NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 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 and Hyderabad, India.
Liquidity
As of June 30, 2020, the Company has a working
capital total of approximately $30.0 million and cash of $39.5 million. The Company experienced a net loss of approximately
$7.3 million and $5.2 million for the three months ended June 30, 2020 and 2019, respectively, and a net loss of $13.5
million and $10.4 million for the six months ended June 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 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 issued 29,970,046 shares of
common stock during the six months ended June 30, 2020 in connection with the ATM resulting in net proceeds to the Company of approximately
$41.8 million. Subsequent to the quarter ended June 30, 2020, the Company issued an additional 1,604,312 shares of common stock
in connection with the ATM, resulting in net proceeds to the Company of approximately $2.3 million.
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. While we believe that the capital raised or that may be raised in connection with sales under our ATM in
an aggregate amount of up to $150 million, the impact of the COVID-19 pandemic on our business and results of operations is 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. In addition, while certain anticipated second quarter projects were initially
delayed by customers, following the end of the quarter we received a substantial purchase order for our sensors from a significant
customer and have also secured certain reseller partnerships focused on increasing interest in our indoor intelligence solutions
for workplace readiness which is directed at enterprise organizations and government agencies to assist them in optimizing the
use of their facilities as well as in developing and monitoring compliance with corporate policies and government regulations for
physical distancing, exposure notification, and the identification of high traffic areas for sanitizing and cleaning in order to
keep their employees healthier and safer within the workplace. If we are successful in expanding the adoption of our products and
services for this and or other solutions, and are able to add to our revenue growth through the completion of strategic transactions,
we may be able to offset any revenue loss that may be experienced due to any constraints resulting 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.
Given our cash balances and our budgeted cash
flow requirements, the Company believes such funds are sufficient to support ongoing operations 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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
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 six-month period ended June 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.
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 and 7, as well as the valuation of the Company’s common stock issued in the transaction;
|
|
|
|
|
●
|
the
allowance for doubtful accounts;
|
|
|
|
|
●
|
the
valuation of loans receivable;
|
|
|
|
|
●
|
the
valuation allowance for deferred tax assets; and
|
|
|
|
|
●
|
impairment
of long-lived assets and goodwill.
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
3 - Summary of Significant Accounting Policies (continued)
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 June 30, 2020 and 2019, the Company had $72,000 and $140,000, respectively, deposited in escrow as restricted
cash for the Shoom acquisition, of which any amounts not subject to claims shall be released to the pre-acquisition stockholders
of Shoom pro-rata on the next anniversary dates of the closing date of the Shoom acquisition. As of June 30, 2020 and 2019, $72,000
and $70,000, respectively, were current and included in Prepaid Assets and Other Current Assets on the condensed consolidated
balance sheets. As of June 30, 2020 and 2019, $0 and $70,000 were non-current and included in Other Assets on the condensed consolidated
balance sheets.
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 June 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
39,458
|
|
|
$
|
1,651
|
|
Restricted cash, current included in prepaid assets and other current assets
|
|
|
72
|
|
|
|
70
|
|
Restricted cash, non-current included in other assets
|
|
|
--
|
|
|
|
70
|
|
Total cash, cash equivalents, and restricted cash in the balance sheets
|
|
$
|
39,530
|
|
|
$
|
1,791
|
|
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.
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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
3 - Summary of Significant Accounting Policies (continued)
Revenue
Recognition (continued)
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 six months ended June 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 $1,509,000 and $912,000 as of June 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 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 June
30, 2020 and December 31, 2019 were deemed immaterial.
Disaggregation
of Revenue
Revenues
consisted of the following (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Recurring revenue
|
|
$
|
839
|
|
|
$
|
603
|
|
|
$
|
1,701
|
|
|
$
|
1,214
|
|
Non-recurring revenue
|
|
|
237
|
|
|
|
888
|
|
|
|
1,179
|
|
|
|
1,640
|
|
Totals
|
|
$
|
1,076
|
|
|
$
|
1,491
|
|
|
$
|
2,880
|
|
|
$
|
2,854
|
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
3 - Summary of Significant Accounting Policies (continued)
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.
The Company incurred stock-based compensation
charges of $286,000 and $858,000 for the three months ended June 30, 2020 and 2019, respectively, and $685,000 and $1,748,000 for
the six months ended June 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
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Compensation and related benefits
|
|
$
|
286
|
|
|
$
|
858
|
|
|
$
|
685
|
|
|
$
|
1,506
|
|
Professional and legal fees
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
242
|
|
Totals
|
|
$
|
286
|
|
|
$
|
858
|
|
|
$
|
685
|
|
|
$
|
1,748
|
|
Net
Loss Per Share
The
Company computes basic and diluted earnings per share by dividing net loss by the weighted average number of common shares outstanding
during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant
to the exercise of options and warrants in the calculation of diluted net loss per common shares would have been anti-dilutive.
The following table summarizes the number
of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the six months
ended June 30, 2020 and 2019:
|
|
For the Six Months Ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
Options
|
|
|
5,662,946
|
|
|
|
109,171
|
|
Warrants
|
|
|
93,252
|
|
|
|
88,412
|
|
Convertible preferred stock
|
|
|
846
|
|
|
|
846
|
|
Reserved for service providers
|
|
|
--
|
|
|
|
25
|
|
Totals
|
|
|
5,757,044
|
|
|
|
198,454
|
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
3 - Summary of Significant Accounting Policies (continued)
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
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 this standard and the adoption of this standard did not have
a material impact on its financials or disclosures.
In
June 2016, the FASB issued 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. For public business entities that meet the definition of
a Securities and Exchange Commission 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 financials or disclosures.
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 financials 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 is currently assessing the impact that this pronouncement
will have on its condensed consolidated financial statements.
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 standard did not have a material impact
on our condensed consolidated financial statements.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
3 - Summary of Significant Accounting Policies (continued)
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 is 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 upon closing.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 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 June 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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
5 - GTX Acquisition (continued)
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.
This note is included as part of other receivables in the Company’s condensed consolidated financial statements. As of June
30, 2020 the balance of the note including interest was $51,716. Proforma information has not been presented as it has been deemed
to be immaterial.
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,
provides a dynamic interactive map that allows customers to put their digitized map into their mobile app or provide the map on
a kiosk or other interface. Using the Jibestream map allows Inpixon 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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
6 - Jibestream Acquisition (continued)
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 June 30, 2020.
Jibestream
was amalgamated into Inpixon Canada on January 1, 2020.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 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 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 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 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
|
|
|
311
|
|
|
|
$
|
2,724
|
|
Liabilities Assumed:
|
|
|
|
|
Deferred Revenue
|
|
$
|
524
|
|
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 Licensing 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 Licensing 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 third quarter of 2020.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
8 - 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 six months
ended June 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
June 30,
2019
|
|
|
|
For the
Six
Months
Ended
June 30, 2019
|
|
Revenues
|
|
$
|
2,026
|
|
|
$
|
3,875
|
|
Net loss attributable to common stockholders
|
|
$
|
(5,842
|
)
|
|
$
|
(12,695
|
)
|
Net loss per basic and diluted common share
|
|
$
|
(12.63
|
)
|
|
$
|
(31.06
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
462,761
|
|
|
|
408,719
|
|
Note
9 - Inventory
Inventory
as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
As of
June 30,
2020
|
|
|
As of
December 31,
2019
|
|
Raw materials
|
|
$
|
41
|
|
|
$
|
13
|
|
Finished goods
|
|
|
337
|
|
|
|
387
|
|
Total Inventory
|
|
$
|
378
|
|
|
$
|
400
|
|
Note
10 - Debt
Debt
as of June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
|
|
As of
June 30,
2020
|
|
|
As of
December 31,
2019
|
|
Short-Term Debt
|
|
|
|
|
|
|
Notes payable, less debt discount of $1,017 and $628, respectively (A)
|
|
$
|
5,448
|
|
|
$
|
7,080
|
|
Revolving line of credit (B)
|
|
|
--
|
|
|
|
150
|
|
Other short-term debt (C)
|
|
|
75
|
|
|
|
74
|
|
Total Short-Term Debt
|
|
$
|
5,523
|
|
|
$
|
7,304
|
|
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
10 - Debt (continued)
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.
INPIXON
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
Note
10 - Debt (continued)
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.
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 June 30, 2020, the outstanding balance of the May 2019
Note was $0 and the note was fully satisfied.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 10 - Debt (continued)
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.
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 June 30, 2020, the outstanding balance of the June 2019
Note was $0 and the note was fully satisfied.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 10 - Debt (continued)
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 June 30, 2020, the outstanding balance of the August 2019
Note was $0 and the note was fully satisfied.
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%.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 10 - Debt (continued)
September 2019 Note Purchase Agreement
and Promissory Note (continued)
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 June 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 June 30, 2020, the outstanding balance of the November
2019 Note was $0 and the note was fully satisfied.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 10 - 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 June 30, 2020, the outstanding principal
balance of the March 2020 Note was approximately $6,465,000.
|
(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.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 10 - Debt (continued)
Payplant Accounts Receivable Bank
Line (continued)
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 June 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 June 30, 2020, the Company owed
approximately $75,000 to the pre-acquisition stockholders of Shoom. Any amounts not subject to claims shall be released to the
pre-acquisition stockholders of Shoom pro-rata on the next anniversary date of the closing date of the Shoom acquisition, August
31, 2020.
Note 11 - 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 $1.3 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 $40.5 million after subtracting
sales commissions and other offering expenses.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 12 - 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 $1,300,000 after subtracting sales commissions and other offering expenses
(see Note 11).
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 $40,500,000 after subtracting sales commissions and other offering expenses
(see Note 11).
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.
Note 13 - 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.
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 June 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 June 30, 2020, there were 126 shares
of Series 5 Convertible Preferred Stock outstanding.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 14 - 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 15 - 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 June 30, 2020 under the 2011 Plan and the 2018 Plan were 417,270 and 11,230,073, respectively. As of June 30,
2020, 5,662,946 of options were granted to employees, directors and consultants of the Company (including 1 share outside of the
Company’s Option Plans) and 5,984,398 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 June 30,
2020 and 2019, the Company recorded a charge for the amortization of employee stock options of approximately $286,000 and $858,000,
respectively, and $685,000 and $1,506,000 for the six months ended June 30,2020 and 2019, respectively.
As of June 30, 2020, the fair value of
non-vested options totaled approximately $2,198,000, which will be amortized to expense over the weighted average remaining term
of 1.12 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 six months ended June 30, 2020 were as follows:
|
|
For the
Six Months Ended
June 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.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 16 - 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
June 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 June 30, 2020 and 2019 (in thousands):
|
|
For the Three Months Ended
June 30, 2020
|
|
For the Three Months Ended
June 30, 2019
|
|
|
$
|
|
%
|
|
$
|
|
%
|
Customer A
|
|
305
|
|
28%
|
|
306
|
|
21%
|
Customer B
|
|
--
|
|
--
|
|
750
|
|
50%
|
The following table sets forth the percentages
of revenue derived by the Company from those customers, which accounted for at least 10% of revenues during the six-month period
ended June 30, 2020 and 2019 (in thousands):
|
|
For the Six Months Ended
June 30, 2020
|
|
For the Six Months Ended
June 30, 2019
|
|
|
$
|
|
%
|
|
$
|
|
%
|
Customer A
|
|
611
|
|
21%
|
|
612
|
|
21%
|
Customer B
|
|
500
|
|
17%
|
|
1,500
|
|
53%
|
As of June 30, 2020, Customer B represented
approximately 32% and Customer C represented approximately 27 % of total accounts receivable. As of June 30, 2019, Customer
B represented approximately 57%, and Customer C represented approximately 19% of total accounts receivable.
As of June 30, 2020, two vendors represented approximately
18% and 12% of total gross accounts payable. Purchases from these vendors during the three and six months ended
June 30, 2020 was $0. As of June 30, 2019, two vendors represented approximately 43% and 14% of
total gross accounts payable. Purchases from these vendors during the three and six months ended June 30, 2019 was
$0.
For the three months ended June 30,
2020, three vendors represented approximately 54%, 20%, and 14% of total purchases. For the three months ended June 30,
2019, two vendors represented approximately 81% and 12% of total purchases.
For the six months ended June 30,
2020, five vendors represented approximately 30%, 18%, 15%, 14% and 13% of total purchases. For the six months
ended June 30, 2019, two vendors represented approximately 80% and 11% of total purchases.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 17 - Foreign Operations
The Company’s operations are located
primarily in the United States, Canada, 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
|
|
|
India
|
|
|
Eliminations
|
|
|
Total
|
|
For the Three Months Ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
536
|
|
|
$
|
1,378
|
|
|
$
|
297
|
|
|
$
|
(1,135
|
)
|
|
$
|
1,076
|
|
Operating income (loss) by geographic area
|
|
$
|
(5,231
|
)
|
|
$
|
(4
|
)
|
|
$
|
107
|
|
|
$
|
--
|
|
|
$
|
(5,128
|
)
|
Net income (loss) by geographic area
|
|
$
|
(7,503
|
)
|
|
$
|
92
|
|
|
$
|
107
|
|
|
$
|
--
|
|
|
$
|
(7,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
1,473
|
|
|
$
|
18
|
|
|
$
|
168
|
|
|
$
|
(168
|
)
|
|
$
|
1,491
|
|
Operating income (loss) by geographic area
|
|
$
|
(4,173
|
)
|
|
$
|
(604
|
)
|
|
$
|
52
|
|
|
$
|
--
|
|
|
$
|
(4,725
|
)
|
Net income (loss) by geographic area
|
|
$
|
(4,681
|
)
|
|
$
|
(602
|
)
|
|
$
|
52
|
|
|
$
|
--
|
|
|
$
|
(5,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
1,715
|
|
|
$
|
2,726
|
|
|
$
|
425
|
|
|
$
|
(1,986
|
)
|
|
$
|
2,880
|
|
Operating income (loss) by geographic area
|
|
$
|
(10,606
|
)
|
|
$
|
(139
|
)
|
|
$
|
52
|
|
|
$
|
--
|
|
|
$
|
(10,693
|
)
|
Net income (loss) by geographic area
|
|
$
|
(13,569
|
)
|
|
$
|
48
|
|
|
$
|
52
|
|
|
$
|
--
|
|
|
$
|
(13,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
2,834
|
|
|
$
|
20
|
|
|
$
|
236
|
|
|
$
|
(236
|
)
|
|
$
|
2,854
|
|
Operating income (loss) by geographic area
|
|
$
|
(8,700
|
)
|
|
$
|
(911
|
)
|
|
$
|
24
|
|
|
$
|
--
|
|
|
$
|
(9,587
|
)
|
Net income (loss) by geographic area
|
|
$
|
(9,495
|
)
|
|
$
|
(909
|
)
|
|
$
|
24
|
|
|
$
|
--
|
|
|
$
|
(10,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
47,436
|
|
|
$
|
8,927
|
|
|
$
|
449
|
|
|
$
|
--
|
|
|
$
|
56,812
|
|
Long lived assets by geographic area
|
|
$
|
5,434
|
|
|
$
|
6,213
|
|
|
$
|
286
|
|
|
$
|
--
|
|
|
$
|
11,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 18 - 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.
The amount owed for principal and accrued interest by Sysorex to the Company as of June 30, 2020 and December 31, 2019 was approximately
$8.5 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 June 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 June 30, 2020 of approximately $83,105. The total owed to the Company for this settlement as of June 30, 2020 was
approximately $648,183. The Company established a full valuation allowance against this balance as of June 30, 2020.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 19 - 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 May1, 2020 through September 30, 2022.
The initial lease rate was $4,479 CAD per month with escalating payments. In connection with the lease, the
Company is obligated to pay $2,566 CAD 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 $24,506 CAD per month with no escalating payments. In connection with the lease, the Company
is obligated to pay $9,651 CAD monthly for operating expenses for building repairs and maintenance. 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 $575 CAD 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 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.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 19 - Leases (continued)
Right-of-use assets is summarized below
(in thousands):
|
|
As of
June 30
2020
|
|
Palo Alto, CA Office
|
|
$
|
808
|
|
Encino, CA Office
|
|
|
194
|
|
Hyderabad, India Office
|
|
|
354
|
|
Coquitlam, Canada Office
|
|
|
90
|
|
Westminster, Canada Office
|
|
|
10
|
|
Toronto, Canada Office
|
|
|
389
|
|
Less accumulated amortization
|
|
|
(654
|
)
|
Right-of-use asset, net
|
|
$
|
1,191
|
|
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 June 30, 2020 was $253,000 and $524,000 for the six-month period ended June 30, 2020.
During the three-month period ended June
30, 2020, the Company recorded $160,913 as rent expense to the right-of-use assets. During the six-month period
ended June 30, 2020, the Company recorded $285,178 as rent expense to the right-of-use assets.
Lease liability is summarized below (in
thousands):
|
|
As of
June 30,
2020
|
|
Total lease liability
|
|
$
|
1,212
|
|
Less: short term portion
|
|
|
(589
|
)
|
Long term portion
|
|
$
|
623
|
|
Maturity analysis under the lease agreement
is as follows (in thousands):
Year ending December 31, 2020
|
|
$
|
326
|
|
Year ending December 31, 2021
|
|
|
536
|
|
Year ending December 31, 2022
|
|
|
362
|
|
Year ending December 31, 2023
|
|
|
113
|
|
Year ending December 31, 2024
|
|
|
16
|
|
Total
|
|
$
|
1,353
|
|
Less: Present value discount
|
|
|
(141
|
)
|
Lease liability
|
|
$
|
1,212
|
|
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 June 30, 2020, the weighted average remaining lease term is 2.41 years and the weighted average discount rate used
to determine the operating lease liabilities was 8.0%.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
AND 2019
Note 20 - 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.
Compliance with Nasdaq Continued
Listing Requirement
On May 30, 2019, the Company received
a deficiency letter from Nasdaq indicating that, based on the Company’s closing bid price for the last 30
consecutive business days, the Company 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 Nasdaq listing Rule 5810(c)(3)(A), the Company was provided
a period of 180 calendar days, or until November 26, 2019, in which to regain compliance. In order to regain compliance with the
minimum bid price requirement, the closing bid price of the Company’s common stock must be
at least $1.00 per share for a minimum of ten consecutive business days without effecting a reverse split.
In addition to the failure to comply with Nasdaq Listing Rule
5550(a)(2), the Nasdaq Staff advised us that the Company’s history of non-compliance with Nasdaq’s minimum bid price
requirement, the corresponding history of reverse stock splits, the dilutive effect of certain offerings and an inability to cure
the bid price deficiency organically without effecting a reverse stock split prior to November 26, 2019 could raise public interest
concerns under Nasdaq Listing Rule 5101 and could result in the Nasdaq Staff issuing a delisting determination with respect to
the Company’s common stock (subject to any appeal the Company may file). Nasdaq rules provide that Nasdaq may suspend or
delist particular securities based on any event, condition or circumstance that exists or occurs that makes continued listing of
the securities on Nasdaq inadvisable or unwarranted in the opinion of the Nasdaq Staff, even though the securities meet all enumerated
criteria for continued listing on Nasdaq. In that regard, the Nasdaq Staff has discretion to determine that the Company’s
failure to comply with the minimum bid price rule or any subsequent price-based market value requirement or the dilutive effect
of the an offering, constitutes a public interest concern and while the Company would have an opportunity to appeal, the Company
cannot assure that Nasdaq would not exercise such discretionary authority or that the Company would be successful if such discretion
is exercised and the Company appeals.
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 21 - Subsequent Events
At-The-Market Program
During the quarter ending 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 $2,324,000 after subtracting sales commissions of 4% of gross
proceeds.
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.