INPIXON - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36404
INPIXON
(Exact name of registrant as specified in its charter)
| Nevada | 88-0434915 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
| 2479
Bayshore Road Suite 195 Palo Alto, CA |
94303 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (408) 702-2167
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock | INPX | The Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock, par value $0.001 | 42,472,787 | |
| (Class) | Outstanding at November 9, 2020 |
INPIXON
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND OTHER INFORMATION CONTAINED IN THIS REPORT
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| ● | our limited cash and our history of losses; |
| ● | our ability to achieve profitability; |
| ● | our limited operating history with recent acquisitions; |
| ● | risks related to our recent acquisitions; |
| ● | our ability to successfully integrate companies or technologies we acquire; |
| ● | emerging competition and rapidly advancing technology in our industry that may outpace our technology; |
| ● | customer demand for the products and services we develop; |
| ● | the impact of competitive or alternative products, technologies and pricing; |
| ● | our ability to manufacture any products we develop; |
| ● | general economic conditions and events and the impact they may have on us and our potential customers, including but not limited to the impact of COVID-19; |
| ● | our ability to obtain adequate financing in the future; |
| ● | our ability to consummate strategic transactions, which may include acquisitions, mergers, dispositions or investments; |
| ● | lawsuits and other claims by third parties or investigations by various regulatory agencies that we are required to report to including, but not limited to, the U.S. Securities and Exchange Commission; |
| ● | our ability to maintain compliance with Nasdaq’s continued listing requirements; |
| ● | our success at managing the risks involved in the foregoing items; and |
| ● | other factors discussed in this Form 10-Q. |
ii
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.
You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Unless otherwise stated or the context otherwise requires, the terms “Inpixon,” “we,” “us,” “our” and the “Company” refer collectively to Inpixon and its subsidiaries.
On January 7, 2020, the Company effected a 1-for-45 reverse stock split of its outstanding common stock. We have reflected the reverse split herein, unless otherwise indicated.
Unless indicated otherwise in this Form 10-Q, all references to “$” refer to United States dollars, the lawful currency of the United States of America. References to “CAD” refer to Canadian dollars, the lawful currency of Canada. References to “INR” refer to Indian rupees, the lawful currency of India. References to “EUR” refer to euros, the single currency of Participating Member States of the European Union. References to “GBP” refer to the British pound, the lawful currency of the United Kingdom.
iii
| 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 September 30, 2020 are not necessarily indicative of the results of operations for the full year. These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our audited consolidated financial statements for the fiscal years ended December 31, 2019 and 2018 included in the annual report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 3, 2020.
1
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and par value data)
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 31,376 | $ | 4,777 | ||||
| Accounts receivable, net | 1,948 | 1,108 | ||||||
| Notes and other receivables | 378 | 74 | ||||||
| Inventory | 414 | 400 | ||||||
| Prepaid assets and other current assets | 1,144 | 406 | ||||||
| Total Current Assets | 35,260 | 6,765 | ||||||
| Property and equipment, net | 553 | 145 | ||||||
| Operating lease right-of-use asset, net | 1,622 | 1,585 | ||||||
| Software development costs, net | 1,729 | 1,544 | ||||||
| Intangible assets, net | 10,761 | 8,400 | ||||||
| Goodwill | 2,555 | 2,070 | ||||||
| Receivable from related party | -- | 616 | ||||||
| Other assets | 113 | 94 | ||||||
| Total Assets | $ | 52,593 | $ | 21,219 | ||||
The accompanying notes are an integral part of these financial statements.
2
INPIXON AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except number of shares and par value data)
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| (Unaudited) | (Audited) | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 813 | $ | 2,383 | ||||
| Accrued liabilities | 1,914 | 1,863 | ||||||
| Operating lease obligation | 572 | 776 | ||||||
| Deferred revenue | 1,842 | 912 | ||||||
| Short-term debt | 6,150 | 7,304 | ||||||
| Acquisition liability | 750 | 502 | ||||||
| Total Current Liabilities | 12,041 | 13,740 | ||||||
| Long Term Liabilities | ||||||||
| Operating lease obligation, noncurrent | 1,074 | 837 | ||||||
| Other liabilities | 7 | 7 | ||||||
| Deferred tax liability, noncurrent | -- | 87 | ||||||
| Acquisition liability, noncurrent | -- | 500 | ||||||
| Total Liabilities | 13,122 | 15,171 | ||||||
| Commitments and Contingencies | -- | -- | ||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock - $0.001 par value; 5,000,000 shares authorized, consisting of Series 4 Convertible Preferred Stock - 10,415 shares authorized; 1 and 1 issued, and 1 and 1 outstanding as of September 30, 2020 and December 31, 2019, respectively, Series 5 Convertible Preferred Stock - 12,000 shares authorized; 126 and 126 issued, and 126 and 126 outstanding as of September 30, 2020 and December 31, 2019, respectively. | -- | -- | ||||||
| Common Stock - $0.001 par value; 250,000,000 shares authorized; 42,259,314 and 4,234,923 issued and 42,259,313 and 4,234,922 outstanding as of September 30, 2020 and December 31, 2019, respectively. | 42 | 4 | ||||||
| Additional paid-in capital | 212,913 | 158,382 | ||||||
| Treasury stock, at cost, 1 share | (695 | ) | (695 | ) | ||||
| Accumulated other comprehensive income | (130 | ) | 94 | |||||
| Accumulated deficit (Excluding $2,442 reclassified to additional paid in capital in quasi-reorganization) | (172,710 | ) | (151,763 | ) | ||||
| Stockholders’ Equity Attributable to Inpixon | 39,420 | 6,022 | ||||||
| Non-controlling Interest | 51 | 26 | ||||||
| Total Stockholders’ Equity | 39,471 | 6,048 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 52,593 | $ | 21,219 | ||||
The accompanying notes are an integral part of these financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Revenues | $ | 2,554 | $ | 1,534 | $ | 5,434 | $ | 4,387 | ||||||||
| Cost of Revenues | 645 | 382 | 1,459 | 1,109 | ||||||||||||
| Gross Profit | 1,909 | 1,152 | 3,975 | 3,278 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Research and development | 1,717 | 926 | 4,329 | 2,677 | ||||||||||||
| Sales and marketing | 1,703 | 847 | 3,862 | 2,161 | ||||||||||||
| General and administrative | 4,103 | 3,521 | 10,371 | 9,890 | ||||||||||||
| Acquisition related costs | 344 | 573 | 540 | 1,220 | ||||||||||||
| Amortization of intangibles | 288 | 969 | 1,811 | 2,602 | ||||||||||||
| Total Operating Expenses | 8,155 | 6,836 | 20,913 | 18,550 | ||||||||||||
| Loss from Operations | (6,246 | ) | (5,684 | ) | (16,938 | ) | (15,272 | ) | ||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense, net | (537 | ) | (1,190 | ) | (1,934 | ) | (2,053 | ) | ||||||||
| Provision for valuation allowance on held for sale loan | (679 | ) | -- | (1,514 | ) | -- | ||||||||||
| Loss on exchange of debt for equity | -- | (27 | ) | (132 | ) | (188 | ) | |||||||||
| Other income/(expense) | 11 | 289 | (488 | ) | 518 | |||||||||||
| Total Other Income (Expense) | (1,205 | ) | (928 | ) | (4,068 | ) | (1,723 | ) | ||||||||
| Net Loss from Operations, before tax | (7,451 | ) | (6,612 | ) | (21,006 | ) | (16,995 | ) | ||||||||
| Income tax benefit | -- | 33 | 87 | 35 | ||||||||||||
| Net Loss | (7,451 | ) | (6,579 | ) | (20,919 | ) | (16,960 | ) | ||||||||
| Net Income Attributable to Non-controlling Interest | 16 | 5 | 25 | 9 | ||||||||||||
| Net Loss Attributable to Stockholders of Inpixon | $ | (7,467 | ) | $ | (6,584 | ) | $ | (20,944 | ) | $ | (16,969 | ) | ||||
| Deemed dividend for triggering of warrant down round feature | -- | -- | -- | (1,250 | ) | |||||||||||
| Net Loss Attributable to Common Stockholders | (7,467 | ) | (6,584 | ) | (20,944 | ) | (18,219 | ) | ||||||||
| Net Loss Per Share - Basic and Diluted | $ | (0.18 | ) | $ | (12.68 | ) | $ | (0.90 | ) | $ | (65.89 | ) | ||||
| Weighted Average Shares Outstanding | ||||||||||||||||
| Basic and Diluted | 41,544,961 | 519,257 | 23,203,004 | 276,499 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Net Loss | $ | (7,451 | ) | $ | (6,579 | ) | $ | (20,919 | ) | $ | (16,960 | ) | ||||
| Unrealized foreign exchange loss from cumulative translation adjustments | 70 | (67 | ) | (225 | ) | (36 | ) | |||||||||
| Comprehensive Loss | $ | (7,381 | ) | $ | (6,646 | ) | $ | (21,144 | ) | $ | (16,996 | ) | ||||
The accompanying notes are an integral part of these financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
(In thousands, except per share data)
| Series 4 Convertible | Series 5 Convertible | Series 6 Convertible | Additional | Accumulated Other | Non- | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Treasury Stock | Comprehensive | Accumulated | Controlling | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Income (Loss) | Deficit | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance - January 1, 2020 | 1 | $ | -- | 126 | $ | -- | -- | $ | -- | 4,234,923 | $ | 4 | $ | 158,383 | (1 | ) | $ | (695 | ) | $ | 96 | $ | (151,762 | ) | $ | 26 | $ | 6,052 | ||||||||||||||||||||||||||||||||
| Stock options granted to employees and consultants for services | -- | -- | -- | -- | -- | -- | -- | -- | 399 | -- | -- | -- | -- | -- | 399 | |||||||||||||||||||||||||||||||||||||||||||||
| Common Shares issued for net cash proceeds of a public offering | -- | -- | -- | -- | -- | -- | 937,010 | 1 | 1,251 | -- | -- | -- | -- | -- | 1,252 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of debt | -- | -- | -- | -- | -- | -- | 1,896,557 | 2 | 4,192 | -- | -- | -- | -- | -- | 4,194 | |||||||||||||||||||||||||||||||||||||||||||||
| Cumulative Translation Adjustment | -- | -- | -- | -- | -- | -- | - | -- | -- | -- | -- | (613 | ) | -- | (1 | ) | (614 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | -- | -- | -- | -- | -- | -- | - | -- | -- | -- | -- | -- | (6,158 | ) | (10 | ) | (6,168 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2020 | 1 | $ | -- | 126 | $ | -- | $ | -- | $ | -- | 7,068,490 | $ | 7 | $ | 164,225 | (1 | ) | $ | (695 | ) | $ | (517 | ) | $ | (157,920 | ) | $ | 15 | $ | 5,115 | ||||||||||||||||||||||||||||||
| Stock options granted to employees for services | -- | -- | -- | -- | -- | -- | -- | -- | 286 | -- | -- | -- | -- | -- | 286 | |||||||||||||||||||||||||||||||||||||||||||||
| Common and preferred shares issued for net cash proceeds from a public offering | -- | -- | -- | -- | -- | -- | 29,033,036 | 29 | 40,490 | -- | -- | -- | -- | -- | 40,519 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of debt | -- | -- | -- | -- | -- | -- | 3,889,990 | 4 | 4,588 | -- | -- | -- | -- | -- | 4,592 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of liability | -- | -- | -- | -- | -- | -- | 183,486 | -- | 200 | -- | -- | -- | -- | -- | 200 | |||||||||||||||||||||||||||||||||||||||||||||
| Cumulative Translation Adjustment | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | 318 | -- | -- | 318 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (7,322 | ) | 19 | (7,303 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2020 | 1 | $ | -- | 126 | $ | -- | $ | -- | $ | -- | 40,175,002 | $ | 40 | $ | 209,789 | (1 | ) | $ | (695 | ) | $ | (199 | ) | $ | (165,242 | ) | $ | 34 | $ | 43,727 | ||||||||||||||||||||||||||||||
| Stock options granted to employees and consultants for services | -- | -- | -- | -- | -- | -- | -- | -- | 256 | -- | -- | -- | -- | -- | 256 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for net cash proceeds from a public offering | -- | -- | -- | -- | -- | -- | 1,604,312 | 2 | 2,268 | -- | -- | -- | -- | -- | 2,270 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Ten Degrees Acquisition shares | -- | -- | -- | -- | -- | -- | 480,000 | -- | 600 | -- | -- | -- | -- | -- | 600 | |||||||||||||||||||||||||||||||||||||||||||||
| Cumulative Translation Adjustment | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | 69 | -- | -- | 69 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (7,468 | ) | 17 | (7,451 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2020 | 1 | $ | -- | 126 | $ | -- | $ | -- | $ | -- | 42,259,314 | $ | 42 | $ | 212,913 | (1 | ) | $ | (695 | ) | $ | (130 | ) | $ | (172,710 | ) | $ | 51 | $ | 39,471 | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(Unaudited)
(In thousands, except per share data)
| Series 4 Convertible | Series 5 Convertible | Series 6 Convertible | Additional | Accumulated Other | Non- | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Treasury Stock | Comprehensive | Accumulated | Controlling | (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Income (Loss) | Deficit | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance - January 1, 2019 | 1 | $ | -- | -- | $ | -- | -- | $ | -- | 35,154 | $ | -- | $ | 123,226 | (1 | ) | $ | (695 | ) | $ | 26 | $ | (117,773 | ) | $ | 18 | $ | 4,802 | ||||||||||||||||||||||||||||||||
| Preferred Shares issued for net cash proceeds of a public offering | -- | -- | 12,000 | -- | -- | -- | -- | -- | 10,814 | -- | -- | -- | -- | -- | 10,814 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of debt | -- | -- | -- | -- | -- | -- | 3,842 | -- | 384 | -- | -- | -- | -- | -- | 384 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for net proceeds from warrants exercised | -- | -- | -- | -- | -- | -- | 306 | -- | 46 | -- | -- | -- | -- | -- | 46 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for warrants exercised | -- | -- | -- | -- | -- | -- | 27,741 | -- | -- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||||||||||||||||||||||||||
| Redemption of convertible Series 5 Preferred Stock | -- | -- | (10,062 | ) | -- | -- | -- | 67,149 | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of liability | -- | -- | -- | -- | -- | -- | 16,655 | -- | 1,130 | -- | -- | -- | -- | -- | 1,130 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for services | -- | -- | -- | -- | -- | -- | 4,445 | -- | 242 | -- | -- | -- | -- | -- | 242 | |||||||||||||||||||||||||||||||||||||||||||||
| Stock options granted to employees and consultants for services | -- | -- | -- | -- | -- | -- | -- | -- | 648 | -- | -- | -- | -- | -- | 648 | |||||||||||||||||||||||||||||||||||||||||||||
| Cumulative Translation Adjustment | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (8 | ) | -- | -- | (8 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (5,144 | ) | (5 | ) | (5,149 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance - March 31, 2019 | 1 | $ | -- | 1,938 | $ | -- | $ | -- | $ | -- | 155,292 | $ | -- | $ | 136,490 | (1 | ) | $ | (695 | ) | $ | 18 | $ | (122,917 | ) | $ | 13 | $ | 12,909 | |||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of debt | -- | -- | -- | -- | -- | -- | 61,636 | -- | 2,005 | -- | -- | -- | -- | -- | 2,005 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for warrants exercised | -- | -- | -- | -- | -- | -- | 18,572 | -- | -- | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||||||||||||||||||||||||||
| Redemption of convertible Series 5 Preferred Stock | -- | -- | (1,812 | ) | -- | -- | -- | 12,093 | -- | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||||||||||
| Stock options granted to employees and consultants for services | -- | -- | -- | -- | -- | -- | -- | -- | 858 | -- | -- | -- | -- | -- | 858 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Locality Acquisition Shares | -- | -- | -- | -- | -- | -- | 14,445 | -- | 513 | -- | -- | -- | -- | -- | 513 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of GTX Acquisition Shares | -- | -- | -- | -- | -- | -- | 22,223 | -- | 650 | -- | -- | -- | -- | -- | 650 | |||||||||||||||||||||||||||||||||||||||||||||
| Cumulative Translation Adjustment | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | 39 | -- | -- | 39 | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (5,240 | ) | 9 | (5,231 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance - June 30, 2019 | 1 | $ | -- | 126 | $ | -- | $ | -- | $ | -- | 284,261 | $ | -- | $ | 140,516 | (1 | ) | $ | (695 | ) | $ | 57 | $ | (128,157 | ) | $ | 22 | $ | 11,743 | |||||||||||||||||||||||||||||||
| Common shares issued for extinguishment of debt | -- | -- | -- | -- | -- | -- | 31,195 | -- | 724 | -- | -- | -- | -- | -- | 724 | |||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued for warrants exercised | -- | -- | -- | -- | -- | -- | 310,154 | 1 | (1 | ) | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||||||||||||||||||||||
| Stock options granted to employees and consultants for services | -- | -- | -- | -- | -- | -- | -- | -- | 872 | -- | -- | -- | -- | -- | 872 | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Jibestream Acquisition Shares | -- | -- | -- | -- | -- | -- | 112,644 | -- | 862 | -- | -- | -- | -- | -- | 862 | |||||||||||||||||||||||||||||||||||||||||||||
| Common and Preferred Shares issued for net cash proceeds of a public offering | -- | -- | -- | -- | 2,997 | -- | 144,387 | -- | 3,931 | -- | -- | -- | -- | -- | 3,931 | |||||||||||||||||||||||||||||||||||||||||||||
| Redemption of convertible Series 6 Preferred Stock | -- | -- | -- | -- | (2,997 | ) | -- | 240,001 | -- | -- | -- | -- | -- | -- | -- | – | ||||||||||||||||||||||||||||||||||||||||||||
| Cumulative Translation Adjustment | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (67 | ) | -- | -- | (67 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | -- | (6,584 | ) | 4 | (6,580 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance - September 30, 2019 | 1 | $ | -- | 126 | $ | -- | -- | $ | -- | 1,122,642 | $ | 1 | $ | 146,904 | (1 | ) | $ | (695 | ) | $ | (10 | ) | $ | (134,741 | ) | $ | 26 | $ | 11,485 | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| (Unaudited) | ||||||||
| Cash Flows (Used In) from Operating Activities | ||||||||
| Net loss | $ | (20,919 | ) | $ | (16,960 | ) | ||
| Adjustment to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 568 | 826 | ||||||
| Amortization of intangible assets | 1,929 | 2,602 | ||||||
| Amortization of right of use asset | 322 | 267 | ||||||
| Stock based compensation | 941 | 2,618 | ||||||
| Amortization of technology | -- | 50 | ||||||
| Loss on exchange of debt for equity | 132 | 188 | ||||||
| Amortization of debt discount | 2,272 | 1,543 | ||||||
| Accrued interest income, related party | (32 | ) | -- | |||||
| Provision for doubtful accounts | -- | 358 | ||||||
| Provision for the valuation allowance held for sale loan | 1,514 | -- | ||||||
| Provision for the valuation allowance related party receivable | 648 | -- | ||||||
| Income tax benefit | (87 | ) | (35 | ) | ||||
| Other | 74 | 23 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and other receivables | (1,111 | ) | (1,241 | ) | ||||
| Inventory | (14 | ) | (194 | ) | ||||
| Other current assets | (814 | ) | (45 | ) | ||||
| Other assets | (20 | ) | (284 | ) | ||||
| Accounts payable | (1,359 | ) | 1,140 | |||||
| Accrued liabilities | 54 | 56 | ||||||
| Deferred revenue | 224 | (369 | ) | |||||
| Operating lease liabilities | (325 | ) | -- | |||||
| Other liabilities | 453 | 400 | ||||||
| Total Adjustments | 5,369 | 7,903 | ||||||
| Net Cash Used in Operating Activities | (15,550 | ) | (9,057 | ) | ||||
| Cash Flows Used in Investing Activities | ||||||||
| Purchase of property and equipment | (546 | ) | (58 | ) | ||||
| Investment in capitalized software | (688 | ) | (658 | ) | ||||
| Cash paid for the acquisition of Jibestream | -- | (3,714 | ) | |||||
| Cash paid for the acquisition of GTX | -- | (250 | ) | |||||
| Cash paid for the acquisition of Locality | -- | (204 | ) | |||||
| Cash paid for the Systat Licensing Agreement | (2,200 | ) | -- | |||||
| Cash paid for the acquisition of Ten Degrees | (1,500 | ) | -- | |||||
| Net Cash Flows Used in Investing Activities | (4,934 | ) | (4,884 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Net (repayments) proceeds to bank facility | (150 | ) | 237 | |||||
| Net proceeds from issuance of common stock, preferred stock and warrants | -- | 14,791 | ||||||
| Net proceeds from issuance of common stock | 44,041 | -- | ||||||
| Net repayments of notes payable | (74 | ) | (71 | ) | ||||
| Loans to related party | (1,806 | ) | (9,866 | ) | ||||
| Advances to related party | -- | (15 | ) | |||||
| Repayments from related party | 292 | 1,683 | ||||||
| Loan to Jibestream | -- | (141 | ) | |||||
| Loan to GTX | -- | (50 | ) | |||||
| Net proceeds from promissory notes | 5,000 | 6,750 | ||||||
| Repayment of acquisition liability to Locality shareholders | (250 | ) | -- | |||||
| Net Cash Provided By Financing Activities | 47,053 | 13,318 | ||||||
| Effect of Foreign Exchange Rate on Changes on Cash | (42 | ) | (36 | ) | ||||
| Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | 26,527 | (659 | ) | |||||
| Cash, Cash Equivalents and Restricted Cash - Beginning of period | 4,849 | 1,224 | ||||||
| Cash, Cash Equivalents and Restricted Cash - End of period (Note 3) | $ | 31,376 | $ | 565 | ||||
| Supplemental Disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 4 | $ | 3 | ||||
| Income Taxes | $ | -- | $ | -- | ||||
| Non-cash investing and financing activities | ||||||||
| Common shares issued for extinguishment of liability | $ | 200 | $ | 1,130 | ||||
| Common shares issued for extinguishment of debt | $ | 8,786 | $ | 3,114 | ||||
| Right of use asset obtained in exchange for lease liability | $ | 389 | $ | 1,003 | ||||
| Common shares issued for GTX acquisition | $ | -- | $ | 650 | ||||
| Common shares issued for Locality acquisition | $ | -- | $ | 514 | ||||
| Common shares issued for Jibestream acquisition | $ | -- | $ | 862 | ||||
| Common shares issued for Ten Degrees acquisition | $ | 600 | $ | -- | ||||
The accompanying notes are an integral part of these financial statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 1 - Organization and Nature of Business
Inpixon, and its wholly-owned subsidiaries, Inpixon Canada, Inc. (“Inpixon Canada”), Inpixon Limited, Inpixon GmbH and its majority-owned subsidiary Inpixon India Limited (“Inpixon India”) (unless otherwise stated or the context otherwise requires, the terms “Inpixon,” “we,” “us,” “our” and the “Company” refer collectively to Inpixon and the aforementioned subsidiaries), are an indoor intelligence company. Our business and government customers use our solutions to secure, digitize and optimize their indoor spaces with our positioning, mapping and analytics products. Our indoor intelligence platform uses sensor technology to detect accessible cellular, Wi-Fi, Bluetooth, ultra-wide band (“UWB”) and radio frequency identification (“RFID”) signals emitted from devices within a venue providing positional information similar to what global positioning system (“GPS”) satellite systems provide for the outdoors. Combining this positional data with our dynamic and interactive mapping solution and a high-performance analytics engine, yields near real time insights to our customers providing them with visibility, security and business intelligence within their indoor spaces. Our highly configurable platform can also ingest data from our customers’ and other third party sensors, Wi-Fi access points, Bluetooth beacons, video cameras, and big data sources, among others, to maximize indoor intelligence. The Company also offers digital tear-sheets with optional invoice integration, digital ad delivery, and an e-edition designed for reader engagement for the media, publishing and entertainment industry. The Company is headquartered in Palo Alto, California, and has subsidiary offices in Coquitlam, Canada, New Westminster, Canada, Toronto, Canada, Slough, United Kingdom, Ratingen, Germany, Bangalore, India and Hyderabad, India.
Liquidity
As of September 30, 2020, the Company has a working capital total of approximately $23.2 million and cash of $31.4 million. The Company experienced a net loss of approximately $7.5 million and $6.6 million for the three months ended September 30, 2020 and 2019, respectively, and a net loss of $20.9 million and $17.0 million for the nine months ended September 30, 2020 and 2019, respectively. On March 3, 2020, the Company entered into an Equity Distribution Agreement (“EDA”) with Maxim Group LLC (“Maxim”) under which the Company may offer and sell shares of its common stock in connection with an at-the-market equity facility (“ATM”) in an aggregate offering amount of up to $50 million, which was increased on June 19, 2020 to $150 million pursuant to an amendment to the EDA, from time to time through Maxim, acting exclusively as the Company’s sales agent. The Company issued 31,574,358 shares of common stock during the nine months ended September 30, 2020 in connection with the ATM resulting in net proceeds to the Company of approximately $44.0 million. Subsequent to the quarter ended September 30, 2020, the Company issued an additional 213,474 shares of common stock in connection with the ATM, resulting in net proceeds to the Company of approximately $230,000.
Risks and Uncertainties
The Company cannot assure you that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we have supplemented the revenues we earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. The impact of the COVID-19 pandemic on our business and results of operations continues to remain uncertain at this time. While we have been able to continue operations remotely, we have experienced supply chain constraints and delays in the receipt of certain components of our products impacting delivery times for our products. We have also seen some impact in the demand of certain products, delays in certain projects and customer orders either because they require onsite services which could not be performed while shelter in place orders have been in effect or because of the uncertainty of the customer’s financial position and ability to invest in our technology. Despite these challenges, we were able to realize growth in revenue during the first and third quarters of 2020 and for the first nine months of 2020 when compared to the same periods of 2019 as a result of an increase in sales associated with our indoor intelligence platform, including our sensors, in addition to additional revenue from the sale of Systat software licenses. The impact that COVID-19 will have on general economic conditions is continuously evolving and the ultimate impact the pandemic will have on our results of operations continues to remain uncertain. There are no assurances that we will be able to continue to experience the same growth or not be materially adversely effected.
Given our cash balances and our budgeted cash flow requirements, the Company believes such funds are sufficient to support ongoing operations for at least one year after the issuance of these financial statements. The Company has control over its expenditures and has the ability to adjust spending accordingly based on its budgeted cash flow requirements and the excess cash on hand.
Note 2 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”), which are the accounting principles that are generally accepted in the United States of America. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the nine-month period ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020. 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, 2019 and 2018 included in the annual report on Form 10-K filed with the SEC on March 3, 2020.
9
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 3 - Summary of Significant Accounting Policies
The Company’s complete accounting policies are described in Note 2 to the Company’s audited consolidated financial statements and notes for the years ended December 31, 2019 and 2018.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates consist of:
| ● | the valuation of stock-based compensation; | |
| ● | the valuation of the assets and liabilities acquired in connection with certain recent acquisitions as described in Notes 4, 5, 6, 7 and 8, as well as the valuation of the Company’s common stock issued in the transactions, as applicable; | |
| ● | the allowance for doubtful accounts; | |
| ● | the valuation of loans receivable; | |
| ● | the valuation allowance for deferred tax assets; and | |
| ● | the impairment of long-lived assets and goodwill. |
Restricted Cash
In connection with certain transactions, the Company may be required to deposit assets, including cash or shares, in escrow accounts. The assets held in escrow are subject to various contingencies that may exist with respect to such transactions. Upon resolution of those contingencies or the expiration of the escrow period, some or all the escrow amounts may be used and the balance released to the Company. As of September 30, 2020 and 2019, the Company had $0 and $71,000, respectively, deposited in escrow as restricted cash for the Shoom acquisition, of which any amounts not subject to claims were to be released to the pre-acquisition stockholders of Shoom pro-rata on the anniversary dates of the closing date of the Shoom acquisition. As of September 30, 2019, $71,000 was current and included in Prepaid Assets and Other Current Assets on the condensed consolidated balance sheet. As of September 30, 2020, the final escrowed amount had been released and the restricted cash balance was $0.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the balance sheets that sum to the total of the same amounts shown in the statement of cash flows.
| As of September 30, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| Cash and cash equivalents | $ | 31,376 | $ | 494 | ||||
| Restricted cash, current included in prepaid assets and other current assets | -- | 71 | ||||||
| Total cash, cash equivalents, and restricted cash in the balance sheets | $ | 31,376 | $ | 565 | ||||
Revenue Recognition
The Company reports revenues under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” and all the related amendments (Topic 606). The Company recognizes revenue after applying the following five steps:
1) identification of the contract, or contracts, with a customer;
2) identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;
3) determination of the transaction price, including the constraint on variable consideration;
4) allocation of the transaction price to the performance obligations in the contract; and
5) recognition of revenue when, or as, performance obligations are satisfied.
10
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 3 - Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Software As A Service Revenue Recognition
With respect to sales of the Company’s maintenance, consulting and other service agreements including the Company’s digital tear-sheets, customers pay fixed monthly fees in exchange for the Company’s services. The Company’s performance obligation is satisfied over time as the digital tear-sheets are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its services.
Mapping Services Revenue Recognition
Mapping services revenue is accounted for using the percentage of completion method. As soon as the outcome of a contract can be estimated reliably, contract revenue is recognized in the condensed consolidated statement of operations in proportion to the stage of completion of the contract. Contract costs are expensed as incurred. Contract costs include all amounts that relate directly to the specific contract, are attributable to contract activity, and are specifically chargeable to the customer under the terms of the contract.
Professional Services Revenue Recognition
The Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts including maintenance service provided by in house personnel, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three and nine months ended September 30, 2020 and 2019, the Company did not incur any such losses. These amounts are based on known and estimated factors.
Contract Balances
The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had deferred revenue of approximately $1,842,000 and $912,000 as of September 30, 2020 and December 31, 2019, respectively, related to cash received in advance for product maintenance services and professional services provided by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for these product maintenance services and professional services and recognize the deferred revenue and related contract costs over the next twelve months. The Company’s contract balances as of September 30, 2020 and December 31, 2019 were deemed immaterial.
Disaggregation of Revenue
Revenues consisted of the following (in thousands):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Recurring revenue | $ | 1,182 | $ | 754 | $ | 2,883 | $ | 1,968 | ||||||||
| Non-recurring revenue | 1,372 | 780 | 2,551 | 2,419 | ||||||||||||
| Totals | $ | 2,554 | $ | 1,534 | $ | 5,434 | $ | 4,387 | ||||||||
Stock-Based Compensation
The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant. The fair value of that award is then ratably recognized as an expense over the period during which the recipient is required to provide services in exchange for that award.
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date and recognized over the period services are required to be provided in exchange for the award, usually the vesting period. Forfeitures of unvested stock options are recorded when they occur.
11
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 3 - Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued)
The Company incurred stock-based compensation charges of $256,000 and $871,000 for the three months ended September 30, 2020 and 2019, respectively, and $941,000 and $2,618,000 for the nine months ended September 30, 2020 and 2019, respectively, which are included in general and administrative expenses. The following table summarizes the nature of such charges for the periods then ended (in thousands):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Compensation and related benefits | $ | 256 | $ | 871 | $ | 941 | $ | 2,376 | ||||||||
| Professional and legal fees | -- | -- | -- | 242 | ||||||||||||
| Totals | $ | 256 | $ | 871 | $ | 941 | $ | 2,618 | ||||||||
Net Loss Per Share
The Company computes basic and diluted earnings per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant to the exercise of options and warrants in the calculation of diluted net loss per common shares would have been anti-dilutive.
The following table summarizes the number of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the nine months ended September 30, 2020 and 2019:
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Options | 5,544,594 | 124,099 | ||||||
| Warrants | 93,252 | 162,646 | ||||||
| Convertible preferred stock | 846 | 846 | ||||||
| Reserved for service providers | -- | 25 | ||||||
| Common stock issuable pursuant to Jibestream acquisition share purchase agreement | -- | 63,645 | ||||||
| Totals | 5,638,692 | 351,261 | ||||||
Preferred Stock
The Company applies the accounting standards for distinguishing liabilities from equity under GAAP when determining the classification and measurement of its convertible preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity.
Recently Issued and Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. In November 2019, the FASB issued ASU No. 2019-10 Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) clarifying effective dates for the impacted ASUs. For public business entities that meet the definition of an SEC filer and smaller reporting company, ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2022, and the guidance is to be applied using the modified retrospective approach. Earlier adoption is permitted for annual and interim reporting periods beginning after December 15, 2018. The Company has adopted this standard and the adoption of this standard did not have a material impact on its condensed consolidated financial statements or disclosures.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU 2018-13”). ASU 2018-13 requires application of the prospective method of transition (for only the most recent interim or annual period presented in the initial fiscal year of adoption) to the new disclosure requirements for (1) changes in unrealized gains and losses included in other comprehensive income and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 also requires prospective application to any modifications to disclosures made because of the change to the requirements for the narrative description of measurement uncertainty. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. The Company has adopted these ASU’s and the adoption of these ASU’s did not have a material impact on its condensed consolidated financial statements or disclosures.
12
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 3 - Summary of Significant Accounting Policies (continued)
Recently Issued and Adopted Accounting Standards (continued)
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”) and in May 2019, the FASB issued Accounting Standards Update No. 2019-05, Financial Instruments--Credit Losses (Topic 326) (“ASU 2019-05”). These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years with early application permitted. The Company has adopted this standard and the adoption of this standard did not have a material impact on its condensed consolidated financial statements or disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) (“ASU 2019-12”): Simplifying the Accounting for Income Taxes,” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2021. The Company does not expect this ASU will have a material effect on its condensed consolidated financial statements or disclosures.
In February 2020, the FASB issued ASU 2020-02, “Financial Statements - Credit losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Relating to Accounting Standards Update No. 2016-02, Leases (Topic 842)” (“ASU 2020-02”), which provides guidance on the measurement and requirements related to credit losses. The new guidance was effective upon issuance of this final accounting standards update. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements or disclosures.
Reverse Stock Split
On January 7, 2020, the Company effected a 1-for-45 reverse stock split of its outstanding common stock. The condensed consolidated financial statements and accompanying notes give effect to the stock split as if it occurred at the beginning of the first period presented. There was no change to the previously reported net loss.
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.
Note 4 - Locality Acquisition
On May 21, 2019, the Company, through its wholly owned subsidiary, Inpixon Canada as purchaser, completed its acquisition of Locality Systems, Inc. (“Locality”) in which Locality’s stockholders sold all of their shares to the purchaser in exchange for consideration of (i) $1,500,000 (the “Aggregate Cash Consideration”) minus a working capital adjustment equal to $85,923, and (ii) 14,445 shares of the Company’s common stock with a fair market value of $514,000. Locality was a technology company specializing in wireless device positioning and radio frequency augmentation of video surveillance systems. The Locality acquisition allows us to accept wireless device positioning from third-party Wi-Fi access points as well as surveillance systems and combine that information with our own location data into our analytics platform providing our customers with additional data and ability to see video and radio frequency data concurrently.
The Aggregate Cash Consideration, less the working capital adjustment applied against the Aggregate Cash Consideration of $85,923, is payable in installments as follows: (i) the initial installment representing $250,000 minus $46,422 of the working capital adjustment was paid on the closing date; (ii) $210,499 was paid on November 21, 2019, which was comprised of a $250,000 installment less $39,501 of the working capital adjustment; (iii) two additional installments, each equal to $250,000, will be paid twelve months and eighteen months after the closing date; and (iv) one final installment representing $500,000 will be paid on the second anniversary of the closing date, in each case minus the cash fees payable to the advisor in connection with the acquisition. Inpixon Canada will have the right to offset any loss, as defined in the purchase agreement, first, against any installment of the installment cash consideration that has not been paid and second, against the sellers and the advisor on a several basis, in accordance with the indemnification provisions of the purchase agreement.
The total recorded purchase price for the transaction was approximately $1,928,000, which consisted of cash at closing of $204,000, approximately $1,210,000 of cash that will be paid in installments as discussed above and $514,000 representing the value of the stock issued at closing.
13
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 4 - Locality Acquisition (continued)
The purchase price was allocated and modified for measurement period adjustments due to the receipt of the final valuation report and updated tax provision estimates as follows (in thousands):
| Preliminary Allocation | Valuation Measurement Period Adjustments | Tax Provision Measurement Period Adjustments | Adjusted Allocation | |||||||||||||
| Assets Acquired: | ||||||||||||||||
| Cash | $ | 70 | $ | -- | $ | -- | $ | 70 | ||||||||
| Accounts receivable | 7 | -- | -- | 7 | ||||||||||||
| Other current assets | 4 | -- | -- | 4 | ||||||||||||
| Inventory | 2 | -- | -- | 2 | ||||||||||||
| Fixed assets | 1 | -- | -- | 1 | ||||||||||||
| Developed technology | 1,523 | (78 | ) | -- | 1,445 | |||||||||||
| Customer relationships | 216 | (31 | ) | -- | 185 | |||||||||||
| Non-compete agreements | 49 | -- | -- | 49 | ||||||||||||
| Goodwill | 619 | 80 | (46 | ) | 653 | |||||||||||
| $ | 2,491 | $ | (29 | ) | $ | (46 | ) | $ | 2,416 | |||||||
| Liabilities Assumed: | ||||||||||||||||
| Accounts payable | $ | 13 | $ | -- | $ | -- | $ | 13 | ||||||||
| Accrued liabilities | 48 | -- | -- | 48 | ||||||||||||
| Deferred revenue | 28 | -- | -- | 28 | ||||||||||||
| Deferred tax liability | 474 | (29 | ) | (46 | ) | 399 | ||||||||||
| 563 | (29 | ) | (46 | ) | 488 | |||||||||||
| Total Purchase Price | $ | 1,928 | $ | -- | $ | -- | $ | 1,928 | ||||||||
The value of the intangibles and goodwill were calculated by a third party valuation firm based on projections and financial data provided by management of the Company. The deferred revenue included in the financial statements is the expected liability to service the projects. The goodwill represents the excess fair value after the allocation to the intangibles. The calculated goodwill is not deductible for tax purposes. The financial data of Locality is included in the Company’s financial statements starting on the acquisition date through the period ended September 30, 2020. Proforma information has not been presented as it has been deemed to be immaterial.
Note 5 - GTX Acquisition
On June 27, 2019, the Company completed its acquisition of certain assets of GTX Corp (“GTX”), consisting of a portfolio of GPS technologies and intellectual property (the “Assets”) that allow us to provide positioning and positioning solutions for assets and devices homogenously from the indoors to the outdoors. Prior to this asset acquisition, the Company was only providing indoor location.
The Assets were acquired for aggregate consideration consisting of (i) $250,000 in cash delivered at the closing and (ii) 22,223 shares of the Company’s restricted common stock.
The total recorded purchase price for the transaction was $900,000, which consisted of the cash paid of $250,000 and $650,000 representing the value of the stock issued upon closing.
The purchase price was allocated based on the receipt of a final valuation report as follows (in thousands):
| Developed technology | $ | 830 | ||
| Non-compete agreements | 68 | |||
| Goodwill | 2 | |||
| Total Purchase Price | $ | 900 |
On September 16, 2019, the Company loaned GTX $50,000 in accordance with the terms of the asset purchase agreement. The note began to accrue interest at a rate of 5% per annum beginning on November 1, 2019. The note was amended on May 11, 2020 to extend the maturity date from April 13, 2020 to September 13, 2020 and require monthly payments against the outstanding balance of the note. The note was amended on October 28, 2020 to extend the maturity date from September 13, 2020 to December 31, 2020 and waive the requirement for the monthly repayment installment obligation provided for in the May 11, 2020 amendment. This note is included as part of other receivables in the Company’s condensed consolidated financial statements. As of September 30, 2020, the balance of the note including interest was $52,381. Proforma information has not been presented as it has been deemed to be immaterial.
14
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 6 - Jibestream Acquisition
On August 15, 2019, the Company, through its wholly owned subsidiary, Inpixon Canada as purchaser (the “Purchaser”), completed its acquisition of Jibestream Inc. (“Jibestream”), a provider of indoor mapping and location technology, for consideration consisting of: (i) CAD $5,000,000, plus an amount equal to all cash and cash equivalents held by Jibestream at the closing, minus, if a negative number, the absolute value of the Estimated Working Capital Adjustment (as defined in the purchase agreement (the “Purchase Agreement”)), minus any amounts loaned by the Purchaser to Jibestream to settle any Indebtedness (as defined in the Purchase Agreement) or other fees, minus any cash payments to the holders of outstanding options to settle any in-the-money options, minus the deferred revenue costs of CAD $150,000, and minus the costs associated with the audit and review of the financial statements of Jibestream required by the Purchase Agreement (collectively, the “Estimated Cash Closing Amount”); plus (ii) 176,289 shares of the Company’s common stock, which was equal to CAD $3,000,000, converted to U.S. dollars based on the exchange rate at the time of the closing, divided by $12.4875 which was the price per share at which shares of the Company’s common stock were issued in the Company’s common stock offering on August 12, 2019 (“Inpixon Shares”).
Jibestream provided a dynamic interactive map that allowed customers to put their digitized map into their mobile app or provide the map on a kiosk or other interface. Inpixon can now utilize the Jibestream map to offer a more intuitive interface to see its locationing data and analytics.
The Nasdaq listing rules required the Company to obtain the approval of the Company’s stockholders for the issuance of 63,645 of the Inpixon Shares (the “Excess Shares”), which was obtained on October 31, 2019, and the shares were issued on November 5, 2019. A number of Inpixon Shares representing fifteen percent (15%) of the value of the purchase price (the “Holdback Amount”) were subject to stop transfer restrictions and forfeiture to secure the indemnification and other obligations of the Vendors in favor of the Company arising out of or pursuant to Article VIII of the Purchase Agreement and, at the option of the Company, to secure the obligation of the Vendors’ to pay any adjustment to the purchase price pursuant to Section 2.5 of the Purchase Agreement.
The total recorded purchase price for the transaction was approximately $5,062,000, which consisted of cash at closing of approximately $3,714,000 and $1,348,000 representing the value of the stock issued upon closing determined based on the closing price of the Company’s common stock as of the closing date on August 15, 2019. Subsequently, the Company agreed not to enforce any right of setoff resulting from a Working Capital Adjustment.
The purchase price was allocated based on the receipt of a final valuation report and modified for measurement period adjustments due to updated tax provision estimates as follows (in thousands):
| Preliminary Allocation | Tax Provision Measurement Period Adjustments | Adjusted Allocation | ||||||||||
| Assets Acquired: | ||||||||||||
| Cash | $ | 5 | $ | -- | $ | 5 | ||||||
| Accounts receivable | 309 | -- | 309 | |||||||||
| Other current assets | 137 | -- | 137 | |||||||||
| Fixed assets | 10 | -- | 10 | |||||||||
| Other assets | 430 | -- | 430 | |||||||||
| Developed technology | 3,193 | -- | 3,193 | |||||||||
| Customer relationships | 1,253 | -- | 1,253 | |||||||||
| Non-compete agreements | 420 | -- | 420 | |||||||||
| Goodwill | 2,407 | (919 | ) | 1,488 | ||||||||
| $ | 8,165 | $ | (919 | ) | $ | 7,245 | ||||||
| Liabilities Assumed: | ||||||||||||
| Accounts payable | 51 | -- | 51 | |||||||||
| Accrued liabilities | 94 | -- | 94 | |||||||||
| Deferred revenue | 1,156 | -- | 1,156 | |||||||||
| Other liabilities | 513 | -- | 513 | |||||||||
| Deferred tax liability | 1,289 | (919 | ) | 370 | ||||||||
| 3,103 | (919 | ) | 2,183 | |||||||||
| Total Purchase Price | $ | 5,062 | $ | -- | $ | 5,062 | ||||||
The value of the intangibles and goodwill were calculated by a third party valuation firm based on projections and financial data provided by management of the Company. The deferred revenue included in the condensed consolidated financial statements is the expected liability to service the projects. The goodwill represents the excess fair value after the allocation to the intangibles. The calculated goodwill is not deductible for tax purposes. As part of the acquisition, the Company acquired a lease obligation with an operating lease right of use asset of approximately $371,000 and an operating lease obligation of approximately $371,000 which are included in other assets and other liabilities, respectively, in the purchase price allocation. The financial data of Jibestream is included in the Company’s financial statements starting on the acquisition date through the period ended September 30, 2020.
Jibestream was amalgamated into Inpixon Canada on January 1, 2020.
15
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 7 - Systat Licensing Agreement
On June 19, 2020, the Company entered into an exclusive license with Cranes Software International Ltd. and Systat Software, Inc. (together the “Systat Parties”) to use, market, distribute, and develop the SYSTAT and SigmaPlot software suite of products (the “License Grant”) pursuant to the terms and conditions of that certain Exclusive Software License and Distribution Agreement, deemed effective as of June 1, 2020 (the “Effective Date”), and amended on June 30, 2020 (as amended, the “License Agreement”). In accordance with Rule 11-01(d) and ASC 805, the transaction was deemed to be the acquisition of a business and accounted for as a business combination with an acquisition date of June 30, 2020 (the “Closing Date”). In accordance with the terms of the License Agreement, on the Closing Date, we partitioned a portion of that certain promissory note (the “Sysorex Note”) issued to us by Sysorex, Inc. (“Sysorex”), into a new note in an amount equal to $3 million in principal plus accrued interest (the “Closing Note”) and assigned the Closing Note and all rights and obligations thereunder to Systat Software, Inc. in accordance with the terms and conditions of that certain Promissory Note Assignment and Assumption Agreement. An additional $3.3 million of the principal balance underlying the Sysorex Note will be partitioned and assigned to Systat Software, Inc. as consideration payable for the rights granted under the license as follows: (i) $1.3 million on the three month anniversary of the Closing Date; (ii) $1.0 million on the six month anniversary of the Closing Date; and (iii) $1.0 million on the nine month anniversary of the Closing Date. In addition, the cash consideration of $2.2 million was delivered on July 8, 2020.
In connection with the License Grant, the Systat Parties provided us with equipment for us to use at no additional cost for a minimum period of six months following the Closing Date. We are also entitled to any customer maintenance revenue, new license fees, or license renewal fees, received by any of the Systat Parties after June 1, 2020 in connection with the Systat Customer Contracts and/or Systat Distribution Agreements (as such terms are defined in the License Agreement) assigned to and assumed by us in connection with the License Agreement. The net amount owed to the Company for this period is included in the Other Receivable line item listed in the assets acquired below. The License Grant will remain in effect for a period of 15 years following the Closing Date, unless terminated sooner upon mutual written consent of Systat Software, Inc. and us or upon termination by either for the other party’s specified breach.
In connection with the License Grant, the Company expanded its operations into the United Kingdom and Germany. As a result of such expansion, the Company formed Inpixon Limited, a new wholly owned subsidiary in the United Kingdom, and established Inpixon GmbH, a wholly owned subsidiary incorporated under the laws of Germany.
The total recorded purchase price for the transaction was $2,200,000, which consisted of the $2,200,000 cash consideration as a full valuation allowance was retained against the Sysorex note.
The preliminary purchase price is allocated as follows (in thousands):
| Assets Acquired: | ||||
| Other receivable | $ | 44 | ||
| Developed technology | 1,200 | |||
| Customer relationships | 395 | |||
| Tradename & Trademarks | 279 | |||
| Non-compete agreements | 495 | |||
| Goodwill | 520 | |||
| $ | 2,933 | |||
| Liabilities Assumed: | ||||
| Deferred Revenue | $ | 733 | ||
| Total Purchase Price | $ | 2,200 | ||
The value of the intangibles and goodwill were calculated by a third party valuation firm based on projections and financial data provided by management of the Company. The deferred revenue included in the condensed consolidated financial statements is the expected liability to service the projects. The goodwill represents the excess fair value after the allocation to the intangibles. The calculated goodwill is not deductible for tax purposes. The financial data of the License Grant is included in the Company’s financial statements as of deemed acquisition date of June 30, 2020.
A final valuation of the assets and purchase price allocation of the License Grant has not been completed as of the end of this reporting period as the third party valuation has not been finalized. Consequently, the purchase price was preliminarily allocated based upon the Company’s best estimates at the time of this filing. These amounts are subject to revision upon the completion of formal studies and valuations, as needed, which the Company expects to occur during the fourth quarter of 2020.
16
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 8 - Ten Degrees Acquisition
On August 19, 2020, in accordance with the terms and conditions of that certain Asset Purchase Agreement, by and among the Company, Ten Degrees Inc. (“TDI”), Ten Degrees International Limited (“TDIL”), mCube International Limited (“MCI”), and the holder of a majority of the outstanding capital of TDIL and mCube, Inc., and the sole shareholder of 100% of the outstanding capital stock of MCI (“mCube,” together with TDI, TDIL, and MCI collectively, the “Transferors”), we acquired a suite of on-device “blue-dot” indoor location and motion technologies, including patents, trademarks, software and related intellectual property from the Transferors (collectively, the “Assets”). The Assets were acquired for consideration consisting of (i) $1,500,000 in cash and (ii) 480,000 shares of our common stock. In accordance with the terms of the APA, commencing as of the date of the APA, the Transferors, and their affiliates, have agreed to not compete with our business associated with the Assets for a period of five years from the closing date. In addition, each party agreed to not solicit any employees from the other party for a period of one year from the closing date, subject to certain exceptions.
The total recorded purchase price for the transaction was $2,100,000, which consisted of the cash paid of $1,500,000 and $600,000 representing the value of the stock issued upon closing.
The preliminary purchase price is allocated as follows (in thousands):
| Developed technology | $ | 1,701 | ||
| Non-compete agreements | 399 | |||
| Total Purchase Price | $ | 2,100 |
The value of the intangibles were calculated by a third party valuation firm based on projections and financial data provided by management of the Company. A final valuation of the assets and purchase price allocation has not been completed as of the end of this reporting period as the third party valuation has not been finalized. Consequently, the purchase price was preliminarily allocated based upon the Company’s best estimates at the time of this filing. These amounts are subject to revision upon the completion of formal studies and valuations, as needed, which the Company expects to occur during the fourth quarter of 2020.
Note 9 - Proforma Financial Information
The following unaudited proforma financial information presents the condensed consolidated results of operations of the Company and Jibestream for the three and nine months ended September 30, 2019, as if the acquisition had occurred as of the beginning of the first period presented instead of on August 15, 2019. The proforma information does not necessarily reflect the results of operations that would have occurred had the entities been a single company during those periods.
| (in thousands, except per share data) | For the Three Months Ended September 30, 2019 | For the Nine Months Ended September 30, 2019 | ||||||
| Revenues | $ | 2,031 | $ | 5,898 | ||||
| Net loss attributable to common stockholders | $ | (7,226 | ) | $ | (19,805 | ) | ||
| Net loss per basic and diluted common share | $ | (9.31 | ) | $ | (37.19 | ) | ||
| Weighted average common shares outstanding: | ||||||||
| Basic and Diluted | 776,288 | 532,588 | ||||||
Note 10 - Inventory
Inventory as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| Raw materials | $ | 73 | $ | 13 | ||||
| Finished goods | 341 | 387 | ||||||
| Total Inventory | $ | 414 | $ | 400 | ||||
17
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 11 - Debt
Debt as of September 30, 2020 and December 31, 2019 consisted of the following (in thousands):
| As of September 30, 2020 | As of 2019 | |||||||
| Short-Term Debt | ||||||||
| Notes payable, less debt discount of $655 and $628, respectively (A) | $ | 6,150 | $ | 7,080 | ||||
| Revolving line of credit (B) | -- | 150 | ||||||
| Other short-term debt (C) | -- | 74 | ||||||
| Total Short-Term Debt | $ | 6,150 | $ | 7,304 | ||||
| (A) | Notes Payable |
December 2018 Note Purchase Agreement and Promissory Note
On December 21, 2018, the Company entered into a note purchase agreement with Iliad Research and Trading, L.P. (“Iliad” or the “Holder”), pursuant to which the Company agreed to issue and sell to Iliad an unsecured promissory note (the “December 2018 Note”) in an aggregate principal amount of $1,895,000, which is payable on or before December 31, 2019 (as provided in the Exchange Agreement, dated October 24, 2019, described below (the “October 24th Exchange Agreement”)). The initial principal amount includes an original issue discount of $375,000 and $20,000 that the Company agreed to pay to the Holder to cover its legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the December 2018 Note, the Holder paid an aggregate purchase price of $1,500,000. Interest on the December 2018 Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the December 2018 Note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it will pay 115% of the portion of the outstanding balance the Company elects to prepay. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the December 2018 Note is paid in full, the Holder has the right to redeem up to an aggregate of 1/3 of the initial principal balance of the December 2018 Note each month (each monthly exercise, a “Monthly Redemption Amount”) by providing written notice (each, a “Monthly Redemption Notice”) delivered to the Company; provided, however, that if any Monthly Redemption Amount is not exercised in its corresponding month then such Monthly Redemption Amount will be available for the Holder to redeem in any future month in addition to such future month’s Monthly Redemption Amount. Upon receipt of any Monthly Redemption Notice, the Company shall pay the applicable Monthly Redemption Amount in cash within 5 business days of the Company’s receipt of such Monthly Redemption Notice. Pursuant to the October 24th Exchange Agreement described below, the Holder agreed that the exercise of any redemption rights described above would be deferred until no earlier than December 31, 2019.
Amendment to Note Purchase Agreements
On February 8, 2019, the Company entered into a global amendment (the “Global Amendment”) to the note purchase agreements entered into on October 12, 2018 and December 21, 2018, in connection with the notes issued as of such dates, to delete the phrase “by cancellation or exchange of the Note, in whole or in part” from Section 8.1 of those agreements. The Company also agreed to pay Iliad’s fees and other expenses in an aggregate amount of $80,000 (the “Fee”) in connection with the preparation of the Global Amendment by adding $40,000 of the Fee to the outstanding balance of each of the notes.
Standstill Agreement
On August 8, 2019, the Company and Iliad entered into a standstill agreement with respect to the December 2018 Note (the “Standstill Agreement”). Pursuant to the Standstill Agreement, Iliad agreed that it will not redeem all or any portion of the December 2018 Note for a period beginning on August 8, 2019, and ending on the date that is 90 days from August 8, 2019. As consideration for this, the outstanding balance of the December 2018 Note was increased by $206,149.
The Company and Iliad entered into an amendment to the December 2018 Note pursuant to which the maturity date of the note was further extended from December 31, 2019 to March 31, 2020. In addition, Iliad agreed to further extend the standstill previously agreed to pursuant to the terms of that certain Standstill Agreement, dated as of August 8, 2019, whereby Iliad will not be entitled to redeem all or any portion of the principal amount of the Note until March 31, 2020.
Note Exchanges
From October 15, 2019 through December 31, 2019, the Company exchanged approximately $2,112,000 of the outstanding principal and interest under the December 2018 Note for 707,078 shares of the Company’s common stock at exchange prices between $1.80 and $4.95 per share. As of March 31, 2020, the outstanding principal balance of the December 2018 Note was approximately $28,749.
On April 1, 2020, the Company exchanged approximately $223,000 of the remaining outstanding principal and interest under the December 2018 Note for 187,517 shares of the Company’s common stock at an exchange price of $1.19 per share. After this exchange the balance owed under the December 2018 Note was $0.
18
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 11 - Debt (continued)
May 2019 Note Purchase Agreement and Promissory Note
On May 3, 2019, the Company entered into a note purchase agreement (the “Purchase Agreement”) with Chicago Venture Partners, L.P. (“Chicago Venture”), an affiliate of Iliad, pursuant to which the Company agreed to issue and sell to the investor an unsecured promissory note (the “May 2019 Note”) in an aggregate principal amount of $3,770,000, which is payable on or before the date that is 10 months from the issuance date. The initial principal amount includes an original issue discount of $750,000 and $20,000 that the Company agreed to pay to the holder to cover the holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the May 2019 Note, the holder paid an aggregate purchase price of $3,000,000. Interest on the May 2019 Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the May 2019 Note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to the holder 115% of the portion of the outstanding balance the Company elects to prepay. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the May 2019 Note is paid in full, the holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the May 2019 Note each month (each monthly exercise, a “Monthly Redemption Amount”) by providing written notice (each, a “Monthly Redemption Notice”) delivered to the Company; provided, however, that if the holder does not exercise any Monthly Redemption Amount in its corresponding month then such Monthly Redemption Amount shall be available for the holder to redeem in any future month in addition to such future month’s Monthly Redemption Amount. Upon receipt of any Monthly Redemption Notice, the Company shall pay the applicable Monthly Redemption Amount in cash to the holder within five business days of the Company’s receipt of such Monthly Redemption Notice.
During the year ended December 31, 2019, the Company exchanged approximately $2,076,000 of the outstanding principal and interest under the note for 738,891 shares of the Company’s common stock at exchange prices between $1.80 and $3.51 per share. The Company analyzed the exchange of principal under the note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and recorded an approximately $96,000 loss on the exchange of debt for equity as a separate item in the other income/expense section of the consolidated statements of operations for the year ended December 31, 2019.
During the three months ended March 31, 2020, the Company exchanged approximately $1,958,000 of the outstanding principal and interest under the May 2019 Note for 524,140 shares of the Company’s common stock at exchange prices between $3.65 and $4.05 per share. The Company analyzed the exchange of principal under the May 2019 Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and recorded an approximately $53,000 loss on the exchange of debt for equity as a separate item in the other income/expense section of the condensed consolidated statements of operations for the three months ended March 31, 2020.
As of September 30, 2020, the outstanding balance of the May 2019 Note was $0 and the note was fully satisfied.
June 2019 Note Purchase Agreement and Promissory Note
On June 27, 2019, the Company entered into a note purchase agreement (the “Purchase Agreement”) with Chicago Venture, pursuant to which the Company agreed to issue and sell to the holder an unsecured promissory note (the “June 2019 Note”) in an aggregate principal amount of $1,895,000, which is payable on or before the date that is 9 months from the issuance date. The initial principal amount includes an original issue discount of $375,000 and $20,000 that the Company agreed to pay to the holder to cover the holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the June 2019 Note, the holder paid an aggregate purchase price of $1,500,000. Interest on the June 2019 Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the June 2019 Note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to the holder 115% of the portion of the outstanding balance the Company elects to prepay. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the June 2019 Note is paid in full, the holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the June 2019 Note each month by providing written notice delivered to the Company; provided, however, that if the holder does not exercise any monthly redemption amount in its corresponding month then such monthly redemption amount shall be available for the holder to redeem in any future month in addition to such future month’s monthly redemption amount. Upon receipt of any monthly redemption notice, the Company shall pay the applicable monthly redemption amount in cash to the holder within five business days. The June 2019 Note includes customary event of default provisions, subject to certain cure periods, and provides for a default interest rate of 22%. Upon the occurrence of an event of default (except a default due to the occurrence of bankruptcy or insolvency proceedings (the “Bankruptcy-Related Event of Default”)), the holder may, by written notice, declare all unpaid principal, plus all accrued interest and other amounts due under the June 2019 Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the June 2019 Note (the “Mandatory Default Amount”). Upon the occurrence of a Bankruptcy-Related Event of Default, without notice, all unpaid principal, plus all accrued interest and other amounts due under the June 2019 Note will become immediately due and payable at the Mandatory Default Amount. Pursuant to the terms of the Purchase Agreement, if the Company consummates an offering of its equity securities, the Company is required to make a cash payment to the holder in the following amount: (a) twenty-five percent (25%) of the outstanding balance of the June 2019 Note if the Company receives net proceeds equal to $2,500,000.00 or less; (b) fifty percent (50%) of the outstanding balance of the June 2019 Note if the Company receives net proceeds of more than $2,500,000.00 but less than $5,000,000.00; and (c) one hundred percent (100%) of the outstanding balance of the June 2019 Note if the Company receives net proceeds equal to $5,000,000.00 or more.
19
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 11 - Debt (continued)
Effective as of August 12, 2019, the Company and Chicago Venture entered into an amendment agreement, dated as of August 14, 2019, to provide that the Company’s obligation to repay all or a portion of the outstanding balance of the June 2019 Note upon the completion of any offering of equity securities of the Company would not apply or be effective until December 27, 2019. As consideration for the amendment, a fee of $191,883 was added to the outstanding balance of the June 2019 Note.
During the three months ended March 31, 2020, the Company exchanged approximately $2,236,000 of the outstanding principal and interest under the June 2019 Note for 1,372,417 shares of the Company’s common stock at exchange prices between $1.12 and $3.05 per share. The Company analyzed the exchange of principal under the June 2019 Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and recorded an approximately $33,000 loss on the exchange of debt for equity as a separate item in the other income/expense section of the condensed consolidated statements of operations for the three months ended March 31, 2020.
As of September 30, 2020, the outstanding balance of the June 2019 Note was $0 and the note was fully satisfied.
August 2019 Note Purchase Agreement and Promissory Note
On August 8, 2019, the Company entered into a note purchase agreement with Chicago Venture, pursuant to which the Company agreed to issue and sell to the holder an unsecured promissory note (the “August 2019 Note”) in an aggregate principal amount of $1,895,000, which is payable on or before the date that is 9 months from the issuance date. The initial principal amount includes an original issue discount of $375,000 and $20,000 that the Company agreed to pay to the holder to cover the holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the August 2019 Note, the holder paid an aggregate purchase price of $1,500,000. Interest on the Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the August 2019 Note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to the holder 115% of the portion of the outstanding balance the Company elects to prepay. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the August 2019 Note is paid in full, the holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the August 2019 Note each month by providing written notice to the Company; provided, however, that if the holder does not exercise any monthly redemption amount in its corresponding month then such monthly redemption amount shall be available for the holder to redeem in any future month in addition to such future month’s monthly redemption amount. Upon receipt of any monthly redemption notice, the Company shall pay the applicable monthly redemption amount in cash to the holder within five business days of the Company’s receipt of such monthly redemption notice. The August 2019 Note includes customary event of default provisions, subject to certain cure periods, and provides for a default interest rate of 22%. Upon the occurrence of an event of default (except a default due to the occurrence of bankruptcy or insolvency proceedings (the “Bankruptcy-Related Event of Default”)), the holder may, by written notice, declare all unpaid principal, plus all accrued interest and other amounts due under the August 2019 Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the Note (the “Mandatory Default Amount”). Upon the occurrence of a Bankruptcy-Related Event of Default, without notice, all unpaid principal, plus all accrued interest and other amounts due under the Note will become immediately due and payable at the Mandatory Default Amount.
During the three months ended June 30, 2020, the Company exchanged approximately $2,034,000 of the outstanding principal and interest under the August 2019 Note for 1,832,220 shares of the Company’s common stock at exchange prices between $1.09 and $1.128 per share. The Company analyzed the exchange of principal under the August 2019 Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and recorded an approximately $25,000 loss on the exchange of debt for equity as a separate item in the other income/expense section of the condensed consolidated statements of operations for the three months ended June 30, 2020.
As of September 30, 2020, the outstanding balance of the August 2019 Note was $0 and the note was fully satisfied.
20
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 11 - Debt (continued)
September 2019 Note Purchase Agreement and Promissory Note
On September 17, 2019, the Company entered into a note purchase agreement with Iliad, pursuant to which the Company agreed to issue and sell to the holder an unsecured promissory note (the “September 2019 Note”) in an aggregate principal amount of $952,500, which is payable on or before the date that is 9 months from the issuance date. The initial principal amount includes an original issue discount of $187,500 and $15,000 that the Company agreed to pay to the holder to cover the holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the September 2019 Note, the holder paid an aggregate purchase price of $750,000. Interest on the Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the September 2019 Note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to the holder 115% of the portion of the outstanding balance the Company elects to prepay. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the September 2019 Note is paid in full, the holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the September 2019 Note each month by providing written notice to the Company; provided, however, that if the holder does not exercise any monthly redemption amount in its corresponding month then such monthly redemption amount shall be available for the holder to redeem in any future month in addition to such future month’s monthly redemption amount. Upon receipt of any monthly redemption notice, the Company shall pay the applicable monthly redemption amount in cash to the holder within five business days of the Company’s receipt of such monthly redemption notice. The September 2019 Note includes customary event of default provisions, subject to certain cure periods, and provides for a default interest rate of 22%.
Upon the occurrence of an event of default (except a default due to the occurrence of bankruptcy or insolvency proceedings (the “Bankruptcy-Related Event of Default”)), the holder may, by written notice, declare all unpaid principal, plus all accrued interest and other amounts due under the September 2019 Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the September 2019 Note (the “Mandatory Default Amount”). Upon the occurrence of a Bankruptcy-Related Event of Default, without notice, all unpaid principal, plus all accrued interest and other amounts due under the September 2019 Note will become immediately due and payable at the Mandatory Default Amount. Under the terms of the September 2019 Note, since it was still outstanding on December 17, 2019, a one-time monitoring fee equal to ten percent (10%) of the then outstanding balance, or $97,661, was added to the September 2019 Note.
During the three months ended June 30, 2020, the Company exchanged approximately $1,120,000 of the outstanding principal and interest under the September 2019 Note for 975,704 shares of the Company’s common stock at exchange prices between $1.136 and $1.17 per share. The Company analyzed the exchange of principal under the September 2019 Note as an extinguishment and compared the net carrying value of the debt being extinguished to the reacquisition price (shares of common stock being issued) and recorded an approximately $22,000 loss on the exchange of debt for equity as a separate item in the other income/expense section of the condensed consolidated statements of operations for the three months ended June 30, 2020.
As of September 30, 2020, the outstanding balance of the September 2019 Note was $0 and the note was fully satisfied.
November 2019 Note Purchase Agreement and Promissory Note
On November 22, 2019, the Company issued a promissory note to St. George Investments LLC (“St. George”), an affiliate of Iliad and Chicago Venture, pursuant to which the Company agreed to issue and sell to the holder an unsecured promissory note (the “November 2019 Note”) in the initial principal amount of $952,500, which is payable on or before the date that is 6 months from the issuance date, subject to extension in accordance with the terms of the November 2019 Note. The initial principal amount includes an original issue discount of $187,500 and $15,000 that the Company agreed to pay to St. George to cover its legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the November 2019 Note, St. George paid an aggregate purchase price of $750,000. Interest on the November 2019 Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to the holder 115% of the portion of the outstanding balance the Company elects to prepay. The November 2019 Note includes customary event of default provisions, subject to certain cure periods, and provides for a default interest rate of 22%. Upon the occurrence of an event of default (except a default due to the occurrence of bankruptcy or insolvency proceedings (the “Bankruptcy-Related Event of Default”)), the holder may, by written notice, declare all unpaid principal, plus all accrued interest and other amounts due under the November 2019 Note to be immediately due and payable at an amount equal to 115% of the outstanding balance of the Note (the “Mandatory Default Amount”). Upon the occurrence of a Bankruptcy-Related Event of Default, without notice, all unpaid principal, plus all accrued interest and other amounts due under the Note will become immediately due and payable at the Mandatory Default Amount. Under the terms of the November 2019 Note, since it was still outstanding on February 22, 2020, a one-time monitoring fee equal to ten percent (10%) of the then-current outstanding balance, or approximately $97,688, was added to the note. As of March 31, 2020, the outstanding balance of the November 2019 Note was approximately $1,050,188.
During the three months ended June 30, 2020, the Company exchanged approximately $1,215,000 of the outstanding principal and interest under the November 2019 Note for 894,549 shares of the Company’s common stock at exchange prices between $1.354 and $1.362 per share.
As of September 30, 2020, the outstanding balance of the November 2019 Note was $0 and the note was fully satisfied.
21
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 11 - Debt (continued)
March 2020 Note Purchase Agreement and Promissory Note
On March 18, 2020, the Company entered into a note purchase agreement with Iliad, pursuant to which the Company agreed to issue and sell to the holder an unsecured promissory note (the “March 2020 Note”) in an aggregate initial principal amount of $6,465,000, which is payable on or before the date that is 12 months from the issuance date. The initial principal amount includes an original issue discount of $1,450,000 and $15,000 that the Company agreed to pay to the holder to cover the holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the March 2020 Note, the holder paid an aggregate purchase price of $5,000,000. Interest on the March 2020 Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the March 2020 Note. The Company may pay all or any portion of the amount owed earlier than it is due; provided, that in the event the Company elects to prepay all or any portion of the outstanding balance, it shall pay to the holder 115% of the portion of the outstanding balance the Company elects to prepay. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the March 2020 Note is paid in full, the holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the March 2020 Note each month by providing written notice delivered to the Company; provided, however, that if the holder does not exercise any monthly redemption amount in its corresponding month then such monthly redemption amount shall be available for the holder to redeem in any future month in addition to such future month’s monthly redemption amount. Upon receipt of any monthly redemption notice, the Company shall pay the applicable monthly redemption amount in cash to the holder within five business days of the Company’s receipt of such Monthly Redemption Notice. The March 2020 Note includes customary event of default provisions, subject to certain cure periods, and provides for a default interest rate of 22%. Upon the occurrence of an event of default (except a default due to the occurrence of bankruptcy or insolvency proceedings, the holder may, by written notice, declare all unpaid principal, plus all accrued interest and other amounts due under the March 2020 Note to be immediately due and payable. Upon the occurrence of a bankruptcy-related event of default, without notice, all unpaid principal, plus all accrued interest and other amounts due under the March 2020 Note will become immediately due and payable at the mandatory default amount. If the March 2020 Note is still outstanding on the date that is six (6) months from the issuance date, then a one-time monitoring fee equal to ten percent (10%) of the then-current outstanding balance shall be added to the March 2020 Note.
As of September 30, 2020, the outstanding principal balance of the March 2020 Note was approximately $6,805,000.
| (B) | Revolving Line of Credit |
Payplant Accounts Receivable Bank Line
In accordance with the Payplant Loan and Security Agreement, dated as of August 14, 2017 (the “Loan Agreement”), the Loan Agreement allows the Company to request loans from the Lender (in the manner provided therein) with a term of no greater than 360 days in amounts that are equivalent to 80% of the face value of purchase orders received. The Lender is not obligated to make the requested loan, however, if the Lender agrees to make the requested loan, before the loan is made, the Company must provide Lender with (i) one or more promissory notes for the amount being loaned in favor of Lender, (ii) one or more guaranties executed in favor of Lender and (iii) other documents and evidence of the completion of such other matters as Lender may request. The principal amount of each loan shall accrue interest at a 30 day rate of 2% (the “Interest Rate”), calculated per day on the basis of a year of 360 days and, when combined with all fees that may be characterized as interest will not exceed the maximum rate allowed by law. Upon the occurrence and during the continuance of any event of default, interest shall accrue at a rate equal to the Interest Rate plus 0.42% per 30 days. All computations of interest shall be made on the basis of a year of 360 days. The promissory note is subject to the interest rates described in the Loan Agreement and is secured by the assets of the Company pursuant to the Loan Agreement and will be satisfied in accordance with the terms of the Payplant Client Agreement.
On August 31, 2018, Inpixon, Sysorex, Sysorex Government Services, Inc. (“SGS”), and Payplant executed Amendment 1 to Payplant Client Agreement (the “Amendment”). Pursuant to the Amendment, Sysorex and SGS are no longer parties to the Payplant Client Agreement, originally entered into on August 14, 2017, and have been released from any and all obligations and liabilities arising under the Payplant Client Agreement, whether such obligations and liabilities were in existence prior to or on the date of the Amendment or arise after the date of the Amendment. As of September 30, 2020, the outstanding balance on the revolving line of credit is $0.
On August 13, 2020, we provided Payplant a Notice of Termination (the “Notice”) of (i) that certain Loan and Security Agreement, dated as of August 14, 2017 (the “Loan Agreement”), by and among the Company, Payplant and Lender and (ii) that certain Payplant Client Agreement, dated as of August 14, 2017, as amended (the “Client Agreement”), by and between the Company and Payplant, pursuant to which we are able to request loans from the Lender. In accordance with Section 14 and Section 27 of the Loan Agreement and the Client Agreement, respectively, we terminated each agreement as the Company has fully satisfied all obligations under the Loan Agreement and will not incur any additional obligations thereunder. As a result of the termination, the security interest we previously granted under the Loan Agreement was terminated and we paid a corresponding UCC termination fee of $150 to Payplant in accordance with Section 27 of the Client Agreement.
| (C) | Other Short-Term Debt |
As of September 30, 2020, the Company owed $0 to the pre-acquisition stockholders of Shoom.
22
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 12 - Capital Raises
At-The-Market Program
On March 3, 2020, the Company entered into an Equity Distribution Agreement (“EDA”) with Maxim Group LLC (“Maxim”) under which the Company may offer and sell shares of our common stock in connection with an at-the-market equity facility (“ATM”) in an aggregate offering amount of up to $50 million, which was increased on June 19, 2020 to $150 million pursuant to an amendment to the EDA, from time to time through Maxim, acting exclusively as our sales agent. The Company intends to use the net proceeds of the ATM primarily for working capital and general corporate purposes. The Company may also use a portion of the net proceeds to invest in or acquire businesses or technologies that it believes are complementary to its own, although the Company has no current plans, commitments or agreements with respect to any acquisitions as of the date of this filing. Maxim will be entitled to compensation at a fixed commission rate of 4.0% of the gross sales price per share sold for the initial $50.0 million of shares and 3.25% for any sales in excess of such amount. In addition, the Company has agreed to reimburse Maxim for its costs and out-of-pocket expenses incurred in connection with its services, including the fees and out-of-pocket expenses of its legal counsel.
The Company is not obligated to make any sales of the shares under the EDA and no assurance can be given that the Company will sell any shares under the EDA, or if it does, as to the price or amount of shares that the Company will sell, or the dates on which any such sales will take place. The EDA will continue until the earliest of (i) December 3, 2021, (ii) the sale of shares having an aggregate offering price of $150.0 million, and (iii) the termination by either Maxim or the Company upon the provision of 15 days written notice or otherwise pursuant to the terms of the EDA.
The Company issued 937,010 shares of common stock during the quarter ended March 31, 2020, in connection with the ATM at per share prices between $1.23 and $2.11, resulting in net proceeds to the Company of approximately $1.25 million after subtracting sales commissions and other offering expenses.
The Company issued 29,033,036 shares of common stock during the quarter ended June 30, 2020, in connection with the ATM at per share prices between $1.13 and $2.02, resulting in net proceeds to the Company of approximately $40.52 million after subtracting sales commissions and other offering expenses.
The Company issued 1,604,312 shares of common stock during the quarter ended September 30, 2020, in connection with the ATM at per share prices between $1.5064 and $1.5134, resulting in net proceeds to the Company of approximately $2.27 million after subtracting sales commissions and other offering expenses.
Note 13 - Common Stock
During the three months ended March 31, 2020, the Company issued 1,896,557 shares of common stock under exchange agreements to settle outstanding balances totaling approximately $4,194,000 under partitioned notes.
During the three months ended March 31, 2020, the Company issued 937,010 shares of common stock in connection with the ATM at per share prices between $1.23 and $2.11, resulting in net proceeds to the Company of approximately $1.25 million after subtracting sales commissions and other offering expenses (see Note 12).
During the three months ended June 30, 2020, the Company issued 3,889,990 shares of common stock under exchange agreements to settle outstanding balances totaling approximately $4,592,000 under partitioned notes.
During the three months ended June 30, 2020, the Company issued 29,033,036 shares of common stock in connection with the ATM at per share prices between $1.13 and $2.02, resulting in net proceeds to the Company of approximately $40.52 million after subtracting sales commissions and other offering expenses (see Note 12).
During the three months ended June 30, 2020, the Company issued 183,486 shares of common stock for the extinguishment of liability totaling approximately $200,000.
During the three months ended September 30, 2020, the Company issued 1,604,312 shares of common stock in connection with the ATM at per share prices between $1.5064 and $1.5134, resulting in net proceeds to the Company of approximately $2.27 million after subtracting sales commissions and other offering expenses (see Note 12).
On August 19, 2020, the Company issued 480,000 shares of common stock to the security holders of Ten Degrees as part of an acquisition (See Note 8).
Note 14 - Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred stock with a par value of $0.001 per share with rights, preferences, privileges and restrictions as to be determined by the Company’s Board of Directors.
23
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 14 - Preferred Stock (continued)
Series 4 Convertible Preferred Stock
On April 20, 2018, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 4 Convertible Preferred Stock (“Series 4 Preferred”), authorized 10,415 shares of Series 4 Preferred and designated the preferences, rights and limitations of the Series 4 Preferred. The Series 4 Preferred is non-voting (except to the extent required by law) and was convertible into the number of shares of common stock, determined by dividing the aggregate stated value of the Series 4 Preferred of $1,000 per share to be converted by $828.00.
As of September 30, 2020, there was 1 share of Series 4 Preferred outstanding.
Series 5 Convertible Preferred Stock
On January 14, 2019, the Company filed with the Secretary of State of the State of Nevada the Certificate of Designation that created the Series 5 Convertible Preferred Stock, authorized 12,000 shares of Series 5 Convertible Preferred Stock and designated the preferences, rights and limitations of the Series 5 Convertible Preferred Stock. The Series 5 Convertible Preferred Stock is non-voting (except to the extent required by law). The Series 5 Convertible Preferred Stock is convertible into the number of shares of Common Stock, determined by dividing the aggregate stated value of the Series 5 Convertible Preferred Stock of $1,000 per share to be converted by $149.85.
As of September 30, 2020, there were 126 shares of Series 5 Convertible Preferred Stock outstanding.
Note 15 - Reverse Stock Split
On January 3, 2020, 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-45 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of January 7, 2020.
The condensed consolidated financial statements and accompanying notes give effect to 1-for-45 reverse stock split as if it occurred at the first period presented.
Note 16 - Stock Options
In September 2011, the Company adopted the 2011 Employee Stock Incentive Plan (the “2011 Plan”) which provides for the granting of incentive and non-statutory common stock options and stock based incentive awards to employees, non-employee directors, consultants and independent contractors. The plan was amended and restated in May 2014. Unless terminated sooner by the Board of Directors, this plan will terminate on August 31, 2021.
In February 2018, the Company adopted the 2018 Employee Stock Incentive Plan (the “2018 Plan” and together with the 2011 Plan, the “Option Plans”), which will be utilized with the 2011 Plan for employees, corporate officers, directors, consultants and other key persons employed. The 2018 Plan will provide for the granting of incentive stock options, NQSOs, stock grants and other stock-based awards, including Restricted Stock and Restricted Stock Units (as defined in the 2018 Plan).
Incentive stock options granted under the Option Plans are granted at exercise prices not less than 100% of the estimated fair market value of the underlying common stock at date of grant. The exercise price per share for incentive stock options may not be less than 110% of the estimated fair value of the underlying common stock on the grant date for any individual possessing more that 10% of the total outstanding common stock of the Company. Options granted under the Option Plans vest over periods ranging from immediately to four years and are exercisable over periods not exceeding ten years.
On August 10, 2020, our Board of Directors approved an amendment to the Company’s 2018 Plan to remove the limit on the amount of non-qualified stock options that can be issued under the 2018 Plan to any one individual.
The aggregate number of shares that may be awarded as of September 30, 2020 under the 2011 Plan and the 2018 Plan were 417,270 and 12,730,073, respectively. As of September 30, 2020, 5,544,594 of options were granted to employees, directors and consultants of the Company (including 1 share outside of the Company’s Option Plans) and 7,602,750 options were available for future grant under the Option Plans.
During the three months ended June 30, 2020, the Company granted stock options for the purchase of 5,567,500 shares of common stock to employees and directors of the Company. These stock options are 100% vested at grant or vest pro-rata over 12 to 48 months, have a life of ten years and an exercise price of $1.10 per share. The Company valued the stock options using the Black-Scholes option valuation model and the fair value of the awards was determined to be approximately $1,911,000. The fair value of the common stock as of the grant date was determined to be $1.10 per share.
During the three months ended September 30, 2020 and 2019, the Company recorded a charge for the amortization of employee stock options of approximately $256,000 and $871,000, respectively, and $941,000 and $2,376,000 for the nine months ended September 30,2020 and 2019, respectively.
24
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 16 - Stock Options (continued)
As of September 30, 2020, the fair value of non-vested options totaled approximately $1,907,000, which will be amortized to expense over the weighted average remaining term of 0.985 years.
The fair value of each employee stock option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. Key weighted-average assumptions used to apply this pricing model during the nine months ended September 30, 2020 were as follows:
| For the Nine Months Ended September 30, 2020 | ||||
| Risk-free interest rate | 0.33% | |||
| Expected life of stock option grants | 5 years | |||
| Expected volatility of underlying stock | 34.43% | |||
| Dividends assumption | $-- | |||
The expected stock price volatility for the Company’s stock options was determined by the historical volatilities for industry peers and used an average of those volatilities. The Company attributes the value of stock-based compensation to operations on the straight-line single option method. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods. The dividends assumption was $0 as the Company historically has not declared and does not expect to declare any dividends.
Note 17 - Credit Risk and Concentrations
Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash and cash equivalents. The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently, believes that its accounts receivable credit risk exposure beyond such allowances is limited.
The Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. Cash is also maintained at foreign financial institutions for its Canadian subsidiary and its majority-owned India subsidiary. Cash in foreign financial institutions as of September 30, 2020 and December 31, 2019 was immaterial. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash.
The following table sets forth the percentages of revenue derived by the Company from those customers, which accounted for at least 10% of revenues during the three-month period ended September 30, 2020 and 2019 (in thousands):
| For the Three Months Ended September 30, 2020 | For the Three Months Ended September 30, 2019 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Customer A | 800 | 31% | 500 | 33% | ||||||||||||
| Customer B | 305 | 12% | 306 | 20% | ||||||||||||
The following table sets forth the percentages of revenue derived by the Company from those customers, which accounted for at least 10% of revenues during the nine-month period ended September 30, 2020 and 2019 (in thousands):
| For the Nine Months Ended September 30, 2020 | For the Nine Months Ended September 30, 2019 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Customer A | 1,300 | 23% | 2,000 | 46% | ||||||||||||
| Customer B | 916 | 17% | 918 | 21% | ||||||||||||
As of September 30, 2020, Customer A represented approximately 44% of total accounts receivable. As of September 30, 2019, Customer A represented approximately 59%, and Customer C represented approximately 17% of total accounts receivable.
As of September 30, 2020, two vendors represented approximately 19% and 11% of total gross accounts payable. Purchases from these vendors during the three and nine months ended September 30, 2020 was $0. As of September 30, 2019, two vendors represented approximately 41% and 14% of total gross accounts payable. Purchases from these vendors during the three and nine months ended September 30, 2019 was $0.
25
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 17 - Credit Risk and Concentrations (continued)
For the three months ended September 30, 2020, four vendors represented approximately 21%, 19%, 15%, and 14% of total purchases. For the three months ended September 30, 2019, five vendors represented approximately 23%, 19%, 13%, 12% and 10% of total purchases.
For the nine months ended September 30, 2020, four vendors represented approximately 24%, 13%, 11%, and 10% of total purchases. For the nine months ended September 30, 2019, three vendors represented approximately 25%, 19% and 13% of total purchases.
Note 18 - Foreign Operations
The Company’s operations are located primarily in the United States, Canada, United Kingdom, Germany and India. Revenues by geographic area are attributed by country of domicile of the Company’s subsidiaries. The financial data by geographic area are as follows (in thousands):
| United States | Canada | Germany | United Kingdom | India | Eliminations | Total | ||||||||||||||||||||||
| For the Three Months Ended September 30, 2020: | ||||||||||||||||||||||||||||
| Revenues by geographic area | $ | 1,919 | $ | 1,199 | $ | 42 | $ | 31 | $ | 372 | $ | (1,009 | ) | $ | 2,554 | |||||||||||||
| Operating income (loss) by geographic area | $ | (5,996 | ) | $ | (103 | ) | $ | (146 | ) | $ | (93 | ) | $ | 92 | $ | -- | $ | (6,246 | ) | |||||||||
| Net income (loss) by geographic area | $ | (7,178 | ) | $ | (126 | ) | $ | (146 | ) | $ | (92 | ) | $ | 91 | $ | -- | $ | (7,451 | ) | |||||||||
| For the Three Months Ended September 30, 2019: | ||||||||||||||||||||||||||||
| Revenues by geographic area | $ | 1,231 | $ | 303 | $ | -- | $ | -- | $ | 154 | $ | (154 | ) | $ | 1,534 | |||||||||||||
| Operating income (loss) by geographic area | $ | (4,733 | ) | $ | (977 | ) | $ | -- | $ | -- | $ | 26 | $ | -- | $ | (5,684 | ) | |||||||||||
| Net income (loss) by geographic area | $ | (5,658 | ) | $ | (947 | ) | $ | -- | $ | -- | $ | 26 | $ | -- | $ | (6,579 | ) | |||||||||||
| For the Nine Months Ended September 30, 2020: | ||||||||||||||||||||||||||||
| Revenues by geographic area | $ | 3,634 | $ | 3,925 | $ | 42 | $ | 31 | $ | 797 | $ | (2,995 | ) | $ | 5,434 | |||||||||||||
| Operating income (loss) by geographic area | $ | (16,601 | ) | $ | (242 | ) | $ | (146 | ) | $ | (93 | ) | $ | 144 | $ | -- | $ | (16,938 | ) | |||||||||
| Net income (loss) by geographic area | $ | (20,747 | ) | $ | (77 | ) | $ | (146 | ) | $ | (92 | ) | $ | 143 | $ | -- | $ | (20,919 | ) | |||||||||
| For the Nine Months Ended September 30, 2019: | ||||||||||||||||||||||||||||
| Revenues by geographic area | $ | 4,064 | $ | 323 | $ | -- | $ | -- | $ | 391 | $ | (391 | ) | $ | 4,387 | |||||||||||||
| Operating income (loss) by geographic area | $ | (13,433 | ) | $ | (1,889 | ) | $ | -- | $ | -- | $ | 50 | $ | -- | $ | (15,272 | ) | |||||||||||
| Net income (loss) by geographic area | $ | (15,153 | ) | $ | (1,857 | ) | $ | -- | $ | -- | $ | 50 | $ | -- | $ | (16,960 | ) | |||||||||||
| As of September 30, 2020: | ||||||||||||||||||||||||||||
| Identifiable assets by geographic area | $ | 42,328 | $ | 9,393 | $ | 128 | $ | 121 | $ | 623 | $ | -- | $ | 52,593 | ||||||||||||||
| Long lived assets by geographic area | $ | 7,706 | $ | 6,620 | $ | 15 | $ | 30 | $ | 294 | $ | -- | $ | 14,665 | ||||||||||||||
| As of December 31, 2019: | ||||||||||||||||||||||||||||
| Identifiable assets by geographic area | $ | 11,061 | $ | 9,675 | $ | -- | $ | -- | $ | 483 | $ | -- | $ | 21,219 | ||||||||||||||
| Long lived assets by geographic area | $ | 4,347 | $ | 6,981 | $ | -- | $ | -- | $ | 345 | $ | -- | $ | 11,673 | ||||||||||||||
26
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 19 - Related Party Transactions
Nadir Ali, the Company’s Chief Executive Officer and a member of its Board of Directors, is also a member of the Board of Directors of Sysorex.
Sysorex Note Purchase Agreement
On December 31, 2018, the Company and Sysorex entered into a note purchase agreement (the “Note Purchase Agreement”) pursuant to which the Company agreed to purchase from Sysorex at a purchase price equal to the Loan Amount (as defined below), a secured promissory note (the “Secured Note”) for up to an aggregate principal amount of $3 million (the “Principal Amount”), including any amounts advanced through the date of the Secured 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 10% percent 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, Sysorex agreed to pay $20,000 to the Company to cover the Company’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of the Secured Note (the “Transaction Expense Amount”), all of which amount is included in the Principal Amount. Sysorex may borrow repay and borrow under the Secured 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 the Company to the Maturity Date (as defined below) pursuant to the terms of the Note Purchase Agreement will become part of the aggregate Loan Amount underlying the Secured Note. All outstanding principal amounts and accrued unpaid interest owing under the Secured Note shall become immediately due and payable on the earlier to occur of (i) 24 month anniversary of the date the Secured Note is issued (the “Maturity Date”), (ii) at such date when declared due and payable by the Company upon the occurrence of an Event of Default (as defined in the Secured Note), or (iii) at any such earlier date as set forth in the Secured Note. All accrued unpaid interest shall be payable in cash. On February 4, 2019, April 2, 2019, and May 22, 2019, the Secured Note was amended to increase the Principal Amount that may be outstanding at any time from $3 million to $5 million, $5 million to $8 million and $8 million to $10 million, respectively. On March 1, 2020, the Company extended the maturity date of the Secured Note to December 31, 2022. In addition, the Secured Note was amended to increase the default interest rate from 18% to 21% or the maximum rate allowable by law and to require a cash payment to the Company by Sysorex against the Loan Amount in an amount equal to no less than 6% of the aggregate gross proceeds raised following the completion of any financing, or series of related financings, in which Sysorex raises aggregate gross proceeds of at least $5 million.
In accordance with the terms of the Systat License Agreement (see Note 7), on June 30, 2020, the Company partitioned a portion of the Secured Note into a new note in an amount equal to $3 million in principal plus accrued interest (the “Closing Note”) and assigned the Closing Note and all rights and obligations thereunder to Systat in accordance with the terms and conditions of that certain Promissory Note Assignment and Assumption Agreement. An additional $1.3 million of the principal balance underlying the Sysorex Note was partitioned and assigned to Systat as consideration payable for the rights granted under the license as of September 30, 2020. The amount owed for principal and accrued interest by Sysorex to the Company as of September 30, 2020 and December 31, 2019 was approximately $7.8 million and $10.6 million, respectively.
The Secured Note has been classified as “held for sale” and the Company, with the assistance of a third-party valuation firm, estimated the fair value of such using Sysorex financial projections, a discounted cash flow model and a 12.3% discount rate. As a result, the Company established a full valuation allowance as of September 30, 2020. The Company is required to periodically re-evaluate the carrying value of the note and the related valuation allowance based on various factors, including, but not limited to, Sysorex’s performance and collectability of the note. Sysorex’s performance against those financial projections will directly impact future assessments of the fair value of the note.
Sysorex Receivable
On February 20, 2019, the Company, Sysorex and Atlas Technology Group, LLC (“Atlas”) entered into a settlement agreement resulting in a net award of $941,796 whereby Atlas agreed to accept an aggregate of 16,655 shares of freely-tradable common stock of the Company in full satisfaction of the award. The Company and Sysorex 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 would be shared by each party following the Spin-off. As a result, Sysorex owes the Company approximately $565,078 for the settlement plus the interest accrued through September 30, 2020 of approximately $83,105. The total owed to the Company for this settlement as of September 30, 2020 was approximately $648,183. The Company established a full valuation allowance against this balance as of September 30, 2020.
27
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 20 - Leases
The Company has an operating lease for its administrative office in Palo Alto, California, effective October 1, 2014, for 8.3 years. The initial lease rate was $14,225 per month with escalating payments. In connection with the lease, the Company is obligated to pay $8,985 monthly for operating expenses for building repairs and maintenance. The Company also has an operating lease for its administrative office in Encino, CA. This lease was effective June 1, 2014 and will end on July 31, 2021. The current lease rate is $6,984 per month and $276 per month for the common area maintenance. Additionally, the Company has an amended operating lease for its administrative office in Coquitlam, Canada, from May 1, 2020 through September 30, 2022. The initial lease rate was CAD $4,479 per month with escalating payments. In connection with the lease, the Company is obligated to pay CAD $2,566 monthly for operating expenses for building repairs and maintenance. The Company has an operating lease for its administrative office in Toronto, Canada, from August 15, 2019 through July 31, 2021. The monthly lease rate is CAD $24,506 per month with no escalating payments. In connection with the lease, the Company is obligated to pay CAD $9,651 monthly for operating expenses for building repairs and maintenance. Starting in January 2021, the lease rate for the Toronto office space will be reduced due to a smaller leased office space. The extension agreement for the reduced office space is through June 30, 2026 with escalating payments. Additionally, the Company has an operating lease for its administrative office in New Westminster, Canada, from August 1, 2019 through July 31, 2021. The initial lease rate was CAD $575 per month. The Company has an operating lease for its administrative office in Hyderabad, India, from January 1, 2019 through February 28, 2024. The monthly lease rate is 482,720 INR per month with 5% escalating payments. In connection with the lease, the Company is obligated to pay 68,960 INR monthly for operating expenses for building repairs and maintenance. The Company has an operating lease for its administrative office in Ratingen, Germany, from July 1, 2020 through June 30, 2022 with an initial lease rate of 641 EUR per month. The Company has an operating lease for its administrative office in Slough, United Kingdom, from July 1, 2020 through October 31, 2021. The monthly lease rate is 1,600 GBP per month with 4% escalating payments. The Company has no other operating or financing leases with terms greater than 12 months.
The Company adopted ASC Topic 842, Leases (“ASC Topic 842”) effective January 1, 2019 using the modified-retrospective method, and thus, the prior comparative period continues to be reported under the accounting standards in effect for that period.
The Company elected to use the package of practical expedients permitted which allows (i) an entity not to reassess whether any expired or existing contracts are or contain leases; (ii) an entity need not reassess the lease classification for any expired or existing leases; and (iii) an entity need not reassess any initial direct costs for any existing leases. At the time of adoption, the Company did not have any leases with terms of 12 months or less, which would have resulted in short-term lease payments being recognized in the condensed consolidated statements of income on a straight-line basis over the lease term. All of the Company’s leases were previously classified as operating and are similarly classified as operating lease under the new standard.
On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use asset of $641,992, lease liability of $683,575 and eliminated deferred rent of $41,583. The adoption of ASC 842 did not have a material impact to prior year comparative periods and a result, a cumulative-effect adjustment was not required. The Company determined the lease liability using the Company’s estimated incremental borrowing rate of 8.0% to estimate the present value of the remaining monthly lease payments. With the Locality acquisition, the Company adopted ASC Topic 842 effective May 21, 2019 for the Westminster, Canada office operating lease. With the Jibestream acquisition, the Company adopted ASC Topic 842 effective August 15, 2019 for the Toronto, Canada office operating lease. With the India acquisition, the Company adopted ASC Topic 842 effective January 1, 2019 for the Hyderabad, India office operating lease. With the Systat license agreement, the Company adopted ASC Topic 842 effective July 1, 2020 for the Ratingen, Germany and Slough, United Kingdom office operating leases.
Right-of-use assets is summarized below (in thousands):
| As of September 30, 2020 | ||||
| Palo Alto, CA Office | $ | 630 | ||
| Encino, CA Office | 194 | |||
| Hyderabad, India Office | 362 | |||
| Coquitlam, Canada Office | 92 | |||
| Westminster, Canada Office | 10 | |||
| Toronto, Canada Office | 902 | |||
| Ratingen, Germany Office | 18 | |||
| Slough, United Kingdom Office | 32 | |||
| Less accumulated amortization | (618 | ) | ||
| Right-of-use asset, net | $ | 1,622 | ||
Lease expense for operating leases recorded in the balance sheet is included in operating costs and expenses and is based on the future minimum lease payments recognized on a straight-line basis over the term of the lease plus any variable lease costs. Operating lease expenses, inclusive of short-term and variable lease expenses, recognized in the Company’s condensed consolidated statement of income for the three-month period ended September 30, 2020 was $279,000 and $802,000 for the nine-month period ended September 30, 2020.
28
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 20 - Leases (continued)
During the three-month period ended September 30, 2020, the Company recorded $175,736 as rent expense to the right-of-use assets. During the nine-month period ended September 30, 2020, the Company recorded $460,913 as rent expense to the right-of-use assets.
Lease liability is summarized below (in thousands):
| As of September 30, 2020 | ||||
| Total lease liability | $ | 1,646 | ||
| Less: short term portion | (572 | ) | ||
| Long term portion | $ | 1,074 | ||
Maturity analysis under the lease agreement is as follows (in thousands):
| Year ending December 31, 2020 | $ | 173 | ||
| Year ending December 31, 2021 | 577 | |||
| Year ending December 31, 2022 | 501 | |||
| Year ending December 31, 2023 | 253 | |||
| Year ending December 31, 2024 | 159 | |||
| Year ending December 31, 2025 and thereafter | 202 | |||
| Total | $ | 1,865 | ||
| Less: Present value discount | (219 | ) | ||
| Lease liability | $ | 1,646 |
Operating lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the date of adoption of Topic 842. As of September 30, 2020, the weighted average remaining lease term is 3.21 years and the weighted average discount rate used to determine the operating lease liabilities was 8.0%.
Note 21 - Commitments and Contingencies
Litigation
Certain conditions may exist as of the date the condensed consolidated financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
29
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 21 - Commitments and Contingencies (continued)
Compliance with Nasdaq Continued Listing Requirement
Between November 2015 and May 2018, we received four deficiency letters from Nasdaq indicating that we did not comply with certain Nasdaq continued listing requirements. Such deficiencies were later cured. However, on May 30, 2019, we received another deficiency letter from Nasdaq indicating that, based on our closing bid price for the last 30 consecutive business days, we did not comply with the minimum bid price requirement of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). In accordance with the Nasdaq Listing Rules, the Company was provided with a 180 calendar day period, through November 26, 2019 (the “Compliance Deadline”), to regain compliance with the Minimum Bid Price Requirement. On November 27, 2019, the Company received notice from the Nasdaq Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) that based upon the Company’s continued non-compliance with the Minimum Bid Price Requirement (as defined below), the Company’s common stock would be subject to delisting from Nasdaq (the “Staff Delisting Determination”), unless the Company timely requested an appeal hearing before the Nasdaq Hearings Panel (the “Panel”). The Company requested such hearing, which was held on January 23, 2020, following the Company’s implementation of a reverse stock split effective on January 7, 2020.
On February 5, 2020, the Company received a letter from the Office of General Counsel of Nasdaq informing us that the Nasdaq Hearings Panel (the “Panel”) granted the Company’s request to continue the listing of the Company’s common stock on Nasdaq. The Panel also determined to impose a Panel Monitor pursuant to Nasdaq Listing Rule 5815(d)(4)(A) to last until February 5, 2021 (“Panel Monitor Period”). If at any time before February 5, 2021, the Staff or the Panel determines that the Company has failed to meet the minimum bid price requirement for a period of 30 consecutive trading days or any other requirement for continued listing on Nasdaq, the Panel will direct the Staff to issue a Staff Delisting Determination and the Hearings Department will promptly schedule a new hearing, with the initial Panel or a newly convened Panel if the initial Panel is unavailable. During the monitor period, the Company is obligated to notify the Panel immediately, in writing, in the event the Company’s bid price falls below the minimum requirement for any reason, or if the Company falls out of compliance with any applicable listing requirement.
Note 22 - Subsequent Events
At-The-Market Program
During the quarter ending December 31, 2020, the Company issued 213,474 shares of common stock in connection with the ATM, at per share prices between $1.1206 and $1.1209, resulting in net proceeds to the Company of approximately $230,000 after subtracting sales commissions and other offering expenses.
Nanotron Acquisition
On October 6, 2020, we acquired, through our wholly-owned subsidiary Inpixon GmbH, all of the outstanding capital stock (the “Nanotron Shares”) of Nanotron Technologies GmbH, a limited liability company incorporated under the laws of Germany (“Nanotron”), pursuant to the terms and conditions of that certain Share Sale and Purchase Agreement, dated as of October 5, 2020 (the “Purchase Agreement”), among the Purchaser, Nanotron and Sensera Limited, a stock corporation incorporated under the laws of Australia and the sole shareholder of Nanotron (the “Seller”).
As a result of the acquisition, we now own 100% of Nanotron. Nanotron’s business consists of developing and manufacturing location-aware IoT systems and solutions.
At the closing, the Purchaser paid to the Seller an aggregate purchase price of $8,700,000 (less the Holdback Funds (as defined below) and certain other closing adjustments) for the Nanotron Shares (“Purchase Price”). The Purchase Price may be subject to certain post-Closing adjustments based on actual working capital as of the closing as described in the Purchase Agreement. The Purchaser retained $750,000 (the “Holdback Funds”) from the Purchase Price to secure the Seller’s obligations under the Purchase Agreement, with any unused portion of the Holdback Funds to be released to the Seller on the date that is 18 months after the closing date. The Purchaser paid the Purchase Price from funds received in connection with a capital contribution from us, and a portion of the Purchase Price was used by the Seller to satisfy outstanding loans payable by the Seller to obtain the release of certain existing security interests on Nanotron’s assets.
30
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
Note 22 - Subsequent Events (continued)
Subscription of Units of Cardinal Venture Holdings
On September 30, 2020, we entered into a Subscription Agreement (the “Subscription Agreement”) with Cardinal Venture Holdings LLC, a Delaware limited liability company (“CVH”), pursuant to which we agreed to (i) contribute up to $1,800,000 (the “Contribution”) to CVH and (ii) purchase up to 599,999 Class A Units of CVH (the “Class A Units”) and up to 1,800,000 Class B Units of CVH (the “Class B Units,” and, together with the Class A Units, the “Units”). The aggregate purchase price of $1,800,000 for the Units is deemed to be satisfied through the Contribution. The $1,800,000 purchase price was paid on October 12, 2020 and therefore that is the date the purchase of the Units was closed.
CVH owns certain interests in the sponsor entity (the “Sponsor”) to a special purpose acquisition company formed for the purpose of pursuing an initial public offering of its securities followed by effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “SPAC”). It is anticipated that the Contribution will be used by CVH to fund the Sponsor’s purchase of securities in the SPAC.
Nadir Ali, our Chief Executive Officer, beneficially owns membership interests in CVH through 3AM LLC, a Delaware limited liability company and a founding member of CVH (“3AM”).
Concurrently with our entry into the Subscription Agreement, we entered into the Amended and Restated Limited Liability Company Agreement of CVH (the “LLC Agreement”), dated as of September 30, 2020. Under the terms of the LLC Agreement, in the event the Managing Member (as defined in the LLC Agreement) can no longer manage CVH’s affairs due to his death, disability or incapacity, 3AM will serve as CVH’s replacement Managing Member. Except as may be required by law, the Company, as a non-managing member under the LLC Agreement, does not have any voting rights and generally cannot take part in the management or control of CVH’s business and affairs.
The LLC Agreement provides that each Class A Unit and each Class B Unit represents the right of the Company to receive any distributions made by the Sponsor on account of the Class A Interests and Class B Interests, respectively, of the Sponsor.
We are not required to make additional capital contributions to CVH, unless any such capital contribution is approved by all of CVH’s members. In addition, the LLC Agreement contains terms and conditions that provide for limitations on liability, restrictions on rights to distributions and certain indemnification rights for CVH’s members.
31
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”
Except where indicated, all share and per share data in this section, as well as the condensed consolidated financial statements, reflect the 1-for-45 reverse split of our common stock effective on January 7, 2020.
Overview of Our Business
We are an indoor intelligence company. Our business and government customers use our solutions to secure, digitize and optimize their indoor spaces with our positioning, mapping and analytics products. Our indoor intelligence platform uses sensor technology to detect accessible cellular, Wi-Fi, Bluetooth, ultra-wide band (“UWB”) and radio frequency identification (“RFID”) signals emitted from devices within a venue providing positional information similar to what global positioning system (“GPS”) satellite systems provide for the outdoors. Combining this positional data with our dynamic and interactive mapping solution and a high-performance analytics engine, yields near real time insights to our customers providing them with visibility, security and business intelligence within their indoor spaces. Our highly configurable platform can also ingest data from our customers’ and other third party sensors, Wi-Fi access points, Bluetooth beacons, video cameras, and big data sources, among others to maximize indoor intelligence. We also offer digital tear-sheets with optional invoice integration, digital ad delivery, and an e-edition designed for reader engagement for the media, publishing and entertainment industry. Our Indoor Intelligence products secure, digitize and optimize the interior of any premises with indoor positioning and data analytics that provide rich positional information, similar to a global positioning system, and browser-like intelligence for the indoors.
Our Indoor Intelligence product line has long sales cycles, which result from customer-related issues such as budget and procurement processes but also because of the early stages of indoor-positioning technology and the learning curve required for customers to implement such solutions. Customers also often engage in a pilot program first which prolongs sales cycles and is typical of most emerging technology adoption curves. Indoor Intelligence sales can be licensed-based with government customers but commercial customers may prefer a SaaS or subscription model. Our other digital solutions are also delivered on a SaaS model and allow us to generate industry analytics that complement our indoor-positioning solutions.
We experienced a net loss of approximately $7.5 million and $6.6 million for the three months ended September 30, 2020 and 2019, respectively, and a net loss of $20.9 million and $17.0 million for the nine months ended September 30, 2020 and 2019, respectively. We cannot assure you that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we have supplemented the revenues we earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. During the first quarter of 2020, we raised $5 million in gross proceeds in connection with a debt financing and during the nine months ended September 30, 2020, we raised net proceeds of approximately $44.0 million, in connection with sales under our at-the-market equity facility (the “ATM”). In addition, we may raise additional capital under the ATM facility up to a maximum gross proceeds of $150 million, however, general economic or other conditions resulting from COVID-19 or other events materially may impact the liquidity of our common stock or our ability to continue to access capital from the ATM to support our growth plans. Given our cash balances and budgeted cash flow requirements, we believe we have sufficient funds to support ongoing operations for the next twelve months.
Effects of COVID-19
The impact of the COVID-19 pandemic on our business and results of operations continues to remain uncertain at this time. While we have been able to continue operations remotely, we have experienced supply chain constraints and delays in the receipt of certain components of our products impacting delivery times for our products. We have also seen some impact in the demand of certain products and delays in certain projects and customer orders either because they require onsite services which could not be performed while shelter in place orders have been in effect or because of the uncertainty of the customer’s financial position and ability to invest in our technology. Despite these challenges, we were able to realize growth in revenue during the first and third quarters of 2020 and for the nine months of 2020 when compared to the same periods of 2019 as a result of an increase in sales associated with our indoor intelligence platform, including our sensors, in addition to additional revenue from the sale of Systat software licenses. The impact that COVID-19 will have on general economic conditions is continuously evolving and the ultimate impact the pandemic will have on our results of operations continues to remain uncertain and there are no assurances that we will be able to continue to experience the same growth or not be materially adversely effected. A further discussion of the impact of the COVID-19 pandemic on our business is set forth below in Part II, Item 1A. Risk Factors.
A further discussion of the impact of the COVID-19 pandemic on our business is set forth below in Part II, Item 1A. Risk Factors.
32
Corporate Strategy Update
Management continues to pursue a corporate strategy that is focused on building and developing our business as a provider of end-to-end solutions ranging from the collection of data to delivering insights from that data to our customers with a focus on securing, digitizing and optimizing premises with our indoor positioning, mapping and analytics solutions for businesses and governments. In connection with such strategy and to facilitate our long-term growth, we continue to evaluate various strategic transactions including acquisitions of companies with technologies and intellectual property (“IP”) that complement those goals by adding technology, differentiation, customers and/or revenue. Some of these opportunities may offer us the ability to enhance our technology and product offerings, expand our verticals and/or our international presence and global footprint. We believe these complementary technologies will add value to the Company and allow us to provide a comprehensive indoor intelligence platform, offering a one-stop shop to our customers. In addition, we may seek to expand our capabilities around security, artificial intelligence, augmented reality and virtual reality or other high growth sectors. Candidates with proven technologies that complement our overall strategy may come from anywhere in the world, as long as there are strategic and financial reasons to make the acquisition. In addition, we are also exploring opportunities that will supplement our revenue growth. We are primarily looking for accretive acquisitions that have business value and operational synergies, but will be opportunistic for other strategic and/or attractive transactions that we believe may increase overall shareholder value, which may include, but not be limited to other alternative investment opportunities, such as minority investments. joint ventures or special purpose acquisition companies. If we make any acquisitions in the future, we expect that we may pay for such acquisitions with cash, equity securities and/or debt in combinations appropriate for each acquisition. In addition, we may consider an assignment of our remaining note receivable from Sysorex Inc. (“Sysorex”). In furtherance of this strategy, over the last year, we enhanced our product offerings and expanded our intellectual property portfolio by completing several strategic transactions, including, the acquisition of (1) Locality Systems, Inc. (“Locality”), a technology company based near Vancouver, Canada, specializing in wireless device positioning and radio frequency (“RF”) augmentation of video surveillance systems, (2) Jibestream Inc. (“Jibestream”), a provider of a highly configurable intelligent indoor mapping platform to expand our suite of products, (3) certain GPS products, software, technologies, and intellectual property from GTX Corp (“GTX”), a U.S. based company specializing in GPS technologies, (4) an exclusive, worldwide license to market, distribute and develop the SYSTAT and SigmaPlot software suite of products from Systat Software, Inc., (5) a suite of on-device “blue dot” indoor location and motion technologies, including patents, trademarks, software and related intellectual property (IP), from Ten Degrees, Inc., Ten Degrees International and certain other affiliated parties and (6) Nanotron Technologies GmbH, a global location awareness technology company to strengthen and expand our product portfolio and capabilities for UWB, RTLS, and 2.4 GHz CSS.
Recent Events
“Blue Dot” Technology Acquisition
On August 19, 2020, in accordance with the terms and conditions of that certain Asset Purchase Agreement, by and among us, Ten Degrees Inc., a Delaware corporation (“TDI”), Ten Degrees International Limited, a Cayman Islands exempted company limited by shares and the sole shareholder of 100% of the outstanding capital stock of TDI (“TDIL”), mCube International Limited, a Cayman Island company (“MCI”), and the holder of a majority of the outstanding capital of TDIL and mCube, Inc., a Delaware corporation, and the sole shareholder of 100% of the outstanding capital stock of MCI (“mCube”, together with TDI, TDIL, and MCI collectively, the “Transferors”), dated August 19, 2020 (the “APA”), we acquired a suite of on-device “blue-dot” indoor location and motion technologies, including patents, trademarks, software and related intellectual property from the Transferors (collectively, the “Assets”).
The Assets were acquired for consideration consisting of (i) $1.5 million in cash and (ii) 480,000 shares of our common stock.
In accordance with the terms of the APA, commencing as of the date of the APA, the Transferors, and their affiliates, have agreed to not compete with our business associated with the Assets for a period of five years from the closing date. In addition, each party agreed to not solicit any employees from the other party for a period of one year from the closing date, subject to certain exceptions.
All of Transferors’ right, title and interest in and to the Assets were sold, conveyed, transferred, assigned, and delivered to us in accordance with a Bill of Sale and Assignment executed by the Transferors, dated as of the closing date.
Nanotron Acquisition
On October 6, 2020, we acquired, through our wholly-owned subsidiary Inpixon GmbH, a limited liability company incorporated under the laws of Germany (the “Purchaser), all of the outstanding capital stock (the “Nanotron Shares”) of Nanotron Technologies GmbH, a limited liability company incorporated under the laws of Germany (“Nanotron”), pursuant to the terms and conditions of that certain Share Sale and Purchase Agreement, dated as of October 5, 2020 (the “Purchase Agreement”), among the Purchaser, Nanotron and Sensera Limited, a stock corporation incorporated under the laws of Australia and the sole shareholder of Nanotron (the “Seller”).
33
As a result of the acquisition, we now own 100% of Nanotron. Nanotron’s business consists of developing and manufacturing location-aware IoT systems and solutions.
At the closing, the Purchaser paid to the Seller an aggregate purchase price of $8,700,000 (less the Holdback Funds (as defined below) and certain other closing adjustments) for the Nanotron Shares (“Purchase Price”). The Purchase Price may be subject to certain post-Closing adjustments based on actual working capital as of the closing as described in the Purchase Agreement. The Purchaser retained $750,000 (the “Holdback Funds”) from the Purchase Price to secure the Seller’s obligations under the Purchase Agreement, with any unused portion of the Holdback Funds to be released to the Seller on the date that is 18 months after the closing date. The Purchaser paid the Purchase Price from funds received in connection with a capital contribution from us, and a portion of the Purchase Price was used by the Seller to satisfy outstanding loans payable by the Seller to obtain the release of certain existing security interests on Nanotron’s assets.
Subscription of Units of Cardinal Venture Holdings
On September 30, 2020, we entered into a Subscription Agreement (the “Subscription Agreement”) with Cardinal Venture Holdings LLC, a Delaware limited liability company (“CVH”), pursuant to which we agreed to (i) contribute up to $1,800,000 (the “Contribution”) to CVH and (ii) purchase up to 599,999 Class A Units of CVH (the “Class A Units”) and up to 1,800,000 Class B Units of CVH (the “Class B Units,” and, together with the Class A Units, the “Units”). The $1,800,000 purchase price was paid on October 12, 2020 and therefore that is the date the purchase of the Units was closed.
CVH owns certain interests in the sponsor entity (the “Sponsor”) to a special purpose acquisition company formed for the purpose of pursuing an initial public offering of its securities followed by effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “SPAC”). It is anticipated that the Contribution will be used by CVH to fund the Sponsor’s purchase of securities in the SPAC.
Nadir Ali, our Chief Executive Officer, beneficially owns membership interests in CVH through 3AM LLC, a Delaware limited liability company and a founding member of CVH (“3AM”).
Concurrently with our entry into the Subscription Agreement, we entered into the Amended and Restated Limited Liability Company Agreement of CVH (the “LLC Agreement”), dated as of September 30, 2020. Under the terms of the LLC Agreement, in the event the Managing Member (as defined in the LLC Agreement) can no longer manage CVH’s affairs due to his death, disability or incapacity, 3AM will serve as CVH’s replacement Managing Member. Except as may be required by law, the Company, as a non-managing member under the LLC Agreement, does not have any voting rights and generally cannot take part in the management or control of CVH’s business and affairs.
The LLC Agreement provides that each Class A Unit and each Class B Unit represents the right of the Company to receive any distributions made by the Sponsor on account of the Class A Interests and Class B Interests, respectively, of the Sponsor.
We are not required to make additional capital contributions to CVH, unless any such capital contribution is approved by all of CVH’s members. In addition, the LLC Agreement contains terms and conditions that provide for limitations on liability, restrictions on rights to distributions and certain indemnification rights for CVH’s members.
Equity Distribution Agreement
We entered into an Equity Distribution Agreement, dated March 3, 2020,with Maxim Group LLC (“Maxim”) under which we may offer and sell shares of our common stock in connection with an at-the-market equity facility (“ATM”) from time to time through Maxim, acting exclusively as our sales agent. The ATM had an initial aggregate offering amount of up to $50.0 million, which we increased to $150.0 million pursuant to Amendment No. 1 to Equity Distribution, dated as of June 19, 2020 (the “Amendment”). The Amendment also provided that Maxim will receive a reduced commission of 3.25%, down from 4.0%, from any sales in excess of the initial $50.0 million offering amount. We intend to use the net proceeds of the ATM primarily for working capital and general corporate purposes. We may also use a portion of the net proceeds to invest in or acquire businesses or technologies that we believe are complementary to our own.
We issued and sold 31,574,358 shares of common stock during the nine months ended September 30, 2020, in connection with the ATM at per share prices between $1.13 and $2.11, resulting in net proceeds to the Company of approximately $44 million, after subtracting sales commissions and other offering expenses.
Subsequent to the quarter ended September 30, 2020, the Company issued 213,474 shares of common stock in connection with the ATM, at per share prices between $1.1206 and $1.1209, resulting in net proceeds to the Company of approximately $230,000 after subtracting sales commissions and other offering expenses.
Such sales were made pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-223960), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2018, as amended on May 15, 2018, and declared effective on June 5, 2018 (the “Registration Statement”), and a base prospectus dated as of June 5, 2018 included in the Registration Statement and the prospectus supplements relating to the ATM filed with the SEC on March 3, 2020 and June 22, 2020.
34
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 3 of the condensed consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. There have been no changes to estimates during the periods presented in the filing. Historically changes in management estimates have not been material.
Revenue Recognition
The Company records revenue according to “Revenue from Contracts with Customers (Topic 606)”, or ASU 2016-12, which requires revenue to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and is evaluated using a five-step model.
Software As A Service Revenue Recognition
With respect to sales of our maintenance, consulting and other service agreements including our digital tear-sheets, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital tear-sheets are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service.
Mapping Services Revenue Recognition
Mapping services revenue is accounted for using the percentage of completion method. As soon as the outcome of a contract can be estimated reliably, contract revenue is recognized in the consolidated statement of operations in proportion to the stage of completion of the contract. Contract costs are expensed as incurred. Contract costs include all amounts that relate directly to the specific contract, are attributable to contract activity, and are specifically chargeable to the customer under the terms of the contract
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 materials contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts including maintenance service provided by in house personnel, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three and nine months ended September 30, 2020 and 2019, the Company did not incur any such losses. These amounts are based on known and estimated factors.
Contract Balances
The timing of our revenue recognition may differ from the timing of payment by our customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. As of September 30, 2020, the Company had deferred revenue of approximately $1,761,000 related to software license agreements and approximately $81,000 related to cash received in advance for product maintenance services provided by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for these maintenance services and recognize the deferred revenue and related contract costs over the next twelve months.
35
Long-lived Assets
We account for our long-lived assets in accordance with Accounting Standards Codification (“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:
| ● | significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows for two consecutive years); |
| ● | significant negative industry or economic trends; |
| ● | knowledge of transactions involving the sale of similar property at amounts below our carrying value; or |
| ● | our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.” |
Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.
When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and 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 three and nine months ended September 30, 2020 and 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 the develop products and services to seek returns on its investment. We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, as part of our continued efforts. Although there can be no assurance that these efforts will be successful, we intend to allocate financial and personnel resources when deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, the related development of our technology (resulting in our lack of ability to expand our business), may be subject to significant impairment.
As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. The Company will continue to monitor these uncertainties in future periods, to determine the impact.
We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the three and nine months ended September 30, 2020 and 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.
Acquired In-Process Research and Development (“IPR&D”)
In accordance with authoritative guidance, we recognize IPR&D at fair value as of the acquisition date, and subsequently account for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. Once an IPR&D project has been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off. During fiscal year 2014, we acquired IPR&D through the acquisition of AirPatrol, in 2015 through the acquisition of the assets of LightMiner, in 2019 through the acquisitions of Locality, Jibestream and certain assets of GTX and in 2020 through the SYSTAT licensing agreement and the acquisition of assets of Ten Degrees. Our IPR&D is comprised of AirPatrol, LightMiner, Locality, Jibestream, GTX, SYSTAT and Ten Degrees technology, which was valued on the date of the acquisition. It will take additional financial resources to continue development of these technologies.
We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, for further development of the AirPatrol, Locality, Jibestream, GTX, SYSTAT and Ten Degrees technologies. Through September 30, 2020, we have made some progress with raising capital since these acquisitions, building our pipeline and getting industry acknowledgment. We have been recognized by leading industry analysts in a report on leading indoor positioning companies and were also awarded the IoT Security Excellence award by TMC. Management remains focused on growing revenue from these products and continues to pursue efforts to recognize the value of the AirPatrol, Locality, Jibestream, GTX, SYSTAT and Ten Degrees technologies. 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 IPR&D will be subject to significant impairment.
36
Impairment of Long-Lived Assets Subject to Amortization
We amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment indicator exists. We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including our intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize any intangible asset impairment charges for the three and nine months ended September 30, 2020 and 2019. See “Acquired In-Process Research and Development (“IPR&D”)” for further information.
Software Development Costs
The Company develops and utilizes internal software for the processing of data provided by its customers. Costs incurred in this effort are accounted for under the provisions of FASB ASC 350-40, Internal Use Software and ASC 985-20, Software – Cost of Software to be Sold, Leased or Marketed, whereby direct costs related to development and enhancement of internal use software is capitalized, and costs related to maintenance are expensed as incurred. The Company capitalizes its direct internal costs of labor and associated employee benefits that qualify as development or enhancement. These software development costs are amortized over the estimated useful life which management has determined ranges from one to four years.
Allowance for Doubtful Accounts
We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management’s determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors.
As of September 30, 2020 and December 31, 2019, reserves for credit losses included a reserve for doubtful accounts of approximately $ 467,000 and $646,000, respectively, due to the aging of the items greater than 120 days outstanding and other potential non-collections.
Business Combinations
We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to our consolidated financial results will be adjusted. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.
Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date and are included in our Consolidated Financial Statements from the acquisition date.
Stock-Based Compensation
We account for equity instruments issued to non-employees in accordance with accounting guidance, which requires that such equity instruments are recorded at their fair value on the measurement date, which is typically the date the services are performed.
We account for equity instruments issued to employees in accordance with accounting guidance that requires that awards are recorded at their fair value on the date of grant and are amortized over the vesting period of the award. We recognize compensation costs over the requisite service period of the award, which is generally the vesting term of the equity instrument issued.
The Black-Scholes option valuation model is used to estimate the fair value of the options or the equivalent security granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the average of historical volatilities for industry peers.
37
The Company incurred stock-based compensation charges of $256,000 and $871,000 for the three months ended September 30, 2020 and 2019, respectively, and $941,000 and $2,618,000 for the nine months ended September 30, 2020 and 2019 respectively, which are included in general and administrative expenses. Key weighted-average assumptions used to apply this pricing model during the nine months ended September 30, 2020 were as follows:
| For the Nine Months Ended September 30, 2020 | ||||
| Risk-free interest rate | 0.33% | |||
| Expected life of stock option grants | 5 years | |||
| Expected volatility of underlying stock | 34.43% | |||
| Dividends assumption | $ -- | |||
Results of Operations
Three months ended September 30, 2020 compared to three months ended September 30, 2019
| For the Three Months Ended | ||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||
| (in thousands, except percentages) | Amount | % of Revenues | Amount | % of Revenues | % Change* | |||||||||||||||
| Revenues | $ | 2,554 | 100 | % | $ | 1,534 | 100 | % | 66 | % | ||||||||||
| Cost of revenues | $ | 645 | 25 | % | $ | 382 | 25 | % | 69 | % | ||||||||||
| Gross profit | $ | 1,909 | 75 | % | $ | 1,152 | 75 | % | 66 | % | ||||||||||
| Operating expenses | $ | 8,155 | 319 | % | $ | 6,836 | 446 | % | 19 | % | ||||||||||
| Loss from operations | $ | (6,246 | ) | (245 | )% | $ | (5,684 | ) | (371 | )% | 10 | % | ||||||||
| Net loss | $ | (7,451 | ) | (292 | )% | $ | (6,579 | ) | (429 | )% | 13 | % | ||||||||
| Net loss attributable to stockholders of Inpixon | $ | (7,467 | ) | (292 | )% | $ | (6,584 | ) | (429 | )% | 13 | % | ||||||||
| * | Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results. |
Revenues
Revenues for the three months ended September 30, 2020 were $2,554,000 compared to $1,534,000 for the comparable period in the prior year for an increase of $1,020,000, or approximately 66%. Revenues increased in the third quarter of 2020 over the prior period in 2019 primarily attributable to an increase in sales in our Aware and Mapping product lines and the addition of sales from the new Systat licensing product line.
Cost of Revenues
Cost of revenues for the three months ended September 30, 2020 were $645,000 compared to $382,000 for the comparable period in the prior year. This increase of $263,000, or approximately 69%, was primarily attributable the increased sales during the quarter.
Gross Profit
The gross profit margin for the three months ended September 30, 2020 and 2019 was 75%.
Operating Expenses
Operating expenses for the three months ended September 30, 2020 were $8.2 million and $6.8 million for the comparable period in the prior year. This increase of approximately $1.4 million is primarily attributable to the increased operating expenses of the Systat licensing product line, increased professional fees and marketing expenses offset by a decrease in travel expenses, stock based compensation and amortization of intangibles.
Loss From Operations
Loss from operations for the three months ended September 30, 2020 was $6.2 million as compared to $5.7 million for the comparable period in the prior year. This increase in loss of approximately $0.5 million was primarily attributable to higher operating expenses offset by the increase in revenue for the quarter ended September 30, 2020.
Other Income/Expense
Other income/expense for the three months ended September 30, 2020 was a loss of $1,205,000 compared to a loss of $928,000 for the comparable period in the prior year. This increase in loss of $277,000 is primarily attributable to a $648,000 valuation allowance adjustment on held for sale loan offset by a reduction in interest expense due to the pay down of notes payable.
38
Provision for Income Taxes
There was no provision for corporate income taxes for the three months ended September 30, 2020 and 2019 as the Company was in a net taxable loss position. Deferred tax assets resulting from such losses are fully reserved as of September 30, 2020 and 2019 since, at present, the Company has no history of taxable income and it is more likely than not that such assets will not be realized.
Net Income Attributable to Non-Controlling Interest
Net income attributable to non-controlling interest for the three months ended September 30, 2020 was $16,000 compared to net income of $5,000 for the comparable period in the prior year. This increase in income of $11,000 was attributable to the gain from Inpixon India and is immaterial.
Net Loss Attributable To Stockholders of Inpixon
Net loss attributable to stockholders of Inpixon for the three months ended September 30, 2020 was $7.5 million compared to $6.6 million for the comparable period in the prior year. The higher loss of approximately $0.9 million was primarily attributable the higher operating expenses offset by the increased revenue during the three months ended September 30, 2020.
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
| For the Nine Months Ended | ||||||||||||||||||||
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||
| (in thousands, except percentages) | Amount | % of Revenues | Amount | % of Revenues | % Change* | |||||||||||||||
| Revenues | $ | 5,434 | 100 | % | $ | 4,387 | 100 | % | 24 | % | ||||||||||
| Cost of revenues | $ | 1,459 | 27 | % | $ | 1,109 | 25 | % | 32 | % | ||||||||||
| Gross profit | $ | 3,975 | 73 | % | $ | 3,278 | 75 | % | 21 | % | ||||||||||
| Operating expenses | $ | 20,913 | 385 | % | $ | 18,550 | 423 | % | 13 | % | ||||||||||
| Loss from operations | $ | (16,938 | ) | (312 | )% | $ | (15,272 | ) | (348 | )% | 11 | % | ||||||||
| Net loss | $ | (20,919 | ) | (385 | )% | $ | (16,960 | ) | (387 | )% | 23 | % | ||||||||
| Net loss attributable to stockholders of Inpixon | $ | (20,944 | ) | (385 | )% | $ | (16,969 | ) | (387 | )% | 23 | % | ||||||||
| * | Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results. |
Revenues
Revenues for the nine months ended September 30, 2020 were $5,434,000 compared to $4,387,000 for the comparable period in the prior year for an increase of $1,047,000, or approximately 24%, which was primarily attributable to additional mapping revenues due to a full nine months of sales during 2020, the addition of sales from the new Systat licensing product line offset by a decline in Aware product line sales (in the second quarter) during the 2020 period.
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2020 were $1,459,000 compared to $1,109,000 for the comparable period in the prior year. This increase of $350,000, or approximately 32%, was primarily attributable to the increased sales during the quarter.
Gross Profit
The gross profit margin for the nine months ended September 30, 2020 was 73% compared to 75% for the nine months ended September 30, 2019. This decrease in margin is primarily due to the addition of the Systat licensing product line sales at a lower margin.
Operating Expenses
Operating expenses for the nine months ended September 30, 2020 were $20.9 million and $18.6 million for the comparable period ended September 30, 2019. This increase of approximately $2.3 million is primarily attributable to increased operating expenses of the Systat licensing product line, increased operating expenses of the Jibestream division as it was included for a full nine months during 2020, increased professional fees and marketing expenses offset by a decrease in travel expenses, stock based compensation and amortization of intangibles.
39
Loss From Operations
Loss from operations for the nine months ended September 30, 2020 was $16.9 million as compared to $15.3 million for the comparable period in the prior year. This increase in loss of approximately $1.6 million was primarily attributable to higher operating expenses offset by the increase in revenue for the nine months ended September 30, 2020.
Other Income/Expense
Other income/expense for the nine months ended September 30, 2020 was a loss of $4,068,000 compared to a loss of $1,723,000 for the comparable period in the prior year. This increase in loss of approximately $2,345,000 is primarily attributable to the additional expense of the $1,514,000 valuation allowance adjustment due to the uncertainty of being repaid in connection with note receivable from Sysorex and a $648,000 valuation allowance for related party receivable from a settlement agreement in the nine months ended September 30, 2020.
Provision for Income Taxes
There was no provision for corporate income taxes for the nine months ended September 30, 2020 and 2019 as the Company was in a net taxable loss position. Deferred tax assets resulting from such losses are fully reserved as of September 30, 2020 and 2019 since, at present, the Company has no history of taxable income and it is more likely than not that such assets will not be realized. The Company recorded an income tax benefit of approximately $87,000 during the nine months ended September 30, 2020 for the reduction of the deferred tax liability related to the amortization of the Locality and Jibestream intangibles.
Net Income Attributable To Non-Controlling Interest
Net income attributable to non-controlling interest for the nine months ended September 30, 2020 was $25,000 compared to net income of $9,000 for the comparable period in the prior year. This increase in income of $16,000 was attributable to the gain from Inpixon India and is immaterial.
Net Loss Attributable To Stockholders of Inpixon
Net loss attributable to stockholders of Inpixon for the nine months ended September 30, 2020 was $20.9 million compared to $17.0 million for the comparable period in the prior year. The higher loss of approximately $3.9 million was primarily attributable to the higher operating expenses to include the expenses of the new Systat division and a full nine months of the Jibestream division, the $1,514,000 valuation allowance adjustment on held for sale loan and the $648,000 valuation allowance on related party receivable offset by the increased revenue during the nine ended September 30, 2020.
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 September 30, 2020 was a loss of $4.6 million compared to a loss of $2.4 million for the prior period in 2019. Adjusted EBITDA for the nine months ended September 30, 2020 was a loss of $12.4 million compared to a loss of $7.0 million for the prior period in 2019.
The following table presents a reconciliation of net income/loss attributable to stockholders of Inpixon, which is our GAAP operating performance measure, to Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019 (in thousands):
| For
the Three Months Ended September 30, | For
the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net loss attributable to common stockholders | $ | (7,467 | ) | $ | (6,584 | ) | $ | (20,944 | ) | $ | (18,219 | ) | ||||
| Adjustments: | ||||||||||||||||
| Non-recurring one-time charges: | ||||||||||||||||
| Loss on exchange of debt for equity | -- | 27 | 132 | 188 | ||||||||||||
| Provision for valuation allowance for held for sale loan | 679 | -- | 1,514 | -- | ||||||||||||
| Provision for the valuation allowance for related party receivable | -- | -- | 648 | -- | ||||||||||||
| Settlement of litigation | -- | -- | -- | 6 | ||||||||||||
| Acquisition transaction/financing costs | 344 | 573 | 540 | 1,220 | ||||||||||||
| Costs associated with public offering | -- | -- | -- | 50 | ||||||||||||
| Severance | -- | 26 | -- | 126 | ||||||||||||
| Bad debts expense/provision | 444 | 253 | 444 | 358 | ||||||||||||
| Deemed dividend for triggering of warrant down round feature | -- | -- | -- | 1,250 | ||||||||||||
| Stock-based compensation - compensation and related benefits | 256 | 871 | 941 | 2,618 | ||||||||||||
| Interest expense, net | 537 | 1,190 | 1,934 | 2,054 | ||||||||||||
| Depreciation and amortization | 589 | 1,268 | 2,497 | 3,428 | ||||||||||||
| Income tax benefit | -- | (33 | ) | (87 | ) | (35 | ) | |||||||||
| Adjusted EBITDA | $ | (4,618 | ) | $ | (2,409 | ) | $ | (12,381 | ) | $ | (6,956 | ) | ||||
40
We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:
| ● | to review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting; |
| ● | to compare our current operating results with corresponding periods and with the operating results of other companies in our industry; |
| ● | as a basis for allocating resources to various projects; |
| ● | as a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and |
| ● | to evaluate internally the performance of our personnel. |
We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:
| ● | we believe Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, 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 with a standard operating metric used by management to evaluate our operating performance; and |
| ● | we believe that the use of Adjusted EBITDA is helpful to compare our results to other companies. |
Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other condensed consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:
| ● | Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
41
| ● | Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; |
| ● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; |
| ● | Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and |
| ● | other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure. |
Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.
Proforma Non-GAAP Net Loss per Share
Basic and diluted net loss per share for the three months ended September 30, 2020 was ($0.18) compared to ($12.68) for the prior period in 2019. Basic and diluted net loss per share for the nine months ended September 30, 2020 was ($0.90) compared to ($65.89) for the prior period in 2019.
Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one time charges including gain on the settlement of obligations, severance costs, provision for doubtful accounts, acquisition costs and the costs associated with public offerings.
Proforma non-GAAP net loss per basic and diluted common share for the three months ended September 30, 2020 was ($0.13) compared to a loss of ($7.44) per share for the prior period in 2019. Proforma non-GAAP net loss per basic and diluted common share for the nine months ended September 30, 2020 was ($0.64) compared to a loss of ($35.45) per share for the prior period in 2019.
The following table presents a reconciliation of net loss per basic and diluted share, which is our GAAP operating performance measure, to proforma non-GAAP net loss per share for the periods reflected (in thousands, except per share data):
| For
the Three Months Ended September 30, | For
the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net loss attributable to common stockholders | $ | (7,467 | ) | $ | (6,584 | ) | $ | (20,944 | ) | $ | (18,219 | ) | ||||
| Adjustments: | ||||||||||||||||
| Non-recurring one-time charges: | ||||||||||||||||
| Loss on exchange of debt for equity | -- | 27 | 132 | 188 | ||||||||||||
| Provision for valuation allowance for held for sale loan | 679 | -- | 1,514 | -- | ||||||||||||
| Provision for the valuation allowance for related party receivable | -- | -- | 648 | -- | ||||||||||||
| Settlement of litigation | -- | -- | -- | 6 | ||||||||||||
| Acquisition transaction/financing costs | 344 | 573 | 540 | 1,220 | ||||||||||||
| Costs associated with public offering | -- | -- | -- | 50 | ||||||||||||
| Severance | -- | 26 | -- | 126 | ||||||||||||
| Bad debts expense/provision | 444 | 253 | 444 | 358 | ||||||||||||
| Deemed dividend for triggering of warrant down round feature | -- | -- | -- | 1,250 | ||||||||||||
| Stock-based compensation - compensation and related benefits | 256 | 871 | 941 | 2,618 | ||||||||||||
| Amortization of Intangibles | 288 | 969 | 1,811 | 2,602 | ||||||||||||
| Proforma non-GAAP net loss | $ | (5,456 | ) | $ | (3,865 | ) | $ | (14,914 | ) | $ | (9,801 | ) | ||||
| Proforma non-GAAP net loss per basic and diluted common share | $ | (0.13 | ) | $ | (7.44 | ) | $ | (0.64 | ) | $ | (35.45 | ) | ||||
| Weighted average basic and diluted common shares outstanding | 41,544,961 | 519,257 | 23,203,004 | 276,499 | ||||||||||||
We rely on proforma non-GAAP net loss per share, which is a non-GAAP financial measure:
| ● | to review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting; |
| ● | to compare our current operating results with corresponding periods and with the operating results of other companies in our industry; |
42
| ● | as a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and |
| ● | to evaluate internally the performance of our personnel. |
We have presented proforma non-GAAP net loss per share above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss), and that by including this information we can provide investors with a more complete understanding of our business. Specifically, we present proforma non-GAAP net loss per share as supplemental disclosure because:
| ● | we believe proforma non-GAAP net loss per share is a useful tool for investors to assess the operating performance of our business without the effect of non-cash items including stock based compensation, amortization of intangibles and one time charges including gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, 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 proforma non-GAAP net loss per share is helpful to compare our results to other companies. |
Liquidity and Capital Resources as of September 30, 2020
Our current capital resources and operating results as of and through September 30, 2020, consist of:
| 1) | an overall working capital of $23.2 million; |
| 2) | cash of approximately $31.4 million; |
| 3) | ATM equity facility in an aggregate offering amount of up to $150 million of which we have raised approximately $44.0 million of net proceeds after subtracting sales commissions and other offering costs as of September 30, 2020; and |
| 4) | net cash used by operating activities for the period of $15.6 million. |
The breakdown of our overall working capital deficit is as follows (in thousands):
| Working Capital | Assets | Liabilities | Net | |||||||||
| Cash and cash equivalents | $ | 31,376 | $ | -- | $ | 31,376 | ||||||
| Accounts receivable, net / accounts payable | 1,948 | 813 | 1,135 | |||||||||
| Operating lease obligation | -- | 572 | (572 | ) | ||||||||
| Prepaid licenses and maintenance contracts / deferred revenue | -- | 1,842 | (1,842 | ) | ||||||||
| Notes and other receivables / Short-term debt | 378 | 6,150 | (5,772 | ) | ||||||||
| Acquisition liability | -- | 750 | (750 | ) | ||||||||
| Other | 1,558 | 1,914 | (356 | ) | ||||||||
| Total | $ | 35,260 | $ | 12,041 | $ | 23,219 | ||||||
Net cash used in operating activities during the nine months ended September 30, 2020 of $15.6 million consists of net loss of $20.9 million offset by non-cash adjustments of $8.3 million less net cash changes in operating assets and liabilities of approximately $2.9 million.
During the first quarter of 2020, we raised $5 million in gross proceeds in connection with a debt financing and during the nine months ended September 30, 2020 we raised net proceeds of approximately $44 million in connection with sales under the ATM. Given our current cash balances and budgeted cash flow requirements, the Company believes such funds are sufficient to support ongoing operations for the next 12 months from the issuance date of the financial statements. In addition, we may continue to raise up to an aggregate of $150 million in gross proceeds under the ATM, however, general economic or other conditions resulting from COVID 19 or other events materially may impact the liquidity of our common stock or our ability to continue to access capital from the ATM to support our growth plans. In addition, the impact of the COVID-19 pandemic on our business and results of operations continues to remain uncertain at this time. While we have been able to continue operations remotely we have experienced supply chain constraints and delays in the receipt of certain components of our products impacting delivery times for our products, we have also seen some impact in the demand of certain products including our SaaS or subscription based services and products, delays in certain projects and customer requests either because they require onsite services which could not be performed while shelter in place orders have been in effect or because of the uncertainty of the customer’s financial position and ability to invest in our technology. If we are successful in growing our revenues as we did in the first and third quarters of 2020 we may be able to offset any revenue loss that may be experienced due to any constraints that may result from the pandemic or other general economic conditions, however, there are no assurances that we will be successful or that we will be able to offset any losses, if realized. The Company is also pursuing possible strategic transactions and may raise such additional capital as needed, using our equity securities, an assignment of the remaining note receivable from Sysorex and/or cash and debt financings in combinations appropriate for each acquisition.
43
Liquidity and Capital Resources as of September 30, 2020 Compared to September 30, 2019
The Company’s net cash flows used in operating, investing and financing activities for the nine months ended September 30, 2020 and 2019 and certain balances as of the end of those periods are as follows (in thousands):
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Net cash used in operating activities | $ | (15,550 | ) | $ | (9,057 | ) | ||
| Net cash used in investing activities | (4,934 | ) | (4,884 | ) | ||||
| Net cash provided by financing activities | 47,053 | 13,318 | ||||||
| Effect of foreign exchange rate changes on cash | (42 | ) | (36 | ) | ||||
| Net increase in cash | $ | 26,527 | $ | (659 | ) | |||
| As of September 30, 2020 | As of December 31, 2019 | |||||||
| Cash and cash equivalents | $ | 31,376 | $ | 4,777 | ||||
| Working capital surplus (deficit) | $ | 23,219 | $ | (6,975 | ) | |||
Operating Activities for the nine months ended September 30, 2020
Net cash used in operating activities during the nine months ended September 30, 2020 was $15.6 million. The cash flows related to the nine months ended September 30, 2020 consisted of the following (in thousands):
| Net loss | $ | (20,919 | ) | |
| Non-cash income and expenses | 8,281 | |||
| Net change in operating assets and liabilities | (2,912 | ) | ||
| Net cash used in operating activities | $ | (15,550 | ) |
The non-cash income and expense of $8.3 million consisted primarily of the following (in thousands):
| $ | 2,497 | Depreciation and amortization expenses (including amortization of intangibles) primarily attributable to the Shoom, AirPatrol, LightMiner, Locality, GTX, Jibestream, Systat and Ten Degrees, which were acquired effective August 31, 2013, April 16, 2014, November 21, 2016, May 21, 2019, June 27, 2019, August 15, 2019, June 30, 2020 and August 19, 2020, respectively. | ||
| 322 | Amortization of right of use asset | |||
| 941 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations | |||
| 132 | Loss on exchange of debt for equity | |||
| 2,272 | Amortization of debt discount | |||
| 1,514 | Provision for the valuation allowance for held for sale loan | |||
| 648 | Provision for the valuation allowance for related party receivable | |||
| (32 | ) | Accrued interest income, related party | ||
| (87 | ) | Income tax benefit | ||
| 74 | Other | |||
| $ | 8,281 | Total non-cash income |
The net use of cash in the change in operating assets and liabilities aggregated a decrease of approximately $2.9 million and consisted primarily of the following (in thousands):
| $ | (1,111 | ) | Increase in accounts receivable and other receivables | |
| (848 | ) | Increase in inventory, other current assets and other assets | ||
| (1,359 | ) | Decrease in accounts payable | ||
| 507 | Increase in accrued liabilities and other liabilities | |||
| (325 | ) | Decrease in operating lease liabilities | ||
| 224 | Increase in deferred revenue | |||
| $ | (2,912 | ) | Net cash used in the changes in operating assets and liabilities |
Operating Activities for the nine months ended September 30, 2019
Net cash used in operating activities during the nine months ended September 30, 2019 was $9.1 million. The cash flows related to the nine months ended September 30, 2019 consisted of the following (in thousands):
| Net loss | $ | (16,960 | ) | |
| Non-cash income and expenses | 8,440 | |||
| Net change in operating assets and liabilities | (537 | ) | ||
| Net cash used in operating activities | $ | (9,057 | ) |
44
The non-cash income and expense of $8.4 million consisted primarily of the following (in thousands):
| $ | 3,428 | Depreciation and amortization expenses (including amortization of intangibles) primarily attributable to the Shoom, AirPatrol, LightMiner, Locality, GTX, and Jibestream, which were acquired effective August 31, 2013, April 16, 2014, November 21, 2016, May 21, 2019, June 27, 2019, and August 15, 2019, respectively. | ||
| 267 | Amortization of right of use asset | |||
| 2,618 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations | |||
| 188 | Loss on exchange of debt for equity | |||
| 50 | Amortization of technology | |||
| 1,543 | Amortization of debt discount | |||
| 358 | Provision for doubtful accounts | |||
| (35 | ) | Income tax benefit | ||
| 23 | Other | |||
| $ | 8,440 | Total non-cash income |
The net use of cash in the change in operating assets and liabilities aggregated a decrease of approximately $537,000 and consisted primarily of the following (in thousands):
| $ | (1,241 | ) | Increase in accounts receivable and other receivables | |
| (523 | ) | Increase in inventory, other current assets and other assets | ||
| 1,140 | Increase in accounts payable | |||
| 456 | Increase in accrued liabilities and other liabilities | |||
| (369 | ) | Decrease in deferred revenue | ||
| $ | (537 | ) | Net cash used in the changes in operating assets and liabilities |
Cash Flows from Investing Activities as of September 30, 2020 and 2019
Net cash flows used in investing activities during the nine months ended September 30, 2020 was approximately $4.9 million compared to net cash flows used in investing activities during the nine months ended September 30, 2019 of approximately $4.9 million. Cash flows related to investing activities during the nine months ended September 30, 2020 include $2.2 million payment for the Systat Licensing Agreement, $1.5 million payment for the Ten Degrees acquisition, $688,000 investment in capitalized software and $546,000 for the purchase of property and equipment. Cash flows related to investing activities during the nine months ended September 30, 2019 include $3.7 million payment for the Jibestream acquisition, $658,000 investment in capitalized software, $250,000 investment in GTX, $204,000 investment in Locality, and $58,000 for the purchase of property and equipment.
Cash Flows from Financing Activities as of September 30, 2020 and 2019
Net cash flows provided by financing activities during the nine months ended September 30, 2020 was approximately $47.1 million. During the nine months ended September 30, 2020, the Company received incoming cash flows of $44 million from the issuance of common stock, $5.0 million of proceeds from promissory notes, and $292,000 of repayments from related parties, offset by $1.8 million of loans to related party, $250,000 of acquisition liability repayments, $150,000 of net repayments to bank facility and $74,000 of notes payable repayments. Net cash flows provided by financing activities during the nine months ended September 30, 2019 was $13.3 million. During the nine months ended September 30, 2019, the Company received incoming cash flows of $14.8 million from the issuance of common stock, preferred stock and warrants, $6.8 million of net proceeds from promissory notes, $1.7 million of repayments from a related party, and $237,000 net proceeds from bank facility offset by $9.9 million of loans to related parties, $141,000 loan to Jibestream, $71,000 notes payable repayment, $50,000 loan to GTX, and $15,000 advances to related party.
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 Note 3 to our financial statements, which are included in this Form 10-Q in Item 1.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
45
| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with GAAP.
In connection with the preparation of this Form 10-Q, management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company’s management determined that there were no material changes needed to internal controls as a result of the COVID-19 pandemic.
Limitations of the Effectiveness of Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
46
| Item 1. | Legal Proceedings |
There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.
There are no proceedings in which any of the directors, officers or affiliates of the Company, or any registered or beneficial holder of more than 5% of the Company’s voting securities, is an adverse party or has a material interest adverse to that of the Company.
| Item 1A. | Risk Factors |
We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by these risks. In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors disclosed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, filed with the SEC on August 14, 2020, and the Current Report on Form 8-K, filed with the SEC on October 5, 2020, which reports are incorporated by reference herein, all of which could materially affect our business, financial condition and future results. For example, these risks now include risks related to recent transactions, the COVID-19 pandemic and related economic developments.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
| a) | Sales of Unregistered Securities |
None.
| c) | Issuer Purchases of Equity Securities |
None.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosure |
Not applicable.
47
| Item 5. | Other Information |
The information set forth below is included herein, by our option, for the purpose of providing disclosure under “Item 8.01 – Other Events.” of Form 8-K.
We entered into an Equity Distribution Agreement, dated March 3, 2020,with Maxim Group LLC (“Maxim”) under which we may offer and sell shares of our common stock in connection with an at-the-market equity facility (“ATM”) from time to time through Maxim, acting exclusively as our sales agent. The ATM had an initial aggregate offering amount of up to $50.0 million, which we increased to $150.0 million pursuant to Amendment No. 1 to Equity Distribution, dated as of June 19, 2020 (the “Amendment”). The Amendment also provided that Maxim will receive a reduced commission of 3.25%, down from 4.0%, from any sales in excess of the initial $50.0 million offering amount. We intend to use the net proceeds of the ATM primarily for working capital and general corporate purposes. We may also use a portion of the net proceeds to invest in or acquire businesses or technologies that we believe are complementary to our own.
We issued and sold 31,574,358 shares of common stock during the nine months ended September 30, 2020, in connection with the ATM at per share prices between $1.13 and $2.11, resulting in net proceeds to the Company of approximately $44 million, after subtracting sales commissions and other offering expenses.
Subsequent to the quarter ended September 30, 2020, the Company issued 213,474 shares of common stock in connection with the ATM, at per share prices between $1.1206 and $1.1209, resulting in net proceeds to the Company of approximately $230,000 after subtracting sales commissions and other offering expenses.
Such sales were made pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-223960), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2018, as amended on May 15, 2018, and declared effective on June 5, 2018 (the “Registration Statement”), and a base prospectus dated as of June 5, 2018 included in the Registration Statement and the prospectus supplements relating to the ATM filed with the SEC on March 3, 2020 and June 22, 2020.
| Item 6. | Exhibits |
See the Exhibit index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
48
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 12, 2020 | INPIXON | |
| By: | /s/ Nadir Ali | |
| Nadir Ali | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ Wendy Loundermon | |
| Wendy Loundermon | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
49
EXHIBIT INDEX
50
| * | Certain schedules, exhibits and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Inpixon hereby undertakes to furnish copies of such omitted materials supplementally upon request by the SEC. |
| # | Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets (“[****]”) because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed. |
| + | Indicates a management contract or compensatory plan. |
| ## | This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
51