Item
1.
|
Financial
Statements
|
The
accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial information which are the accounting principles that are generally accepted in the United States of America
and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In
the opinion of management, the condensed consolidated financial statements contain all material adjustments, consisting only of
normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the
Company for the interim periods presented.
The
results for the period ended June 30, 2019 are not necessarily indicative of the results of operations for the full year. 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, 2018 and 2017 included in the Annual Report on
Form 10-K
filed
with the Securities and Exchange Commission (the “SEC”) on March 28, 2019.
Sysorex,
Inc. and Subsidiary
Condensed
Consolidated Balance Sheets
(In
thousands of dollars, except number of shares and par value data)
|
|
As of
|
|
As of
|
|
|
June 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
(Unaudited)
|
|
(Audited)
|
Assets
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash
|
|
$
|
13
|
|
|
$
|
6
|
|
Accounts receivable, net
|
|
|
18
|
|
|
|
321
|
|
Other receivables
|
|
|
6
|
|
|
|
9
|
|
Prepaid licenses and maintenance contracts
|
|
|
5
|
|
|
|
15
|
|
Prepaid assets and other current assets
|
|
|
49
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
91
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
18
|
|
|
|
27
|
|
Intangible assets, net
|
|
|
1,070
|
|
|
|
2,572
|
|
Other assets
|
|
|
29
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,208
|
|
|
$
|
3,035
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,262
|
|
|
$
|
13,976
|
|
Accrued liabilities
|
|
|
316
|
|
|
|
603
|
|
Short-term debt, net of discount
|
|
|
563
|
|
|
|
596
|
|
Deferred revenue
|
|
|
90
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
9,231
|
|
|
|
15,357
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
|
|
|
Related party payable
|
|
|
10,031
|
|
|
|
2,204
|
|
Acquisition liability - Integrio
|
|
|
62
|
|
|
|
62
|
|
Other liabilities
|
|
|
45
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
19,369
|
|
|
|
17,697
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Common stock, par value $0.00001 per share, 500,000,000 shares authorized; 416,482 shares issued as of June 30, 2019 and December 31, 2018 and 341,105 shares and 335,233 shares outstanding as of June 30, 2019 and December 31, 2018, respectively
|
|
|
-
|
|
|
|
-
|
|
Treasury stock, at cost, 75,378 shares at June 30, 2019 and 81,250 shares at December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in-capital
|
|
|
(11,539
|
)
|
|
|
(11,539
|
)
|
Accumulated deficit
|
|
|
(6,622
|
)
|
|
|
(3,123
|
)
|
Total Stockholders’ Deficit
|
|
|
(18,161
|
)
|
|
|
(14,662
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
1,208
|
|
|
$
|
3,035
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
Sysorex,
Inc. and Subsidiary
Condensed
Consolidated Statements of Operations
(In
thousands of dollars, except number of shares and per share data)
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,109
|
|
|
$
|
568
|
|
|
$
|
1,341
|
|
|
$
|
900
|
|
Services
|
|
|
175
|
|
|
|
421
|
|
|
|
209
|
|
|
|
1,335
|
|
Total Revenues
|
|
|
1,284
|
|
|
|
989
|
|
|
|
1,550
|
|
|
|
2,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
968
|
|
|
|
271
|
|
|
|
1,112
|
|
|
|
446
|
|
Services
|
|
|
142
|
|
|
|
290
|
|
|
|
167
|
|
|
|
710
|
|
Total Cost of Revenues
|
|
|
1,110
|
|
|
|
561
|
|
|
|
1,279
|
|
|
|
1,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
174
|
|
|
|
428
|
|
|
|
271
|
|
|
|
1,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
68
|
|
|
|
-
|
|
|
|
157
|
|
Sales and marketing
|
|
|
274
|
|
|
|
496
|
|
|
|
560
|
|
|
|
1,133
|
|
General and administrative
|
|
|
468
|
|
|
|
1,311
|
|
|
|
1,266
|
|
|
|
2,545
|
|
Gain on Earnout
|
|
|
-
|
|
|
|
(577
|
)
|
|
|
-
|
|
|
|
(934
|
)
|
Amortization of intangibles
|
|
|
751
|
|
|
|
519
|
|
|
|
1,502
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,493
|
|
|
|
1,817
|
|
|
|
3,328
|
|
|
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,319
|
)
|
|
|
(1,389
|
)
|
|
|
(3,057
|
)
|
|
|
(2,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(325
|
)
|
|
|
(276
|
)
|
|
|
(471
|
)
|
|
|
(736
|
)
|
Other income, net
|
|
|
29
|
|
|
|
382
|
|
|
|
29
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(296
|
)
|
|
|
106
|
|
|
|
(442
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,615
|
)
|
|
$
|
(1,283
|
)
|
|
$
|
(3,499
|
)
|
|
$
|
(2,993
|
)
|
Net Loss per share - basic and diluted
|
|
$
|
(4.73
|
)
|
|
$
|
(4.55
|
)
|
|
$
|
(10.29
|
)
|
|
$
|
(10.61
|
)
|
Weighted Average Shares Outstanding - basic and diluted
|
|
|
341,104
|
|
|
|
282,083
|
|
|
|
340,098
|
|
|
|
282,083
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
Sysorex,
Inc. and Subsidiary
Condensed
Consolidated Statement of Changes in Stockholders’ Deficit
For
the Six Months Ended June 30, 2019
(In
thousands of dollars, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Paid-In
|
|
Accumulated
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018
|
|
|
416,482
|
|
|
$
|
-
|
|
|
|
81,250
|
|
|
$
|
-
|
|
|
$
|
(11,539
|
)
|
|
$
|
(3,123
|
)
|
|
$
|
(14,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reissued from Treasury related to exercise of former parent warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,872
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,884
|
)
|
|
|
(1,884
|
)
|
Balance – March 31, 2019
|
|
|
416,482
|
|
|
|
-
|
|
|
|
75,378
|
|
|
|
-
|
|
|
|
(11,539
|
)
|
|
|
(5,007
|
)
|
|
|
(16,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,615
|
)
|
|
|
(1,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – June 30, 2019
|
|
|
416,482
|
|
|
$
|
-
|
|
|
|
75,378
|
|
|
$
|
-
|
|
|
$
|
(11,539
|
)
|
|
$
|
(6,622
|
)
|
|
$
|
(18,161
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Sysorex,
Inc. and Subsidiary
Condensed
Consolidated Statement of Changes in Stockholders’ Deficit
For
the Six Months Ended June 30, 2018
(In
thousands of dollars, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-In
|
|
|
Parent
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Investment
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2018
|
|
|
400,000
|
|
|
$
|
-
|
|
|
|
117,917
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(22,172
|
)
|
|
$
|
-
|
|
|
$
|
(22,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of accounting standards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,287
|
|
|
|
-
|
|
|
|
1,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,710
|
)
|
|
|
-
|
|
|
|
(1,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net distributions from Parent
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,019
|
|
|
|
-
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2018
|
|
|
400,000
|
|
|
|
-
|
|
|
|
117,917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,576
|
)
|
|
|
-
|
|
|
|
(16,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,283
|
)
|
|
|
|
|
|
|
(1,283
|
)
|
Net distributions from Parent
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,686
|
|
|
|
-
|
|
|
|
4,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2018
|
|
|
400,000
|
|
|
$
|
-
|
|
|
|
117,917
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(13,173
|
)
|
|
$
|
-
|
|
|
$
|
(13,173
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Sysorex,
Inc. and Subsidiary
Condensed
Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
|
|
For the Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,499
|
)
|
|
|
(2,993
|
)
|
Adjustment to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
9
|
|
|
|
99
|
|
Amortization of intangibles
|
|
|
1,502
|
|
|
|
1,038
|
|
Stock based compensation
|
|
|
-
|
|
|
|
55
|
|
Gain on earnout
|
|
|
-
|
|
|
|
(934
|
)
|
Gain on the settlement of vendor liabilities
|
|
|
(44
|
)
|
|
|
(209
|
)
|
Amortization of debt discount
|
|
|
63
|
|
|
|
299
|
|
Provision for doubtful accounts
|
|
|
(25
|
)
|
|
|
41
|
|
Other
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
328
|
|
|
|
1,108
|
|
Other receivables
|
|
|
2
|
|
|
|
7
|
|
Prepaid assets and other current assets
|
|
|
2
|
|
|
|
155
|
|
Prepaid licenses and maintenance contracts
|
|
|
9
|
|
|
|
(12
|
)
|
Other assets
|
|
|
6
|
|
|
|
(36
|
)
|
Accounts payable
|
|
|
(5,670
|
)
|
|
|
(6,050
|
)
|
Accrued liabilities
|
|
|
(287
|
)
|
|
|
(2,694
|
)
|
Accrued issuable equity
|
|
|
(29
|
)
|
|
|
-
|
|
Deferred revenue
|
|
|
(92
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
(4,226
|
)
|
|
|
(7,100
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Operating Activities
|
|
|
(7,725
|
)
|
|
|
(10,093
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
-
|
|
|
|
(15
|
)
|
Net Cash Used In Investing Activities
|
|
|
-
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Related party advances
|
|
|
7,827
|
|
|
|
-
|
|
Repayments on revolver line of credit
|
|
|
(95
|
)
|
|
|
-
|
|
Net distributions from (to) parent
|
|
|
-
|
|
|
|
10,350
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
7,732
|
|
|
|
10,350
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash
|
|
|
7
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
Cash – beginning of period
|
|
|
6
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Cash – end of period
|
|
$
|
13
|
|
|
$
|
264
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
43
|
|
|
$
|
264
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
1 — Description of Business, the Spin-Off and Going Concern and Management’s Plans
Description
of Business
Sysorex,
Inc., through its wholly-owned subsidiary, Sysorex Government Services, Inc., formerly known as (f/k/a) Inpixon Federal, Inc.
(“SGS”), (unless otherwise stated or the context otherwise requires, the terms “SGS” “we,”
“us,” “our” and the “Company” refer collectively to Sysorex, Inc. and SGS), provides information
technology solutions primarily to the public sector. These solutions include cybersecurity, professional services, engineering
support, IT consulting, enterprise level technology, networking, wireless, help desk, and custom IT solutions. The Company is
headquartered in Virginia.
The
Spin-Off
On August 31, 2018 (the
“Distribution Date”), the Company became an independent company through the pro rata distribution by Inpixon of
100% of the outstanding common stock of Sysorex to Inpixon equity holders (the “Distribution”). Each Inpixon
equity holder of record as of the close of business on August 21, 2018 received one share of the Company’s common stock
(on a pre-reverse stock split basis) for every three shares of Inpixon common stock held on the record date or such number of
shares of common stock issuable upon complete conversion of Inpixon convertible preferred stock or exercise of certain
participating warrants. Approximately 400,000 shares of the Company’s common stock were distributed on the Distribution
Date to Inpixon equity holders. In connection with the initial Distribution of its common stock, the Company reserved 117,917
shares of common stock for issuance in treasury (a) to the holders of certain Inpixon warrants who will be entitled
to receive shares of the Company’s common stock if the warrants are exercised, and (b) the holders of Inpixon
securities that were subject to beneficial ownership limitations in connection with the distribution and for future
issuances. The Company’s common stock began regular-way trading on the OTC Markets under the symbol “SYSX”
on September 4, 2018.
Immediately
prior to the Distribution, Inpixon transferred substantially all of the assets and liabilities and operations of Inpixon’s
value added reseller business to the Company, which was completed on August 31, 2018 (the “Capitalization”). The Company’s
condensed consolidated financial statements prior to the Capitalization were prepared on a stand-alone basis and were derived
from Inpixon’s condensed consolidated financial statements and accounting records. The condensed consolidated financial
statements included herein reflect the Company’s financial position, results of operations, and cash flows as the Company’s
business was operated as part of Inpixon’s prior to the Capitalization. Following the Capitalization, the condensed consolidated
financial statements include the accounts of the Company and SGS. All periods presented have been accounted for in conformity
with the accounting principles that are generally accepted in the United States of America (“GAAP”).
Going
Concern and Management’s Plans
As
of June 30, 2019, the Company had cash balance of $13,000 and a working capital deficit of approximately $9.1 million. In
addition, the Company has a stockholders’ deficit of approximately $18.2 million. For the six months ended June 30,
2019 and 2018, the Company incurred net losses of approximately $3.5 million and $3.0 million, respectively. 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 condensed consolidated
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 condensed consolidated financial statements are issued.
The
Company does not believe that its capital resources as of June 30, 2019, availability on the Payplant facility to
finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received, funds from
financing from our related party note (as defined in Note 7 below) and other short-term borrowings, higher margin public
sector contracts capture, reauthorization of key vendors and credit limitation improvements will be sufficient to fund
planned operations during the year ending December 31, 2019. As a result, substantial doubt exists that the Company will be
able to support its obligations for the next twelve months. The Company may raise additional capital as needed, through the
issuance of equity, equity-linked or debt securities. In addition, the Company is evaluating various strategic transactions
and acquisitions of companies with technologies and intellectual property that the Company believes will enhance our products
and services by adding technology, differentiation, customers and/or revenue. The Company is primarily looking for accretive
opportunities that have business value and operational synergies. If the Company makes any acquisitions in the future, the
Company expects to pay for such acquisitions using our equity securities, cash and debt financing in combinations appropriate
for each acquisition.
The Company’s condensed consolidated financial statements as of June 30,
2019 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 funding to secure additional resources to generate sufficient revenues and increased margin. The
Company’s condensed consolidated financial statements as of June 30, 2019 do not include any adjustments that might
result from the outcome of this uncertainty.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
2 — Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with 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, 2019 is not necessarily
indicative of the results to be expected for the year ending December 31, 2019. 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, 2018 and 2017 included in the Annual Report on
Form 10-K
filed with SEC on March 28, 2019.
Note
3 — Summary of Significant Accounting Policies
The
condensed consolidated financial statements have been prepared using the accounting records of Sysorex and SGS. All material inter-company
balances and transactions have been eliminated.
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
allowance for doubtful accounts; and
|
|
●
|
the
impairment of long-lived assets.
|
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 previous reported earnings.
Revenue
Recognition
Hardware
and Software Revenue Recognition
The
Company is a primary resale channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”),
software publishers and wholesale distributors.
The
Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company
evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and
recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified
product or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer
or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified
good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the
Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
The
Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when
control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal
title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer
has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s
products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s
warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The
Company’s shipping terms typically specify F.O.B. destination.
The
Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without
having to physically hold the inventory at its warehouse. The Company is the principal in the transaction and recognizes revenue
for drop-shipment arrangements on a gross basis.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
3 — Summary of Significant Accounting Policies
(cont.)
The
Company may provide integration of products from multiple vendors as a solution it sells to the customer. In this arrangement,
the Company provides direct warranty to the customer with the Company’s own personnel as the customer requires warranty
on the solution and not individual vendor products. This type of warranty is sold integral to the overall solution quoted to the
customer. The Company considers these service-type warranties to be performance obligations of the principal from the underlying
products that make up a solution and therefore is acting as a principal in the transaction and records revenue on a gross basis
at the point of sale.
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.
For
resale of services, including maintenance services, warranties, and extended warranties, the Company is acting as an agent as
the primary activity for those services are fulfilled by a third party. While the Company may facilitate and act as a first responder
for these services, the third-party service providers perform the primary maintenance and warranty services for the customer.
Therefore, the Company is not primarily responsible for performing these services and revenue is recorded on a net basis.
Professional
Services Revenue Recognition
The Company’s professional services include fixed fee and time and materials contracts. Fixed fees
are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly
or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor
hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company
has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration
corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company
recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service.
Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient
in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized
as soon as they become known. For the six months ended June 30, 2019 and 2018, 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.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
3 — Summary of Significant Accounting Policies
(cont.)
Recent
Accounting Standards
In
February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing
and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and
other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. As an emerging
growth company, the Company expects to delay adoption of ASU 2016-02 until January 1, 2020. ASU 2016-02 is not expected
to have a material impact on the financial statements or disclosures.
Emerging
Growth Company
Sysorex
is an “emerging growth company” as defined in the JOBS Act. As such, Sysorex will be eligible to take advantage
of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth
companies, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended
transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards,
meaning that Sysorex, as an emerging growth company, can delay the adoption of certain accounting standards until those
standards would otherwise apply to private companies. Sysorex has elected to take advantage of this extended transition
period, and therefore our financial statements may not be comparable to those of companies that comply with such new or
revised accounting standards.
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 condensed consolidated financial statements.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
4 — Credit Risk and Concentrations
Financial
instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash. 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. 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 that accounted for at least
10% of revenues during the six months ended June 30, 2019 and 2018 (in thousands of dollars):
|
|
For the Six Months Ended
June 30, 2019
|
|
|
For the Six Months Ended
June 30, 2018
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Customer
A
|
|
|
999
|
|
|
|
61
|
%
|
|
|
--
|
|
|
|
--
|
|
Customer
B
|
|
|
494
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
Customer
C
|
|
|
--
|
|
|
|
--
|
|
|
|
512
|
|
|
|
23
|
%
|
Customer
D
|
|
|
--
|
|
|
|
--
|
|
|
|
422
|
|
|
|
19
|
%
|
The
following table sets forth the percentages of revenue derived by the Company from those customers that accounted for at least
10% of revenues during the three months ended June 30, 2019 and 2018 (in thousands of dollars):
|
|
For the Three Months Ended
June 30, 2019
|
|
|
For the Three Months Ended
June 30, 2018
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Customer
A
|
|
|
999
|
|
|
|
81
|
%
|
|
|
--
|
|
|
|
--
|
|
Customer
B
|
|
|
171
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
Customer
C
|
|
|
--
|
|
|
|
--
|
|
|
|
211
|
|
|
|
21
|
%
|
Customer
D
|
|
|
--
|
|
|
|
--
|
|
|
|
187
|
|
|
|
19
|
%
|
Customer
E
|
|
|
--
|
|
|
|
--
|
|
|
|
157
|
|
|
|
16
|
%
|
Customer
F
|
|
|
--
|
|
|
|
--
|
|
|
|
106
|
|
|
|
11
|
%
|
As of June 30, 2019, Customer B represented
approximately 52% of total accounts receivable. As of June 30, 2018, Customer C represented approximately 19%, Customer D represented
approximately 27%, Customer E represented approximately 0%, and Customer F represented approximately 15% of total accounts receivable.
For the six months ended June 30, 2019, three
vendors represented approximately 76%, 11%, and 11% of total purchases. Purchases from these vendors during the six months ended
June 30, 2019 were $1.0 million, $0.1 million, and $0.1 million. For the three months ended June 30, 2019, one vendor represented
approximately 87% of total purchases. Purchases from this vendor during the three months ended June 30, 2019 was $0.9 million.
For the six months ended June 30, 2018, two vendors represented approximately 37% and 29% of total purchases. Purchases from these
vendors during the six months ended June 30, 2018 were $0.2 million and $0.2 million. For three months ended June 30, 2018, four
vendors represented approximately 45%, 35%, 16% and 11% of total purchases. Purchases from these vendors during the three months
ended June 30, 2018 were $0.1 million, $0.09 million, $0.04 million, and $0.03 million.
As
of June 30, 2019, two vendors represented approximately 35%, and 17% of total gross accounts payable. As of June 30, 2018, two
vendors represented approximately 38% and 20% of total gross accounts payable.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
5 — Short-Term Debt
Short
Term Debt as of June 30, 2019 and December 31, 2018 consisted of the following (in thousands):
|
|
As of
June 30,
|
|
|
As of
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Short-Term Debt
|
|
|
|
|
|
|
Chicago Venture Convertible Note payable (A)
|
|
$
|
563
|
|
|
$
|
500
|
|
Revolving Credit Facility (B)
|
|
|
-
|
|
|
|
96
|
|
Total Short-Term Debt
|
|
$
|
563
|
|
|
$
|
596
|
|
(A) Chicago
Venture Convertible Note Payable
On December 31, 2018, the Company issued
a $625,000 principal face amount convertible promissory note (the “Convertible Note”) to an investor (the “Lender”),
which yielded net proceeds of $500,000 to the Company pursuant to a Securities Purchase Agreement, dated as of December 31, 2018,
by and between the Company and the Lender. The Convertible Note bears interest at the rate of 10% per year and is due and payable
10 months after the date of issuance. The Convertible Note carries an original issue discount of $105,000 and the Company agreed
to pay $20,000 to the Lender to cover its transaction costs incurred with the purchase and sale of the Convertible Note.
The agreement states that the Lender has
the right to convert all or part of the outstanding balance into fully paid and non-assessable shares of common stock. The conversion
formula is as follows: the number of shares will equal the amount of the outstanding balance of the Convertible Note being converted
divided by $5.00 per share. Since the value of the underlying equity on the commitment date was $2.29 per share, which was less
than the lender conversion price $5.00, the Company determined there was no beneficial conversion feature.
The lender conversion price is subject to
certain adjustment such as down-round features whereby the agreement notes that if the Company were to sell, issue or grant any
common stock, option to purchase common stock, right to reprice, preferred shares convertible into common stock, or debt, warrants,
options or other securities which are convertible, exercisable, or exchangeable for shares of common stock at a price per share
less than the lender conversion price, then the lender conversion price shall be reduced to equal the new lower price, subject
to a floor of $1.00 per share. When and if there is an adjustment under the down-round provision, the Company will analyze the
accounting treatment of the adjustment.
Redemptions may occur at any time after
the 6-month anniversary of the date of issuance of the Convertible 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.
(B) Revolving Credit Facility
On August 31, 2018, the Company entered
in an agreement with Payplant Alternatives Funds LLC (“Payplant”), pursuant to which Payplant may purchase from the
Company, in Payplant’s sole and absolute discretion, Eligible Receivables, as that term is defined in the agreement, in exchange
for cash advances, subject to the terms and conditions in the agreement.
On September 21, 2018, the Company entered
into the Payplant Loan and Security Agreement (the “Loan Agreement”) with Payplant LLC as agent for Payplant. Pursuant
to the Loan Agreement and the terms set forth in the form of promissory note attached as Exhibit A to the Loan Agreement, (the
“Note”), Payplant, in its sole and absolute discretion, may loan money to the Company on the basis of purchase orders
or invoices issued by the Company to customers for goods and services provided. The term of any loan made to the Company may not
exceed 360 days. The principal amount of any loan will accrue interest at a 30-day rate of 2%, calculated per day. Upon the occurrence
and during the continuance of an Event of Default, as defined in the Loan Agreement, interest will accrue at a rate equal to the
interest rate plus 0.42% per 30 days. In no event will interest, when combined with all fees that may be characterized as interest,
exceed the Maximum Rate, as defined in the Loan Agreement. All computations of interest will be made on the basis of a 360-day
year. The Company will have the right to prepay any loan upon the payment of a premium of at least 30 days of interest.
As security for the repayment of any loans
and the performance of the Company’s Obligations, as defined in the Loan Agreement, the Company granted to Payplant a security
interest in the Collateral, as defined in the Loan Agreement.
As of June 30, 2019, there was no principal
amount outstanding. As of December 31, 2018, the principal amount outstanding under the Loan Agreement was $96,000 and is included
in Short Term Debt in the condensed consolidated financial statements.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
6 — Accrued Issuable Equity
In connection with the Distribution of its
common stock, the Company has 31,941 shares of common stock reserved in treasury for eventual issuance to certain holders of Inpixon
securities that are currently subject to beneficial ownership limitations in connection with the Distribution. On August 31, 2018,
we recorded approximately $128,000. The Accrued Issuable Equity balance as of June 30, 2019 and December 31, 2018 was approximately
$45,000 and $74,000, respectively.
Note 7 — Related Party Transactions
On December 31, 2018, the Company entered
into a note purchase agreement with Inpixon (the “Note Purchase Agreement”) pursuant to which Inpixon, the Company’s
former parent (also referred to herein as the “Parent”), agreed to purchase from the Company at a purchase price equal
to the Loan Amount (as defined below), a secured promissory note (the “Related Party Note”) for up to an aggregate
principal amount of 3,000,000 (the “Principal Amount”), including any amounts advanced through the date of the Related
Party Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with
the Prior Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent
(10%) per annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount.
In addition, the Company agreed to pay $20,000 to Inpixon to cover Inpixon’s legal fees, accounting costs, due diligence,
monitoring and other transaction costs incurred in connection with the purchase and sale of the Related Party Note (the “Transaction
Expense Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any
amounts disbursed to the Company and the Transaction Expense Amount.
The Company may borrow under the Related
Party Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest, not to exceed the Principal Amount
at any one time.
All sums advanced by Inpixon to the maturity
date pursuant to the terms of the Note Purchase Agreement will become part of the aggregate Loan Amount underlying the Related
Party Note. All outstanding principal amounts and accrued unpaid interest owing under the Related Party Note shall become immediately
due and payable on the earlier to occur of (i) December 31, 2020 (the “Maturity Date”), (ii) at such date when declared
due and payable by Inpixon upon the occurrence of an Event of Default (as defined in the Related Party Note), or (iii) at any such
earlier date as set forth in the Related Party Note. All accrued unpaid interest shall be payable in cash.
Pursuant to the terms of the Related Party
Note, the Company granted Inpixon, subject to any and all Payplant Liens (as defined in the Related Party Note) and Permitted Liens
(as defined in the Related Party Note), a continuing first priority security interest in all assets of the Company whether owned
as of the date of the Related Party Note or subsequently acquired, including all proceeds therefrom (collectively, the “Collateral”)
to secure the payment of the Related Party Note and all other loans and advances (including all renewals, modifications and extensions
thereof) and all obligations of any and every kind and nature of the Company to Inpixon, whether arising prior to, under or after
the Related Party Note, however incurred or evidenced, plus all interest, reasonable costs, reasonable expenses and reasonable
attorneys’ fees, which may be made or incurred by Inpixon in the disbursement, administration, and collection of such amounts,
and in the protection, maintenance, and liquidation of the Collateral.
On February 4, 2019, the Related Party Note
was amended to increase the maximum principal amount that may be outstanding at any time under the Related Party Note from $3,000,000
to $5,000,000. On April 15, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding
at any time under the Related Party Note from $5,000,000 to $8,000,000. On May 22, 2019, the Related Party Note was amended to
increase the maximum principal amount that may be outstanding at any time under the Related Party Note from $8,000,000 to $10,000,000.
The proceeds received, interest and legal
costs accrued in accordance with the Related Party Note as of June 30, 2019 is $10,031,431. As further discussed in Note 8 –
Commitments and Contingencies, Litigation, the Company has reclassified its obligation of $565,081 in its financial statements
from Accounts Payable at December 31, 2018 to Related Party Note, as of February 28, 2019.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
8 — Commitments and Contingencies
Litigation
Certain
conditions may exist as of the date the 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 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
February 20, 2019, Inpixon, the Company and Atlas Technology Group, LLC (“Atlas”) entered into a settlement agreement
(the “Settlement Agreement”) in connection with the satisfaction of an arbitration award in an aggregate amount of
$1,156,840 plus pre-judgment interest equal to an aggregate of $59,955 (the “Award”) granted to Atlas following arbitration
proceedings arising out of an engagement agreement, dated September 8, 2016, by and between Atlas and Inpixon as well as its subsidiaries,
including the predecessor to the Company (the “Engagement Agreement”).
Pursuant
to the Settlement Agreement, Atlas agreed to (a) reduce the Award by $275,000 resulting in a net award of $941,795 (the “Net
Award”) and (b) accept an aggregate of 749,440 shares of freely-tradable common stock of Inpixon (the “Settlement
Shares”), in satisfaction of the Award, which was determined by dividing 120% of the Net Award by $1.508, which was the
“minimum price,” as defined under Nasdaq Listing Rule 5635(d), of Inpixon’s common stock. The closing occurred
on February 21, 2019.
The
Award is deemed satisfied in full and the parties are deemed to have released each other from any claims arising out of the
Engagement Agreement.
In
connection with the Spin-off, the Company and Inpixon each agreed pursuant to the terms and conditions of that certain Separation
and Distribution Agreement, dated August 7, 2018, as amended, that 50% of the costs and liabilities related to the arbitration
action arising from the Engagement Agreement would be shared by each party following the spin-off. As a result, the Company is
obligated to indemnify Inpixon for half of the total amount paid by Inpixon to satisfy the Award.
In
the event that the total net proceeds received by Atlas or its designees from the sale of the Settlement Shares (exclusive of
brokerage fees) exceeds the amount of the Net Award, Atlas agreed to deliver an amount equal to the difference between the sale
proceeds and the Net Award to the legal counsel for Inpixon and the Company to be applied against fees incurred in connection
with the arbitration and the Settlement Agreement.
The
Company has reclassified its obligation of $565,081 in its financial statements from Accounts Payable at December 31, 2018 to
Related Party Note, as of February 28, 2019.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Note
9 — Stockholders’ Deficiency
Treasury
stock
As part of the Spin-off, and in connection
with the initial Distribution of its common stock, the Company has 117,917 shares of common stock reserved for issuance in treasury
(a) for the holders of certain Parent warrants who will be entitled to receive shares of the Company’s common stock if the
warrants are exercised, and (b) for the holders of Parent securities that were subject to beneficial ownership limitations in connection
with the distribution and for future issuances.
During the six months ended June 30, 2019,
the Company reissued 5,872 shares of common stock from treasury in connection with the exercise of Parent warrants.
Note
10 — Reverse Stock Split
On July 25, 2019, 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-100 reverse
stock split of the Company’s issued and outstanding shares of common stock, effective as of July 30, 2019. The financial
statements and accompanying notes give effect to the 1-for-100 reverse stock split as if they occurred at the first period presented.
Note 11 — Subsequent Event
On July 5, 2019, the Company issued 22,857 shares of common stock for the settlement of approximately $20,000
of short-term debt.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion
of our financial condition and results of operations in conjunction with the combined financial statements and the related notes
included elsewhere in this Form 10-Q and with our audited financial statements and related notes included on
Form 10-K
, as filed
with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2019. In addition to our historical condensed
consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates,
and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II,
Item 1A, “Risk Factors.”
The historical financial statements
we have included in this Form 10-Q may not reflect what our business, financial position or results of operations would have been
had we been a publicly traded company during the periods presented or what our results of operations, financial position and cash
flows will be in the future when we are a stand-alone company.
Overview
Sysorex was incorporated in California
on January 3, 1994 as Lilien Systems and was acquired by Inpixon on March 20, 2013. Effective January 1, 2016, Inpixon consummated
a reorganization transaction pursuant to which certain Inpixon subsidiaries, including, AirPatrol Corporation and Shoom were merged
with and into Lilien and Lilien changed its name to “Sysorex USA”; and all outstanding shares of capital stock of
SGS were assigned to Lilien, pursuant to which SGS became a direct subsidiary of Lilien. Sysorex USA changed its name to Inpixon
USA on March 1, 2017. On July 26, 2018, Inpixon USA merged into Sysorex, Inc., a wholly-owned subsidiary of Inpixon, for the purpose
of changing its name and moving its state of formation from California to Nevada. Lilien significantly expanded Inpixon’s
operations providing it with a Big Data analytics platform and enterprise infrastructure capabilities.
On
August 31, 2018, Inpixon 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 Inpixon’s wholly-owned subsidiary,
Sysorex, Inc., a Nevada corporation (“Sysorex,” “we,” “us,” “our” and similar
terms), to holders of Inpixon’s common stock, preferred stock and certain Inpixon warrants as of August 21, 2018 (the “Record
Date”). The distribution occurred by way of a pro rata stock distribution to such holders of common stock, preferred stock
and warrants, each of whom received one share of Sysorex common stock (on a pre-reverse stock split basis) for every three shares
of Inpixon common stock held (or into which such preferred stock was convertible or warrants were exercisable) on the Record Date.
As a result of
the Spin-off, Sysorex is an independent public company and Sysorex’s common stock began regular-way trading on the OTC Markets
under the symbol “SYSX” on September 4, 2018.
Although the Spin-off
was completed on August 31, 2018, the Company has reflected the Spin-off in these financial statements as if it occurred on September
30, 2018 as the Company determined that the impact is not material to the financial statements.
The financial
statements present the combined results of operations, financial condition, and cash flows of Sysorex and its subsidiary. These
financial statements were prepared on a combined basis because the operations were under common control. All intercompany accounts
and transactions have been eliminated between the combined entities.
Sysorex is a leading provider of information
technology solutions from multiple vendors, including hardware products, software, services, including warranty and maintenance
support, offered through our dedicated sales force, ecommerce channels, existing federal contracts and service team. Since our
founding, we have served our customers by offering products and services from key industry vendors such as Aruba, Cisco, Dell,
GETAC, Lenovo, Microsoft, Panasonic, Samsung, Symantec, VMware and others. We provide our customers with comprehensive solutions
incorporating leading products and services across a variety of technology practices and platforms such as cyber, cloud, networking,
security, and mobility. We utilize our professional services, consulting services and partners to develop and implement these
solutions. Our sales and marketing efforts in collaboration with our vendor partners, allows us to reach multiple customer public
sector segments including federal, state and local governments, as well as educational institutions.
Revenues from our business are typically
driven by public sector delivery orders that are received on a monthly basis. During the six months ended June 30, 2019, 100%
of our revenues were from these delivery orders. These delivery orders include information technology hardware, software, professional
services, warranty and maintenance support, and highly integrated solutions that include two or more of the aforementioned items.
We experience variability in our net sales
and operating results on a quarterly basis as a result of many factors. We experience some seasonal trends in our sales of technology
solutions to government and educational institutions. For example, the fiscal year-ends of U.S. Public Sector customers vary for
those in the federal government space and those in the state and local government and educational institution (“SLED”)
space. We generally see an increase in our second quarter sales related to customers in the U.S. SLED sector and in our third
quarter sales related to customers in the federal government space as these customers close out their budgets for their fiscal
year (June 30th and September 30th, respectively). We may also experience variability in our gross profit and gross profit margin
as a result of changes in the various vendor programs we participate in and its effect on the amount of vendor consideration we
receive from a particular vendor or their authorized distributor/wholesaler, which may be impacted by a number of events outside
of our control. As such, the results of interim periods are not necessarily indicative of the results that may be expected for
any other interim period or for the full year.
A substantial portion of our business is
dependent on sales through existing federal contracts, known as Government Wide Acquisition Contracts (“GWAC”). We
have three key GWAC contracts, known in the industry as GSA Federal Supply Schedule IT 70, NASA SEWP V, and NIH CIO-CS. Maintaining
current vendor offerings and pricing is critical to attaining sales.
Our planned operating expenditures each
quarter are based in large part on sales forecasts for the quarter. If our sales do not meet expectations in any given quarter,
our operating results for the quarter may be materially adversely affected. Our narrow margins may magnify the impact of these
factors on our operating results. Management regularly reviews our operating performance using a variety of financial and non-financial
metrics including sales, shipments, margin, vendor consideration, advertising expense, personnel costs, account executive productivity,
accounts receivable aging, supplier inventory turnover, liquidity and cash resources. Our management monitors the various metrics
against goals and budgets, and makes necessary adjustments intended to enhance our performance.
Our current debt repayment to key vendors
due to prior non-payment of invoices has impacted our ability to receive the most favorable cost, terms, and delivery priority.
General economic conditions also have an effect on our business and results of operations. For example, if the federal government
fails to pass a budget or a continuing resolution before adopting an annual budget, our primary customers will not have the ability
to make purchases off of our existing contracts until the budget issue is resolved. If current tariffs and stipulation by the
government to require the purchase of goods that are substantially made or assembled in America are enacted, this could severely
impact our ability to source from vendors whom manufacture overseas. These factors affect sales of our products, sales cycles,
adoption rates of new technologies and level of price competition. We continue to focus our efforts paying down our debt, cost
controls, competitive pricing strategies, capturing new contracts, and driving higher margin service and solution sales. We also
continue to make selective investments in our sales force personnel, service and solutions capabilities and internal information
technology infrastructure and tools in an effort to meet vendor program requirements and to position us for enhanced productivity
and future growth.
Basis of Presentation
Sysorex, Inc., through its wholly-owned
subsidiary, Sysorex Government Services, Inc., formerly known as Inpixon Federal, Inc. (“SGS”), (unless otherwise
stated or the context otherwise requires, the terms “SGS” “we,” “us,” “our” and
the “Company” refer collectively to Sysorex and the above subsidiary), provides information technology solutions primarily
to the public sector. These include cybersecurity, professional services, engineering support, IT consulting, enterprise level
technology, networking, wireless, help desk, and custom IT solutions. The Company is headquartered in Virginia.
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, 2019 is not necessarily
indicative of the results to be expected for the year ending December 31, 2019. These interim unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s audited condensed consolidated financial statements
and notes for the years ended December 31, 2018 and 2017 included in the Form 10-K filed with SEC on March 28, 2019.
Critical Accounting Policies and Estimates
In connection with the preparation of our
condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply
judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our
assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be
relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies,
assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance
with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from
our assumptions and estimates, and such differences could be material.
Our significant accounting policies are
discussed in Note 3 of the condensed consolidated financial statements. We believe that the following accounting estimates are
the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult,
subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
There have been no changes to estimates during the periods presented in the filing. Historically, changes in management estimates
have not been material.
Revenue Recognition
Hardware and Software Revenue Recognition
The Company is a primary resale channel
for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers
and wholesale distributors.
The Company accounts for a contract when
it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the
contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators
amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis:
(i) the Company is primarily responsible for fulfilling the promise to provide the specified goods or service, (ii) the Company
has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the
customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction
do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction
and the associated revenues are recognized on a net basis.
The Company recognizes revenue once control
has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i)
the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company
has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of
ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered to customers
in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by
the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically
specify F.O.B. destination.
The Company leverages drop-shipment arrangements
with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at
its warehouses. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross
basis.
The Company may provide integration of
products from multiple vendors as a solution it sells to the customer. In this arrangement, the Company provides direct warranty
to the customer with the Company’s own personnel as the customer requires warranty on the solution and not individual vendor
products. This type of warranty is sold integral to the overall solution quoted to the customer. The Company considers these service-type
warranties to be performance obligations of the principal from the underlying products that make up a solution and therefore is
acting as a principal in the transaction and records revenue on a gross basis at the point of sale.
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.
For resales of services, including maintenance
services, warranties, and extended warranties, the Company is acting as an agent as the primary activity for those services are
fulfilled by a third party.
While the Company may facilitate and act
as a first responder for these services, the third-party service providers perform the primary maintenance and warranty services
for the customer. Therefore, the Company is not primarily responsible for performing these services and revenue is recorded on
a net basis.
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 six months ended June 30, 2019 and 2018, the Company did not incur
any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term
and short-term contracts are derived principally with various United States government agencies and commercial customers.
Long-lived Assets
We account for our long-lived assets in
accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“ASC 360”),
which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable or the useful life has changed. Some of the events or changes in circumstances that would trigger an impairment
test include, but are not limited to:
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significant
under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows for
two consecutive years);
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significant
negative industry or economic trends;
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knowledge
of transactions involving the sale of similar property at amounts below our carrying value; or
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our
expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet
the criteria to be classified as “held for sale.”
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Long-lived assets are grouped for recognition
and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows
of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by
comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising
from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum
of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess,
if any, of net carrying value over fair value.
When assessing the recoverability of our
long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated
future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact
on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection
of comparable sales, operating expenses, capital requirements for maintaining property and equipment and residual value of asset
groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts,
recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change
in the future, we may be required to record an impairment charge. Based on our evaluation, we did not record a charge for impairment
for the six months ended June 30, 2019.
The benefits to be derived from our acquired
intangibles, will take additional financial resources to continue the development of our technology. Management believes our technology
has significant long-term profit potential, and to date, management continues to allocate existing resources to develop products
and services to seek returns on its investment. We continue to seek additional resources, through both capital raising efforts
and meeting with industry experts, as part of our continued efforts. Although there can be no assurance that these efforts will
be successful, we intend to allocate financial and personnel resources when deemed possible and/or necessary. If we choose to
abandon these efforts, or if we determine that such funding is not available, the related development of our technology (resulting
in our lack of ability to expand our business), may be subject to significant impairment.
As described previously, we continue to
experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. The Company
will continue to monitor these uncertainties in future periods, to determine the impact.
We evaluate the remaining useful lives
of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining
period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence,
demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological
advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining
carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised
remaining useful life. We have determined that there were no events or circumstances during the six months ended June 30, 2019,
which would indicate a revision to the remaining amortization period related to any of our long-lived assets. Accordingly, we
believe that the current estimated useful lives of long-lived assets reflect the period over which they are expected to contribute
to future cash flows and are therefore deemed appropriate.
Deferred Income Taxes
In accordance with ASC 740 “Income
Taxes” (“ASC 740”), we routinely evaluate the likelihood of the realization of income tax benefits and the recognition
of deferred tax assets. In evaluating the need for any valuation allowance, we will assess whether it is more likely than not
that some portion, or all, of the deferred tax asset may not be realized. Ultimately, the realization of deferred tax assets is
dependent upon the generation of future taxable income during those periods in which temporary differences become deductible and/or
tax credits and tax loss carry-forwards can be utilized. In performing our analyses, we consider both positive and negative evidence
including historical financial performance, previous earnings patterns, future earnings forecasts, tax planning strategies, economic
and business trends and the potential realization of net operating loss carry-forwards within a reasonable timeframe. To this
end, we considered (i) that we have had historical losses in the prior years and cannot anticipate generating a sufficient level
of future profits in order to realize the benefits of our deferred tax asset; (ii) tax planning strategies; and (iii) the adequacy
of future income as of and for the six months ended June 30, 2019, based upon certain economic conditions and historical losses
through June 30, 2019. After consideration of these factors, we deemed it appropriate to establish a full valuation allowance.
A liability for “unrecognized tax
benefits” is recorded for any tax benefits claimed in our tax filings that do not meet these recognition and measurement
standards. As of June 30, 2019 and the year ended December 31, 2018, no liability for unrecognized tax benefits was required to
be reported. The guidance also discusses the classification of related interest and penalties on income taxes. Our policy is to
record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded
during the six months ended June 30, 2019 and 2018.
Allowance for Doubtful Accounts
We maintain our reserves for credit losses
at a level we believe to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit
quality rating to all new customers and update these ratings regularly, but no less than annually. Our determination of the adequacy
of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s
credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors.
The Company’s allowance for doubtful
accounts was approximately $25,000 and $65,000 as of June 30, 2019 and December 31, 2018, respectively.
Three Months Ended June 30, 2019 Compared to Three Months
Ended June 30, 2018
The following table sets forth selected
unaudited condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
(in thousands, except percentages)
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
1,109
|
|
|
|
86
|
%
|
|
$
|
568
|
|
|
|
57
|
%
|
|
|
95
|
%
|
Services revenues
|
|
$
|
175
|
|
|
|
14
|
%
|
|
$
|
421
|
|
|
|
43
|
%
|
|
|
(58
|
)%
|
Cost of net revenues - products
|
|
$
|
968
|
|
|
|
75
|
%
|
|
$
|
271
|
|
|
|
27
|
%
|
|
|
257
|
%
|
Cost of net revenues - services
|
|
$
|
142
|
|
|
|
11
|
%
|
|
$
|
290
|
|
|
|
29
|
%
|
|
|
(51
|
)%
|
Gross profit
|
|
$
|
174
|
|
|
|
14
|
%
|
|
$
|
428
|
|
|
|
43
|
%
|
|
|
(59
|
)%
|
Operating expenses
|
|
$
|
1,493
|
|
|
|
116
|
%
|
|
$
|
1,817
|
|
|
|
184
|
%
|
|
|
(18
|
)%
|
Loss from operations
|
|
$
|
(1,319
|
)
|
|
|
(103
|
)%
|
|
$
|
(1,389
|
)
|
|
|
(140
|
)%
|
|
|
5
|
%
|
Net loss
|
|
$
|
(1,615
|
)
|
|
|
(126
|
)%
|
|
$
|
(1,283
|
)
|
|
|
(130
|
)%
|
|
|
26
|
%
|
Revenues
Revenues for the three months ended June
30, 2019 and June 30, 2018 were approximately $1.3 million and $1.0 million, respectively. The Company continues to improve
its product division sales and is expected to improve its service revenue sales once capital and credit restraints are
relieved.
Cost of Revenues
Cost of revenues for the three months ended
June 30, 2019 was $1.1 million compared to $0.6 million for the prior year period. The cost increase of $0.5 million is attributable
to increased product revenues.
The gross profit margin for the three months
ended June 30, 2019 was 14% compared to 43% during the three months ended June 30, 2018. This decrease in gross margin is primarily
due to the capital constraints resulting in our inability to obtain affordable pricing.
Operating Expenses
Operating
expenses for the three months ended June 30, 2019 were $1.5 million compared to $1.8 million for the prior year period. This decrease
of $0.3 million is primarily attributable to a decrease in compensation costs, occupancy costs and travel costs of approximately
$0.9 million due to the downsizing of staff and office locations, offset by the gain on earnout of $0.6 million recorded in 2018.
Loss from Operations
Loss
from operations for the three months ended June 30, 2019 was $1.3 million compared to $1.4 million for the prior year period.
Provision for Income Taxes
There was no provision for income taxes
for the three months ended June 30, 2019 and 2018. Deferred tax assets resulting from such losses would be fully reserved as of
June 30, 2019 and 2018 since, at present, we have no history of taxable income and it is more likely than not those such assets
will not be realized.
Net Loss
Net loss for the three months ended June
30, 2019 was $1.6 million compared to $1.3 million for the prior year period. This increase in loss of $0.3 million was attributable
to the changes described for the various reporting captions discussed above.
Six Months Ended June 30, 2019 Compared to Six Months
Ended June 30, 2018
The following table sets forth selected
unaudited condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:
|
|
For the Six Months Ended
|
|
|
|
|
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
|
|
|
(in thousands, except percentages)
|
|
Amount
|
|
|
% of
Revenues
|
|
|
Amount
|
|
|
% of
Revenues
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
1,341
|
|
|
|
87
|
%
|
|
$
|
900
|
|
|
|
40
|
%
|
|
|
49
|
%
|
Services revenues
|
|
$
|
209
|
|
|
|
13
|
%
|
|
$
|
1,335
|
|
|
|
60
|
%
|
|
|
(84
|
)%
|
Cost of net revenues - products
|
|
$
|
1,112
|
|
|
|
72
|
%
|
|
$
|
446
|
|
|
|
20
|
%
|
|
|
149
|
%
|
Cost of net revenues - services
|
|
$
|
167
|
|
|
|
11
|
%
|
|
$
|
710
|
|
|
|
32
|
%
|
|
|
(76
|
)%
|
Gross profit
|
|
$
|
271
|
|
|
|
17
|
%
|
|
$
|
1,079
|
|
|
|
48
|
%
|
|
|
(60
|
)%
|
Operating expenses
|
|
$
|
3,328
|
|
|
|
215
|
%
|
|
$
|
3,939
|
|
|
|
176
|
%
|
|
|
(16
|
)%
|
Loss from operations
|
|
$
|
(3,057
|
)
|
|
|
(197
|
)%
|
|
$
|
(2,860
|
)
|
|
|
(128
|
)%
|
|
|
7
|
%
|
Net loss
|
|
$
|
(3,499
|
)
|
|
|
(226
|
)%
|
|
$
|
(2,993
|
)
|
|
|
(134
|
)%
|
|
|
17
|
%
|
Revenues
Revenues for the six months ended June 30,
2019 were $1.6 million compared to $2.2 million for the prior year period. This $0.6 million decrease is primarily associated with
the decline in revenues as a result of supplier credit limitations resulting in our inability to meet our customers’
requests.
Cost of Revenues
Cost of revenues for the six months ended
June 30, 2019 was $1.3 million compared to 1.2 million for the prior year period. This increase of $0.1 was primarily attributable
to lower sales resulting from the capital constraints and supplier credit limitations.
The gross profit margin for the six months
ended June 30, 2019 was 17% compared to 48% during the six months ended June 30, 2018. This decrease in gross margin is primarily
due to the capital constraints resulting in our inability to obtain affordable pricing.
Operating Expenses
Operating expenses
for the six months ended June 30, 2019 were $3.3 million compared to $3.9 million for the prior year period. This decrease of
$0.6 million is primarily attributable to a decrease in compensation costs, occupancy costs and travel costs due to the downsizing
of staff and office locations offset by the gain on earnout of $0.9 million recorded in 2018.
Loss from Operations
Loss
from operations for the six months ended June 30, 2019 was $3.1 million compared to $2.9 million for the prior year period. This
increase in loss of $0.2 million was attributable to
is primarily due to the capital constraints resulting in our inability
to obtain affordable pricing.
in
2019 offset by the gain on earnout recorded in 2018.
Provision for Income Taxes
There was no provision for income taxes
for the six months ended June 30, 2019 and 2018. Deferred tax assets resulting from such losses would be fully reserved as of
June 30, 2019 and 2018 since, at present, we have no history of taxable income and it is more likely than not those such assets
will not be realized.
Net Loss
Net loss for the six months ended June
30, 2019 was $3.5 million compared to $3.0 million for the prior year period. This increase in loss of $0.5 million was attributable
to the changes described for the various reporting captions discussed above.
Non-GAAP Financial information
EBITDA
EBITDA is defined
as net income (loss) before interest, provision for (benefit from) income taxes, and depreciation and amortization. Adjusted EBITDA
is used by our management as the matrix in which it manages the business. It is defined as EBITDA plus adjustments for other income
or expense items, non-recurring items and non-cash stock-based compensation.
Adjusted EBITDA for the three months ended
June 30, 2019 was a loss of $0.6 million compared to a loss of $1.3 million for the prior year period. Adjusted EBITDA for the
six months ended June 30, 2019 was a loss of $1.6 million compared to a loss of $2.8 million for the prior year period.
The following table presents a reconciliation
of net income/loss attributable to stockholders of Sysorex, which is our GAAP operating performance measure, to Adjusted EBITDA
for the three and six months ended June 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(1,615
|
)
|
|
$
|
(1,283
|
)
|
|
$
|
(3,499
|
)
|
|
$
|
(2,993
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring one-time charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on the settlement of obligations
|
|
|
(44
|
)
|
|
|
(83
|
)
|
|
|
(44
|
)
|
|
|
(209
|
)
|
Gain on earnout
|
|
|
-
|
|
|
|
(358
|
)
|
|
|
-
|
|
|
|
(934
|
)
|
Gain on sale of contracts
|
|
|
-
|
|
|
|
(601
|
)
|
|
|
-
|
|
|
|
(601
|
)
|
Provision for doubtful accounts
|
|
|
(25
|
)
|
|
|
25
|
|
|
|
(25
|
)
|
|
|
41
|
|
Severance
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
Stock-based compensation - compensation and related benefits
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
55
|
|
Interest expense
|
|
|
325
|
|
|
|
276
|
|
|
|
471
|
|
|
|
736
|
|
Depreciation and amortization
|
|
|
756
|
|
|
|
545
|
|
|
|
1,511
|
|
|
|
1,137
|
|
Adjusted EBITDA
|
|
$
|
(603
|
)
|
|
$
|
(1,454
|
)
|
|
$
|
(1,586
|
)
|
|
$
|
(2,753
|
)
|
We rely on Adjusted
EBITDA, which is a non-GAAP financial measure for the following:
|
●
|
to review and assess the operating performance
of our Company as permitted by ASC Topic 280, Segment Reporting;
|
|
|
|
|
●
|
to compare our current operating results with
corresponding periods and with the operating results of other companies in our industry;
|
|
|
|
|
●
|
as a basis for allocating resources to various
projects;
|
|
|
|
|
●
|
as a measure to evaluate potential economic
outcomes of acquisitions, operational alternatives and strategic decisions; and
|
|
|
|
|
●
|
to evaluate internally the performance of our
personnel.
|
We have presented Adjusted EBITDA above
because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional
way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By
including this information, we can provide investors with a more complete understanding of our business. Specifically, we present
Adjusted EBITDA as supplemental disclosure because of the following:
|
●
|
we believe Adjusted EBITDA is a useful tool
for investors to assess the operating performance of our business without the effect of interest, income taxes, depreciation
and amortization and other non-cash items including stock based compensation, amortization of intangibles, change in
the fair value of shares to be issued, change in the fair value of derivative liability, impairment of goodwill and one time
charges including gain/loss on the settlement of obligations, severance costs, provision for doubtful accounts, acquisition
costs and the costs associated with public offerings;
|
|
|
|
|
●
|
we believe that it is useful to provide to investors
a standard operating metric used by management to evaluate our operating performance; and
|
|
|
|
|
●
|
we believe that the use of Adjusted EBITDA is
helpful to compare our results to other companies.
|
Even though we believe Adjusted EBITDA
is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this
metric in isolation or as a substitute for net income (loss) and the other combined carve-out statement of operations data prepared
in accordance with GAAP. Some of these limitations include the fact that:
|
●
|
Adjusted EBITDA does not reflect our cash expenditures
or future requirements for capital expenditures or contractual commitments;
|
|
|
|
|
●
|
Adjusted EBITDA does not reflect changes in,
or cash requirements for, our working capital needs;
|
|
|
|
|
●
|
Adjusted EBITDA does not reflect the significant
interest expense or the cash requirements necessary to service interest or principal payments on our debt;
|
|
|
|
|
●
|
Although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does
not reflect any cash requirements for such replacements;
|
|
|
|
|
●
|
Adjusted EBITDA does not reflect income or other
taxes or the cash requirements to make any tax payments; and
|
|
|
|
|
●
|
other companies in our industry may calculate
Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure.
|
Because of these limitations, Adjusted
EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as
a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results
and providing Adjusted EBITDA only as supplemental information.
Liquidity and Capital Resources
– General:
Our capital resources and operating results
as of and through June 30, 2019, consist of:
|
1)
|
an overall working capital deficit of $9.1 million;
|
|
|
|
|
2)
|
cash of $13,000;
|
|
|
|
|
3)
|
a revolving credit facility entered into in 2018; and
|
|
|
|
|
4)
|
net cash used in operating activities for the
year-to date of $7.7 million.
|
The breakdown of our overall working capital
deficit is as follows (in thousands):
Working
Capital
|
|
Assets
|
|
|
Liabilities
|
|
|
Net
|
|
Cash
|
|
$
|
13
|
|
|
$
|
-
|
|
|
$
|
13
|
|
Accounts receivable, net / accounts payable
and accrued liabilities
|
|
|
18
|
|
|
|
8,578
|
|
|
|
(8,560
|
)
|
Other receivables
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
Other
|
|
|
54
|
|
|
|
653
|
|
|
|
(599
|
)
|
Total
|
|
$
|
91
|
|
|
$
|
9,231
|
|
|
$
|
(9,140
|
)
|
Accounts payable and accrued liabilities
exceed the accounts receivable by $8.6 million. These deficits are expected to be funded by our anticipated cash flow from operations
and financing activities, as described below, over the next twelve months.
Net cash used in operating activities during the six months ended June 30, 2019 of $7.7 million consists
of net loss of ($3.5) million plus non-cash adjustments of $1.5 million and net cash used in changes in operating assets and liabilities
of ($5.7) million. We expect net cash from operations to increase during the 3rd and 4th Quarter of 2019, as a result of, the following:
|
1)
|
We significantly reduced our cost of operations
in 2018 by reducing headcount and office locations, estimated to have a $6 million impact on an annual basis. We continue to
search for cost efficiencies and estimate to have saved approximately $0.3 million for the six months ended June 30,
2019.
|
|
|
|
|
2)
|
We are working with our key distributors and financing partners to address our credit limitation issues. We believe revenues during the three months ended June 30, 2019 and the year ended December 31, 2018 could have been higher but were negatively impacted by our inability to timely process orders due to past due amounts and credit limitations with various vendors. We expect to relieve some of these issues by continuing to grow our services revenue.
|
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 condensed consolidated 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 condensed consolidated financial
statements are issued.
The Company’s continuation is dependent
upon attaining and maintaining profitable operations and raising additional capital as needed, but there can be no assurance that
we will be able to close on any financing. The Company’s ability to generate positive cash flow from operations is dependent
upon sustaining certain cost reductions and generating sufficient revenues. Inpixon, our parent pre-Spin-off, has funded our operations
primarily with proceeds from public and private offerings of its common stock and secured and unsecured debt instruments and made
an additional cash contribution of $2 million prior to the Spin-off which amount was reduced by the aggregate amount of certain
operating and other expenses of Sysorex from June 30, 2018 through the Spin-off. We depend on our vendors and suppliers to provide
us with credit financing on our purchases of products and services. Many of our vendors and suppliers are no longer offering the
Company the customary net-30 or net-45 payment terms with credit limits ranging from $100,000 to up to $10 million. Due to our
past nonpayment issues to vendors and suppliers, the Company is on a prepay basis for those vendors and suppliers that are willing
to supply to customers. As a result, restrictions exist obtaining financing for large customer orders. In 2019, we experienced
increased credit limitations imposed by vendors, which contributed to the decline in revenues by approximately 45% during the
six months ended June 30, 2019 as compared to the same period in the prior fiscal year.
As a result of contributions by Inpixon
provided following the completion of certain equity financings during 2018 and 2019, we have been able to begin to improve our
credit limitations through negotiated settlements plans with our vendors. Our vendors, however, could seek to limit the availability
of vendor credit to us or modify the other terms under which they sell to us, or both, at any time, which could negatively impact
our liquidity. We have ongoing discussions concerning our liquidity and financial position with the vendor community and
third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing,
payment terms and ongoing business arrangements. We also used a revolving credit facility to finance purchase orders and invoices
in an amount equal to 80% of the face value of purchase orders received, with the remaining 20%, net of fees paid upon collection
of the customer receivable, which is more specifically described below.
Based
on future debt and /or equity offerings, projected revenues, the revolving credit facility that the Company entered into in order
to continue to finance purchase orders and invoices following the Spin-off and the $10 million related party note from Inpixon,
credit limitation improvements resulting or anticipated to result from negotiated vendor settlement arrangements have occurred.
There are, however, no guarantees that these sources will be sufficient to provide the capital necessary to fund the Company’s
operations during the next twelve months, therefore, the Company does intend to seek other sources of capital to supplement
and strengthen its financial position under financing structures that are available to it.
Our history of operating losses, the amount
of our indebtedness and the potential for significant judgments to be rendered against us may impair our ability to raise capital
on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances
that we will be able to secure additional funding from public or private offerings or debt financings on terms acceptable to us,
if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a
material adverse effect on our business and ability to continue as a going concern, and we may have to curtail, or even to cease,
certain operations. We are evaluating various strategic transactions and acquisitions of companies with technologies and
intellectual property that we believe will enhance our products and services by adding technology, differentiation, customers
and/or revenue. We are primarily looking for accretive opportunities that have business value and operational synergies. If we
make any acquisitions in the future, we expect that we may pay for such acquisitions using our equity securities, cash and debt
financing in combinations appropriate for each acquisition.
Revolving Credit Facility
On August 31, 2018, the Company and SGS
(together with the Company, the “Borrowers”), entered in an agreement with Payplant Alternatives Funds LLC, pursuant
to which Payplant may purchase from the Borrowers, in Payplant’s sole and absolute discretion, Eligible Receivables, as
that term is defined in the agreement, in exchange for cash advances, subject to the terms and conditions in the agreement.
On September 21, 2018, the Company entered
into the Payplant Loan and Security Agreement (the “Loan Agreement”) with Payplant LLC as agent for Payplant Alternatives
Fund LLC (“Payplant”). Pursuant to the Loan Agreement and the terms set forth in the form of promissory note attached
as Exhibit A to the Loan Agreement, (the “Note”), Payplant, in its sole and absolute discretion, may loan money to
the Borrowers on the basis of purchase orders or invoices issued by the Borrowers to customers for goods and services provided.
The term of any loan made to the Borrowers may not exceed 360-days. The principal amount of any loan will accrue interest at a
30-day rate of 2%, calculated per day. Upon the occurrence and during the continuance of an Event of Default, as defined in the
Loan Agreement, interest will accrue at a rate equal to the interest rate plus 0.42% per 30 days. In no event will interest, when
combined with all fees that may be characterized as interest, exceed the Maximum Rate, as defined in the Loan Agreement. All computations
of interest will be made on the basis of a 360-day year. The Borrowers will have the right to prepay any loan upon the payment
of a premium of least 30 days of interest.
As security for the repayment of any loans
and the performance of the Borrowers’ Obligations, as defined in the Loan Agreement, the Borrowers granted to Payplant a
security interest in the Collateral, as defined in the Loan Agreement.
The Loan Agreement also includes representations
and warranties made by the Borrowers, negative covenants prohibiting certain actions by the Borrowers (including, but not limited
to, restrictions on additional borrowing without the consent of Payplant, restrictions on the creation of liens on the Borrowers’
property, restrictions on transactions with affiliates, restrictions on the transfer or sale of assets and restrictions on the
payment of dividends) and a definition of “Events of Default” that are customary in agreements of this type. Upon
the occurrence and during the continuance of any Event of Default, Payplant may, without notice or demand, declare the entire
unpaid principal amount of the loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Agreement
to be immediately due and payable.
As of June 30, 2019, there was no principal
amount outstanding under the Loan Agreement.
Liquidity and Capital Resources as of June 30, 2019 Compared
to June 30, 2018
The Company’s net cash flows used
in operating, investing and financing activities for the six months ended June 30, 2019 and 2018 and certain balances as of the
end of those periods are as follows (in thousands):
|
|
For the Six Months Ended
June 30,
|
|
(thousands, except per share data)
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(7,725
|
)
|
|
$
|
(10,093
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(15
|
)
|
Net cash provided by financing activities
|
|
|
7,732
|
|
|
|
10,350
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
7
|
|
|
$
|
242
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
13
|
|
|
$
|
6
|
|
Working capital deficit
|
|
$
|
(9,140
|
)
|
|
$
|
(14,956
|
)
|
Operating Activities:
Net cash used in operating activities during
the six months ended June 30, 2019 was $7.7 million. Net cash provided by operating activities during the six months ended June
30, 2018 was $7.7 million. Net cash used in operating activities during the six months ended June 30, 2019 consisted of the following
(in thousands):
Net loss
|
|
$
|
(3,499
|
)
|
Non-cash income and expenses
|
|
|
1,505
|
|
Net change in operating assets and liabilities
|
|
|
(5,731
|
)
|
Net cash used in operating activities
|
|
$
|
(7,725
|
)
|
The non-cash income and expenses of $1,505,000
consisted primarily of (in thousands):
$
|
9
|
|
|
Depreciation
and amortization expense
|
|
1,502
|
|
|
Amortization
of intangibles
|
|
63
|
|
|
Amortization
of debt discount
|
|
(44)
|
|
|
Gain
on settlement of vendor liabilities
|
|
(25)
|
|
|
Provision
for doubtful accounts
|
$
|
1,505
|
|
|
Total
non-cash income and expenses
|
The net use of cash due to changes in operating
assets and liabilities totaled ($5.7) million and consisted primarily of the following (in thousands):
$
|
330
|
|
|
Decrease in accounts receivable
and other receivables
|
|
11
|
|
|
Decrease in prepaid assets
|
|
(5,670
|
)
|
|
Decrease in accounts payable
|
|
(92
|
)
|
|
Decrease in deferred revenue
|
|
(316
|
)
|
|
Decrease in accrued liabilities and other liabilities
|
|
6
|
|
|
Decrease in other assets
|
$
|
(5,731
|
)
|
|
Net use of cash in the changes in operating
assets and liabilities
|
Financing Activities:
Net cash provided by financing activities
during the six months ended June 30, 2019 was approximately $7.7 million. Net cash provided by financing activities for the six
months ended June 30, 2018 was approximately $10.4 million. The net cash provided by financing activities during the six months
ended June 30, 2019 was primarily comprised of net advances from Inpixon on a related party note from Inpixon, and payments made
on the Company’s revolving line of credit with Payplant.
Going Concern and Management Plans
Our condensed consolidated financial statements
as of June 30, 2019 have been prepared under the assumption that we will continue as a going concern for the next twelve months
from the date the financial statements are issued. Footnote 1 to the notes to our financial statements as of June 30, 2019 include
language referring to our recurring and continuing losses from operations and expressing substantial doubt in our ability to continue
as a going concern without additional capital becoming available. Management’s plans and assessment of the probability that
such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern,
is dependent upon the ability to obtain additional equity or debt financing, attain further operating efficiency, reduce expenditures,
and, ultimately, to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial
doubt about our ability to continue as a going concern. Our condensed consolidated financial statements as of June 30, 2019 do
not include any adjustments that might result from the outcome of this uncertainty.
Liquidity and Capital Resources – Payplant
As security for the repayment of any
loans and the performance of the Borrowers’ Obligations, as defined in the Loan Agreement, the Borrowers granted to
Payplant a security interest in the Collateral, as defined in the Loan Agreement. As of June 30, 2019, there was no principal
obligation outstanding under the Loan Agreement.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet guarantees,
interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded
contracts.
Recently Issued Accounting Standards
For a discussion of recently issued accounting
pronouncements, please see the Recent Accounting Standards section of Note 3 to our condensed consolidated financial statements,
which is included in this Form 10-Q in Item 1.