The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
The accompanying notes are an integral part of these financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 1 - Organization and Nature of Business and Going Concern
Inpixon, its wholly-owned subsidiary, Inpixon
Canada, Inc. (“Inpixon Canada”), and its majority-owned subsidiary Sysorex India Limited (“Sysorex India”)
(unless otherwise stated or the context otherwise requires, the terms “Inpixon” “we,” “us,”
“our” and the “Company” refer collectively to Inpixon and the above subsidiaries), provides Big Data analytics
and location based products and related services. The Company is headquartered in California, and has subsidiary offices in Hyderabad,
India and Vancouver, Canada.
On August 31, 2018, the Company completed
the spin-off of its value-added reseller business from its indoor positioning analytics business by way of a distribution
of all the shares of common stock of its wholly-owned subsidiary, Sysorex, Inc. (“Sysorex”), to its stockholders of
record as of August 21, 2018 and certain warrant holders.
Going Concern and Management’s
Plans
As of March 31, 2019, the Company has
a working capital deficiency of approximately $0.09 million. For the three months ended March 31, 2019, the Company incurred a
net loss of approximately $5.1 million. The aforementioned factors raise substantial doubt about the Company’s ability to
continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the
classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year
after the date the financial statements are issued.
On January 15, 2019, the Company completed
a rights offering whereby it sold 12,000 units at a price to the public of $1,000 per unit for aggregate net proceeds of approximately
$10.77 million after commissions and expenses. The Company also raised approximately $3 million in net proceeds from the sale of
a promissory note on May 3, 2019.
The Company expects its capital resources
as of March 31, 2019, availability on the Payplant facility to finance purchase orders and invoices in an amount equal to 80%
of the face value of purchase orders received (as described in Note 5), funds from higher margin business line expansion
and credit limitation improvements will not be sufficient to fund planned operations for the next twelve months from the date
the financial statements are issued. In addition, the Company is pursuing possible strategic transactions. Therefore, the
Company may raise such additional capital as needed, through the issuance of equity, equity-linked or debt securities. The
Company’s condensed consolidated financial statements as of March 31, 2019 have been prepared under the assumption that
the Company will continue as a going concern for the next twelve months from the date the financial statements are issued. Management’s
plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s
ability to continue as a going concern, is dependent upon the ability to attain further operating efficiency, reduce expenditures,
and, ultimately, to generate sufficient levels of revenue. The Company’s condensed consolidated financial statements as
of March 31, 2019 do not include any adjustments that might result from the outcome of this uncertainty.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
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”)
for interim financial information, which are the accounting principles that are generally accepted in the United States of America.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of the Company’s operations for the three-month period ended March 31, 2019 is not necessarily
indicative of the results to be expected for the year ending December 31, 2019. These interim unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes
for the years ended December 31, 2018 and 2017 included in the Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission on March 28, 2019.
Note 3 - Summary of Significant Accounting
Policies
The Company’s complete accounting
policies are described in Note 2 to the Company’s audited consolidated financial statements and notes for the years ended
December 31, 2018 and 2017.
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 allowance for doubtful accounts;
|
|
|
|
|
●
|
the valuation allowance for the deferred tax asset; and
|
|
|
|
|
●
|
impairment of long-lived assets and goodwill.
|
Restricted Cash
In connection with certain transactions, the
Company may be required to deposit assets, including cash or investment 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 March
31, 2019, the Company had $140,000 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, on a pro-rata basis, on each of the next (2) anniversary
dates of the closing date of the Shoom acquisition. $70,000 of that amount is current and included in Prepaid Assets and Other
Current Assets and $70,000 is non-current and included in Other Assets on the condensed consolidated balance sheet. As of March
31, 2018, the Company had $210,000 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, on a pro-rata basis, on each of the next (2) anniversary
dates of the closing date of the Shoom acquisition. $70,000 of that amount is current and included in Prepaid Assets and Other
Current Assets and $140,000 is non-current and included in Other Assets on the condensed consolidated balance sheet as of March
31, 2018.
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 show in
the statement of cash flows.
|
|
For the Three Months Ended
March, 31,
|
|
(in thousands)
|
|
2019
|
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
3,830
|
|
|
|
$
|
6,694
|
|
Restricted cash
|
|
|
70
|
|
|
|
|
70
|
|
Restricted
cash included in other assets, noncurrent
|
|
|
70
|
|
|
|
|
140
|
|
Total cash, cash equivalents, and restricted cash in the balance sheet
|
|
$
|
3,970
|
|
|
|
$
|
6,904
|
|
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 3 - Summary of Significant Accounting
Policies (continued)
Revenue Recognition
The Company records revenue according
to “Revenue from Contracts with Customers (Topic 606)”, or ASU 2016-12,
which
requires revenue
to be recognized either at a “point in time” or “over time”, depending on the
facts and circumstances of the arrangement, and is evaluated using a five-step model.
Software As A Service Revenue Recognition
With respect to sales of our maintenance,
consulting and other service agreements, including our digital advertising and electronic services, customers pay fixed monthly
fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital
advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly
over the service period using a time-based measure because the Company is providing continuous access to its service.
Professional Services Revenue Recognition
The Company’s professional services
include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables.
The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and materials
contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs,
are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for
the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of
the performance completed to date. For fixed fee contracts including maintenance service provided by in house personnel, the Company
recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service.
Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient
in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized
as soon as they become known. For the three months ended March 31, 2019 and 2018, the Company did not incur any such losses. These
amounts are based on known and estimated factors.
Contract Balances
The
timing of our revenue recognition may differ from the timing of payment by our customers. The Company records a receivable
when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively,
when payment precedes the provision of the related services, the Company records deferred revenue until the performance
obligations are satisfied. The Company had deferred revenue of approximately $173,000 as of March 31, 2019 related to cash
received in advance for product maintenance services provided by the Company’s technical staff. The Company expects to
satisfy its remaining performance obligations for these maintenance services and recognize the deferred revenue and related
contract costs over the next twelve months after March 31, 2019.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
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.
Options and warrants granted to consultants
and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair value at the end of each
reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the
related vesting period.
The Company incurred stock-based compensation
charges of $0.9 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, which are included in
general and administrative expenses. The Company recognizes forfeitures as they occur. The following table summarizes the nature
of such charges for the periods then ended (in thousands):
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Compensation and related benefits
|
|
$
|
648
|
|
|
$
|
206
|
|
Professional and legal fees
|
|
|
242
|
|
|
|
80
|
|
Totals
|
|
$
|
890
|
|
|
$
|
286
|
|
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 three months
ended March 31, 2019 and 2018:
|
|
For the Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Options
|
|
|
2,772,460
|
|
|
|
205
|
|
Warrants
|
|
|
5,371,452
|
|
|
|
207,565
|
|
Convertible preferred stock
|
|
|
582,184
|
|
|
|
--
|
|
Convertible note
|
|
|
--
|
|
|
|
15,754
|
|
Reserved for service providers
|
|
|
1,100
|
|
|
|
1,100
|
|
Totals
|
|
|
8,727,196
|
|
|
|
224,624
|
|
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
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.
Reclassification
Certain accounts in the prior year’s
consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current
year’s consolidated financial statements. These reclassifications have no effect on previously reported earnings.
Recently Issued and Adopted Accounting
Standards
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU
No. 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets
and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and
quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty
of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. As a result of
the new standard, all of our leases greater than one year in duration will be recognized in our balance sheets as both operating
lease liabilities and right-of-use assets upon adoption of the standard. The Company adopted the standard using the prospective
approach. Upon adoption, we recorded approximately $0.6 million in right-of-use assets and $0.7 million in operating lease liabilities
on our balance sheet.
In June 2018, the FASB issued ASU No. 2018-07,
“Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” (“ASU
2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and
services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively
provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of
a contract accounted for under Revenue from Contracts with Customers (Topic 606). ASU 2018-07 is effective for fiscal years beginning
after December 15, 2018, 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 financial statements or disclosures.
In August 2018, the FASB issued ASU No.
2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement,” (“ASU 2018-13”). ASU 2018-13 requires application of the prospective method of transition (for
only the most recent interim or annual period presented in the initial fiscal year of adoption) to the new disclosure requirements
for (1) changes in unrealized gains and losses included in OCI 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.
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.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 4 - Inventory
Inventory as of March 31, 2019 and December
31, 2018 consisted of the following (in thousands):
|
|
As of
March 31,
2019
|
|
|
As of
December 31,
2018
|
|
Raw materials
|
|
$
|
167
|
|
|
$
|
143
|
|
Finished goods
|
|
|
531
|
|
|
|
425
|
|
Total Inventory
|
|
$
|
698
|
|
|
$
|
568
|
|
Note 5 - Debt
Debt as of March 31, 2019 and December 31, 2018 consisted of
the following (in thousands):
|
|
As of
March 31,
2019
|
|
|
As of
December 31,
2018
|
|
Short-Term Debt
|
|
|
|
|
|
|
Notes payable, less debt discount of $515 and $752, respectively (A)
|
|
$
|
3,970
|
|
|
$
|
4,104
|
|
Revolving line of credit (B)
|
|
|
--
|
|
|
|
23
|
|
Total Short-Term Debt
|
|
$
|
3,970
|
|
|
$
|
4,127
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
73
|
|
|
$
|
74
|
|
Total Long-Term Debt
|
|
$
|
73
|
|
|
$
|
74
|
|
On January 29, 2019, the Company and the
holder of that certain outstanding convertible promissory note (the “Note Holder”), issued on November 17, 2017 (as
amended, supplemented or otherwise modified, the “Original Note”), with an outstanding balance of $383,768 (the “Remaining
Balance”), entered into an exchange agreement (the “Exchange Agreement”), pursuant to which the Company and the
Note Holder agreed to (i) partition a new convertible promissory note in the form of the Original Note (the “Partitioned
Note”) in the original principal amount equal to the Remaining Balance (the “Exchange Amount”) and then cause
the Remaining Balance to be reduced by the Exchange Amount; and (ii) exchange the Partitioned Note for the delivery of 172,869
shares of the Company’s common stock at an effective price share equal to $2.22. Following such partition of the Original
Note, the Original Note was deemed paid in full, was automatically deemed canceled, and shall not be reissued.
October 2018 Note Purchase Agreement
and Promissory Note
On October 12, 2018, the Company entered into
a note purchase agreement with an institutional investor (the “Holder”), pursuant to which the Company agreed to issue
and sell to the Holder an unsecured promissory note (the “Note”) in an aggregate principal amount of $2,520,000 (the
“Initial Principal Amount”), 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 $500,000 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 Note,
the Holder paid an aggregate purchase price of $2,000,000. 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 Note. Beginning on the date that is 6 months from the issuance date and
at the intervals indicated below until the 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 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 5 business days of the Company’s receipt of such Monthly Redemption Notice.
On April 10, 2019 and April 24, 2019, the
Company entered into exchange agreements with the Holder whereby the Company issued shares of the Company’s common stock
as payment on the Note as more fully described in Note 15.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 5 - Debt (continued)
|
(A)
|
Notes Payable (continued)
|
December 2018 Note Purchase Agreement
and Promissory Note
On December 21, 2018, the Company entered
into a note purchase agreement with the Holder, pursuant to which the Company agreed
to issue and sell to the Holder an unsecured promissory note (the “December 2018 Note”) in an aggregate principal amount
of $1,895,000 (the “Initial Principal Amount”), 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 $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 December 2018 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 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 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
December 2018 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 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 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 5 business days
of the Company’s receipt of such Monthly Redemption Notice.
Amendment to Note Purchase Agreements
On February 8,
2019, the Company entered into a global amendment (the “Global Amendment”) to the Note and the December 2018 Note 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 the Holder’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.
|
(B)
|
Revolving Line of Credit
|
Payplant Accounts Receivable Bank
Line
Pursuant to the terms of that certain Commercial
Loan Purchase Agreement, dated as of August 14, 2017 (the “Purchase Agreement”), Gemcap Lending I, LLC (“GemCap”)
sold and assigned to Payplant LLC, as agent for Payplant Alternatives Fund LLC (“Payplant” or “Lender”),
all of its right, title and interest to that certain revolving Secured Promissory Note in an aggregate principal amount of up to
$10,000,000 (the “GemCap Note”) issued in accordance with that certain Loan and Security Agreement, dated as of November
14, 2016 (the “GemCap Loan”), by and among GemCap and the Company and its wholly-owned subsidiaries, Sysorex and Sysorex Government Services, Inc. (“SGS”)
for an aggregate purchase price of $1,402,770.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 5 - Debt (continued)
|
(B)
|
Revolving Line of Credit (continued)
|
Payplant Accounts Receivable Bank
Line (continued)
In connection with the purchase and assignment
of the GemCap Loan in accordance with the Purchase Agreement, the GemCap Loan was amended and restated in accordance with the terms
and conditions of the Payplant Loan and Security Agreement, dated as of August 14, 2017, between the Company and Payplant (the
“Loan Agreement”). The Loan Agreement allows the Company to request loans from the Lender (in the manner provided therein)
with a term of no greater than 360 days in amounts that are equivalent to 80% of the face value of purchase orders received. The
Lender is not obligated to make the requested loan, however, if the Lender agrees to make the requested loan, before the loan is
made, the Company must provide Lender with (i) one or more promissory notes for the amount being loaned in favor of Lender, (ii)
one or more guaranties executed in favor of Lender and (iii) other documents and evidence of the completion of such other matters
as Lender may request. The principal amount of each loan shall accrue interest at a 30 day rate of 2% (the “Interest Rate”),
calculated per day on the basis of a year of 360 days and, when combined with all fees that may be characterized as interest will
not exceed the maximum rate allowed by law. Upon the occurrence and during the continuance of any event of default, interest shall
accrue at a rate equal to the Interest Rate plus 0.42% per 30 days. All computations of interest shall be made on the basis of
a year of 360 days. The promissory note is subject to the interest rates described in the Loan Agreement and is secured by the
assets of the Company pursuant to the Loan Agreement and will be satisfied in accordance with the terms of the Payplant Client
Agreement.
On August 31, 2018, Inpixon, Sysorex, 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.
Note 6 - Capital Raises
January 2019 Capital Raise
On January 15,
2019, the Company closed a rights offering whereby it sold an aggregate of 12,000 units consisting of an aggregate of 12,000
shares of Series 5 Convertible Preferred Stock and 3,600,000 warrants to purchase common stock exercisable for one share of
common stock at an exercise price of $3.33 per share in accordance with the terms and conditions of a warrant agency agreement
(the “Warrant Agency Agreement”), resulting in gross proceeds to the Company of approximately $12 million, and
net proceeds of approximately $10.77 million after deducting expenses relating to dealer-manager fees and expenses, and
excluding any proceeds received upon exercise of any warrants.
Following the rights offering, the conversion
price of the Series 4 Preferred was reduced to the floor price of $4.96, the exercise price of the warrants issued in the April
2018 public offering were also reduced to the floor price of $4.96 and the number of shares issuable upon exercise of such warrants
was increased to 2,769,000 shares of common stock. The maximum deemed dividend under the Series 4 Preferred Stock has been recognized
so there is no accounting effect from the conversion price reduction of the Series 4 Preferred Stock. However, the Company recorded
a $1.3 million deemed dividend for the reduction to the exercise price of the April 2018 warrants.
Note 7 - Common Stock
On January 29, 2019, the Company issued
172,869 shares of common stock under an exchange agreement to settle the outstanding balance of $383,768 under Partitioned
Note
. Following
the issuance of the common stock, the Original
N
ote was deemed paid in full (see Note 5).
On February 20, 2019, the Company issued
749,440 shares of common stock under a settlement agreement for an arbitration proceeding (see Note 14).
During the three months ended March 31,
2019, the Company issued 13,761 shares of common stock in connection with the exercise of 13,761 warrants at $3.33 per share.
During the three months ended March 31,
2019, the Company issued 1,248,324 shares of common stock in connection with the exercise of 2,080,539 warrants through cashless
exercises.
During the three months ended March 31,
2019, 10,062 shares of Series 5 Preferred were converted into 3,021,663 shares of the Company’s common stock.
During the three months ended March
31, 2019, the Company issued 200,000 shares of common stock for services which were fully vested upon grant. The Company
recorded an expense of approximately $242,000.
Note 8 - 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.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 8 - Preferred Stock (continued)
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 $3.33.
On January 15, 2019, the Company closed
a rights offering whereby it sold an aggregate of 12,000 units consisting of an aggregate of 12,000 shares of Series
5 Convertible Preferred Stock and 3,600,000 warrants to purchase common stock exercisable for one share of common stock at an exercise
price of $3.33 per share.
During the three months ended March 31,
2019, 10,062 shares of Series 5 Preferred were converted into 3,021,663 shares of the Company’s common stock. As of March
31, 2019, there was 1,938 shares of Series 5 Preferred outstanding.
Note 9 - 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 is utilized with the 2011 Plan for employees, corporate officers, directors, consultants and other key persons employed.
The 2018 Plan provides 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.
The aggregate number of shares that
may be awarded under the 2011 Plan as of January 1, 2019 is 158,424 and awarded under the 2018 Plan as of January 1, 2019 is
5,316,376. As of March 31, 2019, 2,772,460 of options were granted to employees, directors and consultants of the Company
(including 39 shares outside of our Options Plans) and 2,702,379 shares of common stock were reserved for future issuance under the Option Plans.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 9 - Stock Options (continued)
During the three months ended
March 31, 2019, the Company granted stock options for the purchase of 2,717,500 shares of common stock to employees and
directors of the Company. These stock options are either 100% vested or vest pro-rata over 12 to 48 months, have a life of
ten years and an exercise price of $2.26 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 $3.3 million. The fair value of the common stock as of
the grant date was determined to be $2.26 per share.
During the three months ended March 31,
2019 and 2018, the Company recorded a charge of $648,000 and $206,000, respectively, for the amortization of employee stock options.
As of March 31, 2019, the fair value
of non-vested stock options totaled $3.3 million, which will be amortized to expense over the weighted average remaining term
of 0.64 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 three months ended March 31, 2019 were as follows:
|
|
For the Three Months Ended
March 31, 2019
|
|
|
|
|
|
Risk-free interest rate
|
|
2.66%
|
|
Expected life of stock option grants
|
|
7 years
|
|
Expected volatility of underlying stock
|
|
49.65%
|
|
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 assumptions was $0 as
the Company historically has not declared any dividends and does not expect to.
Note 10 - 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
March 31, 2019 and December 31, 2018 was immaterial. The Company has not experienced any losses and believes it is not exposed
to any significant credit risk from cash.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 10 - Credit Risk and Concentrations
(continued)
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 months ended
March 31, 2019 and 2018 (in thousands):
|
|
For the Three Months Ended
March 31, 2019
|
|
|
For the Three Months Ended
March 31, 2018
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Customer A
|
|
|
750
|
|
|
|
55%
|
|
|
|
--
|
|
|
|
--
|
|
Customer B
|
|
|
306
|
|
|
|
22%
|
|
|
|
325
|
|
|
|
38%
|
|
Customer C
|
|
|
--
|
|
|
|
--
|
|
|
|
105
|
|
|
|
12%
|
|
As of March 31, 2019, Customer A represented
approximately 37%, Customer D represented approximately 22%, Customer E represented approximately 11%, and Customer C represented
approximately 11% of total accounts receivable. As of December 31, 2018, Customer C represented approximately 30%, Customer D represented
approximately 26% and Customer E represented approximately 13% of total accounts receivable.
As of March 31, 2019, one vendor represented
approximately 43% of total gross accounts payable. Purchases from this vendor during the three months ended March 31, 2019 was
$0. As of December 31, 2018, one vendor represented approximately 49% of total gross accounts payable. Purchases
from this vendor during the three months ended March 31, 2018 was $0.
For the three months ended March 31, 2019,
two vendors represented approximately 56% and 44% of total purchases. For the three months ended March 31, 2018, one vendor represented
approximately 84% of total purchases.
Note 11 - Foreign Operations
The Company’s operations are located
primarily in the United States, Canada, India and, prior to the sale of Sysorex Arabia, in Saudi Arabia. Revenues by geographic
area are attributed by country of domicile of our subsidiaries. The financial data by geographic area are as follows (in thousands):
|
|
United
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
|
|
|
Canada
|
|
|
India
|
|
|
Eliminations
|
|
|
Total
|
|
For the Three Months Ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
1,361
|
|
|
$
|
2
|
|
|
$
|
68
|
|
|
$
|
(68
|
)
|
|
$
|
1,363
|
|
Operating loss by geographic area
|
|
$
|
(4,527
|
)
|
|
$
|
(308
|
)
|
|
$
|
(28
|
)
|
|
$
|
--
|
|
|
$
|
(4,863
|
)
|
Net loss by geographic area
|
|
$
|
(4,814
|
)
|
|
$
|
(308
|
)
|
|
$
|
(28
|
)
|
|
$
|
--
|
|
|
$
|
(5,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area
|
|
$
|
843
|
|
|
$
|
6
|
|
|
$
|
52
|
|
|
$
|
(52
|
)
|
|
$
|
849
|
|
Operating loss by geographic area
|
|
$
|
(3,289
|
)
|
|
$
|
(489
|
)
|
|
$
|
(2
|
)
|
|
$
|
--
|
|
|
$
|
(3,780
|
)
|
Net loss by geographic area
|
|
$
|
(5,748
|
)
|
|
$
|
(493
|
)
|
|
$
|
(2
|
)
|
|
$
|
--
|
|
|
$
|
(6,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
19,543
|
|
|
$
|
438
|
|
|
$
|
141
|
|
|
$
|
--
|
|
|
$
|
20,122
|
|
Long lived assets by geographic area
|
|
$
|
5,357
|
|
|
$
|
146
|
|
|
$
|
32
|
|
|
$
|
--
|
|
|
$
|
5,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets by geographic area
|
|
$
|
11,872
|
|
|
$
|
187
|
|
|
$
|
119
|
|
|
$
|
--
|
|
|
$
|
12,178
|
|
Long lived assets by geographic area
|
|
$
|
6,233
|
|
|
$
|
140
|
|
|
$
|
28
|
|
|
$
|
--
|
|
|
$
|
6,401
|
|
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 12 - Related Party Transactions
Nadir Ali, the Company’s Chief Executive
Officer and a member of its Board of Directors, is also the Chairman of the Board of Directors of 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 3,000,000.00 (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. The amount owed by Sysorex to the Company as of December 31, 2018 was $2.2 million and as of March 31, 2019 was $7 million.
On February 4, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any
time under the Related Party Note from $3,000,000 to $5,000,000. On April 2, 2019, the Related Party Note was amended to increase
the maximum principal amount that may be outstanding at any time under the Related Party Note from $5,000,000 to $8,000,000.
Note 13 -
Leases
The Company currently has three office leases.
The first operating lease is for its administrative office in Palo Alto, California, effective October 1, 2014, for five 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 second operating lease
is 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. The third operating lease is for its administrative
office in Coquitlam, Canada, from October 1, 2016 through September 30, 2021. The initial lease rate was $8,931 CAD per month
with escalating payments. In connection with the lease, the Company is obligated to pay $6,411 CAD 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 prospective approach. In addition, the Company elected
not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less. 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 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.
Right-of-use assets is summarized below
(in thousands):
|
|
March 31,
2019
|
|
Palo Alto, CA Office
|
|
$
|
178
|
|
Encino, CA Office
|
|
|
201
|
|
Coquitlam, Canada Office
|
|
|
267
|
|
Less accumulated amortization
|
|
|
(82
|
)
|
Right-of-use asset, net
|
|
$
|
564
|
|
During the three months ended March 31,
2019, the Company recorded $91,667 as rent expense to the right-of-use assets.
Lease liability is summarized below
(in thousands):
|
|
March 31,
2019
|
|
Total lease liability
|
|
$
|
599
|
|
Less: short term portion
|
|
|
(331
|
)
|
Long term portion
|
|
$
|
268
|
|
Maturity analysis under the lease agreement
is as follows (in thousands):
Nine months ending December 31, 2019
|
|
$
|
295
|
|
Year ending December 31, 2020
|
|
|
218
|
|
Year ending December 31, 2021
|
|
|
137
|
|
Total
|
|
$
|
650
|
|
Less: Present value discount
|
|
|
(51
|
)
|
Lease liability
|
|
$
|
599
|
|
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 14 - Commitments and Contingencies
Litigation
Certain conditions may exist as of the
date the 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 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.
Atlas Settlement
On February 20, 2019, in connection with
the satisfaction of an award in an aggregate amount of $1,156,840 plus pre-judgment interest equal to an aggregate of $59,955 (the
“Award”) granted to Atlas Technology Group, LLC (“Atlas”) following arbitration proceedings arising out
of an engagement agreement, dated September 8, 2016, by and between Atlas and the Company (including its subsidiaries) (the “Engagement
Agreement”), the Company, Sysorex and Atlas entered into a settlement agreement (the “Settlement Agreement”)
pursuant to which Atlas agreed to (a) reduce the Award by $275,000 resulting in a “Net Award” of $941,796 and (b) accept
an aggregate of 749,440 shares of freely-tradable common stock of the Company (the “Settlement Shares”) in satisfaction
of the Award which was determined by dividing 120% of the Net Award by $1.508, which was the “minimum price,” as defined
under Nasdaq Listing Rule 5635(d).
Pursuant to the Settlement Agreement, after
the Company issued and delivered the Settlement Shares to Atlas, the Award was deemed satisfied in full and the parties were deemed
to have released each other from any claims arising out of the Engagement Agreement. The Settlement Shares were issued
to Atlas pursuant to the Company’s registration statement on Form S-3, as amended (SEC File No. 333-223960), which was declared
effective by the Securities and Exchange Commission on June 5, 2018.
In connection with Spin-off of Sysorex,
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 arising from the Engagement
Agreement would be shared by each party following the Spin-off. As a result, Sysorex indemnified the Company for half of
the total amount paid by the Company to satisfy the Award.
Note 15 - Subsequent Events
During the three months ending June 30,
2019, the Company issued 835,740 shares of common stock in connection with the exercise of 1,392,900 warrants through cashless exercises.
During the three months ending June 30,
2019, 1,517 shares of Series 5 Preferred were converted into 455,556 shares of the Company’s common stock.
During the three months ending June 30, 2019,
the Company granted stock options for the purchase of 2,337,500 shares of common stock to employees and consultants of the Company.
These stock options vest pro-rata over 12 to 48 months, have a life of ten years and an exercise price of $0.75 per share.
INPIXON AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
2019 AND 2018
Note 15 - Subsequent Events (continued)
Exchange
Agreements
On April 10, 2019, the Company and the
Holder of the Original Note, with an outstanding balance of $2,689,868 as of April 10, 2019, entered into an exchange agreement,
pursuant to which the Company and the Holder agreed to (i) partition a new promissory note in the form of the Original Note (the
“Partitioned Note”) in the original principal amount equal to $500,000 (the “Exchange Amount”) and then
cause the Outstanding Balance to be reduced by the Exchange Amount; and (ii) exchange the Partitioned Note for the delivery of
626,566 shares of the Company’s common stock, at an effective price per share equal to $0.798. The exchange was completed
on April 12, 2019.
On April 24, 2019, the Company and the
Holder of the Original Note, with an outstanding balance of $2,198,400 as of April 24, 2019 (the “Outstanding Balance”),
entered into an exchange agreement, pursuant to which the Company and the Holder agreed to (i) partition a new promissory note
in the form of the Original Note (the “Partitioned Note”) in the original principal amount equal to $400,000 (the “Exchange
Amount”) and then cause the Outstanding Balance to be reduced by the Exchange Amount; and (ii) exchange the Partitioned Note
for the delivery of 444,988 shares of the Company’s common stock at an effective price per share equal to $0.8989. The exchange
was completed on April 25, 2019.
Second Amendment to Sysorex Loan
Documents
On
April 2, 2019, the Company and Sysorex, Inc. entered into that certain Second Amendment Agreement to that certain Note Purchase
Agreement, dated as of December 31, 2018 (as amended from time to time in accordance with its terms, the “NPA”), and
that certain Secured Promissory Note issued to the Company by Sysorex on December 31, 2018 (as amended from time to time in accordance
with its terms, the “Note,” together with the NPA, the “Sysorex Loan Documents”). Pursuant to the Second
Amendment Agreement, the Sysorex Loan Documents were amended to increase the maximum principal amount that may be outstanding at
any time under the Note from $5,000,000 to $8,000,000.
May 2019 Note Purchase Agreement
and Promissory Note
On May 3, 2019, the Company entered into
a note purchase agreement (the “Purchase Agreement”) with the Holder, pursuant to which the Company agreed to issue
and sell to the Holder an unsecured promissory note (the “May 2019 Note”) in an aggregate principal amount of $3,770,000
(the “Initial Principal Amount”), 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 Note, the Holder paid an aggregate purchase price of $3,000,000. 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 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 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.