# XTI Aerospace, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [XTI Aerospace, Inc.](/companies/xtia.md) (CIK 1529113)
- Form: 10-Q
- Filed: 2018-11-06
- Accepted by EDGAR: Nov 5, 2018, 19:51 ET
- Period: 2018-09-30
- Accession: 0001213900-18-014922
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529113/000121390018014922/f10q0918_inpixon.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529113/000121390018014922/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $940.0k | us-gaap:Revenues |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $2.6m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $298.0k | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $818.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $642.0k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $1.8m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $296.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $820.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | −$3.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | −$11.6m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$5.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | −$17.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | −$4.84 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | −$55.24 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | −$23.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $39.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-09-30 | $1.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $4.9m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $13.0m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $3.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $4.0m | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $142.0k | us-gaap:LongTermDebt |
| Short-term borrowings | at 2018-09-30 | $1.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2018-09-30 | $9.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,870 characters.

*You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”*

Except where indicated, all share and per share data in this section, as well as the condensed consolidated financial statements, reflect the 1-for-15 reverse stock split of the Company’s common stock effected on March 1, 2017, the 1-for-30 reverse stock split effected on February 6, 2018 and the 1-for-40 reverse stock split effected on November 2, 2018.

### Overview of our Business

We provide Indoor Positioning Analytics (“IPA”) and services to private and public sector customers. Our premier proprietary product secures, digitizes and optimizes the interior of any premises with indoor positioning and data analytics that provide rich positional information, similar to a global positioning system, and browser-like intelligence for the indoors.

### Indoor Positioning Analytics

Revenues from our Indoor Positioning Analytics (“IPA”) business line was $2.6 million for the nine months ended September 30, 2018. Our IPA segment does have long sales cycles which are a result from customer related issues such as budget and procurement processes but also because of the early stages of indoor-positioning technology and the learning curve required for customers to implement such solutions. Customers also engage in a pilot program first which prolongs sales cycles and is typical of most emerging technology adoption curves. We anticipate sales cycles to improve in 2018 as our customer base moves from innovators to mainstream customer adoption. The sales cycle is also improving with the increased presence and awareness of beacon and Wi-Fi locationing technologies in the market. IPA segment sales can be licensed based with government customers but are primarily on a SaaS model with commercial customers. Our other SaaS products include cloud-based applications for media customers, which allow us to generate industry analytics that complement our indoor-positioning solutions.

### Recent Events

### January 2018 Capital Raise

On January 5, 2018, the Company entered into a securities purchase agreement (the “January 2018 SPA”) with certain investors pursuant to which the Company agreed to sell, in a registered direct offering, an aggregate of 14,996 shares (the “January 2018 Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”), at a purchase price of $212.40 per share for aggregate gross proceeds of approximately $3.2 million. After deducting placement agent fees and other expenses, the net proceeds from the offering was approximately $2.8 million. Concurrently with the sale of the January 2018 Shares, pursuant to the January 2018 SPA the Company also sold warrants to purchase up to 14,996 shares of Common Stock (the “January 2018 Warrants”). This offering closed on January 8, 2018.

The January 2018 Warrants became exercisable on February 2, 2018 (the “January 2018 Warrant Initial Exercise Date”), at an exercise price per share equal to $264.00, subject to certain adjustments pursuant to the terms of the January 2018 Warrants (the “January 2018 Warrant Exercise Price”), and will expire on the fifth anniversary of the January 2018 Warrant Initial Exercise Date. As a result of a Dilutive Issuance (as defined in the January 2018 Warrants) as of February 20, 2018, the January 2018 Warrant Exercise Price was adjusted to the floor price of $120.00 per share pursuant to the January 2018 Warrants.

### Reverse Stock Split

At a meeting of our stockholders held on February 2, 2018, our stockholders holding a majority of our outstanding voting power approved an amendment to our Articles of Incorporation to effect a reverse stock split of our Common Stock at an exchange ratio between 1-for -5 and 1-for-60 with our Board of Directors retaining the discretion as to whether to implement the reverse stock split and the exact exchange ratio to implement. The Board of Directors approved the implementation of a reverse stock split at a ratio of 1-for-30 effective as of February 6, 2018.

On October 31, 2018, the Company received stockholder approval for a reverse stock split at its 2018 annual meeting of stockholders and implemented a 1-for-40 reverse stock split effective as of November 2, 2018.

### February 2018 Public Offering

On February 20, 2018, the Company completed a public offering for approximately $18 million in securities, consisting of (i) an aggregate of 83,149 Class A units, at a price to the public of $94.00 per Class A unit, each consisting of one share of Common Stock, and a five-year warrant to purchase one share of Common Stock, and (ii) 10,184.9752 Class B units, at a price to the public of $1,000 per Class B unit, each consisting of one share of the Company’s newly designated Series 3 convertible preferred stock, par value $0.001 per share (“Series 3 Preferred”), with a stated value of $1,000 and initially convertible into approximately 11 shares of Common Stock at a conversion price of $94.00 per share for up to an aggregate of 108,351 shares of Common Stock and warrants exercisable for the number of shares of Common Stock into which the shares of Series 3 Preferred is initially convertible. The warrants (“February 2018 Warrant”) were immediately exercisable at an exercise price of $140.00 per share (subject to adjustment).

The Company received approximately $18 million in gross proceeds from this offering, including the satisfaction of approximately $1 million in amounts payable to service providers. After satisfying the amounts due to service providers and deducting placement agent fees, the net cash proceeds from this offering was approximately $15.4 million. The Company used the net proceeds from the transactions for working capital and general corporate purposes, including research and development and sales and marketing.

The shares of Series 3 Preferred issued in this offering have all been converted into Common Stock. As a result of the April 2018 offering described below as of April 24, 2018, the exercise price of the February 2018 Warrants was adjusted to the floor price of $25.36 per share and the number of shares of Common Stock underlying the February 2018 Warrants was increased to an aggregate of 1,057,178 shares of Common Stock.

### April 2018 Public Offering

On April 24, 2018, the Company completed a public offering consisting of 10,115 units at a price to the public of $1,000 per unit, each consisting of (i) one share of our newly designated Series 4 convertible preferred stock, par value $0.001 per share (the “Series 4 Preferred”), with a stated value of $1,000 and initially convertible into approximately 54 shares of Common Stock, at a conversion price of $18.40 per share (subject to adjustment) and (ii) one warrant to purchase such number of shares of Common Stock as each share of Series 4 Preferred is convertible into. The warrants are immediately exercisable at an exercise price of $26.80 per share (subject to adjustment).

The Series 4 Preferred contain an anti-dilution protection feature, to adjust the conversion price if shares of Common Stock are sold or issued for a consideration per share less than the conversion price then in effect (subject to certain exemptions), provided, that the conversion price will not be less than $4.96. In addition, on the 60th day following the original issuance date of the Series 4 Preferred, the conversion price will be reduced, and only reduced, to the lesser of (x) the then conversion price, as may be adjusted, and (y) 80% of the VWAP (as defined in the certificate of designation filed for the Series 4 Preferred) on the trading day immediately prior to the 60th day, provided that the conversion price will not be less than $4.96.

The Company received approximately $10.1 million in gross proceeds from this offering, before deducting placement agent fees and offering expenses payable by the Company. After deducting placement agent fees and expenses, the net proceeds from this offering were approximately $9.2 million. The Company intends to use the net proceeds from this offering for working capital, general corporate purposes (including research and development, sales and marketing and the satisfaction of outstanding amounts payable to our vendors in connection with trade payables). Additionally, the Company may use a portion of the net proceeds of this offering to finance acquisitions of, or investments in, competitive and complementary businesses, products or services as a part of our growth strategy. However, the Company does not have any current commitments with respect to any such acquisitions or investments.

### Non-Compliance with Nasdaq Continued Listing Requirement

As previously reported, on May 17, 2018, the Company received a letter from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of the Company’s Common Stock for the last 30 consecutive business days beginning on April 5, 2018 and ending on May 16, 2018, the Company no longer meets the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until November 13, 2018, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our Common Stock must be at least $1.00 per share for a minimum of ten consecutive business days, but generally no more than twenty consecutive business days during this 180-day period. As of the date of this Form 10-Q, the closing bid price of our Common Stock has not been equal to or greater than $1.00 per share for a minimum of ten consecutive business days. As a result, we do not expect to be able to regain compliance within this 180-day period; however, we will be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that our Common Stock will be subject to delisting.

On October 31, 2018, we received stockholder approval for a reverse stock split at our 2018 annual meeting of stockholders and implemented a 1-for-40 reverse stock split effective as of November 2, 2018, which we believe will cause us to compy with the minimum bid price requirement.

There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements.

### Spin-off of Sysorex

On August 31, 2018, we completed the previously announced spin-off (the “Spin-off”) of our value added reseller business from our indoor positioning analytics business by way of a distribution of all the shares of common stock of our wholly-owned subsidiary, Sysorex, Inc. (“Sysorex”), to our stockholders of record as of August 21, 2018 (the “Record Date”) and certain warrant holders. The distribution occurred by way of a pro rata stock distribution to such Common Stock, preferred stock and warrant holders, each of whom received one share of Sysorex’s common stock for every 0.075 shares of our Common Stock held on the Record Date or such number of shares of Common Stock issuable upon complete conversion of the preferred stock or exercise of the warrants. The Spin-off was governed by a Separation and Distribution Agreement as well as other related agreements between the Company and Sysorex (collectively, the “Spin-off Agreements”).

As a result of the Spin-off, our Common Stock continues trading on the Nasdaq Stock Market (“Nasdaq”), and Sysorex is an independent public company with common stock quoted on the OTC Markets.

In accordance with Accounting Standards Codification (“ASC”) 205-20, “*Discontinued Operations,”* the results of Sysorex, including Inpixon’s former subsidiary, Sysorex Government Services, Inc., formerly Inpixon Federal, Inc., are reflected in Inpixon’s condensed consolidated financial statements as discontinued operations and, therefore, are presented as assets and liabilities of discontinued operations on the condensed consolidated balance sheet and loss from discontinued operations on the condensed consolidated statements of operations.

Certain amounts in the prior year’s condensed consolidated financial statements and related footnotes thereto have been reclassified to conform with the current year presentation as a result of the Spin-off of Sysorex.

### Note Purchase Agreement and Promissory Note

On October 12, 2018, the Company entered into a Note Purchase Agreement with an institutional investor (the “Holder”), pursuant to which the Company agreed to issue and sell to the Holder an unsecured promissory note (the “Note”) in an aggregate principal amount of $2,520,000.00 (the “Initial Principal Amount”), which is payable on or before the date that is 12 months from the issuance date. The Initial Principal Amount includes an original issue discount of $500,000.00 and $20,000.00 that the Company agreed to pay to the Holder to cover the Holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the Note, the Holder paid an aggregate purchase price of $2,000,000.00. Interest on the Note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the Note. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the Note is paid in full, the Holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the Note each month (each monthly exercise, a “Monthly Redemption Amount”) by providing written notice (each, a “Monthly Redemption Notice”) delivered to the Company; provided, however, that if the Holder does not exercise any Monthly Redemption Amount in its corresponding month then such Monthly Redemption Amount shall be available for the Holder to redeem in any future month in addition to such future month’s Monthly Redemption Amount. Upon receipt of any Monthly Redemption Notice, the Company shall pay the applicable Monthly Redemption Amount in cash to the Holder within 5 business days of the Company’s receipt of such Monthly Redemption Notice.

### JOBS Act

Pursuant to Section 107 of the Jumpstart Our Business Startups Act of 2012, emerging growth companies may delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to opt out of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

### Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated 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 3 of the condensed consolidated financial statements. 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

We provide IT solutions and services to customers with revenues currently derived primarily from the sale of third-party hardware and software products, software, assurance, licenses and other consulting services, including maintenance services. The products and services we sell, and the manner in which they are bundled, are technologically complex and the characterization of these products and services requires judgment in order to apply revenue recognition policies. For all of these revenue sources, we determine whether we are the principal or the agent in accordance with Accounting Standards Codification Topic, 605-45 Principal Agent Considerations.

#### Hardware and Software Revenue Recognition

For sales of hardware and software products, the Company’s performance obligation is satisfied at a point in time when they are shipped to the customer. This is when the customer has title to the product and the risks and rewards of ownership. The delivery of products to our customers occurs in a variety of ways, including (i) as a physical product shipped from the Company’s warehouse, (ii) via drop-shipment by a third-party vendor, or (iii) via electronic delivery with respect to software licenses. The Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its warehouse. In such arrangements, the Company negotiates the sale price with the customer, pays the supplier directly for the product shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability of the product and ensuring that such product meets the standards and requirements of the customer. Accordingly, the Company is the principal in the transaction with the customer and records revenue on a gross basis. The Company receives fixed consideration for sales of hardware and software products. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer approved invoice. The Company has elected the practical expedient to expense the costs of obtaining a contract when they are incurred because the amortization period of the asset that otherwise would have been recognized is less than a year.

#### Software As A Service Revenue Recognition

With respect to sales of our maintenance, consulting and other service agreements including our digital advertising and electronic services, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service.

#### Professional Services Revenue Recognition

The Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and 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 including maintenance service provided by in house personnel, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the nine months ended September 30, 2018 and 2017, the Company did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term contracts are derived principally with various United States government agencies and commercial customers.

### Long-lived Assets

We account for our long-lived assets in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

- significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows for two consecutive years);
- significant negative industry or economic trends;
- knowledge of transactions involving the sale of similar property at amounts below our carrying value; or
- our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.”

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 also 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 the 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 for the nine months ended September 30, 2018 and 2017.

The benefits to be derived from our acquired intangibles, will take additional financial resources to continue the development of our technology. Management believes our technology has significant long-term profit potential, and to date, management continues to allocate existing resources to the develop products and services to seek returns on its investment. We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, as part of our continued efforts. Although there can be no assurance that these efforts will be successful, we intend to allocate financial and personnel resources when deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, the related development of our technology (resulting in our lack of ability to expand our business), may be subject to significant impairment.

As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. The Company will continue to monitor these uncertainties in future periods, to determine the impact.

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 nine months ended September 30, 2018 and 2017 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.

### Goodwill and Indefinite-lived Assets

We have recorded goodwill and other indefinite-lived assets in connection with our acquisitions of Shoom, Inc. (“Shoom”). 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. We review our goodwill during the fourth quarter of each year, but may need to review goodwill more frequently, if facts and circumstances warrant a review. The evaluation of impairment involves comparing the current fair value of the business to the recorded value, including goodwill. To determine the fair value of the business, we utilize both the income approach, which is based on estimates of future net cash flows, and the market approach, which observes transactional evidence involving similar businesses. There was no goodwill impairment for the nine months ended September 30, 2018 or 2017.

We analyze goodwill first to assess qualitative factors 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 percent.

Events and circumstances for an entity to consider in conducting the qualitative assessment are:

- Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets.
- Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development.
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows.
- Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation.
- Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
- If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers).

As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. We also require significant funds to operate and continue to experience losses. If these conditions continue, it may necessitate a requirement to record a goodwill impairment charges. The Company will continue to monitor these uncertainties in future periods.

### Software Development Costs

The Company develops and utilizes internal software for the processing of data provided by its customers. Costs incurred in this effort are accounted for under the provisions of FASB ASC 350-40, Internal Use Software and ASC 985-20, Software – Cost of Software to be Sold, Leased or Marketed, whereby direct costs related to development and enhancement of internal use software is capitalized, and costs related to maintenance are expensed as incurred. The Company capitalizes its direct internal costs of labor and associated employee benefits that qualify as development or enhancement. These software development costs are amortized over the estimated useful life which management has determined ranges from one to five years.

### Allowance for Doubtful Accounts

We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management’s determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors.

As of September 30, 2018 and December 31, 2017, allowance for credit losses included an allowance for doubtful accounts of approximately $1.3 million and approximately $1.1 million, respectively, due to the aging of the items greater than 120 days outstanding and other potential non-collections.

### 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 consolidated financial results will be adjusted. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.

Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date and are included in our consolidated financial statements from the acquisition date.

### Stock-Based Compensation

We account for equity instruments issued to non-employees in accordance with accounting guidance which requires that such equity instruments are recorded at their fair value on the measurement date, which is typically the date the services are performed.

We account for equity instruments issued to employees in accordance with accounting guidance that requires that awards are recorded at their fair value on the date of grant and are amortized over the vesting period of the award. We recognize compensation costs over the requisite service period of the award, which is generally the vesting term of the equity instrument issued.

The Black-Scholes option valuation model is used to estimate the fair value of the options or the equivalent security granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the average of historical volatilities for industry peers.

The Company incurred stock-based compensation charges, net of estimated forfeitures, of $122,000 and $288,000 for the three months ended September 30, 2018 and 2017, respectively, and $979,000 and $1,282,000 for the nine months ended September 30, 2018 and 2017, respectively, which are included in general and administrative expenses.

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 for the nine months ended September 30, 2018 and 2017 were as follows:

|  | For the Nine Months Ended September 30, 2018 | 2017 |
| --- | --- | ---: |
| Risk-free interest rate | 2.79-3.01% | 2.27% |
| Expected life of option grants | 5-6 years | 7 years |
| Expected volatility of underlying stock | 45.64-46.18% | 47.34% |
| Dividends assumption | $-- | $-- |

### Rounding

All dollar amounts in this section have been rounded to the nearest thousand.

### Results of Operations

### Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

The following table sets forth selected unaudited condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:

*(in thousands, except percentages)*

|  | For the Three Months Ended September 30, 2018 Amount | % of Revenues | September 30, 2017 Amount | % of Revenues | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $271 | 29% | $52 | 6% | 421% |
| Services revenues | $669 | 71% | $819 | 94% | (18)% |
| Cost of net revenues - products | $107 | 11% | $94 | 11% | 14% |
| Cost of net revenues - services | $191 | 20% | $173 | 20% | 10% |
| Gross profit | $642 | 68% | $604 | 69% | 6% |
| Operating expenses | $3,959 | 421% | $5,299 | 608% | (25)% |
| Loss from operations | $(3,317) | (353)% | $(4,695) | (539)% | (29)% |
| Net loss | $(5,180) | (551)% | $(14,641) | (1681)% | (65)% |
| Net loss attributable to common stockholders | $(5,184) | (551)% | $(14,637) | (1680)% | (65)% |

### Net Revenues

Net revenues for the three months ended September 30, 2018 were $940,000 compared to $871,000 for the comparable period in the prior year. This $69,000 increase, or approximately 8%, is primarily associated with the increase in sales from our IPA products.

### Cost of Revenues

Cost of revenues for the three months ended September 30, 2018 was $298,000 compared to $267,000 for the prior year period. This increase of $31,000 was primarily attributable to the higher sales from our IPA products. The gross profit margin for the three months ended September 30, 2018 was 68% compared to 69% during the three months ended September 30, 2017.

### Operating Expenses

Operating expenses for the three months ended September 30, 2018 were $4.0 million compared to $5.3 million for the prior year period. This decrease of $1.3 million is primarily attributable to a decrease in compensation and occupancy costs due to the downsizing of staff and office locations.

### Loss from Operations

Loss from operations for the three months ended September 30, 2018 was $3.3 million compared to $4.7 million for the prior year period. This decrease in loss of $1.4 million was primarily attributable due to the decrease in compensation and occupancy costs due to the downsizing of staff and office locations.

### Other Income/Expense

Total other income/expense for the three months ended September 30, 2018 and 2017 was ($78,000) and ($192,000), respectively. This decrease in loss of $114,000 in 2018 was primarily attributable to higher interest expense in 2017 primarily due to a higher interest on the Company’s bank credit lines and debt discount.

### Loss from Discontinued Operations

Loss from discontinued operations for the three months ended September 30, 2018 was $1.8 million compared to $9.8 million for the prior year period. This decrease in loss of $8 million was primarily attributable due to the decrease in compensation and occupancy costs due to the downsizing of staff and office locations, a $7.8 million impairment of goodwill charge in 2017 offset by lower gross profits in the three months ended September 30, 2018 from the decrease of the Infrastructure business line due to prior credit line issues.

### Provision for Income Taxes

There was no provision for income taxes for the three months ended September 30, 2018 and 2017. Deferred tax assets resulting from such losses are fully reserved as of September 30, 2018 and 2017 since, at present, we have no history of taxable income and it is more likely than not that such assets will not be realized.

### Net Loss Attributable to Non-Controlling Interest

Net gain attributable to non-controlling interest for the three months ended September 30, 2018 was $4,000 compared to ($4,000) for the three months ended September 30, 2017.

### Net Loss Attributable To Common Stockholders of Inpixon

Net loss attributable to common stockholders of Inpixon for the three months ended September 30, 2018 was $5.2 million compared to $14.6 million for the prior year period. This decrease in loss of $9.4 million was attributable to the changes described for the various reporting captions discussed above.

### Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

The following table sets forth selected unaudited condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:

*(in thousands, except percentages)*

|  | For the Nine Months Ended September 30, 2018 Amount | % of Revenues | September 30, 2017 Amount | % of Revenues | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Product revenues | $554 | 21% | $476 | 16% | $16% |
| Services revenues | $2,073 | 79% | $2,531 | 84% | (18)% |
| Cost of net revenues - products | $259 | 10% | $410 | 14% | (37)% |
| Cost of net revenues - services | $559 | 21% | $580 | 19% | (4)% |
| Gross profit | $1,809 | 69% | $2,017 | 67% | (10)% |
| Operating expenses | $13,388 | 510% | $14,083 | 468% | (5)% |
| Loss from operations | $(11,579) | (441)% | $(12,066) | (401)% | (4)% |
| Net loss | $(17,278) | (658)% | $(27,129) | (902)% | (36)% |
| Net loss attributable to common stockholders | $(17,284) | (658)% | $(27,116) | (902)% | (36)% |

### Net Revenues

Net revenues for the nine months ended September 30, 2018 were $2.6 million compared to $3.0 million for the comparable period in the prior year. This $400,000 decrease, or approximately 13%, is primarily associated with the lower revenues during the first six months of 2018 resulting from the on-going transition to more subscription or SaaS based revenues compared to license revenues in prior year periods.

### Cost of Revenues

Cost of revenues for the nine months ended September 30, 2018 was $818,000 compared to $990,000 for the prior year period. This decrease of $172,000 is primarily due to the lower sales in 2018 as compared to 2017. The gross profit margin for the nine months ended September 30, 2018 was 69% compared to 67% during the nine months ended September 30, 2017.

### Operating Expenses

Operating expenses for the nine months ended September 30, 2018 were $13.4 million compared to $14.1 million for the prior year period. This decrease of $700,000 is primarily attributable to a decrease in compensation and occupancy costs due to the downsizing of staff and office locations.

### Loss from Operations

Loss from operations for the nine months ended September 30, 2018 was $11.6 million compared to $12.1 million for the prior year period. This decrease in loss of $500,000 was primarily attributable due to the decrease in compensation and occupancy costs due to the downsizing of staff and office locations offset by the lower sales in the nine months ended September 30, 2018 as compared to the prior year.

### Other Income/Expense

Total other income/expense for the nine months ended September 30, 2018 and 2017 was ($921,000) and ($1,117,000), respectively. This decrease in loss of $196,000 in 2018 was primarily attributable to higher interest expense in 2017 due to a higher interest on the Company’s bank credit lines and debt discount.

### Loss from Discontinued Operations

Loss from discontinued operations for the nine months ended September 30, 2018 was $4.8 million compared to $13.9 million for the prior year period. This decrease in loss of $9.1 million was primarily attributable due to the decrease in compensation and occupancy costs due to the downsizing of staff and office locations, a $7.8 million impairment of goodwill charge in 2017 offset by lower gross profits in the nine months ended September 30, 2018 from the decrease of the Infrastructure business line due to prior credit line issues.

### Provision for Income Taxes

There was no provision for income taxes for the nine months ended September 30, 2018 and 2017. Deferred tax assets resulting from such losses are fully reserved as of September 30, 2018 and 2017 since, at present, we have no history of taxable income and it is more likely than not that such assets will not be realized.

### Net Loss Attributable to Non-Controlling Interest

Net loss attributable to non-controlling interest for the nine months ended September 30, 2018 was $6,000 compared to ($13,000) for the nine months ended September 30, 2017.

### Net Loss Attributable To Common Stockholders of Inpixon

Net loss attributable to common stockholders of Inpixon for the nine months ended September 30, 2018 was $17.3 million compared to $27.1 million for the prior year period. This decrease in loss of $9.8 million was attributable to the changes described for the various reporting captions discussed above.

### Non-GAAP Financial information

### EBITDA

EBITDA is defined as net income (loss) before interest, provision for (benefit from) income taxes, 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 for the three months ended September 30, 2018 was a loss of $3.4 million compared to a loss of $3.1 million for the prior year period. Adjusted EBITDA for the nine months ended September 30, 2018 was a loss of $10.9 million compared to a loss of $9.2 million for the prior year period.

The following table presents a reconciliation of net income/loss attributable to stockholders of Inpixon, which is our GAAP operating performance measure, to Adjusted EBITDA for the three and nine months ended September 30, 2018 and 2017 (in thousands):

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to common stockholders | $(5,184) | $(14,637) | $(17,284) | $(27,116) |
| Adjustments: |  |  |  |  |
| Non-recurring one-time charges: |  |  |  |  |
| Acquisition transaction/financing costs | 78 | -- | 94 | 5 |
| Costs associated with public offering | 4 | 159 | 85 | 159 |
| Impairment of goodwill | -- | 8,392 | -- | 8,392 |
| Gain on the settlement of obligations | (45) | -- | (307) | -- |
| Gain on earnout | -- | (561) | (934) | (561) |
| Gain on the sale of Sysorex Arabia | -- | -- | (23) | -- |
| Gain on the sale of contracts | -- | -- | (601) | -- |
| Change in the fair value of derivative liability | -- | (46) | (48) | (254) |
| Provision for doubtful accounts | -- | 773 | 221 | 773 |
| Severance | -- | -- | 15 | 27 |
| Stock based compensation – acquisition costs | -- | -- | -- | 7 |
| Stock-based compensation - compensation and related benefits | 122 | 288 | 979 | 1,275 |
| Interest expense | 146 | 694 | 1,785 | 2,721 |
| Depreciation and amortization | 1,452 | 1,817 | 5,137 | 5,418 |
| Adjusted EBITDA | $(3,427) | $(3,121) | $(10,881) | $(9,154) |

39

We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:

- to review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;
- 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, and other non-operating expenses as well as depreciation and amortization which are non-cash expenses;
- We believe that it is useful to provide investors with a standard operating metric used by management to evaluate our operating performance; and
- We believe that the use of Adjusted EBITDA is helpful to compare our results to other companies.

Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:

- Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
- Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
- Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
- Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
- Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and
- Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.

### Proforma Non-GAAP Net Loss per Share

Basic and diluted net loss per share for the three months ended September 30, 2018 was ($4.84) compared to ($1,858.90) for the prior year period. Basic and diluted net loss per share for the nine months ended September 30, 2018 was ($55.24) compared to ($6,936.81) for the prior year period. These decreases are attributable to the changes discussed in our results of operations.

Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one time charges including acquisition costs, the costs associated with public offerings, severance costs and changes in the fair value of shares to be issued.

Proforma non-GAAP net loss per basic and diluted common share for the three months ended September 30, 2018 was ($3.61) compared to ($546.74) for the prior year period. Proforma non-GAAP net loss per basic and diluted common share for the nine months ended September 30, 2018 was ($27.11) compared to ($3,376.57) for the prior year period.

The following table presents a reconciliation of net loss per basic and diluted share, which is our GAAP operating performance measure, to proforma non-GAAP net loss per share for the periods reflected:

*(thousands, except per share data)*

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to common stockholders | $(5,184) | $(14,637) | $(17,284) | $(27,116) |
| Adjustments: |  |  |  |  |
| Non-recurring one-time charges: |  |  |  |  |
| Acquisition transaction/financing costs | 78 | -- | 94 | 5 |
| Costs associated with public offering | 4 | 159 | 85 | 159 |
| Impairment of goodwill | -- | 8,392 | -- | 8,392 |
| Gain on the settlement of obligations | (45) | -- | (307) | -- |
| Gain on earnout | -- | (561) | (934) | (561) |
| Gain on the sale of Sysorex Arabia | -- | -- | (23) | -- |
| Gain on the sale of contracts | -- | -- | (601) | -- |
| Change in the fair value of derivative liability | -- | (46) | (48) | (254) |
| Provision for doubtful accounts | -- | 773 | 221 | 773 |
| Severance | -- | -- | 15 | 27 |
| Stock based compensation – acquisition costs | -- | -- | -- | 7 |
| Stock-based compensation - compensation and related benefits | 122 | 288 | 979 | 1,275 |
| Amortization of intangibles | 1,158 | 1,327 | 3,804 | 4,094 |
| Proforma non-GAAP net loss | $(3,867) | $(4,305) | $(13,999) | $(13,199) |
| Proforma non-GAAP net loss per basic and diluted common share | $(3.61) | $(546.74) | $(27.11) | $(3,376.57) |
| Weighted average basic and diluted common shares outstanding | 1,071,310 | 7,874 | 516,302 | 3,909 |

We rely on proforma non-GAAP net loss per share, which is a non-GAAP financial measure and not a substitution for GAAP:

- to review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;
- to compare our current operating results with corresponding periods and with the operating results of other companies in our industry;
- 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 proforma non-GAAP net loss per share 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), and that by including this information we can provide investors with a more complete understanding of our business. Specifically, we present proforma non-GAAP net loss per share as supplemental disclosure because:

- we believe proforma non-GAAP net loss per share is a useful tool for investors to assess the operating performance of our business without the effect of non-cash items including stock based compensation, amortization of intangibles and one time charges including acquisition costs, costs associated with the public offering, severance costs and changes in the fair value of shares to be issued;
- we believe that it is useful to provide investors with a standard operating metric used by management to evaluate our operating performance; and
- we believe that the use of proforma non-GAAP net loss per share is helpful to compare our results to other companies.

### Liquidity and Capital Resources as of September 30, 2018 Compared With September 30, 2017

The Company’s net cash flows used in operating, investing and financing activities for the nine months ended September 30, 2018 and 2017 and certain balances as of the end of those periods are as follows (in thousands):

*(thousands, except per share data)*

|  | For the Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(23,385) | $218 |
| Net cash used in investing activities | (1,237) | (1,154) |
| Net cash used in financing activities | 25,957 | (763) |
| Effect of foreign exchange rate changes on cash | (15) | (15) |
| Net increase (decrease) in cash | $1,320 | $(1,714) |

|  | September 30, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Cash and cash equivalents | $1,461 | $119 |
| Working capital deficit | $1,093 | $(32,822) |

### Operating Activities:

Net cash used in operating activities during the nine months ended September 30, 2018 was $24.1 million. Net cash provided by operating activities during the nine months ended September 30, 2017 was $218,000. Net cash used in operating activities during the nine months ended September 30, 2018 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(17,278) |
| Non-cash income and expenses | 6,390 |
| Net change in operating assets and liabilities | (12,497) |
| Net cash used in operating activities | $(23,385) |

The non-cash income and expenses of $6.4 million consisted primarily of (in thousands):

|  |  |
| ---: | --- |
| $1,334 | Depreciation and amortization expense |
| 3,804 | Amortization of intangibles primarily attributable to the Lilien, Shoom, AirPatrol, LightMiner and Integrio operations, which were acquired effective March 1, 2013, August 31, 2013, April 16, 2014, April 24, 2015 and November 21, 2016, respectively. |
| 979 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations and prior acquisitions |
| 417 | Amortization of debt discount |
| (307) | Gain on the settlement of liabilities |
| 163 | Other |
| $6,390 | Total non-cash income and expenses |

The net use of cash due to changes in operating assets and liabilities totaled ($12.5 million) and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $207 | Decrease in accounts receivable and other receivables |
| (5) | Decrease in prepaid licenses and maintenance contracts |
| (8,797) | Decrease in accounts payable |
| 64 | Increase in deferred revenue |
| (4,035) | Decrease in accrued liabilities and other liabilities |
| 69 | Increase in inventory and other assets |
| $(12,497) | Net use of cash in the changes in operating assets and liabilities |

42

### Investing Activities:

Net cash used in investing activities during the nine months ended September 30, 2018 and 2017 was $1.2 million. The net cash used in investing activities during the nine months ended September 30, 2018 was comprised of approximately $39,000 for the purchase of property and equipment, $661,000 for the investment in capitalized software, $175,000 for and investment in technology and $362,000 of cash that was contributed to Sysorex in connection with the Spin-off.

### Financing Activities:

Net cash provided by financing activities during the nine months ended September 30, 2018 was approximately $26.0 million. Net cash used in financing activities for the nine months ended September 30, 2017 was approximately $763,000. The net cash provided by financing activities during the nine months ended September 30, 2018 was primarily comprised of $28.0 million from the issuance of stock and warrants, $1.1 million of net repayments to the bank facility, $774,000 advances to a related party, $24,000 repayments from a related party and $113,000 of repayments of notes payable.

### Liquidity and Capital Resources - General:

Our current capital resources and operating results as of September 30, 2018, as described in the preceding paragraphs, consist of:

1\) an overall working capital of $1.1 million;

2\) cash of $1.5 million;

3\) the Payplant Credit Facility which we borrow against based on eligible assets of which $0 is utilized; and

4\) net cash used in operating activities year-to-date of $23.4 million.

The breakdown of our overall working capital is as follows (in thousands):

| Working Capital | Assets | Liabilities | Net |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $1,461 | $- | $1,461 |
| Accounts receivable, net / accounts payable | 878 | 777 | 101 |
| Notes and other receivables | 64 | - | 64 |
| Prepaid licenses and maintenance contracts / deferred revenue | - | 52 | (52) |
| Short-term debt | - | 1,815 | (1,815) |
| Other | 2,483 | 1,149 | 1,334 |
| Total | $4,886 | $3,793 | $1,093 |

Net cash used in operating activities during the nine months ended September 30, 2018 of $23.4 million consists of net loss of $17.3 million less non-cash expenses of $6.4 million and net cash used in changes in operating assets and liabilities of ($12.5 million). We expect net cash from operations to increase during 2018 as we expect the IPA business line to continue to grow and contribute more to operation expenses as we build out our channel partners and expand our product offerings.

The Company’s capital resources as of September 30, 2018, availability on the Payplant facility to finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received and funds from higher margin business line expansion should be sufficient to fund planned operations during the year ending December 31, 2018 based on current projections; however, the Company will need additional funds to support its operations for the next twelve months. In addition, the Company is pursuing possible strategic transactions and if the Company purposes any such opportunities, other expansion plans or changes its business plan it may need to raise additional capital. The Company may raise such additional capital if needed through the issuance of equity, equity-linked or debt securities.

### Going Concern and Management Plans

Our condensed consolidated financial statements as of September 30, 2018 have been prepared under the assumption that we will continue as a going concern for the next twelve months from the date the financial statements are issued. Footnote 1 to the notes to our condensed consolidated financial statements as of September 30, 2018 include language referring to our recurring and continuing losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern, is dependent upon the ability to obtain additional equity or debt financing, attain further operating efficiency, reduce expenditures, and, ultimately, to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements as of September 30, 2018 do not include any adjustments that might result from the outcome of this uncertainty.

### Liquidity and Capital Resources – Payplant

Pursuant to the terms of a Commercial Loan Purchase Agreement, dated as of August 14, 2017 (the “Purchase Agreement”), Gemcap Lending I, LLC (“GemCap”) sold and assigned to Payplant LLC, as agent for Payplant Alternatives Fund LLC (“Payplant” or “Lender”), all of its right, title and interest to that certain revolving Secured Promissory Note in an aggregate principal amount of up to $10,000,000 (the “GemCap Note”) issued in accordance with that certain Loan and Security Agreement, dated as of November 14, 2016 (the “GemCap Loan”), by and among Gemcap and the Company and its wholly-owned subsidiaries at that time, Sysorex and SGS (together with Inpixon and Sysorex, the “Company”).

In connection with the purchase and assignment of the Gemcap Loan in accordance with the Purchase Agreement, the GemCap Loan was amended and restated in accordance with the terms and conditions of the Payplant Loan and Security Agreement, dated as of August 14, 2017, between the Company and Payplant (the “Loan Agreement”). The Loan Agreement allows the Company to request loans (each a “Loan” and collectively the “Loans”) from the Lender (in the manner provided therein) with a term of no greater than 360 days in amounts that are equivalent to 80% of the face value of purchase orders received (“Aggregate Loan Amount”). The Lender is not obligated to make the requested loan, however, if the Lender agrees to make the requested loan, before the loan is made, the Company must provide Lender with (i) one or more promissory notes (“Notes”) for the amount being loaned in favor of Lender, (ii) one or more guaranties executed in favor of Lender and (iii) other documents and evidence of the completion of such other matters as Lender may request. The principal amount of each Loan shall accrue interest at a 30 day rate of 2% (the “Interest Rate”), calculated per day on the basis of a year of 360 days and, when combined with all fees that may be characterized as interest will not exceed the maximum rate allowed by law Upon the occurrence and during the continuance of any event of default, interest shall accrue at a rate equal to the Interest Rate plus 0.42% per 30 days. All computations of interest shall be made on the basis of a year of 360 days. The promissory note is subject to the interest rates described in the Loan Agreement and is secured by the assets of the Company pursuant to the Loan Agreement and will be satisfied in accordance with the terms of the Payplant Client Agreement.

In connection with the completion of the Spin-off, on August 31, 2018, the Company, together with Sysorex and SGS, and Payplant, executed Amendment 1 to Payplant Client Agreement (the “Amendment”). Pursuant to the Amendment, Sysorex and SGS are no longer parties to the Payplant Client Agreement, originally entered into on August 14, 2017, and have been released from any and all obligations and liabilities arising under the Payplant Client Agreement, whether such obligations and liabilities were in existence prior to or on the date of the Amendment or arise after the date of the Amendment.

As of September 30, 2018, the principal amount outstanding under the Loan Agreement was $0.

### 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.

### Recently Issued Accounting Standards

For a discussion of recently issued accounting pronouncements, please see the Recent Accounting Standards section of Note 3 to our condensed consolidated financial statements, which is included in this Form 10-Q in Item 1.

## Controls and procedures

As filed, 2,333 characters.

### Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with GAAP.

In connection with the preparation of this Form 10-Q, management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective.

### Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

### Limitations of the Effectiveness of Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

## Risk factors

As filed, 4,208 characters.

We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by these risks. Except as disclosed below, there have been no material changes to the Risk Factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

### Risks Related to Our Consolidated Operations

### The spin-off of our VAR business may not achieve the intended benefits.

We completed the separation of Sysorex on August 31, 2018. The performance of our obligations under the transition services agreement entered into with Sysorex for a period of time after the separation, may require significant time and attention from our senior management and employees, which could adversely affect our business, financial results and results of operations.

The separation of the businesses may also result in dis-synergies post-separation that could negatively impact the balance sheet, income statement and cash flows of each business. Moreover, we may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation, which could materially and adversely affect our business, financial condition and results of operations and lead to increased volatility in the price of our common stock.

### Risks Related to Our Securities

***Our Common Stock may be delisted from the Nasdaq Capital Market if we cannot satisfy Nasdaq’s continued listing requirements in the future.***

On May 17, 2018, we received a deficiency letter from Nasdaq indicating that, based on our closing bid price for the last 30 consecutive business days, we do not comply with the minimum bid price requirement of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until November 13, 2018, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our Common Stock must be at least $1.00 per share for a minimum of ten consecutive business days, but generally no more than twenty consecutive business days during this 180-day period. As of the date of this Form 10-Q, the closing bid price of our Common Stock has not been equal to or greater than $1.00 per share for a minimum of ten consecutive business days. As a result, we do not expect to be able to regain compliance within this 180-day period; however, we will be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that our Common Stock will be subject to delisting.

On October 31, 2018, we received stockholder approval for a reverse stock split at our 2018 annual meeting of stockholders and implemented a 1-for-40 reverse stock split effective as of November 2, 2018, which we believe will cause us to compy with the minimum bid price requirement.

There can be no assurance that, the per share trading price of our Common Stock following our reverse stock split will remain above $1.00 per share for the requisite period of time or that we will be able to continue to meet other listing requirements. If our Common Stock is delisted, market liquidity for our Common Stock could be severely affected and our stockholders’ ability to sell their shares of our Common Stock could be limited. A delisting of our Common Stock from Nasdaq would negatively affect the value of our Common Stock. A delisting of our Common Stock could also adversely affect our ability to obtain financing for our operations and could result in the loss of confidence in our company.

Filed Nov 6, 2018.
Source: SEC EDGAR, the filing index for accession 0001213900-18-014922. Last ingested by Listed: Nov 6, 2026, 18:14 ET. No prices; not investment advice.