The
accompanying notes are an integral part of these financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
1 - Organization and Nature of Business and Going Concern
Inpixon,
through its wholly-owned subsidiaries, 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. The Company is headquartered in California,
and has subsidiary offices in 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 August 31, 2018, and as more fully described
in Note 7, we completed the spin-off of our value added reseller business from our indoor positioning analytics business by
way of a distribution of all the shares of common stock of our wholly-owned subsidiary, Sysorex, Inc. to our stockholders of record
as of August 21, 2018 and certain warrant holders.
Going
Concern and Management’s Plans
As
of September 30, 2018, the Company has net working capital of approximately $1.1 million. For the nine months ended September
30, 2018, the Company incurred a net loss of approximately $17.3 million which includes the losses generated by Sysorex, Inc.
through August 31, 2018, the date the entity and its wholly owned subsidiary were spun off as more fully described in Note 7.
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 14,996 shares of the Company’s
common stock and warrants to purchase up to 14,996 shares of common stock at a purchase price of $212.40 per share of common stock
for aggregate net proceeds of approximately $2.8 million. On February 20, 2018, the Company completed a public offering consisting
of an aggregate of 83,149 Class A units, at a price to the public of $94.00 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 net proceeds of approximately $15.4 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. On October 12, 2018, the Company raised approximately $2 million in net proceeds
from a one-year promissory note.
The Company expects its capital resources
as of September 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 will need additional funds to support its operations for the next twelve months. In addition, the Company is
pursuing possible strategic transactions and if the Company pursues any such opportunities, other expansion plans or changes its
business plan it may need to raise additional capital. The Company may raise such additional capital as needed, through the issuance
of equity, equity-linked or debt securities. The Company’s condensed consolidated financial statements as of September
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 September 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 NINE MONTHS ENDED SEPTEMBER 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
nine month period ended September 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, neither 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 NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies
(continued)
Revenue
Recognition (continued)
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.
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 including maintenance service
provided by in house personnel, 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 nine months ended September 30, 2018 and 2017, the Company did not incur any such losses. These amounts are
based on known and estimated factors.
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 $52,000 as of September 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 NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies
(continued)
Stock-Based
Compensation (continued)
The
Company incurred stock-based compensation charges of $122,000 and $288,000 for the three months ended September 30, 2018
and 2017, and $979,000 and $1,282,000 for the nine months ended September 30, 2018 and 2017, respectively, which are included
in general and administrative expenses. The Company has elected to recognize forfeitures as they occur, rather than
calculate an estimated forfeiture rate using a modified retrospective transition approach. The following table summarizes
the nature of such charges for the periods then ended (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Compensation and related benefits
|
|
$
|
122
|
|
|
$
|
201
|
|
|
$
|
899
|
|
|
$
|
713
|
|
Professional and legal fees
|
|
|
--
|
|
|
|
87
|
|
|
|
80
|
|
|
|
246
|
|
Acquisition transaction costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
7
|
|
Interest expense
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
316
|
|
Totals
|
|
$
|
122
|
|
|
$
|
288
|
|
|
$
|
979
|
|
|
$
|
1,282
|
|
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 nine months ended September 30, 2018 and 2017:
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
67,454
|
|
|
|
258
|
|
Warrants
|
|
|
1,622,971
|
|
|
|
3,177
|
|
Convertible preferred stock
|
|
|
984
|
|
|
|
--
|
|
Convertible note
|
|
|
15,881
|
|
|
|
--
|
|
Convertible debenture
|
|
|
--
|
|
|
|
337
|
|
Reserved for service providers
|
|
|
1,100
|
|
|
|
--
|
|
Totals
|
|
|
1,708,390
|
|
|
|
3,772
|
|
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 NINE MONTHS ENDED SEPTEMBER 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 September 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 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 nine months ended September 30, 2018 and 2017.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
3 - Summary of Significant Accounting Policies (continued)
Recently Issued and Adopted 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.
In
September 2017, the FASB issued ASU 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 Topic 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.
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 did not have a material effect on the post-spin off financial statements of the Company.
Reverse
Stock Split
On March 1, 2017, the Company effectuated
a 1-for-15 reverse stock split of its outstanding common stock, on February 6, 2018, the Company effectuated a 1-for-30
reverse stock split of its outstanding common stock and on November 2, 2018, the Company effectuated a 1-for-40 reverse stock split
of its outstanding common stock. The financial statements and accompanying notes give effect to each of these 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 NINE MONTHS ENDED SEPTEMBER 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 September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
As of
September 30,
2018
|
|
|
As of December 31,
2017
|
|
Raw materials
|
|
$
|
220
|
|
|
$
|
220
|
|
Finished goods
|
|
|
590
|
|
|
|
563
|
|
Total Inventory
|
|
$
|
810
|
|
|
$
|
783
|
|
Note
6 - Goodwill
The
Company has recorded goodwill and other indefinite-lived assets in connection with its acquisition of Shoom, Inc. (“Shoom”)
in September 2013. 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 nine months ended September 30, 2018 and 2017 by doing a quantitative test which confirmed that the fair
value of the reporting unit was in excess of the carrying value of the stock so it was determined that there was no impairment.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
7 - Discontinued Operations
Sale
of Sysorex Arabia
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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
7 - Discontinued Operations (continued)
Sale
of Sysorex Arabia (continued)
The
Company did not recognize any depreciation or amortization expense related to discontinued operations during the nine months ended
September 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.
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 nine months ended September 30, 2018 and 2017, no amounts were required to be accrued under this
provision.
S
pin- Off of Sysorex, Inc. and its
wholly owned subsidiary, Sysorex Government Services, Inc.
On August 31, 2018, the Company completed
the spin-off (the “Spin-off”) of its value added reseller business from its indoor positioning analytics
business by way of a distribution of all the shares of common stock of the Company’s wholly-owned subsidiary, Sysorex, Inc.
(“Sysorex”), to the Company’s stockholders of record as of August 21, 2018 (the “Record Date”) and
certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such common stock, preferred stock
and warrant holders, each of whom received one share of Sysorex’s common stock for every 0.075 shares of the Company’s
common stock held on the Record Date or such number of shares of common stock issuable upon complete conversion of the preferred
stock or exercise of the warrants. The Spin-off was governed by a Separation and Distribution Agreement as well as other related
agreements between the Company and Sysorex (collectively, the “Spin-off Agreements”).
As a result of the Spin-off, the Company’s
common stock continues trading on the Nasdaq Stock Market (“Nasdaq”), and Sysorex is an independent public company
with common stock that is quoted on the OTC Markets.
In accordance with Accounting Standards
Codification (“ASC”) 205-20, “
Discontinued Operations
,” the results of Sysorex, including
Inpixon’s former subsidiary, Sysorex Government Services, Inc., formerly Inpixon Federal, Inc. (“SGS”), are
reflected in Inpixon’s condensed consolidated financial statements as discontinued operations and, therefore, are presented
as assets and liabilities of discontinued operations on the condensed consolidated balance sheet and loss from discontinued operations
on the condensed consolidated statements of operations. Certain amounts in the prior year’s condensed consolidated financial
statements and related footnotes thereto have been reclassified to conform with the current year presentation as a result of the
Spin-off of Sysorex.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
7 - Discontinued Operations (continued)
S
pin-
Off of Sysorex, Inc. and its wholly owned subsidiary Sysorex Government Services, Inc. (continued)
The
major categories of assets and liabilities held for sale in the condensed consolidated balance sheets as of December 31, 2017
(in thousands):
(In thousands)
|
|
As of December 31,
2017
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
22
|
|
Accounts receivable, net
|
|
|
1,882
|
|
Notes and other receivables
|
|
|
171
|
|
Inventory
|
|
|
7
|
|
Prepaid licenses and maintenance contracts
|
|
|
4,638
|
|
Other current assets
|
|
|
263
|
|
Total Current Assets
|
|
$
|
6,983
|
|
|
|
|
|
|
Prepaid licenses and maintenance, non-current
|
|
$
|
2,264
|
|
Property and equipment, net
|
|
|
172
|
|
Intangible assets, net
|
|
|
5,112
|
|
Other assets
|
|
|
10
|
|
Total Non-Current Assets
|
|
$
|
7,558
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
24,271
|
|
Accrued liabilities
|
|
|
3,215
|
|
Deferred revenue
|
|
|
5,554
|
|
Total Current Liabilities
|
|
$
|
33,040
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
$
|
2,636
|
|
Other liabilities
|
|
|
40
|
|
Acquisition liability - Integrio
|
|
|
997
|
|
Total Non-Current Liabilities
|
|
$
|
3,673
|
|
The assets and liabilities that were divested
as part of the Spin-off completed on August 31, 2018 were as follows:
(In thousands)
Assets:
|
|
|
|
Accounts receivable, net
|
|
$
|
651
|
|
Notes and other receivables
|
|
|
473
|
|
Prepaid licenses and maintenance contracts
|
|
|
5
|
|
Other current assets
|
|
|
146
|
|
Property and equipment, net
|
|
|
41
|
|
Intangible assets, net
|
|
|
3,728
|
|
Other assets
|
|
|
34
|
|
Total Assets
|
|
$
|
5,078
|
|
Liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
(15,952
|
)
|
Accrued liabilities
|
|
|
(792
|
)
|
Deferred revenue
|
|
|
(70
|
)
|
Other liabilities
|
|
|
(40
|
)
|
Acquisition liability - Integrio
|
|
|
(62
|
)
|
Total Liabilities
|
|
$
|
(16,916
|
)
|
Total Net Assets Deconsolidated as Result of Spin-off
|
|
$
|
(11,838
|
)
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
8 - Debt
Debt
as of September 30, 2018 and December 31, 2017 consisted of the following (in thousands):
|
|
As of
September 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 NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
8 - Debt (continued)
|
(A)
|
Convertible
Notes Payable (continued)
|
On August 30, 2018, the Company entered
into a Standstill Agreement with the November Noteholder. Pursuant to the Standstill Agreement, the November Noteholder agreed
that its right to redeem all or any portion of the November Note will not commence until the date that is the earlier of (i) 12
months after the purchase price date, and (b) five trading days following receipt of approval from Inpixon’s stockholders,
as may be required in accordance with applicable Nasdaq Listing Rules, to amend the terms of the November Note to modify the Conversion
Price and the Minimum Redemption Price, as those terms are defined in the November Note, on terms that are acceptable to the November
Noteholder. The Standstill Agreement also extends the maturity date of the November Note to December 31, 2018. Inpixon paid the
November Noteholder $75,000 as consideration for the November Noteholder’s consent to enter into the Standstill Agreement
and accordingly expensed the $75,000 to interest expense on the date paid.
|
(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 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.
On August 31, 2018 Inpixon, together with
Sysorex and SGS, and Payplant executed Amendment 1 to Payplant Client Agreement (the “Amendment”). Pursuant to the
Amendment, Sysorex and SGS are no longer parties to the Payplant Client Agreement, originally entered into on August 14, 2017,
and have been released from any and all obligations and liabilities arising under the Payplant Client Agreement, whether such obligations
and liabilities were in existence prior to or on the date of the Amendment or arise after the date of the Amendment.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
8 - Debt (continued)
|
(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 1,254 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 2,982 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 2,646 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 had 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 14,996 shares (the “January 2018 Shares”)
of the Company’s common stock, at a purchase price of $212.40 per share (the “January 2018 Offering”) and warrants
to purchase up to 14,996 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.
After deducting placement agent fees and other expenses, the net proceeds from the offering was approximately $2.8 million. The
January 2018 Warrants were initially exercisable at an exercise price per share equal to $264.00, 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 $120.00 per share.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
9 - Capital Raise (continued)
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 83,149 Class A units, at a price to
the public of $94.00 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 $140.00 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 11 shares of our common stock at a conversion price of $94.00 per share for up to an aggregate of 108,351 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 54 shares of common stock, at a conversion price of $18.40 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 $26.80 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.
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 $18.40 to $7.12 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 $25.36 and increased the number of shares issuable upon exercise of
such warrants to 1,057,178 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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
10 - Common Stock
On January 5, 2018, the Company issued
196 shares of common stock pursuant to a subscription agreement with a service provider at a purchase price of $408.00 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 14,996
shares of the Company’s common stock, at a purchase price of $212.40 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
1,254 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
2,982 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 2,646 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 83,149 Class A units, at a price to the public of $94.00 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 103,976 shares of the Company’s common stock.
During the three months ended March 31,
2018, the Company issued 243 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 4,375 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 718,452 shares of the Company’s common stock.
During the three months ended September
30, 2018, 2,311.2933 shares of Series 4 Preferred were converted into 324,803 shares of the Company’s common stock.
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 $94.00.
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 11 shares of our common stock at a conversion price
of $94.00 per share (see Note 9).
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
11 - Preferred Stock (continued)
Series
3 Preferred (continued)
During the three months ended March 31,
2018, 9773.7252 shares of Series 3 Preferred were converted into 103,976 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 4,375 shares of the Company’s common
stock. As of September 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 $18.40 (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 $7.12.
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 718,452 shares of the Company’s common stock. During the
three months ended September 30, 2018, 2,311.2933 shares of Series 4 Preferred were converted into 324,803 shares of the Company’s
common stock. As of September 30, 2018, there were 7 shares 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 27, 2017, 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-15
reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of March 1, 2017.
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.
On October 31, 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-40
reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of November 2, 2018.
The financial statements and accompanying
notes give effect to the 1-for-15, 1-for-30 and 1-for-40 reverse stock splits and increase in authorized shares as if they occurred
at the first period presented.
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 together 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).
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
13 - Stock Options (continued)
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 416 and awarded under the 2018 Plan as of September 30, 2018 is 4,000,000.
As of September 30, 2018, 67,454 of options were granted to employees, directors and consultants of the Company (including 35 shares
outside of our plan) and 3,932,997 options were available for future grant under the Option Plans.
During the nine months ended September
30, 2018, the Company granted options under the 2018 Plan for the purchase of 67,863 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 $7.20 and $14.40 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 $7.20 and $14.40 per share.
The
Company recorded a stock-based compensation charge of $122,000 and $288,000 for the three months ended September
30, 2018 and 2017, respectively, and $979,000 and $1,282,000 for the nine months ended September 30, 2018 and 2017,
respectively.
As
of September 30, 2018, the fair value of non-vested options totaled $266,820 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 nine months ended September 30, 2018 and 2017 were as follows:
|
|
For the Nine Months Ended
September 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 NINE MONTHS ENDED SEPTEMBER 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 India subsidiary. Cash
in foreign financial institutions as of September 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 nine months ended September 30, 2018 and 2017 (in thousands):
|
|
For the Nine Months
Ended
September 30,
2018
|
|
|
For
the Nine Months Ended
September
30,
2017
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Customer A
|
|
|
956
|
|
|
|
36
|
%
|
|
|
937
|
|
|
|
31
|
%
|
Customer B
|
|
|
280
|
|
|
|
11
|
%
|
|
|
--
|
|
|
|
--
|
|
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 September 30, 2018 and 2017 (in thousands):
|
|
For the Three Months
Ended
September 30,
2018
|
|
|
For the Three Months
Ended
September 30,
2017
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Customer A
|
|
|
312
|
|
|
|
33
|
%
|
|
|
316
|
|
|
|
36
|
%
|
As
of September 30, 2018, Customer A represented approximately 5% and Customer B represented approximately 24% of total accounts
receivable. As of September 30, 2017, Customer A represented less than 1% of total accounts receivable.
As
of September 30, 2018, one vendor represented approximately 60% of total gross accounts payable. There were no purchases from
this vendor during the three and nine months ended September 30, 2018. As of September 30, 2017, one vendor represented
approximately 31% of total gross accounts payable. There were no purchases from this vendor during the three and nine months ended
September 30, 2017.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
15 - Foreign Operations
The
Company’s operations are located primarily in the United States, Canada, India and prior to the sale of Sysorex Arabia in
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 September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
930
|
|
|
$
|
10
|
|
|
$
|
--
|
|
|
$
|
76
|
|
|
$
|
(76
|
)
|
|
$
|
940
|
|
Operating income (loss) by geographic area
|
|
$
|
(3,022
|
)
|
|
$
|
(317
|
)
|
|
$
|
--
|
|
|
$
|
22
|
|
|
$
|
--
|
|
|
$
|
(3,317
|
)
|
Net income (loss) by geographic area
|
|
$
|
(4,885
|
)
|
|
$
|
(317
|
)
|
|
$
|
--
|
|
|
$
|
22
|
|
|
$
|
--
|
|
|
$
|
(5,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
864
|
|
|
$
|
7
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
871
|
|
Operating loss by geographic area
|
|
$
|
(4,197
|
)
|
|
$
|
(498
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(4,695
|
)
|
Net loss by geographic area
|
|
$
|
(14,134
|
)
|
|
$
|
(498
|
)
|
|
$
|
(9
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(14,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
2,606
|
|
|
$
|
21
|
|
|
$
|
--
|
|
|
$
|
202
|
|
|
$
|
(202
|
)
|
|
$
|
2,627
|
|
Operating income (loss) by geographic area
|
|
$
|
(10,422
|
)
|
|
$
|
(1,192
|
)
|
|
$
|
--
|
|
|
$
|
35
|
|
|
$
|
--
|
|
|
$
|
(11,579
|
)
|
Net income (loss) by geographic area
|
|
$
|
(16,117
|
)
|
|
$
|
(1,196
|
)
|
|
$
|
--
|
|
|
$
|
35
|
|
|
$
|
--
|
|
|
$
|
(17,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
2,874
|
|
|
$
|
133
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
3,007
|
|
Operating loss by geographic area
|
|
$
|
(10,720
|
)
|
|
$
|
(1,346
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(12,066
|
)
|
Net loss by geographic area
|
|
$
|
(25,757
|
)
|
|
$
|
(1,346
|
)
|
|
$
|
(26
|
)
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
(27,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
12,644
|
|
|
$
|
244
|
|
|
$
|
--
|
|
|
$
|
103
|
|
|
$
|
--
|
|
|
$
|
12,991
|
|
Long lived assets by geographic area
|
|
$
|
7,056
|
|
|
$
|
144
|
|
|
$
|
--
|
|
|
$
|
20
|
|
|
$
|
--
|
|
|
$
|
7,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
27,212
|
|
|
$
|
432
|
|
|
$
|
|
|
|
$
|
47
|
|
|
$
|
--
|
|
|
$
|
27,691
|
|
Long lived assets by geographic area
|
|
$
|
9,599
|
|
|
$
|
318
|
|
|
$
|
--
|
|
|
$
|
14
|
|
|
$
|
--
|
|
|
$
|
9,931
|
|
Note
16 – Related Party Transactions
Nadir
Ali is the CEO of Inpixon as well as the Chairman of the Board of Sysorex, Inc.
Pursuant
to the terms of those certain employee transition agreements entered into between the Company and Sysorex, effective as of August
31, 2018 (collectively, the “Transition Agreements”), Sysorex agreed to furnish to the Company, on a transitional
basis, the services of certain of its employees and keep such employees’ on its payroll and benefits plans from August 31,
2018 through and including December 31, 2018 (the “Transitional Period”). The Company agreed to reimburse Sysorex
for all costs and expenses incurred by Sysorex with respect to such employees’ employment during the Transitional Period.
Sysorex agreed to invoice the Company upon the calculation of amounts owed for the foregoing costs, and the Company agreed
to reimburse Sysorex for all such costs within 3 days of its receipt of each such invoice, plus an administrative service
fee of 2% of the gross amount of each respective invoice; provided, however, that Sysorex agreed waive such fee for
so long as any Company employees are providing any necessary administrative services on behalf of and for the benefit of Sysorex,
including any employees that are furnished to the Company in accordance with the Transition Agreements. The total amount of payroll
and benefits reimbursed to Sysorex during the month ended September 30, 2018 was $543,000. In addition, Sysorex owes
the Company approximately $750,000 resulting from transactions between the companies during this transition period. The Company
anticipates this balance to be repaid by the end of the Transitional Period December 31, 2018.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
17 - 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 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 alleged that SGS failed to respond to a complaint served on November 22, 2017. The Motion requested a default judgment
in the amount of $336,000. On August 10, 2018, the parties agreed to a settlement payment schedule. In connection with the Spin-off,
Sysorex agreed to indemnify, defend and hold harmless the Company from and against any damages in connection with Sysorex liabilities,
including this matter.
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, formerly Inpixon USA, 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.
On August 15, 2018, the parties entered into a settlement agreement pursuant to which Sysorex agreed to a settlement payment schedule
in connection with this matter. Pursuant to the terms of the settlement agreement, the Company is not liable for any payments
to be made by Sysorex or any damages that may arise under such agreement.
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 is contesting such demand and a hearing has been scheduled for December 4-6, 2018.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
17 - Commitments and Contingencies (continued)
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 had 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 $1.00 per share for a minimum of ten consecutive business days, but
generally no more than twenty consecutive business days during this 180-day period. As of the date of this Form 10-Q, the closing
bid price of the common stock has not been equal to or greater than $1.00 per share for a minimum of ten consecutive business days.
As a result, the Company does not expect to be able to regain compliance within this 180-day period; however, the Company will
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 provide written notice to Nasdaq of the Company’s 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 we are otherwise not eligible, Nasdaq will provide notice to the Company that the
common stock will be subject to delisting.
On
October 31, 2018, the Company received stockholder approval for a reverse stock split at its 2018 annual meeting of stockholders
and implemented a 1-for-40 reverse stock split effective as of November 2, 2018, which it believes will cause the Company to comply with the
minimum bid price requirement.
Note
18 - Subsequent Events
On October 8, 2018, the Company issued
37,500 shares of common stock for services which were fully vested upon the date of grant. The Company recorded an expense of $465,000
for the fair value of those shares.
Subsequent to September 30, 2018, the Company
issued 92,489 shares of common stock in connection with the exercise of 92,489 warrants at $10.80 per share.
Subsequent to September 30, 2018, 6 shares
of Series 4 Preferred were converted into 843 shares of the Company’s common stock.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
Note
18 - Subsequent Events (continued)
November
Noteholder Exchange Agreement
On
October 5, 2018, the Company and the November Noteholder entered into an exchange agreement (the “Exchange Agreement”).
Pursuant to the Exchange Agreement, the Company and the November Noteholder agreed to (i) partition a new convertible promissory
note in the form of the November Note (the “Partitioned Note”) in the original principal amount of $1,536,649 (the
“Exchange Amount”) from the November Note and then cause the outstanding balance of the November Note to be reduced
by the Exchange Amount; and (ii) exchange the Partitioned Note for the delivery of 142,282 shares of the Company’s common
stock (each, an “Exchange Share” and collectively, the “Exchange Shares”) at an effective price per Exchange
Share equal to $10.80. The Exchange Shares were issued on October 8, 2018.
On October 5, 2018, in accordance with
the terms of the price reset provisions described in the Certificate of Designations the Conversion Price of the warrants issued
with the April 24, 2018 public offering were adjusted to $10.80.
Note
Purchase Agreement and Promissory Note
On October 12, 2018 the Company entered
into a Note Purchase Agreement with an institutional investor (the “Holder”), pursuant to which the Company agreed
to issue and sell to the Holder an unsecured promissory note (the “Note”) in an aggregate principal amount of $2,520,000.00
(the “Initial Principal Amount”), which is payable on or before the date that is 12 months from the issuance date.
The Initial Principal Amount includes an original issue discount of $500,000.00 and $20,000.00 that the Company agreed to pay
to the Holder to cover the Holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs.
In exchange for the Note, the Holder paid an aggregate purchase price of $2,000,000.00. Interest on the Note accrues at a rate
of 10% per annum and is payable on the maturity date or otherwise in accordance with the Note. Beginning on the date that is 6
months from the issuance date and at the intervals indicated below until the Note is paid in full, the Holder shall have the right
to redeem up to an aggregate of 1/3 of the initial principal balance of the Note each month (each monthly exercise, a “Monthly
Redemption Amount”) by providing written notice (each, a “Monthly Redemption Notice”) delivered to the Company;
provided, however, that if the Holder does not exercise any Monthly Redemption Amount in its corresponding month then such Monthly
Redemption Amount shall be available for the Holder to redeem in any future month in addition to such future month’s Monthly
Redemption Amount. Upon receipt of any Monthly Redemption Notice, the Company shall pay the applicable Monthly Redemption Amount
in cash to the Holder within 5 business days of the Company’s receipt of such Monthly Redemption Notice.