Inpixon (the registrant named in this filing) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; financial statements are unaudited. The filing identifies the company as Inpixon, not XTI Aerospace.
Business context
Inpixon reported two segments: Indoor Positioning Analytics (IPA), its proprietary location analytics and SaaS business, and Infrastructure, its IT reseller and services business. Management cited supplier credit constraints as a major reason Infrastructure sales declined. After quarter-end, the company entered an agreement to spin off the Infrastructure/VAR business into Sysorex; the transaction was planned for August 2018 but remained subject to conditions.
Key financial results
Dollar amounts below are in millions unless noted.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1.83 | $15.10 | $3.92 | $28.58 |
| Gross profit / margin | $1.01 / 55% | $3.38 / 22% | $2.25 / 57% | $6.67 / 23% |
| Operating loss | $(6.45) | $(5.23) | $(12.06) | $(10.59) |
| Net loss | $(5.86) | $(6.43) | $(12.10) | $(12.49) |
| Net loss attributable to common stockholders | $(15.59) | $(6.43) | $(23.34) | $(12.48) |
| Adjusted EBITDA loss | $(4.06) | $(2.71) | $(7.46) | $(6.03) |
- Revenue fell about 88% in Q2 and 86% in the first half. For the first half, IPA revenue was $2.12 million versus $2.14 million; Infrastructure revenue was $1.80 million versus $26.44 million.
- Management attributed the revenue drop principally to Infrastructure supplier credit limitations and the adoption of ASC 606. Under the new standard, certain third-party maintenance and license revenue is recognized at a point in time rather than over the contract term. The company reported ASC 606 reduced revenue by $1.64 million in Q2 and $3.67 million in the first half, with corresponding cost reductions; management said adoption did not materially affect the financial statements overall, though the reported-period comparisons show a gross-profit impact.
- Gross margin improved mainly because lower-margin storage and maintenance sales declined. Q2 IPA margin was 71% versus 67%; Infrastructure was 19% in both periods. First-half segment margins were 72% for IPA and 40% for Infrastructure, versus 66% and 20%, respectively.
- Operating expenses declined 13% in Q2 and 17% in the first half, partly from staff and office reductions. Operating loss nevertheless widened as revenue contracted. Net loss attributable to common stockholders includes deemed dividends of $9.73 million in Q2 and $11.24 million in the first half, primarily related to preferred-stock conversion features and warrant repricing; these are not the same as consolidated net loss.
Cash, liquidity and capital structure
- At June 30, cash was $8.34 million, current assets $11.78 million, current liabilities $22.00 million, and working capital deficit $10.22 million. Accounts payable was $18.64 million.
- Total reported debt was about $1.96 million ($1.82 million short-term and $0.14 million long-term). The prior-year debenture was converted into common shares and extinguished in February. The November 2017 convertible note remained outstanding; it bore 10% interest and its redemption rights were subject to a standstill agreement.
- First-half operating cash flow was $(17.93) million, versus positive $1.54 million in 2017. Investing cash flow was $(0.58) million; financing cash flow was positive $26.71 million, principally reflecting equity and warrant issuance. Cash increased from $0.14 million at year-end 2017 to $8.34 million.
- The company raised approximately $31.3 million gross through 2018 equity offerings through April. These offerings and preferred conversions substantially increased the share count and included warrants and conversion-price resets. At June 30, 38.25 million common shares were issued; 43.84 million were outstanding at August 9. The filing lists substantial potential dilution from warrants, preferred stock, options and other instruments.
- The Payplant facility had no balance drawn at June 30. It could finance eligible purchase orders, generally up to 80% of face value, but the lender was not obligated to fund requests; its stated maturity was August 15, 2018.
Outlook, risks and unusual items
- Management said available resources, potential Payplant funding, improved supplier credit and higher-margin business expansion should fund planned operations through 2018. It also disclosed substantial doubt about the company’s ability to continue as a going concern, citing a $10.2 million working-capital deficit and $12.1 million first-half net loss. Continued operations depended on financing, cost reductions, efficiency improvements and revenue growth.
- Management expected Infrastructure revenue to begin recovering in Q3 and Q4 2018 as supplier relationships improved and the federal-government selling season began. It gave no quantified revenue or earnings guidance.
- The proposed spin-off was intended to let Inpixon focus on IPA and reduce expenses and trade debt; management acknowledged consolidated revenue would fall materially because Infrastructure had represented about 92% of 2017 revenue. The agreement contemplated contributing up to $2 million cash to Sysorex, subject to specified expense reductions, and distributing one Sysorex share for every three eligible Inpixon shares. Completion was not assured and the company could terminate the transaction before closing.
- Risks include dependence on external financing, recurring losses, supplier and vendor credit limits, competition and technology adoption, customer concentration, and Nasdaq’s minimum-bid-price deficiency. The company had until November 13, 2018 to regain the $1 minimum bid-price requirement or face potential delisting proceedings.
- Several vendor claims were settled or accrued in accounts payable. AVT sought at least $9.15 million and the parties were pursuing settlement; other vendor matters included Virtual Imaging, VMS, Deque and Versata. A consultant’s disputed claim sought a minimum project fee of about $1 million; no amount was accrued. The filing said Sysorex would assume specified VAR-related litigation liabilities in the spin-off, while the consultant matter was expected to be shared.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No impairment charge was recorded in the first half, although management warned continued weak conditions could lead to future goodwill impairment.
Important facts for investors to verify
- Whether the Sysorex spin-off closed, its final cash and liability allocation, and the resulting standalone liquidity and debt of each company.
- Whether supplier credit access and Infrastructure revenue actually recovered, and whether the 2018 funding assessment proved adequate given the operating cash burn and going-concern warning.
- The status and terms of the convertible note, Payplant facility maturity or renewal, and settlement/payment schedules for accrued vendor claims.
- The current Nasdaq bid-price compliance status and any resulting listing action.
- The fully diluted share count and the effects of preferred-stock conversion resets, warrants and other potential equity issuance.
- The effect of ASC 606 on comparable revenue, gross profit and deferred revenue; reported 2017 comparatives were not restated.