CXAPP
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
March 31,
2023 | | |
December 31,
2022 | |
| |
(unaudited) | | |
| |
Assets | |
| | | |
| | |
| |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 6,724 | | |
$ | 6,308 | |
Accounts receivable | |
| 2,671 | | |
| 1,338 | |
Notes and other receivables | |
| 102 | | |
| 273 | |
Prepaid expenses and other current assets | |
| 1,232 | | |
| 650 | |
Total current assets | |
| 10,729 | | |
| 8,569 | |
| |
| | | |
| | |
Property and equipment, net | |
| 153 | | |
| 202 | |
Intangible assets, net | |
| 20,753 | | |
| 19,289 | |
Operating lease right-of-use asset, net | |
| 549 | | |
| 681 | |
Software development costs, net | |
| - | | |
| 487 | |
Goodwill | |
| 44,122 | | |
| - | |
Other assets | |
| 78 | | |
| 52 | |
| |
| | | |
| | |
Total Assets | |
$ | 76,384 | | |
$ | 29,280 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity | |
| | | |
| | |
| |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 596 | | |
$ | 1,054 | |
Accrued liabilities | |
| 3,233 | | |
| 1,736 | |
Deferred revenue | |
| 2,690 | | |
| 2,162 | |
Acquisition liability | |
| - | | |
| 197 | |
Warrant liability | |
| 963 | | |
| - | |
Operating lease obligation, current | |
| 195 | | |
| 266 | |
Total current liabilities | |
| 7,677 | | |
| 5,415 | |
| |
| | | |
| | |
Operating lease obligation, noncurrent | |
| 376 | | |
| 444 | |
Other liabilities | |
| - | | |
| 30 | |
Deferred tax liability | |
| 2,778 | | |
| - | |
Total Liabilities | |
$ | 10,831 | | |
$ | 5,889 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Equity | |
| | | |
| | |
Class A Common Stock, $0.0001 par value; 200,000,000 shares authorized, 8,582,699 shares issued and outstanding as of March 31, 2023 | |
| 1 | | |
| - | |
Class C Common Stock, $0.0001 par value; 10,000,000 shares authorized, 5,487,300 shares issued and outstanding as of March 31, 2023 | |
| 1 | | |
| - | |
Additional paid-in capital | |
| 71,536 | | |
| - | |
Accumulated deficit | |
| (5,985 | ) | |
| - | |
Accumulated other comprehensive income | |
| - | | |
| 1,155 | |
Net parent investment | |
| - | | |
| 22,236 | |
Total Stockholders’ Equity | |
$ | 65,553 | | |
$ | 23,391 | |
| |
| | | |
| | |
Total Liabilities and Stockholders’ Equity | |
$ | 76,384 | | |
$ | 29,280 | |
The accompanying
notes are an integral part of the unaudited condensed consolidated financial statements.
CXAPP INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share
data)
| |
| | | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
Period from
March 15,
2023 to March 31,
2023 | | |
Period from
January 1,
2023 to March 14,
2023 | | |
Three months ended
March 31,
2022 | |
Revenues | |
$ | 342 | | |
$ | 1,620 | | |
$ | 2,582 | |
| |
| | | |
| | | |
| | |
Cost of Revenues | |
| 87 | | |
| 483 | | |
| 589 | |
| |
| | | |
| | | |
| | |
Gross Profit | |
| 255 | | |
| 1,137 | | |
| 1,993 | |
| |
| | | |
| | | |
| | |
Operating Expenses | |
| | | |
| | | |
| | |
Research and development | |
| 211 | | |
| 1,455 | | |
| 1,991 | |
Sales and marketing | |
| 174 | | |
| 964 | | |
| 1,122 | |
General and administrative | |
| 241 | | |
| 2,293 | | |
| 2,304 | |
Amortization of intangible assets | |
| 116 | | |
| 806 | | |
| 975 | |
Change in fair value of earnout | |
| - | | |
| - | | |
| (2,827 | ) |
Total Operating Expenses | |
| 742 | | |
| 5,518 | | |
| 3,565 | |
| |
| | | |
| | | |
| | |
Loss from Operations | |
| (487) | | |
| (4,381 | ) | |
| (1,572 | ) |
| |
| | | |
| | | |
| | |
Other Income (Expense) | |
| | | |
| | | |
| | |
Interest income (expense), net | |
| (1 | ) | |
| 1 | | |
| 1 | |
Change in fair value of derivative liability | |
| 1,686 | | |
| - | | |
| - | |
Total Other Income (Expense) | |
| 1,685 | | |
| 1 | | |
| 1 | |
| |
| | | |
| | | |
| | |
Income tax benefit/(provision) | |
| 1,560 | | |
| - | | |
| (100 | ) |
Net Income (Loss) | |
$ | 2,758 | | |
$ | (4,380 | ) | |
$ | (1,671 | ) |
Unrealized foreign exchange loss from cumulative translation adjustments | |
| - | | |
| (28 | ) | |
| (189 | ) |
Comprehensive Income (Loss) | |
$ | 2,758 | | |
$ | (4,408 | ) | |
$ | (1,860 | ) |
| |
| | | |
| | | |
| | |
Basic and dilutive weighted average shares outstanding, Class A common stock | |
| 8,582,699 | | |
| | | |
| | |
Basic and dilutive net income per share, Class A common stock | |
$ | 0.20 | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Basic and dilutive weighted average shares outstanding, Class C common stock | |
| 5,487,300 | | |
| | | |
| | |
Basic and dilutive net income per share, Class C common stock | |
$ | 0.20 | | |
| | | |
| | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
CXAPP
INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| |
| | | |
| | | |
| | |
Predecessor |
| |
| | |
| | |
| |
| |
Net parent
investment | | |
Accumulated other
comprehensive income (loss) | | |
Total
Stockholders’
Equity | |
Balance at January 1, 2022 | |
$ | 20,155 | | |
$ | 56 | | |
$ | 20,211 | |
Net loss | |
| (1,671 | ) | |
| - | | |
| (1,671 | ) |
Stock-based compensation allocated from parent | |
| 647 | | |
| - | | |
| 647 | |
Parent’s common shares issued for CXApp earnout | |
| 3,697 | | |
| - | | |
| 3,697 | |
Taxes paid related to net share settlement of restricted stock units | |
| (104 | ) | |
| - | | |
| (104 | ) |
Net investments from parent | |
| 6,444 | | |
| - | | |
| 6,444 | |
Cumulative translation adjustment | |
| - | | |
| (189 | ) | |
| (189 | ) |
Balance at March 31, 2022 | |
$ | 29,168 | | |
$ | (133 | ) | |
$ | 29,035 | |
| |
| | | |
| | | |
| | |
Balance at January 1, 2023 | |
$ | 22,236 | | |
$ | 1,155 | | |
$ | 23,391 | |
Net loss | |
| (4,380 | ) | |
| - | | |
| (4,380 | ) |
Stock-based compensation allocated from parent | |
| 158 | | |
| - | | |
| 158 | |
Net investments from parent | |
| 8,680 | | |
| - | | |
| 8,680 | |
Cumulative translation adjustment | |
| - | | |
| (28 | ) | |
| (28 | ) |
Balance at March 14, 2023 | |
$ | 26,694 | | |
$ | 1,127 | | |
$ | 27,821 | |
| |
| | | |
| | |
|
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Successor |
| |
| |
|
| | |
| | |
| | |
| | |
| |
| |
Class
A
Common Stock | |
|
Class
C
Common Stock | | |
Additional
paid-in | | |
Accumulated | | |
Accumulated
other
comprehensive | | |
Total
Stockholders’
Equity | |
| |
Shares | | |
Amount | |
|
Shares | | |
Amount | | |
capital | | |
Deficit | | |
income | | |
(Deficit) | |
Balance
at March 15, 2023 | |
| 7,034,999 | | |
$ | 1 | |
|
| - | | |
$ | - | | |
$ | 1,607 | | |
$ | (8,743 | ) | |
$ | - | | |
$ | (7,135 | ) |
Shares
issued in connection with Business Combination | |
| 1,547,700 | | |
| - | |
|
| 5,487,300 | | |
| 1 | | |
| 69,927 | | |
| - | | |
| - | | |
| 69,928 | |
Net
income | |
| - | | |
| - | |
|
| - | | |
| - | | |
| - | | |
| 2,758 | | |
| - | | |
| 2,758 | |
Stock-based
compensation | |
| - | | |
| - | |
|
| - | | |
| - | | |
| 2 | | |
| - | | |
| - | | |
| 2 | |
Balance
at March 31, 2023 | |
| 8,582,699 | | |
$ | 1 | |
|
| 5,487,300 | | |
$ | 1 | | |
$ | 71,536 | | |
$ | (5,985 | ) | |
$ | - | | |
$ | 65,553 | |
The accompanying
notes are an integral part of the unaudited condensed consolidated financial statements.
CXAPP INC. AND
SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| |
| | | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
Period from
March 15,
2023 to March 31,
2023 | | |
Period from
January 1,
2023 to March 14,
2023 | | |
Three months ended
March 31,
2022 | |
Operating activities | |
| | | |
| | | |
| | |
Net income (loss) | |
$ | 2,758 | | |
$ | (4,380 | ) | |
$ | (1,671 | ) |
Adjustments to reconcile net income
(loss) to net cash used in operating activities | |
| | | |
| | | |
| | |
Depreciation and amortization | |
| 4 | | |
| 228 | | |
| 145 | |
Amortization of intangible assets | |
| 116 | | |
| 806 | | |
| 975 | |
Amortization of right of use asset | |
| 8 | | |
| 40 | | |
| 56 | |
Deferred income taxes | |
| (1,560 | ) | |
| - | | |
| (2 | ) |
Stock-based compensation expense | |
| 2 | | |
| 158 | | |
| 647 | |
Gain on earnout payment liability | |
| - | | |
| - | | |
| (2,827 | ) |
(Gain) loss on foreign currency transactions | |
| 3 | | |
| (32 | ) | |
| (266 | ) |
Gain on change in fair value of derivative liability | |
| (1,686 | ) | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Change in assets and liabilities: | |
| | | |
| | | |
| | |
Accounts receivable and other receivables | |
| (335 | ) | |
| (857 | ) | |
| (304 | ) |
Prepaid expenses and other current assets | |
| (100 | ) | |
| (20 | ) | |
| (521 | ) |
Other assets | |
| (37 | ) | |
| - | | |
| 42 | |
Accounts payable | |
| 135 | | |
| (796 | ) | |
| (94 | ) |
Accrued liabilities | |
| (3,888 | ) | |
| (787 | ) | |
| 100 | |
Income tax liabilities | |
| - | | |
| - | | |
| 6 | |
Operating lease liabilities | |
| (7 | ) | |
| (38 | ) | |
| (56 | ) |
Deferred revenue | |
| 156 | | |
| 534 | | |
| (370 | ) |
Net cash used in operating activities | |
| (4,431 | ) | |
| (5,144 | ) | |
| (4,140 | ) |
| |
| | | |
| | | |
| | |
Investing activities | |
| | | |
| | | |
| | |
Purchases of property and equipment | |
| (23 | ) | |
| (9 | ) | |
| (12 | ) |
Investment in capitalized software | |
| - | | |
| (45 | ) | |
| (39 | ) |
Cash acquired in connection with Business Combination | |
| 10,003 | | |
| - | | |
| - | |
Net cash provided by (used in) investing activities | |
| 9,980 | | |
| (54 | ) | |
| (51 | ) |
| |
| | | |
| | | |
| | |
Financing activities | |
| | | |
| | | |
| | |
Net equity investment from parent | |
| - | | |
| 9,089 | | |
| 6,444 | |
Taxes paid related to stock based compensation | |
| - | | |
| - | | |
| (104 | ) |
Repayment of CXApp acquisition liability | |
| - | | |
| (197 | ) | |
| (1,787 | ) |
Repayment of related party promissory note | |
| (328 | ) | |
| - | | |
| - | |
Net cash (used in) provided by financing activities | |
| (328 | ) | |
| 8,892 | | |
| 4,553 | |
| |
| | | |
| | | |
| | |
Effect of exchange rate changes on cash and cash equivalents | |
| - | | |
| 1 | | |
| 4 | |
Net increase in cash and cash equivalents | |
| 5,221 | | |
| 3,695 | | |
| 366 | |
Cash and cash equivalents, beginning of period | |
| 1,503 | | |
| 6,308 | | |
| 5,028 | |
Cash and cash equivalents, end of period | |
$ | 6,724 | | |
$ | 10,003 | | |
$ | 5,394 | |
| |
| | | |
| | | |
| | |
Supplemental disclosures of cash flow information | |
| | | |
| | | |
| | |
Cash paid for taxes | |
$ | - | | |
$ | - | | |
$ | - | |
Cash paid for interest | |
$ | - | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | |
Supplemental schedule of noncash investing and financing activities | |
| | | |
| | | |
| | |
Parent’s net equity issued for CX App earnout | |
$ | - | | |
$ | - | | |
$ | 3,697 | |
Noncash distribution | |
$ | - | | |
$ | 409 | | |
$ | - | |
Class A Common Stock and Class C Common Stock issued in connection with Business Combination | |
$ | 69,928 | | |
$ | - | | |
$ | - | |
Financing of Director and Officer Insurance (see Note 9) | |
$ | 537 | | |
$ | - | | |
$ | - | |
The
accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – Organization, Nature of Business and Basis of Presentation
CXApp Inc. and its subsidiaries
(“CXApp” or the “Company”) is in the business of delivering intelligent enterprise workplace experiences. 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 experiences in a hybrid
workplace.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States
of America (“GAAP”), for interim financial information and the rules and regulations of the Securities and Exchange Commission
(“SEC”). Accordingly, CXApp does not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of CXApp, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Interim results for the three months ended March 31, 2023 are not necessarily indicative of the results for the full
year ending December 31, 2023. These interim unaudited condensed consolidated financial statement should be read in conjunction with KINS
Technology Group Inc.’s (“KINS”) audited consolidated financial statements and notes for the year ended December 31,
2022 and 2021 included in the annual report on Form 10-K/A for the year ended December 31, 2022, filed with the SEC on April 19, 2023,
and the annual report of Legacy CXApp for the year ended December 31, 2022 and 2021 included as an exhibit to Form 8-K filed with the
SEC on March 20, 2023. All material inter-company balances and transactions have been eliminated.
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,
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) (“Legacy CXApp”) in exchange for the issuance of shares of KINS
capital stock (the “Business Combination”). As a result of the Business Combination, KINS changed their name to CXApp Inc.
(“New CXApp”). The shares are now trading on the Nasdaq using the ticker CXAI. The transaction closed on March 14, 2023. See
Note 3 for more details.
Unless the context otherwise requires, “we,”
“us,” “our,” “CXApp” and the “Company” refer to CXApp Inc., a Delaware corporation, and
its consolidated subsidiaries following the Business Combination (as defined below). Unless the context otherwise requires, references
to “KINS” refer to KINS Technology Group Inc., a Delaware corporation (“KINS”), the Company prior to the Business
Combination. All references herein to the “Board” refer to the board of directors of the Company. “Legacy CXApp”
refers to CXApp Holding Corp., a Delaware corporation and a wholly owned subsidiary of the Company, which the Company acquired through
the Business Combination. Prior to the Separation (as defined below), Legacy CXApp was a wholly owned subsidiary of Inpixon, a Nevada
corporation (“Inpixon”).
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, the “Enterprise Apps Business” (formerly known as CXApp) is treated as the “acquired”
company for financial reporting purposes. KINS (now known as CXApp Inc.) has been determined to be the accounting acquirer because KINS
maintains control of the Board of Directors and management of the combined company.
The
unaudited condensed consolidated financial statements of Successor and Predecessor are not comparable due to a new basis of accounting
that was created from the business combination that occurred on the Closing Date (Note 3). Therefore, the reporting period has been separated
by a black line in the condensed consolidated financial statements with the Predecessor representing the pre-Closing Date period (January
1, 2023 through March 14, 2023) and the Successor representing the post-Closing Date period (March 15, 2023 through March 31, 2023).
The Company noted that the “Predecessor” includes financial information related to the Enterprise Apps Business (as defined
in Note 3), while the “Successor” includes financial information related to the newly formed company after the business combination.
NOTE
2 – Summary of Significant Accounting Policies
Liquidity
As
of March 31, 2023 (Successor), the Company has a working capital surplus of approximately $3,052 thousand and cash and cash equivalents of approximately
$6,724 thousand. For the period ended March 31, 2023 (Successor), the Company incurred net income
of approximately $2,758 thousand. During the period ended March 31, 2023 (Successor), the Company used approximately $4,431 thousand of
cash for operating activities, of which $3,888 thousand was from a reduction in accrued liabilities, primarily paying merger related
transaction liabilities. In assessing the Company’s ability to continue as a going concern, the Company monitors and analyzes its
cash and its ability to generate sufficient cash flow in the future to support its operating and capital expenditure commitments.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company cannot
assure that it will ever earn revenues sufficient to support their operations, or that it will ever achieve profitable operations.
The Company’s recurring losses and utilization of cash in its operations are indicators of substantial doubt that the entity
can continue as a going concern however with the Company’s current liquidity position the Company has taken steps to reduce
operating expenses and extend it’s runway. The Company intends to finance its future working capital requirements and capital
expenditures from cash generated from operating activities and may consider raising funds from equity financings. Management
believes that the actions presently being taken to further implement its business plan and generate its revenues provide the
opportunity for the Company to continue as a going concern for at least 12 months from the issuance of these condensed consolidated
financial statements. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise
additional funds, there can be no assurances to that effect for at least twelve months from the issuance of these condensed
consolidated financial statements. The ability of the Company to continue as a going concern is dependent upon the Company’s
ability to further implement its business plan. The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary
course of business. The financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of the uncertainties
described above.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each of the reporting
periods. Actual results could differ from those estimates. The Company’s significant estimates consist of:
| ● | the
valuation of stock-based compensation; |
| ● | the
valuation of warrant liabilities; |
| ● | the
allowance for credit losses; |
| ● | the
valuation allowance for deferred tax assets; and |
| ● | impairment
of long-lived assets and goodwill. |
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash, checking accounts, money market accounts, temporary investments and certificates of deposit with
maturities of three months or less when purchased. As of March 31, 2023 (Successor), the Company had cash equivalents of approximately $2,000 thousand of certificates of
deposit held by a number of banks limited to $250 thousand per bank with a duration of 90 days or less and at December 31, 2022 (Predecessor)
the Company had no cash equivalents.
Accounts
Receivable, net and Allowance for Credit Losses
Accounts receivables are stated at the amount
the Company expects to collect. The Company recognizes an allowance for credit losses to ensure accounts receivables are not overstated
due to un-collectability. Bad debt reserves are maintained for various customers based on a variety of factors, including the length
of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts
is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy
filings, or deterioration in such customer’s operating results or financial position. If circumstances related to a customer change,
estimates of the recoverability of receivables would be further adjusted. The Company’s allowance for credit losses is not significant
as of March 31, 2023 (Successor) and at December 31, 2022 (Predecessor).
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property
and Equipment, net
Property
and equipment are recorded at cost, less accumulated depreciation and amortization. The Company depreciates its property and equipment
for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range from 3 to
10 years. Leasehold improvements are amortized over the lesser of the useful life of the asset or the initial lease term. Expenditures
for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred,
and expenditures, which extend the economic life, are capitalized. When assets are retired, or otherwise disposed of, the costs and related
accumulated depreciation or amortization are removed from the accounts and any gain or loss on disposal is recognized.
Intangible
Assets
Intangible
assets primarily consist of developed technology, customer lists/relationships, non-compete agreements, intellectual property
agreements, export licenses and trade names/trademarks. They are amortized ratably over a range of 1
to 10
years, which approximates customer attrition rate and technology obsolescence. The Company assesses the carrying value of its
intangible assets for impairment each year. Based on its assessments, the Company did not incur any impairment charges for the
period ended March 31, 2023 (Successor), period ended March 14, 2023 (Predecessor), and three months ended March 31, 2022
(Predecessor).
Goodwill
The
Company tests goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that
the Company may not be able to recover the carrying amount of the net assets of the reporting unit. The Company has determined that the
reporting unit is the entire company, due to the integration of all of the Company’s activities. In evaluating goodwill for impairment,
the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that
the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment, or if the Company
concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs
a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.
The
Company calculates the estimated fair value of a reporting unit using a weighting of the income and market approaches. For the income
approach, the Company uses internally developed discounted cash flow models that include the following assumptions, among others: 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, the Company uses internal analyses based primarily on market
comparables. The Company bases these assumptions on its historical data and experience, third party appraisals, industry projections,
micro and macro general economic condition projections, and its expectations.
Leases
and Right-of-Use Assets
The
Company determines if an arrangement is a lease at its inception. Operating lease liabilities are recognized at the lease commencement
date based on the present value of lease payments over the lease term. The Company generally uses their incremental borrowing rate based
on the information available at the lease commencement date in determining the present value of future payments, because the implicit
rate of the lease is generally not known. Right-of-use assets related to the Company’s operating lease liabilities are measured
at lease inception based on the initial measurement of the lease liability, plus any prepaid lease payments and less any lease incentives.
The Company’s lease terms that are used in determining their operating lease liabilities at lease inception may include options
to extend or terminate the leases when it is reasonably certain that the Company will exercise such options. The Company amortizes their
right-of-use assets as operating lease expense generally on a straight-line basis over the lease term and classify both the lease amortization
and imputed interest as operating expenses. The Company does not recognize lease assets and lease liabilities for any lease with an original
lease term of less than one year.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. Accordingly,
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period
that the change is effective. Income tax benefits are recognized when it is probable that the deduction will be sustained. A valuation
allowance is established when it is more likely than not that all or a portion of a deferred tax asset will either expire before the
Company is able to realize the benefit, or that future deductibility is uncertain.
Comprehensive
Income (Loss) and Foreign Currency Translation
The
Company reports comprehensive income (loss) and its components in its unaudited condensed consolidated financial statements. Comprehensive
loss consists of net loss and foreign currency translation adjustments, affecting stockholders’ equity that, under GAAP, are excluded
from net loss.
Assets
and liabilities related to the Company’s foreign operations are calculated using the Philippine peso and Canadian Dollar, and are
translated at end-of-period exchange rates, while the related revenues and expenses are translated at average exchange rates prevailing
during the period. Gains or losses resulting from transactions denominated in foreign currencies are included in general and administrative
expenses in the unaudited condensed consolidated statements of operations. The Company engages in foreign currency denominated transactions
with customers that operate in functional currencies other than the U.S. dollar. Aggregate foreign currency net transaction losses were
not material for the period ended March 31, 2023 (Successor), period ended March 14, 2023 (Predecessor) and three months ended March
31, 2022 (Predecessor).
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 differ mainly in the duration over which the customer benefits from the software.
License
Subscription Revenue Recognition (Software As A Service)
With respect to sales of the Company’s
license agreements, customers generally pay fixed annual fees in advance in exchange for the Company’s software service provided
by via electronic, which are generally recognized ratably over the license term. Some agreements allow the customer to terminate their
subscription contracts before the end of the applicable term, and in such cases the customer is generally entitled to a refund pro-rata
but only for the elapsed time remaining at the point of termination, which would approximate the deferred revenue at such time. The Company’s
performance obligation is satisfied over time as the 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. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
Renewals or extensions of licenses are evaluated
as distinct licenses and revenue attributed to the distinct service is not recognized until (1) the entity provides the distinct license
(or makes the license available) to the customer and (2) the customer is able to use and benefit from the distinct license. Renewal contracts
are not combined with original contracts, and, as a result, the renewal right is evaluated in the same manner as all other additional
rights granted after the initial contract. The revenue is not recognized until the customer can begin to use and benefit from the license,
which is typically at the beginning of the license renewal period. The Company recognizes revenue resulting from renewal of licensed software
over time.
Professional
Services Revenue Recognition
The
Company’s professional services include milestone, fixed fee and time and materials contracts.
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.
Professional services are also contracted on the
fixed fee and in some cases on a time and materials basis. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables.
The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts
is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed
as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice
because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to
date. For fixed fee contracts 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 period ended March 31, 2023 (Successor), period ended
March 14, 2023 (Predecessor) and three months ended March 31, 2022 (Predecessor), the Company did not incur any such losses. These amounts
are based on known and estimated factors.
Contract
Balances
The
timing of the Company’s revenue recognition may differ from the timing of invoicing to and payment by its customers. The Company
records an unbilled receivable when revenue is recognized prior to invoicing and the Company has an unconditional right to payment. Alternatively,
when invoicing a customer precedes the company providing of the related services, the Company records deferred revenue until the performance
obligations are satisfied. The Company had deferred revenue of approximately $2,690
thousand and $2,162
thousand as of March 31, 2023 (Successor) and
December 31, 2022 (Predecessor), respectively, related to customer invoices rendered in advance for software licenses and professional
services provided by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for the
deferred revenue associated with professional services, and recognize the deferred revenue related to licenses generally over the remaining
contract term generally twelve months following the commencement of the license. The Company recognized revenue in the reporting period
of $170 thousand,
$865
thousand, and $1,328
thousand that was included in the contract liability
balance at the beginning of the period, for the period ended March 31, 2023 (Successor), period ended March 14, 2023 (Predecessor) and
three months ended March 31, 2022 (Predecessor), respectively.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Costs
to Obtain a Contract
The Company recognizes eligible sales commissions
as an asset as the commissions are an incremental cost of obtaining a contract with the customer and the Company expects to recover these
costs. The capitalized costs are amortized over the expected contract term.
Cost
to Fulfill a Contract
The Company incurs costs to fulfill their obligations
under a contract once it has obtained. These costs are generally not significant and are recorded to expense as incurred.
Multiple
Performance Obligations
The
Company enters into contracts with customers for its technology that include multiple performance obligations. Each distinct performance
obligation was determined by whether the customer could benefit from the good or service on its own or together with readily available
resources. The Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company’s
process for determining standalone selling price considers multiple factors including the Company’s internal pricing model and
market trends that may vary depending upon the facts and circumstances related to each performance obligation.
Sales
and Use Taxes
The
Company presents transactional taxes such as sales and use tax collected from customers and remitted to government authorities on a net
basis.
Shipping
and Handling Costs
Shipping
and handling costs are expensed as incurred as part of cost of revenues. These costs were deemed to be nominal during each of the reporting
periods.
Business
Combinations
The
Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 805 “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. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and
results of operations are included as of and subsequent to the acquisition date.
Segments
The
Company and its Chief Executive Officer (“CEO”), acting as the Chief Operating Decision Maker (“CODM”) determines
its reporting units in accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”). The Company evaluates a
reporting unit by first identifying its operating segments under ASC 280. The Company then evaluates each operating segment to determine
if it includes one or more components that constitute a business. If there are components within an operating segment that meet the definition
of a business, the Company evaluates those components to determine if they must be aggregated into one or more reporting units. If applicable,
when determining if it is appropriate to aggregate different operating segments, the Company determines if the segments are economically
similar and, if so, the operating segments are aggregated. The Company has one operating segment and reporting unit. The Company is organized
and operated as one business. Management reviews its business as a single operating segment, using financial and other information rendered
meaningful only by the fact that such information is presented and reviewed in the aggregate.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Forfeitures of unvested stock options
are recorded when they occur.
The
Company incurred stock-based compensation charges of approximately $2 thousand, $158 thousand and $647 thousand for the period ended March 31, 2023 (Successor), the period ended March 14, 2023 (Predecessor) and three months ended March 31, 2022 (Predecessor),
respectively, which are included in general and administrative expenses.
Derivative
Warrant Liabilities
The Company accounts for warrants as either equity-classified
or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance
in FASB ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives and Hedging”
(“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet
the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under
ASC 815, including whether the warrants are indexed to the Company’s own common stock, among other conditions for equity classification.
This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent
quarterly period end date while the warrants are outstanding. The Company currently has two sets of warrants outstanding, known as the
Private Placement Warrants and the Public Warrants, which are both classified as a liability.
For issued or modified warrants that meet all
of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the
time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required
to be recorded at their initial fair value on the date of issuance as a warrant liability, and adjusted to the then fair value in each
balance sheet date thereafter. Changes in the estimated fair value of the warrants are recognized as a non-cash gain or loss on the condensed
consolidated statements of operations and amounted to approximately $1,686 thousand for the period ended March 31, 2023 (Successor).
The Company utilized the Public Warrant quoted market price as the fair value of the Warrants as of each relevant date.
Earnings
Per Share
The Company computes basic and diluted earnings
per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share
are similarly calculated with the inclusion of dilutive common stock equivalents. The following table summarizes the number of common
shares and common share equivalents excluded from the calculation of diluted net income per common share for period ended March 31, 2023
(Successor), which are excluded from the calculation because (i) the warrants were below their exercise price and (ii) the stock options
were not vested :
Schedule of antidilutive shares | |
| | |
| |
Successor | |
| |
Period from
March 15,
2023 to
March 31,
2023 | |
Stock options | |
| 1,377 | |
Warrants | |
| 24,080 | |
Total | |
| 25,457 | |
Fair
Value Measurements
FASB
ASC 820, “Fair Value Measurements” (“ASC 820”), provides guidance on the development and disclosure of fair value
measurements. The Company follows this authoritative guidance for fair value measurements, which defines fair value, establishes a framework
for measuring fair value under generally accepted accounting principles in the United States, and expands disclosures about fair value
measurements. The guidance requires fair value measurements be classified and disclosed in one of the following three categories:
| ● | Level
1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date
for identical assets or liabilities. |
| ● | Level
2: Observable prices that are based on inputs not quoted on active markets but corroborated
by market data. |
| ● | Level
3: Unobservable inputs which are supported by little or no market activity and values determined
using pricing models, discounted cash flow methodologies, or similar techniques, as well
as instruments for which the determination of fair value requires significant judgment or
estimation. |
Fair
value measurements discussed herein are based upon certain market assumptions and pertinent information available to management. Fair
value measurements are applied, when applicable, to determine the fair value of the Company’s warrant liability at each reporting period.
See Note 10.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, notes and other receivable and accounts payable. The Company determines
the estimated fair value of such financial instruments presented in these financial statements using available market information and
appropriate methodologies. These financial instruments are stated at their respective historical carrying amounts, which approximate
fair value due to their short-term nature.
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
The Company has adopted FASB ASC 360 “Property,
Plant, and Equipment” (“ASC 360”) for its long-lived assets. Pursuant to ASC 360-10-35-17, an impairment loss shall be
recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying
amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset
group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of
a long-lived asset (asset group) exceeds its fair value. Pursuant to ASC 360-10-35-20 if an impairment loss is recognized, the adjusted
carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated
(amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.
Pursuant
to ASC 360-10-35-21, the Company’s long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The Company considers the following to be some examples of such events or changes
in circumstances that may trigger an impairment review: (a) significant decrease in the market price of a long-lived asset (asset group);
(b) a significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition;
(c) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset
group), including an adverse action or assessment by a regulator; (d) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of a long-lived asset (asset group); (e) a current-period operating or cash flow
loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated
with the use of a long-lived asset (asset group); and (f) a current expectation that, more likely than not, a long-lived asset (asset
group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company tests
its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
Based
on its assessments, the Company recorded no impairment charges on long-lived assets for period ended March 31, 2023 (Successor), period
ended March 14, 2023 (Predecessor) and three months ended March 31, 2022 (Predecessor), respectively.
Recently
Issued and Adopted Accounting Standards
In October 2021, the FASB issued ASU 2021-08,
“Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which addresses
diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. Under the new
guidance, the acquirer is required to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business
combination. The effective date of the standard is for fiscal years beginning after December 15, 2022, including interim periods within
those fiscal years, with early adoption permitted. CXApp adopted ASU 2021-08 on January 1, 2022. As a result of management’s evaluation,
the adoption of ASU 2021-08 did not have a material impact on the consolidated financial statements.
The Company evaluated recently issued FASB accounting
pronouncements and noted that no recent announcements were applicable to the Company.
NOTE 3 – Business Combination
On
March 14, 2023, the Company completed the Agreement and Plan of Merger (the “Merger Agreement”), by and among KINS,
Inpixon, CXApp, and KINS Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of KINS (“Merger Sub”),
pursuant to which KINS combined with CXApp, 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 agreed upon aggregate purchase price of approximately $69,928
thousand, the Company acquired all of the related assets and liabilities of Legacy CXApp. The consideration transferred in
connection with the Business Combination consisted of 1,547,700
shares of the Company’s Class A Common Stock and 5,487,300
shares of the Company’s Class C Common Stock valued at a price of $9.94
per share. The preliminary estimated goodwill of approximately $44,122
thousand arising from the Business Combination consists of an acquired workforce, as well as synergies expected from combined
operations of KINS and the CXApp.
The Company has authorized Class A and Class
C common stock. Class A common stock and New CXApp Class C common stock are identical in all respects, except that New CXApp Class C
common stock is not listed and will automatically convert into New CXApp Class A common stock on the earlier to occur of (i) the 180th
day following the closing of the Merger and (ii) the day that the last reported sale price of New CXApp Class A common stock equals or
exceeds $12.00 per share for any 20 trading days within any 30-trading day period following the closing of the Merger.
The Business Combination is being accounted for as a business combination
in accordance with ASC 805 Combinations. The Company has determined preliminary fair values of the assets acquired and liabilities assumed
in the Business Combinations. These values are subject to change as we perform additional reviews of our assumptions utilized.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company has made a provisional allocation of the purchase price
of the Business Combination to the assets acquired and the liabilities assumed as of the closing date. The
following table summarizes the preliminary purchase price allocations relating to the Business Combination (in
thousands):
Schedule of assets acquired | |
| | | |
|
|
Description | |
Fair Value | | |
Weighted
Average Useful
Life
(in years) |
|
Purchase Price | |
$ | 69,928 | | |
|
|
| |
| | | |
|
|
Assets acquired: | |
| | | |
|
|
Cash and cash equivalents | |
$ | 10,003 | | |
|
|
Accounts receivable | |
| 2,226 | | |
|
|
Notes and other receivables | |
| 209 | | |
|
|
Prepaid assets and other current assets | |
| 588 | | |
|
|
Operating lease right of use asset | |
| 557 | | |
|
|
Property and equipment, net | |
| 133 | | |
|
|
Other assets | |
| 42 | | |
|
|
Developed technology | |
| 9,268 | | |
10 years |
|
Patents | |
| 2,703 | | |
10 years |
|
Customer relationships | |
| 5,604 | | |
5 years |
|
Tradenames and trademarks | |
| 3,294 | | |
7 years |
|
Total assets acquired | |
$ | 34,627 | | |
|
|
| |
| | | |
|
|
Liabilities assumed: | |
| | | |
|
|
Accounts payable | |
$ | 461 | | |
|
|
Accrued liabilities | |
| 911 | | |
|
|
Deferred revenues | |
| 2,534 | | |
|
|
Operating lease obligation, current | |
| 194 | | |
|
|
Operating lease obligation, noncurrent | |
| 384 | | |
|
|
Deferred tax liability | |
| 4,337 | | |
|
|
Total liabilities assumed | |
| 8,821 | | |
|
|
Goodwill | |
$ | 44,122 | | |
|
|
The value of the intangible assets and
goodwill were calculated by a third party valuation firm based on projections and financial data provided by management of the
Company. Goodwill represents the excess fair value after allocation to the intangible assets. The calculated goodwill is not tax
deductible for tax purposes.
Total
acquisition-related costs for the Business Combination were approximately $3,000
thousand, which were incurred by KINS prior to the close of the Business Combination. These costs are included in the opening
retained earnings of the Company on March 15, 2023.
Measurement Period
The preliminary purchase price allocations for the
acquisitions described above are based on initial estimates and provisional amounts. In accordance with ASC 805-10-25-13, if the
initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquirer
shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement
period, acquirer shall adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts
and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized
as of that date. The Company continues to refine its inputs and estimates inherent in (i) the valuation of intangible assets, (ii)
deferred income taxes, (iii) realization of tangible assets and (iv) the accuracy and completeness of liabilities.
CXApp
Proforma Financial Information
The
following unaudited proforma financial information presents the condensed consolidated results of operations of the Company for the three
month periods ended March 31, 2023 and March 31, 2022, as if the acquisition had occurred as of the beginning of the first period presented (January 1, 2022)
instead of on March 14, 2023. The proforma information does not necessarily reflect the results of operations that would have occurred
had the entities been a single company during those periods.
The
proforma financial information for the Company and the acquired CXApp is as follows (in thousands):
Schedule of proforma financial information | |
| | | |
| | |
| |
For the
Three Months Ended March 31,
2023 | | |
For the
Three Months Ended March 31,
2022 | |
Revenues | |
$ | 1,962 | | |
$ | 2,582 | |
Net income (loss) | |
$ | (6,365 | ) | |
$ | 6,197 | |
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – Disaggregation of Revenue
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
software as a service, design and implementation services for its enterprise apps solutions systems, and professional services for work
performed in conjunction with its systems.
Revenues
consisted of the following (in thousands):
Schedule of disaggregation of Revenue | |
| | | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
Period from
March 15,
2023 to
March 31,
2023 | | |
Period from
January 1,
2023 to
March 14,
2023 | | |
Three months ended March 31,
2022 | |
Subscription revenue | |
| | | |
| | | |
| | |
Software | |
| 240 | | |
| 1,204 | | |
| 1,259 | |
Total subscription revenue | |
$ | 240 | | |
$ | 1,204 | | |
$ | 1,259 | |
| |
| | | |
| | | |
| | |
Non-subscription revenue | |
| | | |
| | | |
| | |
Professional services | |
| 102 | | |
| 416 | | |
| 1,323 | |
Total non-subscription revenue | |
$ | 102 | | |
$ | 416 | | |
$ | 1,323 | |
| |
| | | |
| | | |
| | |
Total Revenue | |
$ | 342 | | |
$ | 1,620 | | |
$ | 2,582 | |
| |
Successor | | |
Predecessor | |
| |
Period from
March 15,
2023 to
March 31,
2023 | | |
Period from
January 1,
2023 to
March 14,
2023 | | |
Three months ended March 31,
2022 | |
Revenue
recognized over time(1)(2) | |
| 342 | | |
| 1,620 | | |
| 2,582 | |
Total | |
$ | 342 | | |
$ | 1,620 | | |
$ | 2,582 | |
| (1) | Professional services are also contracted on the fixed fee and time and materials basis. Fixed fees are paid monthly, in phases, or upon
acceptance of deliverables. The Company has generally 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,
in which revenue is recognized over time. |
| (2) | Software
As A Service Subscription Revenue’s performance obligation is satisfied evenly over the service period using a time-based
measure because the Company is providing continuous access to its service and service is recognized overtime. |
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
5 – Property and Equipment, net
Property
and equipment consisted of the following (in thousands):
Schedule of property and equipment | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
March 31,
2023 | | |
December 31,
2022 | |
Computer and office equipment | |
$ | 139 | | |
$ | 992 | |
Furniture and fixtures | |
| 11 | | |
| 185 | |
Leasehold improvements | |
| 6 | | |
| 28 | |
Software | |
| 1 | | |
| 8 | |
Total | |
| 157 | | |
| 1,213 | |
Less: accumulated depreciation and amortization | |
| (4 | ) | |
| (1,011 | ) |
Total Property and Equipment, Net | |
$ | 153 | | |
$ | 202 | |
Depreciation
and amortization expense were approximately $4 thousand, $19 thousand and $36 thousand for the period ended March 31, 2023
(Successor), the period ended March 14, 2023 (Predecessor), and three months ended March 31, 2022 (Predecessor), respectively.
NOTE
6 – Software Development Costs, net
Capitalized
software development costs consisted of the following (in thousands):
Schedule of capitalized software development | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
March 31,
2023 | | |
December 31,
2022 | |
Capitalized software development costs | |
$ | - | | |
$ | 2,680 | |
Accumulated amortization | |
| - | | |
| (2,193 | ) |
Software development costs, net | |
| - | | |
| 487 | |
Amortization
expense for capitalized software development costs was approximately $209 thousand and $113 thousand for the period ended March
14, 2023 (Predecessor) and the three months ended March 31, 2022 (Predecessor). There was no amortization expense for capitalized software
development costs for the period ended March 31, 2023 (Successor).
NOTE
7 – Goodwill and Intangible Assets
The
Company reviews goodwill for impairment on a reporting unit basis on December 31 of each year and whenever events or changes in circumstances
indicate the carrying value of goodwill may not be recoverable. The Company noted that the carrying amount of Goodwill for the period
ended March 31, 2023 (Successor) was $44,122 thousand, which was entirely due to the business combination noted in Note 3. The Company
did not have any goodwill for the period ended March 14, 2023 (Predecessor) and the year ended December 31, 2022 (Predecessor).
Goodwill
consisted of the following (in thousands):
Schedule of goodwill | |
| | |
Acquisition | |
Amount | |
Balance as of March 14, 2023 | |
$ | - | |
Acquisition of Legacy CXApp | |
| 44,122 | |
Balance as of March 31, 2023 | |
$ | 44,122 | |
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Intangible
assets consisted of the following (in thousands):
Schedule of intangible assets |
|
March 31, 2023 (Successor) |
|
|
|
December 31, 2022 (Predecessor) | |
|
|
Weighted Average Remaining
Useful Life
(Years) |
| |
Gross Amount | |
|
Accumulated Amortization | |
|
Net Carrying Amount |
|
|
Gross
Amount |
| |
Accumulated Amortization | | |
Net Carrying
Amount | |
Trade Name/Trademarks |
|
7 years |
| |
$ | 3,294 | |
|
$ | (20 | ) |
$ |
3,274 |
|
|
$ |
2,183 |
| |
$ | (725 | ) | |
$ |
1,458 | |
Customer Relationships |
|
5 years |
| |
| 5,604 | |
|
| (47 | ) |
|
5,557 |
|
|
|
6,401 |
| |
| (1,765 | ) | |
|
4,636 | |
Developed Technology |
|
10 years |
| |
| 9,268 | |
|
| (38 | ) |
|
9,230 |
|
|
|
15,179 |
| |
| (3,398 | ) | |
|
11,781 | |
Non-compete Agreements |
|
| |
| | - |
|
| | - |
|
|
- |
|
|
|
3,150 | |
| | (1,736 | ) |
|
| 1,414 |
Patents and Intellectual Property |
|
10 years |
| |
| 2,703 | |
|
| (11 | ) |
|
2,692 |
|
|
|
- |
| |
| - | | |
|
- | |
Totals |
|
|
| |
$ | 20,869 | |
|
$ | (116 | ) |
$ |
20,753 |
|
|
$ |
26,913 |
| |
$ | (7,624 | ) | |
$ |
19,289 | |
Aggregate
Amortization Expense:
Aggregate
amortization expense for the period ended March 31, 2023 (Successor), period ended March 14, 2023 (Predecessor) and three months ended
March 31, 2022 (Predecessor) was $116 thousand, $806 thousand and $975 thousand, respectively.
Future amortization expense on intangible assets
is anticipated to be as follows (in thousands):
Schedule of future amortization expense | |
| | |
For the Years Ending December 31, | |
Amount | |
2023 | |
$ | 2,091 | |
2024 | |
| 2,788 | |
2025 | |
| 2,788 | |
2026 | |
| 2,788 | |
2027 | |
| 2,788 | |
2028 and thereafter | |
| 7,510 | |
Total | |
$ | 20,753 | |
NOTE
8 – Deferred Revenue
Deferred
revenue consisted of the following (in thousands):
Schedule of deferred revenue | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
March 31,
2023 | | |
December 31,
2022 | |
License agreements | |
$ | 2,388 | | |
$ | 1,937 | |
Professional Service agreements | |
| 302 | | |
| 225 | |
Total Deferred Revenue | |
$ | 2,690 | | |
$ | 2,162 | |
The
fair value of the deferred revenue approximates the services to be rendered.
NOTE
9 – Accrued Liabilities
Accrued
liabilities consisted of the following (in thousands):
Schedule of accrued Liabilities | |
| | | |
| | |
| |
Successor | | |
Predecessor | |
| |
March 31,
2023 | | |
December 31,
2022 | |
Insurance premiums and accrued interest | |
$ | 538 | | |
$ | - | |
Related party promissory note | |
| 20 | | |
| - | |
Income tax payables | |
| 57 | | |
| - | |
Related party payable | |
| 1,155 | | |
| - | |
Accrued compensation and benefits | |
| 650 | | |
| 586 | |
Accrued bonus and commissions | |
| 192 | | |
| 422 | |
Accrued rent | |
| 3 | | |
| 559 | |
Accrued other | |
| 561 | | |
| 83 | |
Accrued sales and other indirect taxes payable | |
| 6 | | |
| 86 | |
Accrued liabilities | |
$ | 3,182 | | |
$ | 1,736 | |
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financed
Director & Officers Insurance
The
Company entered into a Directors & Officers (“D&O”) insurance agreement with Oakwood D&O Insurance,
effective on March 14, 2023. The agreement states that the Company will pay a total of $671
thousand in premiums at an annual percentage rate of 8%.
The first of nine monthly separate installment payments begin on April 14, 2023. The Company paid a down payment on the policy of
$134
thousand. As of March 31, 2023 (Successor) the Company currently owes $538
thousand on the D&O insurance policy.
Related
Party Liabilities
As
of March 31, 2023, the Company's related party liabilities consisted of a promissory note payable to the KINS sponsor in the amount of $20 thousand for working capital. As of March 31, 2023, accrued
liabilities include an estimate of approximately $1,045 thousand due to Inpixon by CXApp resulting from an agreement to reimburse
Inpixon (subject to review and acceptance by the Company) for certain transaction related costs incurred by Inpixon on behalf of KINS prior to March
14, 2023. This amount is subject to an ongoing review and evaluation by the Company. Additionally, as of March 31, 2023, accrued
liabilities include (i) $30 thousand for estimated costs related to transition services provided by Inpixon to CXApp and (ii) $80
thousand of reimbursable expenses incurred by Inpixon on behalf of CXApp during the period from March 15, 2023 to March 31,
2023.
In connection with a distribution of CXApp securities
by KINS Capital LLC, Inpixon is entitled to acquire 2,500,000 CXApp Private Placement Warrants, which reflects Inpixon’s existing
indirect interests in CXApp.
NOTE
10 - Warrant Liabilities
As
of March 31, 2023 (Successor) there were 13,800 thousand Public Warrants outstanding. Each whole warrant entitles the holder thereof to purchase one share of the Company’s Class A common stock at a price of $11.50 per share, subject to adjustments described in the Company’s registration statement on Form S-1 (Registration No. 333-249177) filed in connection with its initial public offering.
Public
Warrants may only be exercised for a whole number of shares. No fractional warrants will be issued upon separation of the Units and
only whole warrants will trade. The Public Warrants will become exercisable on the later of (a) 30
days after the completion of a Business Combination and (b) 12
months from the closing of the Initial Public Offering. The Public Warrants will expire five 5 years after the completion of a
Business Combination or earlier upon redemption or liquidation.
The
Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation
to settle such warrant exercise unless a registration statement under the Securities Act covering the issuance of the shares of Class
A common stock underlying the warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying
its obligations with respect to registration. No warrant will be exercisable, and the Company will not be obligated to issue shares of
Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has been registered,
qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants.
The Company has filed a registration statement
on Form S-1 (Registration No. 333-271340) under the Securities Act on April 19, 2023 covering the issuance of the shares of Class A common
stock issuable upon exercise of the warrants, and will use its commercially reasonable efforts to have it declared effective by the SEC
within 60 business days following a Business Combination. The Company will use its commercially reasonable efforts to maintain the effectiveness
of such registration statement and a current prospectus relating to those shares of Class A common stock until the warrants expire or
are redeemed. Notwithstanding the above, if the Class A common stock is at the time of any exercise of a warrant not listed on a national
securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities
Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis”
in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to
file or maintain in effect a registration statement, but we will be required to use our commercially reasonable efforts to register or
qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Redemptions
of warrants when the price of Class A common stock equals or exceeds $18.00 – Once the warrants become exercisable, the Company
may redeem the Public Warrants:
| ● | In
whole and not in part; |
| ● | At
a price of $0.01 per warrant; |
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| ● | Upon
not less than 30 days’ prior written notice of redemption, or the 30-day redemption
period, to each warrant holder; and |
| ● | If,
and only if, the reported last sale price of the Company’s Class A common stock equals
or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations, and the like) for any 20 trading days within a 30-day trading period ending
on the third trading day prior to the date on which the Company sends the notice of redemption
to the warrant holders. |
If
and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register
or qualify the underlying securities for sale under all applicable state securities laws.
Redemption
of warrants when the price per share of Class A common stock equals or exceeds $10.00 – Once the warrants become exercisable,
the Company may redeem the outstanding warrants:
| ● | In
whole and not in part; |
| ● | At
a price of $0.10 per warrant provided that holders will be able to exercise their warrants
prior to redemption and receive that number of shares of Class A common stock determined
based on the redemption date and the “fair market value” of the Company’s
Class A common stock; |
| ● | upon
not less than 30 days’ prior written notice of redemption, or the 30-day redemption
period; |
| ● | if,
and only if, the last reported sale price of the Company’s Class A common stock equals
or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations,
recapitalizations and the like) on the trading day prior to the date on which the Company
sends the notice of redemption to the warrant holders; |
| ● | if,
and only if, there is an effective registration statement covering the issuance of the shares
of Class A common stock issuable upon exercise of the warrants and a current prospectus relating
thereto is available throughout the 30-day period after the written notice of redemption
is given. |
As
of March 31, 2023 (Successor), there were 10,280 thousand Private Placement Warrants outstanding. The Private Placement Warrants are identical
to the Public Warrants, except that the Private Placement Warrants and the shares
of Class A common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable
until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement
Warrants will be exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial
purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or
their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the
same basis as the Public Warrants.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – Stock Option Plan and Stock-Based Compensation
To
calculate the stock-based compensation resulting from the issuance of options uses the Black-Scholes option pricing model, which is affected
by the Company’s fair value of its stock price as well as assumptions regarding a number of subjective variables. These variables
include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected
employee stock option exercise behaviors.
2023 Equity Incentive Plan
At the special meeting held on March 10, 2023, the KINS stockholders
considered and approved, among other things, the CXApp Inc. 2023 Equity Incentive Plan (the “Incentive Plan”). The Incentive
Plan was previously approved, subject to stockholder approval, by KINS’ board of directors. The Incentive Plan became effective
immediately upon the closing of the Business Combination. Pursuant to the terms of the Incentive Plan, there are 2,110,500 shares of CXApp
Class A Common Stock available for issuance under the Incentive Plan, which is equal to 15% of the aggregate number of shares of CXApp
common stock issued and outstanding immediately after the closing (giving effect to the redemptions).
Employee
Stock Options
During
the period ended March 31, 2023 (Successor), a total of 1,377 thousand of stock options for the purchase of the Company’s
common stock were granted to employees and directors of the Company. These options vest over a 2 year period, with 50% vested at the
end of year one and 50% vested at the end of year two. The options have a life of 5 to 7 years and an exercise price of $1.53 per share.
The stock options were valued using the Black-Scholes option valuation model and the fair value of the awards was determined to be approximately
$688 thousand. The fair value of the common stock as of the grant date was determined to be $1.53 per share.
During
the period ended March 31, 2023 (Successor), the Company recorded a charge of approximately $2 thousand for the amortization of
employee stock options, which is included in the general and administrative section of the condensed
consolidated statement of operations.
As
of March 31, 2023 (Successor), the fair value of non-vested options totalled approximately $686 thousand, which will be amortized
to expense over the weighted average remaining term of 2.0 years.
The
fair value of each employee 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 period ended March 31, 2023 (Successor) were as follows:
Schedule of assumptions used | |
| |
Risk-free interest rate | |
3.62% – 3.67% | |
Expected life of option grants | |
5 – 7 years | |
Expected volatility of underlying stock | |
37.35% | |
Dividends assumption | |
0% | |
NOTE 12 – Fair Value of Financial Instruments
The Company’s estimates of fair value for financial assets and financial
liabilities are based on the framework established in ASC 820. The Company noted that the only financial asset or financial liability
that is subject to the fair value framework established in ASC 820 are the Warrant Liabilities (Note 10). The framework is based on the
inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used
in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant
inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority
is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s
significant market assumptions. The Company classified the public placement warrants recorded at fair value of on a recurring basis of
$552 thousand as a level 1 investment, as the fair value was determined using quoted prices of the security in active markets. The Company
classified the private placement warrants liabilities recorded at fair value of $411 thousand as a level 2 investment, as the fair
value was determined utilizing the observable market price for the public placement warrants as the private placement warrants are not
actively traded.
NOTE
13 – Income Taxes
The Company recorded an income tax benefit of
approximately $1,560 thousand for the period ended March 31, 2023 (Successor). The Company recorded an income tax expense of approximately
$0 thousand and $100 thousand for the period ended March 14, 2023 (Predecessor), and three months ended March 31, 2022 (Predecessor),
respectively.
The effective tax rate for period ended March 31, 2023 (Successor)
was approximately (164.0%). The income tax benefit, and negative effective tax rate, for the period ended March 31, 2023 (Successor) is
a result of the release of valuation allowance attributable to acquired intangible assets from the Business Combination. The Company acquired
approximately $4,337 thousand of deferred tax liability associated with the Business Combination. As a result of the Company released
its valuation allowance as deferred tax assets will become realizable.
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 – 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 credit losses 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 and Philippines subsidiaries and its majority-owned India subsidiary. Cash
in foreign financial institutions as of March 31, 2023 (Successor) and December 31, 2022 (Predecessor) was immaterial. The Company has
not experienced any losses and believes it is not exposed to any significant credit risk from cash.
NOTE
15 – Foreign Operations
The
Company’s operations are located primarily in the United States, Canada, and the Philippines. Revenues by geographic area are attributed
by country of domicile of the Company’s subsidiaries. The financial data by geographic area are as follows (in thousands):
Schedule of financial data by geographic area | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
United States | | |
Canada | | |
India | | |
Philippines | | |
Eliminations | | |
Total | |
For the Period
Ended March 31, 2023 (Successor): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues by geographic
area | |
$ | 272 | | |
$ | 70 | | |
$ | - | | |
$ | 196 | | |
$ | (196 | ) | |
$ | 342 | |
Operating income (loss) by geographic
area | |
$ | (486 | ) | |
$ | (158 | ) | |
$ | - | | |
$ | 157 | | |
$ | - | | |
$ | (487 | ) |
Net income (loss) by geographic area | |
$ | 2,780 | | |
$ | (158 | ) | |
$ | - | | |
$ | 157 | | |
$ | (21 | ) | |
$ | 2,758 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
For the Period
Ended March 14, 2023 (Predecessor): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues by geographic area | |
$ | 1,395 | | |
$ | 285 | | |
$ | - | | |
$ | 160 | | |
$ | (220 | ) | |
$ | 1,620 | |
Operating income (loss) by geographic
area | |
$ | (3,479 | ) | |
$ | (905 | ) | |
$ | - | | |
$ | 3 | | |
$ | - | | |
$ | (4,381 | ) |
Net income (loss) by geographic area | |
$ | (3,342 | ) | |
$ | (1,041 | ) | |
$ | - | | |
$ | 3 | | |
$ | - | | |
$ | (4,380 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
For the Three
Months Ended March 31, 2022 (Predecessor): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues by geographic area | |
$ | 2,167 | | |
$ | 601 | | |
$ | 270 | | |
$ | - | | |
$ | (456 | ) | |
$ | 2,582 | |
Operating income (loss) by geographic
area | |
$ | (650 | ) | |
$ | (1,008 | ) | |
$ | 72 | | |
$ | - | | |
$ | 14 | | |
$ | (1,572 | ) |
Net income (loss) by geographic area | |
$ | (519 | ) | |
$ | (1,139 | ) | |
$ | (27 | ) | |
$ | - | | |
$ | 14 | | |
$ | (1,671 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As of March
31, 2023 (Successor) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Identifiable assets by geographic
area | |
$ | 75,059 | | |
$ | 991 | | |
$ | - | | |
$ | 405 | | |
$ | (71 | ) | |
$ | 76,384 | |
Long lived assets by geographic area | |
$ | 20,817 | | |
$ | 417 | | |
$ | - | | |
$ | 222 | | |
$ | - | | |
$ | 21,455 | |
Goodwill by geographic area | |
$ | 44,122 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 44,122 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
As of December
31, 2022 (Predecessor) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Identifiable assets by geographic
area | |
$ | 24,591 | | |
$ | 5,484 | | |
$ | 228 | | |
$ | 415 | | |
$ | (1,438 | ) | |
$ | 29,280 | |
Long lived assets by geographic area | |
$ | 15,558 | | |
$ | 4,788 | | |
$ | 98 | | |
$ | 215 | | |
$ | - | | |
$ | 20,659 | |
Goodwill by geographic area | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
CXAPP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
16 – Leases
The
Company has operating leases for administrative offices in Canada and the Philippines. The Manila, Philippines office lease expires
in May 2025 and the Canada lease expires in June 2026. The Company entered into a 13-month lease for administrative offices in
California on April 1, 2023 with lease payments of approximately $19
thousand per month. The Company has no other operating or financing leases with terms greater than 12 months.
Lease
expense for operating leases recorded in the balance sheet is included in operating costs and expenses and is based on the future minimum
lease payments recognized on a straight-line basis over the term of the lease plus any variable lease costs. Operating lease expenses,
inclusive of short-term and variable lease expenses, recognized in the Company’s condensed consolidated statement of operations
for the period ended March 31, 2023 (Successor), period ended March 14, 2023 (Predecessor), and three months ended March 31, 2022 (Predecessor)
was approximately $9 thousand, $57 thousand and $97 thousand, respectively.
Operating
lease liabilities are based on the net present value of the remaining lease payments over the remaining lease term. In determining
the present value of lease payments, the Company used its incremental borrowing rate based on the information available at the date
of adoption of ASC 842 “Leases” (“ASC 842”). As of March 31, 2023 (Successor), the weighted average
remaining lease term is 2.7 years and the weighted average discount rate used to determine the operating lease liabilities was 8.0%.
As of year ended December 31, 2022 (Predecessor), the weighted average remaining lease term is 2.8
years and the weighted average discount rate used to determine the operating lease liabilities was 8.0%.
NOTE
17 – Commitments and Contingencies
Litigation
Certain
conditions may exist as of the date the 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 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.
RESULTS
OF OPERATIONS
Comparison
of the results of operations for the periods ended March 31, 2023 (Successor), period ended March 14, 2023 (Predecessor), and the three
months ended March 31, 2022 (Predecessor)
The
following table sets forth our results of operations. This data should be read together with our unaudited financial statements and related
notes.
| |
Successor | | |
Predecessor | |
(in thousands) | |
Period from
March 15,
2023 to
March 31,
2023 | | |
Period from
January 1,
2023 to
March 14,
2023 | | |
Three months
ended
March 31,
2022 | |
Condensed Consolidated Statements of Operations Data | |
| | | |
| | | |
| | |
Revenues | |
$ | 342 | | |
$ | 1,620 | | |
$ | 2,582 | |
Cost of revenues | |
| 87 | | |
| 483 | | |
| 589 | |
Gross profit | |
| 255 | | |
| 1,137 | | |
| 1,993 | |
Operating expenses | |
| 742 | | |
| 5,518 | | |
| 3,565 | |
Loss from operations | |
| (487 | ) | |
| (4,381 | ) | |
| (1,572 | ) |
Other income (expense), net | |
| 1,685 | | |
| 1 | | |
| 1 | |
Income tax benefit/(provision) | |
| 1,560 | | |
| - | | |
| (100 | ) |
Net income (loss) | |
$ | 2,758 | | |
$ | (4,380 | ) | |
$ | (1,671 | ) |
Revenues
The
Company derives revenue from subscription software as a service, design, deployment and implementation services for its enterprise apps
business. Revenue was $342 thousand and $1,620 thousand for the period ended March 31, 2023 (Successor) and the period ended
March 14, 2023 (Predecessor), respectively, compared to $2,582 thousand for the three months ended March 31, 2022 (Predecessor). This
decrease of $620 thousand is primarily attributable to timing of sales and level of bookings.
Gross
Margin
Cost
of revenues includes the direct costs to deliver the services including labor and overhead. Cost of revenues were $87 thousand and
$483 thousand for the period ended March 31, 2023 (Successor) and the period ended March 14, 2023 (Predecessor), respectively, compared
to $589 thousand for the three months ended March 31, 2022 (Predecessor). The gross profit margin was 75% and 70% for the period
ended March 31, 2023 (Successor) and the period ended March 14, 2023 (Predecessor), respectively, compared to 77% for the three months
ended March 31, 2022 (Predecessor). This fluctuation in gross margin is primarily due to the sales mix during the year and the timing
of related support expenses.
Operating
Expenses
Operating expenses consist primarily of research
and development costs, sales and marketing costs, and general and administrative costs. Operating expenses were $742 thousand and
$5,518 thousand for the period ended March 31, 2023 (Successor) and the period ended March 14, 2023 (Predecessor), respectively,
compared to $3,565 thousand for the three months ended March 31, 2022 (Predecessor). This increase of $2,695 thousand is primarily
attributable to a $2,827 thousand benefit recorded during the three months ended March 31, 2022 (Predecessor) related to an earnout.
Other
Income/(Expense)
Other
income/(expense) was an $1,685 thousand in income and $1 thousand in income for the period ended March 31, 2023 (Successor) and
the period ended March 14, 2023 (Predecessor), respectively, compared to $1 thousand in income for the three months ended March
31, 2022 (Predecessor). This increase in other income was primarily attributable to changes in fair value of derivative warrant liabilities
of $1,686 thousand during the period ended March 31, 2023 (Successor).
Provision
for Income Taxes
There was an income tax benefit of approximately
$1,560 thousand and $0 thousand for the period ended March 31, 2023 (Successor) and the period ended March 14, 2023 (Predecessor),
respectively, compared income tax expense of $100 thousand for the three months ended March 31, 2022 (Predecessor). The
income tax benefit relates for the period ended March 31, 2023 (Successor) primarily a result
of the release of valuation allowance attributable to acquired intangible assets from the Business Combination.
Non-GAAP
Financial information
EBITDA
The
Company 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 for the periods indicated
(in thousands).
| |
Successor | | |
Predecessor | |
| |
Period from
March 15,
2023 to
March 31,
2023 | | |
Period
from January 1, 2023 to
March 14,
2023 | | |
Three months
ended
March 31,
2022 | |
Net income (loss) | |
$ | 2,758 | | |
$ | (4,380 | ) | |
$ | (1,671 | ) |
Interest and other (income) | |
| 1 | | |
| (1 | ) | |
| (1 | ) |
Income tax (benefit)/provision | |
| (1,560 | ) | |
| - | | |
| 100 | |
Depreciation and amortization | |
| 120 | | |
| 1,034 | | |
| 1,120 | |
EBITDA | |
| 1,319 | | |
| (3,347 | ) | |
| (452 | ) |
Adjusted for: | |
| | | |
| | | |
| | |
Earnout compensation expense (benefit) | |
| - | | |
| - | | |
| (2,827 | ) |
Changes in fair value of warrant liabilities | |
| (1,686 | ) | |
| - | | |
| - | |
Unrealized (gains) losses | |
| 3 | | |
| (32 | ) | |
| (266 | ) |
Stock-based compensation - compensation and related
benefits | |
| 2 | | |
| 158 | | |
| 647 | |
Adjusted EBITDA | |
$ | (362 | ) | |
$ | (3,221 | ) | |
$ | (2,898 | ) |
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; |
| ● | 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, impairment, unrealized gains, stock based compensation, interest income and expense, and
income tax benefit. |
| ● | We
believe that it is useful to provide to 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 condensed 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. As of March 31, 2023 (Successor), our
principal source of liquidity was cash and cash equivalents of $6,724 thousand.
Financing
Obligations and Requirements
As of March 31, 2023 (Successor), the Company
has a working capital surplus of approximately $3,052 thousand, and cash and cash equivalents of approximately $6,724 thousand.
For the period ended March 31, 2023 (Successor), the Company had a net income of approximately $2,758 thousand. During the period
ended March 31, 2023 (Successor), the Company used approximately $4,431 thousand of cash for operating activities.
The
Company cannot assure you that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. To
the extent that our resources from the business combination are insufficient to satisfy our cash requirements, we may enter into equity
or debt financing transactions. These transactions are expected to provide us additional cash to fund our capital and liquidity requirements
in the short and long-term. If the financing is not available, or if the terms of financing are less desirable than we expect, we may
be forced to take actions to reduce our capital or operating expenditures, including by not seeking potential acquisition opportunities,
or eliminating redundancies, which may adversely affect our business, operating results, financial condition and prospects. 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 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.
The
total impact that COVID-19 and general macroeconomic conditions may continue to impact our results of operations continues to remain
uncertain and there are no assurances that we will be able to continue to experience the same growth or not be materially adversely affected.
The Company’s recurring losses and utilization of cash in its operations are indicators of going concern however with the Company’s
current liquidity position and access to capital markets, the Company believes it has the ability to mitigate such concerns for a period
of at least one year from the date this financial statements were made issued.
Liquidity
and Capital Resources
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
March 31,
2023 | | |
Period from
January 1,
2023 to
March 14,
2023 | | |
Three months
ended
March 31,
2022 | |
| |
| |
Cash flows (used in) provided
by | |
| | | |
| | | |
| | |
Net cash used in operating activities | |
$ | (4,431 | ) | |
$ | (5,144 | ) | |
$ | (4,140 | ) |
Net cash provided by (used in)
investing activities | |
| 9,980 | | |
| (54 | ) | |
| (51 | ) |
Net cash (used in) provided by financing activities | |
| (328 | ) | |
| 8,892 | | |
| 4,553 | |
Effect of exchange rates on cash | |
| - | | |
| 1 | | |
| 4 | |
Net increase in cash and cash equivalents | |
$ | 5,221 | | |
$ | 3,695 | | |
$ | 366 | |
| |
Successor | | |
Predecessor | |
| |
March 31,
2023 | | |
December 31,
2022 | |
Cash and cash equivalents | |
$ | 6,724 | | |
$ | 6,308 | |
Working capital surplus | |
$ | 3,052 | | |
$ | 3,154 | |
Operating
Activities for the periods ended March 31, 2023 (Successor), March 14, 2023 (Predecessor), and the three months ended March 31, 2022
(Predecessor)
| |
Successor | | |
Predecessor | |
| |
Period from
March 15,
2023 to
March 31,
2023 | | |
Period from
January 1,
2023 to
March 14,
2023 | | |
Three months
ended
March 31,
2022 | |
Net income (loss) | |
$ | 2,758 | | |
$ | (4,380 | ) | |
$ | (1,671 | ) |
Non-cash income and expenses | |
| (3,113 | ) | |
| 1,200 | | |
| (1,272 | ) |
Net change in operating assets and liabilities | |
| (4,076 | ) | |
| (1,964 | ) | |
| (1,197 | ) |
Net cash used in operating activities | |
$ | (4,431 | ) | |
$ | (5,144 | ) | |
$ | (4,140 | ) |
Cash
Flows from Investing Activities for the periods ended March 31, 2023 (Successor), March 14, 2023 (Predecessor), and the three months
ended March 31, 2022 (Predecessor)
Net cash flows provided by investing activities during the period ended
March 31, 2023 (Successor) was approximately $9,980 thousand compared to net cash flows used in investing activities for the period ended
March 14, 2023 (Predecessor) and during the three months ended March 31, 2022 (Predecessor) of approximately $54 thousand and $51 thousand,
respectively. Cash flows related to investing activities during the period ended March 31, 2023 (Successor) include $23.0 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 ended 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 three
months ended March 31, 2022 (Predecessor) include $12 thousand for the purchase of property and equipment, and $39 thousand
for investment in capitalized software.
Cash
Flows from Financing Activities for the periods ended March 31, 2023 (Successor), March 14, 2023 (Predecessor), and the three months
ended March 31, 2022 (Predecessor)
Net cash flows used in financing activities during
period ended March 31, 2023 (Successor) was $328 thousand compared to net cash flows provided by financing activities for the period ended
March 14, 2023 (Predecessor) and during the three months ended March 31, 2022 (Predecessor) of approximately $8,892 thousand and $4,553
thousand, respectively. During the period ended March 31, 2023 (Successor), the Company paid $328 thousand in cash outflows from
a repayment of a related party promissory note. During the period ended 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
three months ended March 31, 2022 (Predecessor), the Company received $6,444 thousand in incoming cash flows from parent, and paid
$104 thousand and $1,787 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 consists of operating lease liabilities and acquisition liabilities that are included in our balance sheet. As
of March 31, 2023 (Successor), the total obligation for operating leases is approximately $571 thousand, of which approximately
$195 thousand is expected to be paid in the next twelve months.
Quantitative
and Qualitative Disclosures about Market Risk
Not applicable.
Critical
Accounting Estimates
Our
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 condensed
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 condensed consolidated financial statements which 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
software as a service and professional services for its enterprise apps software.
Our
contracts with customers often include promises to transfer multiple distinct products and services.
Our
licenses are sold as perpetual or term licenses and the arrangements typically contain various combinations of maintenance and professional
services, which are accounted for as separate performance obligations. In determining how revenue should be recognized, a five-step process
is used, which requires judgment and estimates within the revenue recognition process. The most critical judgements required in applying
ASC 606 Revenue Recognition from Customers, and our revenue recognition policy relate to the determination of distinct performance
obligations.
| ● | Revenue
related to subscription software as a service contract is recognized over time using the
output method (days of software provided) because we are providing continuous access to its
service. |
| ● | Professional
services revenue is accounted for using the percentage of completion method. As soon as the
outcome of a contract can be estimated reliably, contract revenue is recognized in the statement
of operations in proportion to the stage of completion of the contract. Accounting for these
contracts involves the use of estimates to determine total contract costs to be incurred. |
| ● | Professional
services revenue under fixed fee contracts is recognized over time using the input method
(direct labor hours) to recognize revenue over the term of the contract. We have elected
the practical expedient to recognize revenue for the right to invoice because our right to
consideration corresponds directly with the value to the customer of the performance completed
to date. |
We
also consider whether an arrangement has any discounts, material rights, or specified future upgrades that may represent additional performance
obligations. We offer discounts in the form of prompt payment discounts and rebates for a decrease in service level percentages. We have
determined that the most likely amount method is most useful for contracts that provides these discounts and rebates as the contracts
have two potential outcomes and a significant reversal in the amount of cumulative revenue recognized is not expected to occur. Discounts
have not historically been significant, but we continue to monitor and evaluate these estimates based on historical experience, anticipated
performance, and our best judgment. Renewals or extensions of licenses are evaluated as distinct licenses (i.e., a distinct good or service),
and revenue attributed to the distinct good or service cannot be recognized until (1) the entity provides the distinct license (or makes
the license available) to the customer and (2) the customer is able to use and benefit from the distinct license. If any of these judgments
were to change it could cause a material increase or decrease in the amount of revenue we report in a particular period.
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 31, 2023 (Successor) or 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), period ended March 31, 2023 (Successor), and the three months ended March 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.
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 period ended March 31, 2023 (Successor), based upon certain
economic conditions and historical losses through March 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 March 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 period ended March 31, 2023 (Successor), the period ended March 14, 2023 (Predecessor), or the three months ended March 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 financial results will be adjusted. All
acquisition costs are expensed as incurred. 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
financial statements from the acquisition date.
Derivative
Warrant Liabilities
We account for the Warrants in accordance with
the guidance contained in ASC 815-40 under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities.
Accordingly, we classify the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period.
This liability is subject to re-measurement at each balance sheets date until exercised, and any change in fair value is recognized in
our Condensed Consolidated Statements of Operations. We utilized the Public Warrant quoted market price as the fair value of the Warrants
as of each relevant 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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.