Business context and reporting period
Filing identity: The supplied filing is Inpixon’s Form 10-Q for the quarter ended June 30, 2019, not a filing for XTI Aerospace. Inpixon provided indoor positioning and analytics, location-based technology, and digital services. Its 2018 Sysorex spin-off removed the value-added reseller business from current-period continuing operations.
Inpixon acquired Locality Systems on May 21, 2019, adding wireless-device positioning and video-surveillance integration technology, and acquired selected GPS products and intellectual property from GTX on June 27, 2019.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.491 | $0.839 | $2.854 | $1.687 |
| Gross profit / margin | $1.100 / 74% | $0.583 / 69% | $2.127 / 75% | $1.167 / 69% |
| Operating expenses | $5.825 | $5.066 | $11.714 | $9.430 |
| Operating loss | $(4.725) | $(4.483) | $(9.587) | $(8.263) |
| Net loss | $(5.231) | $(5.855) | $(10.380) | $(12.099) |
| Adjusted EBITDA loss | $(1.940) | $(4.064) | $(4.547) | $(7.456) |
- Cash flow: For the first six months, operating cash use was $6.568 million, investing cash use $0.963 million, and financing cash provided $8.073 million. Cash, cash equivalents and restricted cash totaled $1.791 million at June 30; balance-sheet cash and equivalents were $1.651 million.
- Liquidity: Working capital deficit was $5.450 million. Current liabilities were $10.609 million against current assets of $5.159 million. Management stated available resources were insufficient to fund planned operations for the next 12 months from issuance of the statements.
- Debt: Balance-sheet debt was $7.167 million, including $7.094 million short-term and $0.073 million long-term, net of debt discount where applicable. Short-term debt increased from $4.127 million at year-end 2018. New unsecured notes carried 10% interest, substantial original issue discounts, near-term maturities, and monthly redemption rights; the June note also provided for 22% default interest. The Payplant facility had no balance outstanding at quarter-end.
- Related-party exposure: Inpixon’s loan to Sysorex, a company chaired by Inpixon’s CEO, was approximately $10.0 million at June 30, up from $2.2 million at year-end. The loan bears 10% interest and is secured by Sysorex assets.
Changes versus prior comparable periods
- Q2 revenue rose 78% and first-half revenue rose 69%, which management attributed primarily to greater focus on indoor positioning and analytics and a new customer. That customer represented about 50% of Q2 revenue and 53% of first-half revenue.
- Gross margin improved to 74% in Q2 and 75% for the first half, from 69% in each 2018 period, reflecting higher-margin indoor-positioning revenue.
- Operating expenses increased 15% in Q2 and 24% for the first half. Q2 included $0.510 million of acquisition-related costs; first-half expense growth also reflected higher compensation, marketing, infrastructure and stock-based compensation.
- Despite better gross margins, operating loss widened in both comparisons. Reported net loss improved year over year, but the 2018 comparisons included discontinued-operation losses; continuing-operations net loss was $5.231 million in Q2 2019 versus $4.572 million in Q2 2018.
- First-half operating cash use fell from $17.929 million to $6.568 million, while financing inflows also fell from $26.707 million to $8.073 million. Equity issuance, new promissory notes and a rights offering supported 2019 liquidity.
- Common shares issued and outstanding increased from approximately 1.582 million at December 31, 2018 to 12.791 million at June 30, 2019. Debt exchanges, preferred-stock conversions, warrant exercises, service shares and acquisition shares contributed to the increase.
Outlook, risks and unusual items
- Going concern: The company reported substantial doubt about its ability to continue as a going concern, citing recurring losses, a working-capital deficit and insufficient projected resources. Management said it may seek additional equity, equity-linked or debt financing, reduce spending, improve operating efficiency and grow revenue; there is no assurance these plans will succeed.
- Business outlook: Management expected continued growth in the indoor-positioning product line and anticipated sales cycles could improve as customers move beyond early adoption. It also noted long sales cycles, pilot programs and customer budget and procurement constraints. No quantified revenue or earnings guidance was provided.
- Acquisitions: Locality’s recorded purchase price was approximately $1.928 million, including cash installments and 650,000 shares. GTX’s recorded purchase price was $0.900 million, including $0.250 million cash and 1,000,000 shares; its purchase allocation remained preliminary. After quarter-end, Inpixon agreed to acquire Jibestream for cash and stock, subject to an offering and other closing conditions. The filing gives no assurance that the deal would close.
- Financing and dilution: The January rights offering generated approximately $10.77 million net. The company also relied on discounted promissory notes and exchanged debt for common shares, recording a $0.160 million loss on a debt-for-equity exchange. Subsequent to quarter-end, the June note’s equity-offering repayment provision was deferred to December 27, 2019 in return for a $0.192 million fee; another $1.5 million-purchase-price note was issued in August.
- Concentration and operating risks: The new customer concentration and significant customer receivables create exposure to customer retention and collection. Management cited competition, technology adoption, acquisition integration, funding needs and potential impairment of acquired goodwill and intangible assets.
- Regulatory and listing risks: The company disclosed an ongoing SEC Division of Enforcement investigation concerning a 2018 blockchain announcement and a nearby financing transaction. Nasdaq had notified Inpixon of a minimum-bid-price deficiency and raised possible public-interest delisting concerns. The filing also identifies data privacy, cybersecurity and dilution risks.
- Other items: The Atlas arbitration award was settled for 749,440 common shares, with Sysorex responsible for half under the spin-off arrangements. Management reported disclosure controls effective at quarter-end and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Inpixon secured enough financing and liquidity to fund operations, service near-term debt and address the going-concern uncertainty.
- Whether the concentrated new-customer revenue and receivables are recurring and collectible.
- The current principal, maturity, redemption and default terms of the promissory notes, including subsequent amendments and financing costs.
- Whether the $10.0 million related-party Sysorex loan is recoverable and how conflicts of interest are managed.
- Whether Locality and GTX deliver expected revenue and strategic benefits, and the final purchase-price allocations and impairment assumptions.
- The status and funding terms of the proposed Jibestream acquisition, including required offering proceeds, stockholder approval and potential cash substitution.
- The outcomes of the SEC investigation and Nasdaq listing deficiency, and the potential effect of further share issuance and dilution.