Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K, with KIN’s consolidated financial statements included in its annual report on Form 10K/A for the year ended December 31, 2022, as filed with the SEC on April 21, 2023, and the annual report of Legacy CXApp included as an exhibit in the Form 8-K, as filed with the SEC on March 20, 2023. References in this report (the “Annual Report”) to “we”, “us” or the “Company” refer to CXApp Inc. References to our “management” or our “management team” refer to our officers and directors. The following management’s discussion and analysis of financial condition and results of operations describes the principal factors affecting the results of our operations, financial condition, and changes in financial condition for the year ended, December 31, 2023, for the predecessor and successor
Overview of Our Business
The CXApp SaaS platform offers a suite of leading-edge technology workplace experience solutions including an enterprise employee application, indoor mapping, on-device positioning, augmented reality technologies and an AI-based analytics platform, targeting the emerging hybrid workplace market to provide enhanced experiences across people, places, and things.
CXApp creates a connected workplace by reducing app overload, data fragmentation, and complex workflows and streamlines all capabilities through The Workplace SuperApp. All features, services, and integrations are housed in one easy-to-access platform allowing businesses to deliver a more holistic employee experience in a hybrid workplace.
Prior to the closing of the Business Combination, CXApp and subsidiaries were wholly owned subsidiary of Inpixon (“Inpixon”) and the Company’s financial statements consist of Design Reactor, Inpixon Canada, Inpixon Philippines and select assets, liabilities, revenues and expenses of Inpixon and Inpixon India (collectively the “Company,” “we,” “us” or “our”), show the historical combined carve-out financial position, results of operations, changes in net investment and cash flows of the Company and should be read in conjunction with the accompanying notes thereto. The Company’s combined carve-out financial statements do not necessarily reflect what the results of operations, financial position, or cash flows would have been had the Company been a separate entity nor are they indicative of future results of the Company.
The combined carve-out operating results of the Company have been specifically identified based on the Company’s existing divisional organization. The majority of the assets and liabilities of the Company have been identified based on the existing divisional structure. The historical costs and expenses reflected in the Company’s financial statements include an allocation for certain corporate and shared service functions. Management believes the assumptions underlying our combined carve-out financial statements are reasonable. Nevertheless, our combined carve-out financial statements may not include all of the actual expenses that would have been incurred had we operated as a standalone company during the periods presented and may not reflect our results of operations, financial position and cash flows had we operated as a standalone company during the periods presented. Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. We also may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in our historical results of operations, financial position and cash flows.
37
Recent Events
The Business Combination
On September 25, 2022, an
Agreement and Plan of Merger (the “Merger Agreement”), was entered into by and among Inpixon, KINS Technology Group Inc.,
a Delaware corporation (“KINS”), CXApp Holding Corp., a Delaware corporation and newly formed wholly owned subsidiary of Inpixon
(“CXApp”), and KINS Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of KINS (“Merger Sub”),
pursuant to which KINS acquired Inpixon’s enterprise apps business (including its workplace experience technologies, indoor mapping,
events platform, augmented reality and related business solutions) (the “Enterprise Apps Business”) in exchange for the issuance
of shares of KINS capital stock valued at $69,928 thousand (the “Business Combination”). The transaction closed at the end
of business on March 14, 2023.
Immediately prior to the Merger
at the end of business on March 14, 2023 and pursuant to a Separation and Distribution Agreement, dated as of September 25, 2022, among
KINS, Inpixon, CXApp and Design Reactor, (the “Separation Agreement”), and other ancillary conveyance documents, Inpixon,
among other things and on the terms and subject to the conditions of the Separation Agreement, transferred the Enterprise Apps Business,
including certain related subsidiaries of Inpixon, including Design Reactor, to CXApp (the “Reorganization”). Following the
Reorganization, Inpixon distributed 100% of the common stock of CXApp, par value $0.0001, to certain holders of Inpixon securities as
of the record date (the “Spin-Off”).
Immediately following the Spin-Off, in accordance with and subject to the terms and conditions of the Merger Agreement, Merger Sub merged with and into CXApp (the “Merger”), with CXApp continuing as the surviving company and as a wholly-owned subsidiary of KINS.
The Merger Agreement, along
with the Separation and Distribution Agreement and the other transaction documents entered into in connection therewith, provided for,
among other things, the consummation of the following transactions: (i) Inpixon transferred the Enterprise Apps Business (the “Separation”)
to its wholly-owned subsidiary, CXApp, and contributed approximately $4,000 thousand in additional cash so that CXApp would have a minimum
of $10,000 thousand in cash and cash equivalents as of the closing of the Business Combination before deduction of expenses (the “Cash
Contribution”), (ii) following the Separation, Inpixon distributed 100% of the shares of CXApp Common Stock to Inpixon securityholders
by way of the Distribution and (iii) following the completion of the foregoing transactions and subject to the satisfaction or waiver
of certain other conditions set forth in the Merger Agreement, the parties consummated the Merger. The Separation, Distribution and Merger
were intended to qualify as “tax-free” transactions.
At the time the Business Combination was effected (the “Closing”), the outstanding shares of CXApp Common Stock after the Distribution and immediately prior to the effective time of the Merger were converted into an aggregate of 7,035,000 shares of KINS Common Stock which was issued to Inpixon securityholders, subject to adjustment. Each holder’s aggregate merger consideration consisted of approximately 22% KINS Class A Common Stock and approximately 78% KINS Class C Common Stock.
Accounting Treatment for the Business Combination
The Business Combination was accounted for using the acquisition method (as a forward merger), with goodwill and other identifiable intangible assets recorded in accordance with GAAP, as applicable. Under this method of accounting, CXApp is treated as the “acquired” company for financial reporting purposes. KINS has been determined to be the accounting acquirer because KINS maintains control of the Board of Directors and management of the combined company.
2023 Warrant Transactions
In June 2023, 613,138
public warrants, with fair value of approximately $549 thousand, were surrendered for a cashless exercise in exchange for 49,608 shares
of Class A Common Stock. The Company recorded this transaction in the third quarter of 2023.
On July 13, 2023, warrant
holders exercised 435 thousand public warrants at an exercise price of $11.50, for a total of $5,002 thousand of cash proceeds to the
Company.
On July 14, 2023, the Company entered into a Warrant Exchange
Agreement (the “Agreement”) with third party investor (the “Warrant Holder”) with respect to warrants to purchase
an aggregate of 2,000 thousand shares of its common stock, par value $0.0001 per share (the “Common Stock”) initially issued
by the Company in its initial public offering on December 15, 2020 (the “Public Warrants”). Pursuant to the Agreement,
the Company issued an aggregate of 600 thousand shares of Common Stock to the Warrant Holder in exchange for the surrender and cancellation
of the Public Warrants held by such holder. This resulted in an additional paid in capital of $4,914 thousand in a non-cash transaction
and resulted in a $3,900 thousand loss on the warrant conversion, which is included in change in fair value of derivative liability in
the statement of operations.
38
December 2023 Note Purchase Agreement and Promissory Note
On December 15, 2023, we entered into a note purchase agreement with Streeterville Capital, LLC (the “Holder”), pursuant to which we agreed to issue and sell to the Holder an unsecured promissory note (the “December 2023 Note”) in an aggregate initial principal amount of $3,885 thousand, 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 $870 thousand and $15 thousand that we agreed to pay to the Holder to cover the Holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. Net proceeds from the December 2023 Note is $3,000 thousand.
Interest on the December 2023 Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the December 2023 Note. We may pay all or any portion of the amount owed earlier than it is due.
Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the December 2023 Note is paid in full, the Holder shall have the right to redeem up to an aggregate of 1/6th of the initial principal balance of the December 2023 Note plus any interest accrued thereunder each month by providing written notice delivered to us; 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 further month in addition to such future month’s monthly redemption amount.
Upon receipt of any monthly redemption notice, we shall pay the applicable monthly redemption amount in cash to the Holder within five (5) business days of the Company’s receipt of such monthly redemption notice.
The December 2023 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 a Change in Control, and without further notice to Holder, all unpaid principal, plus all accrued interest, original issue discount, and other amounts due hereunder, shall become immediately due and payable.
As of May 15, 2024, the outstanding principal of the note is $4,050 thousand. The unamortized original issue discount and unamortized financing cost amounts to $508 thousand and $9 thousand, respectively, as of May 15, 2024.
Key Factors Affecting CXApp’s Results of Operations
Our financial position and results of operations depend to a significant extent on the following factors:
Customer Base
Our customer base is currently operating within approximately 5 different industries, including approximately 28% in Technology, 14% in Financial Services, 30% in Consumer, 9% in Healthcare and 19% in Media & Entertainment. Approximately 85% of our customers are headquartered in the United States; with over 397 customer campuses built out across approximately 217 cities and over 59 countries throughout the world.
39
Our management uses key metrics such as total revenue growth, recurring and non-recurring revenue, existing customer expansion rates, number of customer campuses (which management believes is a more meaningful metric to measure performance than total number of customers), and churn rates to measure customer growth and market penetration. The CXApp carve-out financials show that our revenue has decreased from approximately $8,470 thousand for the twelve-month period ending December 2022 (Predecessor) to approximately $1,620 thousand for the period January 1, 2023 to March 14, 2023 (Predecessor) and $5,746 thousand for the period from March 15, 2023 to December 31, 2023 (Successor) for a total of $7,366 thousand for the year ended December 31, 2023. Approximately 78% of the Company’s revenue was recurring in 2023 and approximately 65% was recurring in 2022. Approximately 17% of our customers have expanded to add additional revenue opportunities with new campuses, features, or integrations within twelve months of initial deployment and we have an average quarterly customer churn rate of less than 3% for the year ended December 31, 2023.
Our ability to increase revenues from existing customers by identifying additional opportunities to sell more of our products and services and our ability to obtain new customers depends on a number of factors, including our ability to offer high quality products and services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing departments. If we are not able to continue to increase sales of our products and services to existing customers or to obtain new customers in the future, we may not be able to increase our revenues and could suffer a decrease in revenues as well.
Our top three customers accounted for approximately 22% and 27% of our gross revenue during each of the years ended December 31, 2023 and 2022, respectively. One customer accounted for 12% of our gross revenue in 2023 and a separate customer accounted for 11% in 2022; however, each of these customers may or may not continue to be a significant contributor to revenue in 2024. The loss of a significant amount of business from one of our major customers would materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost business. Significant customers or projects in any one period may not continue to be significant customers or projects in other periods. To the extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the extent that such risks impede the customer’s ability to stay in business and make timely payments to us.
Competition
Our industry is developing rapidly, and related technology trends are constantly evolving. In this environment, we face, among other things, significant price competition from our competitors. As a result, we may be forced to reduce the prices of the products and services we sell in response to offerings made by our competitors and may not be able to maintain the level of bargaining power that we have enjoyed in the past when negotiating the prices of our products and services.
Our profitability is dependent on the prices we are able to charge for our products and services. The prices we are able to charge for our products and services are affected by a number of factors, including:
●
our customers’ perceptions of our ability to add value through our products and services;
●
introduction of new products or services by us or our competitors;
●
our competitors’ pricing policies;
●
our ability to charge higher prices where market demand or the value of our products or services justifies it;
●
procurement practices of our customers; and
●
general economic and political conditions.
If we are not able to maintain favorable pricing for our products and services, our results of operations could be adversely affected.
We believe that there is significant opportunity to expand our customer base by making investments in sales, marketing, and brand awareness. Our ability to attract new customers will depend on several factors, including our success in recruiting, training, retaining, and scaling our sales and marketing organization, as well as our ability to capitalize on the competitive dynamics of our target markets. Sales force expansion will be necessary to cover a wider array of markets that are currently underserved.
40
Research and Development
During the year , the Company added resources dedicated for developing the Artificial Intelligence (AI) based Augmented Reality (AR) which will provide digital transformation in CXApp SaaS platform. The management believes that this investment in research and development will maintain a competitive position and create opportunities for the Company.
Pandemic and World Environment
Our business has been impacted by the COVID-19 pandemic and general macroeconomic conditions and may continue to be impacted. While we have been able to continue operations remotely, we have and continue to experience impact in the demand of certain products and delays in certain projects and customer orders either because of customer facilities being partially or fully closed during the pandemic or because of the uncertainty of the customer’s financial position and ability to invest in our technology. If we are unable to successfully respond and manage the impact of the pandemic, and the resulting responses to it, our business, operations, financial condition and results of operations could be adversely impacted.
RESULTS OF OPERATIONS
Year Ended December 31, 2023 compared to the Year Ended December 31, 2022
For the purposes of the
analysis of the results presented herein, the Company is presenting the combined results of operations for the period March 15, 2023
to December 31, 2023 of the Successor Company with the period January 1, 2023 to March 14, 2023 of the Predecessor Company. Although
this presentation is not in accordance with accounting principles generally accepted in the United States, the Company believes
presenting and analyzing the combined results allows for a more meaningful comparison of results for the twelve-month period ended
December 31, 2023 to the year ended December 31, 2022. The following selected data from our audited consolidated statements of
operations and other supplementary data should be referred to while reading the results of operations discussion that follows (dollars
in thousands) :
Non-GAAP
Successor
Predecessor
Non-GAAP
Combined
Predecessor
2023 vs 2022
Changes
Period from
March 15, 2023 to
December 31,
2023
Period from
January 1, 2023 to
March 14,
2023
Year Ended
December 31,
2023
Year Ended
December 31,
2022
$
Change
%
Change*
Revenues
$
5,746
$
1,620
$
7,366
$
8,470
$
(1,104
)
(13
)%
Cost of revenues
1,268
483
1,751
2,064
(313
)
(15
)%
Gross profit
4,478
1,137
5,615
6,406
(791
)
(12
)%
Operating expenses
52,686
5,518
58,204
35,431
22,773
64
%
Loss from operations
(48,208
)
(4,381
)
(52,589
)
(29,025
)
23,564
81
%
Interest income
65
1
66
4
62
1,550
%
Income tax benefit (expense)
3,572
-
3,572
(153
)
3,725
(2,435
)%
Change in fair value of derivative liability
(4,714
)
-
(4,714
)
-
(4,714
)
(100
)%
Other income (expense)
47
-
47
(1
)
48
(4,800
)%
Net loss
$
(49,238
)
$
(4,380
)
$
(53,618
)
$
(29,175
)
$
24,443
84
%
*
Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results.
41
Revenues
The Company derives revenue from software as a service, design, deployment and implementation services for its enterprise apps business. Non-GAAP combined revenue for the year ended December 31, 2023 were $7,366 thousand, compared to $8,470 thousand for the comparable period in the prior year for a decrease of approximately $1,104 thousand, or approximately 13%. The decrease was due to a decline in Professional Services revenue. Professional services are related to integration works and other services that may be requested by the customer, wherein 78% of our recognized revenue is subscription revenue, and as such the decline in revenue is attributable to the professional services revenue because the Company has moved to a full SaaS model versus one-time professional fees.
Gross Margin
Cost of revenues includes the direct costs to deliver the services including labor, overhead, hardware and shipping and freight costs. Non-GAAP combined cost of revenues for the year ended December 31, 2023 were $1,751 thousand compared to $2,064 thousand for the comparable period in the prior year. This decrease in cost of revenues of approximately $313 thousand, or approximately 15%, was attributable to the decrease in professional services revenue related costs.
Gross profit, calculated as revenues less costs of revenues, may vary between periods and is primarily affected by various factors including average selling prices, product costs, product mix, customer mix, and production volumes. The gross profit margin for the year ended December 31, 2023 was 76% (Non-GAAP combined) compared to 76% for the year ended December 31, 2022.
Operating Expenses
Operating expenses consist
primarily of research and development costs, sales and marketing costs, and general and administrative costs. Non-GAAP combined operating
expenses for the year ended December 31, 2023 were $58,204 thousand and $35,431 thousand for the comparable period ended December 31,
2022. This increase of $22,773 thousand is primarily attributable to increase in impairment of goodwill of $30,516 thousand and a decrease
of $7,743 thousand in other operating expenses as an effect of management reduction effort post-business combination.
Loss From Operations
Non-GAAP combined loss from
operations for the year ended December 31, 2023 was $52,589 thousand as compared to $29,025 thousand for the comparable period in the
prior year. This increase in loss of $23,564 thousand is primarily attributable to increased operating expenses as detailed above plus
the decreased gross profit of approximately $791 thousand.
Other Income/(Expense)
Other income (expense) consists primarily of change in fair value of derivative liabilities. Change in fair value of derivative liabilities for the year ended December 31, 2023 is a loss of approximately $4,714 thousand.
Provision for Income Taxes
There was an income tax benefit of $3,572 thousand for the year ended December 31, 2023 (Non-GAAP combined) and an income tax loss of approximately $153 thousand for the year ended December 31, 2022. The net income tax benefit for the year ended December 31, 2023 is primarily a result of the release of valuation allowance attributable to acquired intangible assets from the Business Combination on March 14, 2023.
Net Loss
Non-GAAP combined net loss
for the year ended December 31, 2023 was $53,618 thousand, compared to $29,175 thousand for the comparable period in the prior year. This
increase in loss of approximately $24,443 thousand was primarily attributable to the increase in operating expenses of $22,773 thousand,
change in fair value of derivative liabilities of $4,714 thousand, and other income of $110 thousand, the lower gross margin of $791 thousand,
offset by a lower income tax benefit of approximately $3,725 thousand.
42
Non-GAAP Financial information
EBITDA
This Report includes a non-GAAP measure that we use to supplement our results presented in accordance with U.S. GAAP. EBITDA is defined as earnings before interest and other income, tax and depreciation and amortization. Adjusted EBITDA is used by our management as the matrix in which it manages the business. It is defined as EBITDA plus adjustments for other income or expense items, non-recurring items and non-cash stock-based compensation. Adjusted EBITDA is a performance measure that we believe is useful to investors and analysts because it illustrates the underlying financial and business trends relating to our core, recurring results of operations and enhances comparability between periods.
Adjusted EBITDA is not a recognized measure under U.S. GAAP and is not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. Investors should exercise caution in comparing our non-GAAP measure to any similarly titled measure used by other companies.
This non-GAAP measure excludes certain items required by U.S. GAAP and should not be considered as an alternative to information reported in accordance with U.S. GAAP. The table below presents our adjusted EBITDA reconciled to net income, the most comparative GAAP measure, for the periods indicated (in thousands).
Successor
Predecessor
Period from
March 15, 2023 to
December 31,
2023
Period from
January 1, 2023 to
March 14,
2023
Year ended
December 31,
2022
Net loss
$
(49,238
)
$
(4,380
)
$
(29,175
)
Interest and other income
(65
)
(1
)
(4
)
Tax expense (benefit)
(3,572
)
-
153
Depreciation and amortization
2,237
1,034
4,531
EBITDA
(50,638
)
(3,347
)
(24,487
)
Adjusted for:
Acquisition transaction/financing costs
543
-
16
Earnout compensation expense/(benefit)
-
-
(2,827
)
Changes in fair value of warrant liabilities
4,714
-
-
Unrealized (gains) losses
(44
)
(32
)
-
Impairment of goodwill
36,056
-
5,540
Unrealized gains on notes, loans, investments
-
-
1,478
Stock-based compensation – compensation and related benefits
1,080
158
1,640
Severance costs
-
-
754
Adjusted EBITDA
$
(8,289
)
$
(3,221
)
$
(17,886
)
We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:
●
To compare our current operating results with corresponding periods and with the operating results of other companies in our industry;
●
As a basis for allocating resources to various projects;
43
●
As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and
●
To evaluate internally the performance of our personnel.
We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:
●
We believe Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, depreciation and amortization and other non- cash items including acquisition transaction and financing costs, earnout compensation expense, professional service fees, goodwill impairment, unrealized gains, stock-based compensation, severance costs, interest income and expense, and income tax benefit.
●
We believe that it is useful to provide investors with a standard operating metric used by management to evaluate our operating performance; and
●
We believe that the use of Adjusted EBITDA is helpful to compare our results to other companies.
Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:
●
Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
●
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
●
Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
●
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
●
Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and
●
Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure.
Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, contractual obligations and other commitments. We assess liquidity in terms of our cash flows from operations and their sufficiency to fund our operating and investing activities.
44
As of December 31, 2023 the Company has a working capital deficit of approximately $1,287 thousand and cash of approximately $6,275 thousand. For the period from March 15, 2023 to December 31, 2023 (Successor) the Company incurred net loss of approximately $49,238 thousand. For the period March 15 to December 31, 2023 (Successor) the Company used approximately $12,766 thousand of cash for operating activities, of which $5,876 thousand was from a reduction in accrued liabilities, primarily paying merger related transaction liabilities. The Predecessor Company used approximately $5,144 thousand and $18,895 thousand cash for operating activities for period January 1, 2023 to March 14, 2023 and year ended December 31, 2022, respectively.
The Management believes that
the current liquidity position, including the cash raised under the promissory note of $3,000 thousand dollars payable by December 2024, and the equity line financing agreement we entered into on May 22, 2024 for up to $10,000 thousand, with an initial draw of $2,500 thousand
in the second quarter of 2024,
has the ability to mitigate any going concern indicators for a period of at least one year from the date these financial statements are
issued.
Liquidity and Capital Resources as of December 31, 2023 Compared With December 31, 2022
The Company’s net cash flows used in operating, investing and financing activities and certain balances are as follows (in thousands):
Successor
Predecessor
Period from
March 15,
2023 to
December 31,
2023
Period from
January 1,
2023 to
March 14,
2023
Year ended
December 31,
2022
Net cash used in operating activities
$
(12,766
)
$
(5,144
)
$
(18,895
)
Net cash provided (used) by investing activities
9,946
(54
)
(482
)
Net cash provided by financing activities
7,620
8,892
20,728
Effect of foreign exchange rate changes on cash
(28
)
1
(71
)
Net increase in cash and cash equivalents
$
4,772
$
3,695
$
1,280
Successor
Predecessor
December 31,
2023
December 31,
2022
Cash and cash equivalents
$
6,275
$
6,308
Working capital surplus (deficit)
$
(1,287
)
$
3,154
Operating Activities for the years ended December 31, 2023 and 2022
Net cash used in operating activities during the period consisted of the following (in thousands):
Successor
Predecessor
Period from
March 15,
2023 to
December 31,
2023
Period from
January 1,
2023 to
March 14,
2023
Year ended
December 31,
2022
Net loss
$
(49,238
)
$
(4,380
)
$
(29,175
)
Non-cash income and expense
40,813
1,200
10,133
Net change in operating assets and liabilities
(4,341
)
(1,964
)
147
Net change in operating assets and liabilities
$
(12,766
)
$
(5,144
)
$
(18,895
)
45
The non-cash expenses were approximately $40,813 thousand, $1,200 thousand, and $10,133 thousand for the period from March 15, 2023 to December 31, 2023 (Successor), period from January 1, 2023 to March 14, 2023 (Predecessor), and year ended December 31, 2022 (Predecessor), respectively:
Successor
Predecessor
Period from
March 15,
2023 to
December 31,
2023
Period from
January 1,
2023 to
March 14,
2023
Year ended
December 31,
2022
Depreciation and amortization
$
2,237
$
1,034
$
4,531
Amortization of right of use asset
298
40
266
Amortization of debt discount and deferred financing cost
37
-
-
Stock-based compensation expense
1,080
158
1,640
(Gain) or loss on change in fair value of derivative liability
4,714
-
-
Deferred income taxes
(3,570
)
-
-
Unrealized loss on note
-
-
1,478
Impairment of goodwill
36,056
-
5,540
Earnout payment expense
-
-
(2,827
)
(Gain) loss on foreign currency transactions
(44
)
(32
)
-
Other
5
-
(495
)
Total non-cash expenses
$
40,813
$
1,200
$
10,133
The net cash used in the change
in operating assets and liabilities were approximately $4,341 thousand and $1,964 thousand for the period from March 15, 2023 to December
31, 2023 (Successor) and January 1, 2023 to March 14, 2023 (Predecessor), respectively. The net cash provided by change in operating assets
and liabilities for the year ended December 31, 2022 (Predecessor) is approximately $147 thousand:
Successor
Predecessor
Changes in Operating Assets and Liabilities
Period from
March 15,
2023 to
December 31,
2023
Period from
January 1,
2023 to
March 14,
2023
Year ended
December 31,
2022
Accounts receivable and other receivables
$
300
$
(857
)
$
109
Prepaid expenses and other current assets and other assets
682
(20
)
244
Accounts payable
499
(796
)
400
Accrued liabilities and other liabilities
(5,876
)
(787
)
583
Operating lease liabilities
(306
)
(38
)
(257
)
Deferred revenue
360
534
(932
)
Net cash (used in) provided by the changes in operating assets and liabilities
$
(4,341
)
$
(1,964
)
$
147
46
Cash Flows from Investing Activities for the years ended December 31, 2023 and December 31, 2022
Net cash flows provided by investing activities during the period from March 15, 2023 to December 31, 2023 (Successor) was approximately $9,946 thousand compared to net cash flows used in investing activities for the period from January 1, 2023 to March 14, 2023 (Predecessor) and during the year ended December 31, 2022 (Predecessor) of approximately $54 thousand and $482 thousand, respectively. Cash flows related to investing activities during the period from March 15, 2023 to December 31, 2023 (Successor) include $57 thousand for the purchase of property and equipment, and $10,003 thousand for cash acquired in connection with the Business Combination. Cash flows related to investing activities during the period from January 1, 2023 to March 14, 2023 (Predecessor) include $9 thousand for the purchase of property and equipment, and $45 thousand for the investment in capitalized software. Cash flows related to investing activities during the year ended December 31, 2022 (Predecessor) include $88 thousand for the purchase of property and equipment, and $394 thousand for investment in capitalized software.
Cash Flows from Financing Activities for the years ended December 31, 2023 and December 31, 2022
Net cash flows provided by
financing activities during period from March 15, 2023 to December 31, 2023 (Successor) was $7,620 thousand compared to net cash flows
provided by financing activities for the period from January 1, 2023 to March 14, 2023 (Predecessor) and during the year ended December
31, 2022 (Predecessor) of approximately $8,892 thousand and $20,728 thousand, respectively. During the period from March 15, 2023 to December
31, 2023 (Successor), the Company paid $328 thousand in cash outflows from a repayment of a related party promissory note, received $3,000
thousand from the issuance of a promissory note, received $5,002 thousand of cash proceeds for exercise of 435 public
warrants and paid $54 thousand of issuance cost. During the period from January 1, 2023 to March
14, 2023 (Predecessor), the Company received $9,089 thousand in incoming cash flows from parent, and paid $197 thousand in cash outflows
from a payment of an acquisition liability. During the year ended December 31, 2022 (Predecessor), the Company received $25,967 thousand
in incoming cash flows from parent, and paid $104 thousand and $5,135 thousand in cash outflows from taxes paid related to share based
compensation and from a payment of an acquisition liability, respectively.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Contractual Obligations and Commitments
Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered during our course of business. Our contractual obligations consist of operating lease liabilities and acquisition liabilities that are included in our balance sheet. As of December 31, 2023, the total obligation for operating leases is approximately $505 thousand, of which approximately $275 thousand is expected to be paid in the next twelve months.
Financing Obligations and Requirements
As of May 15, 2024, the Company
owed approximately $3,885 thousand in principal and accrued interest payable of $165 thousand payable within the next nine months. The
interest rate is 10%. See Note 10 of the Notes to Consolidated Financial Statements.
Net cash used in operating
activities during the period March 15, 2023 to December 31, 2023 (Successor) of $12,766 thousand consists of net loss of $49,238 thousand
offset by non-cash adjustments of approximately $40,813 thousand less net cash changes in operating assets and liabilities of approximately
$4,341 thousand. Although the Company has sustained significant losses during the period March 15, 2023 to December 31, 2023 (Successor),
we raised net proceeds of approximately $5,002 thousand and $3,000 thousand from the warrant exchange transaction and from issuance of
promissory note, respectively. We also entered into an equity line financing agreement on May 22, 2024 for up to $10,000 thousand, with
an initial draw of $2,500 thousand in the second quarter of 2024. Given our current cash balances and budgeted cash flow requirements,
the Company believes such funds are sufficient to satisfy its working capital needs, capital asset purchases, debt repayments and other
liquidity requirements associated with its existing operations for the next 12 months from the issuance date of the financial statements.
The Company may continue to pursue strategic transactions and may raise additional capital as needed, using our equity securities and/or
cash and debt financings in combinations appropriate for each acquisition.
47
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2 of the consolidated financial statements that are included elsewhere in this filing. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. There have been no changes to estimates during the periods presented in the filing. Historically changes in management estimates have not been material.
Revenue Recognition
The Company recognizes revenue when control is transferred of the promised products or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services. The Company derives revenue from its software as a service for cloud-based software, as well as design, implementation and other professional services for work performed in conjunction with its cloud based software. The Company enters into contracts with its customers whereby it grants a non-exclusive cloud-based license for the use of its proprietary software and for professional services. The contracts may also provide for on-going services for a specified price, which may include maintenance services, designated support, and enhancements, upgrades and improvements to the software, depending on the contract. Licenses for cloud software provide the customer with a right to use the software as it exists when made available to the customer. All software provides customers with the same functionality and differs mainly in the duration over which the customer benefits from the software.
License Subscription Revenue Recognition (Software As A Service)
The timing of the Company’s revenue recognition related to the licensing revenue stream is dependent on whether the software licensing agreement entered into represents a service. Software that relies on an entity’s IP and is delivered only through a hosting arrangement, where the customer cannot take possession of the software, is a service. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software.
The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice.
Professional Services Revenue Recognition
Professional services under milestone contracts are 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 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.
48
Goodwill, Acquired Intangible Assets and Other Long-Lived Assets — Impairment Assessments
Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.
When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Based on our evaluation we did not record a charge for impairment related to long-lived assets for the period ended March 15, 2023 to December 31, 2023 (Successor), for the period ended January 1, 2023 to March 14, 2023 (Predecessor) and for the year ended December 31, 2022 (Predecessor).
We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the period ended March 14, 2023 (Predecessor), for the period ended March 15, 2023 to December 31, 2023 (Successor), and the year ended December 31, 2022 (Predecessor), which would indicate a revision to the remaining amortization period related to any of our long-lived assets. Accordingly, we believe that the current estimated useful lives of long-lived assets reflect the period over which they are expected to contribute to future cash flows and are therefore deemed appropriate.
We have recorded goodwill and other indefinite-lived assets in connection with the Business Combination. Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of the acquired company, is not amortized. Indefinite-lived intangible assets are stated at fair value as of the date acquired in a business combination. The recoverability of goodwill is evaluated at least annually and when events or changes in circumstances indicate that the carrying amount may not be recoverable.
We analyzed goodwill first to assess qualitative factors, such as macroeconomic conditions, changes in the business environment and reporting unit specific events, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a detailed goodwill impairment test as required. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. If we bypass the qualitative assessment or conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount. We calculate the estimated fair value of a reporting unit using a weighting of the income and market approaches. For the income approach, we use internally developed discounted cash flow models that include the following assumptions, among others made by management: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. For the market approach, we use internal analyses based primarily on market comparables. We base these assumptions on its historical data and experience, third party appraisals, industry projections, micro and macro general economic condition projections, and its expectations. Due to the variables inherent in our estimates of fair value, differences in assumptions may have a material effect on the result of our impairment analysis.
Based on its assessments,
the Company has recorded impairment of goodwill of $36,056 thousand for the period from March 15, 2023 to December 31, 2023 (Successor)
and $5,540 thousand for the year 2022 (Predecessor).
49
Deferred Income Taxes
In accordance with ASC 740 “Income Taxes” (“ASC 740”), management routinely evaluates the likelihood of the realization of its income tax benefits and the recognition of its deferred tax assets. In evaluating the need for any valuation allowance, management will assess whether it is more likely than not that some portion, or all, of the deferred tax asset may not be realized on a jurisdictional basis. Ultimately, the realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which temporary differences become deductible and/or tax credits and tax loss carry-forwards can be utilized. In performing its analyses, management considers both positive and negative evidence including historical financial performance, previous earnings patterns, future earnings forecasts, tax planning strategies, economic and business trends and the potential realization of net operating loss carry-forwards within a reasonable timeframe. To this end, management considered (i) that we have had historical losses in the prior years and cannot anticipate generating a sufficient level of future profits in order to realize the benefits of our deferred tax asset; (ii) tax planning strategies and (iii) the adequacy of future income as of and for the three months ended December 31, 2023 (Successor), based upon certain economic conditions and historical losses through December 31, 2023. After consideration of these factors, management deemed it appropriate to establish a full valuation allowance with respect to the deferred tax assets for the Company as of December 31, 2023 (Successor) and December 31, 2022 (Predecessor), and no liability for unrecognized tax benefits was required to be reported.
The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the three months ended December 31, 2023 (Successor), the period from March 15, 2023 to December 31, 2023 (Successor), the period ended March 14, 2023 (Predecessor), the three months ended December 31, 2022 (Predecessor) or the year ended December 31, 2022 (Predecessor).
Business Combinations
We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to our combined financial results will be adjusted. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.
Upon acquisition, the accounts and results of operations are combined as of and subsequent to the acquisition date and are included in our Combined Financial Statements from the acquisition date.
JOBS Act Accounting Election
Following the transaction, CXApp will be an “emerging growth company” as defined in the JOBS Act. As such, the Company will be eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the requirements to hold a non-binding advisory vote on executive compensation and any golden parachute payments not previously approved. The Company has not made a decision whether to take advantage of any or all of these exemptions. If the Company does take advantage of some or all of these exemptions, some investors may find the Company’s common stock less attractive. The result may be a less active trading market for the Company’s common stock and its stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards, meaning that CXApp, as an emerging growth company, can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of this extended transition period, and therefore our financial statements may not be comparable to those of companies that comply with such new or revised accounting standards. Section 107 of the JOBS Act provides that our decision not to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
50