of $1
per share, as set forth in Nasdaq Listing Rule 5550(a)(2).
In
accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided a period of 180 calendar days, or until November
13, 2018, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid
price of the Company’s common stock must be at least $1 per share for a minimum of ten consecutive business days during
this 180-day period. In the event that the Company does not regain compliance within this 180-day period, the Company may be eligible
to seek an additional compliance period of 180 calendar days if it meets the continued listing requirement for market value of
publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price
requirement, and provides written notice to Nasdaq of its intent to cure the deficiency during this second compliance period,
by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq staff that the Company will not be able
to cure the deficiency, or if the Company is otherwise not eligible, Nasdaq will provide notice to the Company that its common
stock will be subject to delisting.
Note
17 - Subsequent Events
Series 4 Preferred Share Conversions
Subsequent to June 30, 2018, 994.5624 shares
of Series 4 Preferred were converted into 5,590,570 shares of the Company’s common stock.
Inpixon USA Reorganization and Name
Change
On July 26, 2018, solely for the purpose
of reincorporating the Company into the State of Nevada, Inpixon formed a wholly owned subsidiary in the State of Nevada named
“Sysorex, Inc.” which was merged with Inpixon USA and resulted in the Company being reincorporated in the State of
Nevada under the name “Sysorex, Inc.” (“Reincorporation”). At the effective time of the Reincorporation,
all of the 3,950,000 issued and outstanding shares of common stock, no par value per share, of Inpixon USA were converted into
and exchanged for an aggregate of 39,999,000 fully-paid and non-assessable shares of common stock, par value $0.00001 per share,
of Sysorex.
Separation Agreement
On August 7, 2018,
the Company entered into a Separation and Distribution Agreement (the “Separation Agreement”) with its wholly-owned
subsidiary, Sysorex, governing the proposed separation (the “Spin-off”) of the Company’s IT consulting and value-added
reseller business (the “VAR business”).
The Separation Agreement incorporates a
step plan which provides for the transfer of entities, assets and liabilities at the effective time on the date of the Spin-off
pursuant to which (i) the Company will contribute to Sysorex all of the outstanding equity interests of the Sysorex subsidiary
entities, (ii) the Company will contribute to Sysorex the “Contributed Cash”, as such term is defined in the Separation
Agreement, which includes $2 million in cash held by the Company that will be contributed to Sysorex before the Spin-off (which
amount shall be reduced by the aggregate amount of certain operating and other expenses of Sysorex that have been or will be satisfied
by the Company from June 30, 2018 through the date of the Spin-off), (iii) the Company will transfer certain assets to Sysorex
and Sysorex will assume certain of the Company’s liabilities and (iv) Sysorex will contribute to the Company certain assets
and liabilities related to the Company’s indoor positioning analytics business.
One share of
Sysorex common stock for every three shares of the Company’s common stock outstanding or issuable upon complete conversion
of the preferred stock or exercise of certain warrants outstanding as of the record date will be distributed as a stock dividend
to holders of the Company’s common stock, preferred stock and certain warrants of record as of August 21, 2018. Holders
of stock options and other awards under the Company’s equity plans will participate in the Spin-off in accordance with an
employee matters agreement and the terms of such securities.