# XTI Aerospace, Inc.: Form 10-Q for the period ended Mar 31, 2019

- Company: [XTI Aerospace, Inc.](/companies/xtia.md) (CIK 1529113)
- Form: 10-Q
- Filed: 2019-05-14
- Accepted by EDGAR: May 14, 2019, 17:27 ET
- Period: 2019-03-31
- Accession: 0001213900-19-008618
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529113/000121390019008618/f10q0319_inpixon.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529113/000121390019008618/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $1.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-01-01 to 2019-03-31 | $337.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2019-01-01 to 2019-03-31 | $1.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-01-01 to 2019-03-31 | $956.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-01-01 to 2019-03-31 | −$4.9m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2019-01-01 to 2019-03-31 | −$5.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | −$1.42 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | −$3.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $16.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-03-31 | $3.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-03-31 | $6.8m | us-gaap:AssetsCurrent |
| Total assets | at 2019-03-31 | $20.1m | us-gaap:Assets |
| Current liabilities | at 2019-03-31 | $6.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-03-31 | $7.2m | us-gaap:Liabilities |
| Long-term debt | at 2019-03-31 | $73.0k | us-gaap:LongTermDebt |
| Short-term borrowings | at 2019-03-31 | $4.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2019-03-31 | $12.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 58,749 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, 2018, 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.”*

### Overview of our Business

We provide a number of different technology products and services relating to Indoor Positioning and Analytics and other digital solutions to private and public sector customers. Effective August 31, 2018, the Company completed a Spin-off of Sysorex and the associated Infrastructure business and it is no longer a part of our reporting in the current year. In prior years’ financial data, the revenue and expenses of the Spin-off entities are shown as discontinued operations. Our Indoor Positioning Analytics (“IPA”) products secure, digitize and optimize 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. In addition, we offer digital tear-sheets with optional invoice integration, digital ad delivery, and an e-edition designed for reader engagement for the media, publishing and entertainment industry.

Revenues increased in the first quarter of 2019 over the same period in 2018 by approximately 65% because of an increase in our IPA revenues resulting from an increased focus on the IPA product line after the Spin-off of our Sysorex business and the addition of a new customer that accounted for approximately 55% of our revenues for the first quarter of 2019. We expect to continue to grow our IPA product line in 2019. The IPA product line 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 2019 as our customer base moves from early adopters to mainstream customers. The sales cycle is also improving with the increased presence and awareness of beacon and Wi-Fi locationing technologies in the market. IPA sales can be licensed-based with government customers but commercial customers typically prefer a SaaS or subscription model. Our other digital solutions are also delivered on a SaaS model and allow us to generate industry analytics that complement our indoor-positioning solutions.

We experienced a net loss of $5.2 million for the three months ended March 31, 2019 and a net loss of $6.2 million for the three months ended March 31, 2018. We cannot assure that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we have supplemented the revenues we earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. Furthermore, except for our Payplant facility, we have no committed source of financing and we cannot assure that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our business operations by reducing expenditures for employees, consultants, business development and marketing efforts, selling assets or one or more products in our business, or otherwise severely curtailing our operations.

### Corporate Strategy Update

Management continues to pursue a corporate strategy that is focused on building and developing Inpixon as a technology company that provides turnkey solutions from the collection of data to delivering insights from that data to our customers with a focus on securing, digitizing and optimizing premises with IPA for businesses and governments. In connection with such strategy and in order to facilitate our long-term growth, we are evaluating various strategic transactions and acquisitions of companies with technologies and intellectual property (“IP”) that complement such goals by adding technology, differentiation, customers and/or revenue. We are primarily looking for accretive opportunities that have business value and operational synergies. We believe these complimentary technologies will allow us to provide a comprehensive Indoor Positioning Platform, or one-stop shop to our customers. We believe that acquiring complementary products and/or IP will add value to the Company. Candidates with proven technologies that complement our overall strategy may come from anywhere in the world, so long as there are strategic and financial reasons to make the acquisition. If we make any acquisitions in the future, we expect that we may pay for such acquisitions using our equity securities, cash and debt financing in combinations appropriate for each acquisition. In connection with this strategy, on April 10, 2019, the Company announced it signed a non-binding term sheet to acquire Locality Systems Inc. (“Locality”), a technology company based near Vancouver, Canada, specializing in wireless device positioning and radio frequency (RF) augmentation of video surveillance systems. The acquisition is expected to be accretive and is anticipated to have a purchase price consisting of a combination of cash and equity. As of the date of this filing, negotiations between the Company and Locality continue to progress, however, the Company has not entered into a definitive agreement with respect to the proposed transaction which is subject to the satisfaction of due diligence. Accordingly, there can be no assurance that the transaction will be completed.

### Recent Events

### Sysorex Loan Transaction

On December 31, 2018, the Company and Sysorex entered into a note purchase agreement pursuant to which the Company agreed to purchase from Sysorex at a purchase price equal to the Loan Amount (as defined below), a secured promissory note (the “Secured Note”) for up to an aggregate principal amount of 3.0 million (the “Principal Amount”), including any amounts advanced through the date of the Secured Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with the Prior Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent (10%) per annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount. In addition, Sysorex agreed to pay $20,000 to the Company to cover the Company’s legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of the Secured Note (the “Transaction Expense Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any amounts disbursed to Sysorex and the Transaction Expense Amount.

Sysorex may borrow repay and borrow under the Secured Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest, not to exceed the Principal Amount at any one time.

All outstanding principal amounts and accrued unpaid interest owing under the Secured Note shall become immediately due and payable on the earlier to occur of (i) the twenty-four (24) month anniversary of the date the Secured Note is issued (the “Maturity Date”), (ii) at such date when declared due and payable by the Company upon the occurrence of an Event of Default (as defined in the Secured Note), or (iii) at any such earlier date as set forth in the Secured Note. All accrued unpaid interest shall be payable in cash.

Pursuant to the terms of the Secured Note, Sysorex granted the Company, subject to any and all Payplant Liens (as defined in the Secured Note) and Permitted Liens (as defined in the Secured Note), a continuing first priority security interest in all assets of Sysorex whether owned as of the date of the Secured Note or subsequently acquired, including all proceeds therefrom (collectively, the “Collateral”) to secure the payment of the Secured Note and all other loans and advances (including all renewals, modifications and extensions thereof) and all obligations of any and every kind and nature of Sysorex to the Company, whether arising prior to, under or after the date of the Secured Note, however incurred or evidenced, plus all interest, reasonable costs, reasonable expenses and reasonable attorneys’ fees, which may be made or incurred by the Company in the disbursement, administration, and collection of such amounts, and in the protection, maintenance, and liquidation of the Collateral.

On February 4, 2019, the documents were amended to increase the maximum Principal Amount that may be outstanding at any time under the Secured Note from $3.0 million to $5.0 million. On April 2, 2019, the documents were amended to increase the maximum Principal Amount under the Secured Note from $5.0 million to $8.0 million.

### Rights Offering

On January 15, 2019, the Company closed its rights offering (the “Rights Offering”) for aggregate gross proceeds to the Company of $12.0 million and net proceeds of approximately $10.77 million after deducting expenses relating to dealer-manager fees and expenses.

The Company sold an aggregate of 12,000 units consisting of one share of Series 5 Convertible Preferred Stock with a stated value of $1,000 (and immediately convertible into shares of common stock at a conversion price of $3.33 per share) and 300 warrants to purchase common stock with an exercise price of $3.33 per share. The warrants are exercisable for 5 years after the date of issuance. The Series 5 Convertible Preferred Stock and the warrants comprising the units immediately separated upon the closing of the Rights Offering.

### Atlas Technology Settlement

On February 20, 2019, the Company, Sysorex and Atlas Technology Group, LLC (“Atlas”) entered into a settlement agreement (the “Settlement Agreement”) in connection with the satisfaction of an arbitration award in an aggregate amount of $1,156,840.25 plus pre-judgment interest equal to an aggregate of $59,955.28 (the “Award”) granted to Atlas following arbitration proceedings arising out of an engagement agreement, dated September 8, 2016, by and between Atlas and the Company as well as its subsidiaries, including the predecessor to Sysorex (the “Engagement Agreement”).

Pursuant to the Settlement Agreement, Atlas agreed to (a) reduce the Award by $275,000 resulting in a net award of $941,795.53 (the “Net Award”) and (b) accept an aggregate of 749,440 shares of freely-tradable common stock of the Company (the “Settlement Shares”), in satisfaction of the Award, which was determined by dividing 120% of the Net Award by $1.508, which was the “minimum price,” as defined under Nasdaq Listing Rule 5635(d). The closing occurred on February 21, 2019.

The Award is deemed satisfied in full and the parties have released each other from any claims arising out of the Engagement Agreement. In connection with the Spin-off, the Company and Sysorex each agreed pursuant to the terms and conditions of that certain Separation and Distribution Agreement, dated August 7, 2018, as amended, that 50% of the costs and liabilities related to the arbitration action arising from the Engagement Agreement would be shared by each party following the Spin-off. As a result, Sysorex is obligated to indemnify the Company for half of the total amount paid by the Company to satisfy the Award.

In the event that the total net proceeds received by Atlas or its designees from the sale of the Settlement Shares (exclusive of brokerage fees) exceeds the amount of the Net Award, Atlas agreed to deliver an amount equal to the difference between the sale proceeds and the Net Award to the legal counsel for the Company and Sysorex to be applied against fees incurred in connection with the arbitration and the Settlement Agreement.

### Note Exchanges

On January 29, 2019, the Company and the holder of that certain outstanding convertible promissory note, issued on November 17, 2017 (as amended, supplemented or otherwise modified, the “Original Note”), with an outstanding balance of $383,768.07 (the “Remaining Balance”), entered into an exchange agreement (the “Exchange Agreement”), pursuant to which the Company and the holder agreed to (i) partition a new convertible promissory note in the form of the Original Note in the original principal amount equal to the Remaining Balance (the “Exchange Amount”) and then cause the Remaining Balance to be reduced by the Exchange Amount; and (ii) exchange the partitioned note for the delivery of 172,869 shares of the Company’s common stock at an effective price per share equal to $2.22. The exchange was completed on January 29, 2019. Following such partition of the Original Note, the Original Note was deemed paid in full, was automatically deemed canceled, and shall not be reissued.

On April 10, 2019, the Company and the holder (the “Note Holder”) of that certain outstanding promissory note, issued on October 12, 2018 (as amended, supplemented or otherwise modified, the “Original Note”), with an outstanding balance of $2,689,868 as of April 10, 2019, entered into an exchange agreement, pursuant to which the Company and the Note Holder agreed to (i) partition a new promissory note in the form of the Original Note (in the original principal amount equal to $500,000 (the “Exchange Amount”) and then cause the outstanding balance to be reduced by the Exchange Amount; and (ii) exchange the partitioned note for the delivery of 626,566 shares of the Company’s common stock, at an effective price per share equal to $0.798. The exchange was completed on April 12, 2019.

On April 24, 2019, the Company and the Note Holder of the Original Note, with an outstanding balance of $2,198,400 as of April 24, 2019, entered into an exchange agreement, pursuant to which the Company and the Note Holder agreed to (i) partition a new promissory note in the form of the Original Note in the original principal amount equal to $400,000 (the “Exchange Amount”) and then cause the outstanding balance to be reduced by the Exchange Amount; and (ii) exchange the partitioned note for the delivery of 444,988 shares of the Company’s common stock at an effective price per share equal to $0.8989. The exchange was completed on April 25, 2019.

### Issuance of Promissory Note

On May 3, 2019, the Company entered into a note purchase agreement (the “Purchase Agreement”) with an institutional investor identified therein (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 $3,770,000.00 (the “Initial Principal Amount”), which is payable on or before the date that is 10 months from the issuance date. The Initial Principal Amount includes an original issue discount of $750,000.00 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 $3,000,000.00 (the “Transaction”). The Note accrues interest at a rate of 10% per annum. 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.

### JOBS Act

Pursuant to Section 107 of the JOBS Act, 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 (“GAAP”). In connection with the preparation of our 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

The Company records revenue according to “Revenue from Contracts with Customers (Topic 606)”, or ASU 2016-12, which requires revenue to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and is evaluated using a five-step model.

#### Software As A Service Revenue Recognition

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

#### Professional Services Revenue Recognition

The Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and materials contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts including maintenance service provided by in house personnel, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three months ended March 31, 2019 and 2018, the Company did not incur any such losses. These amounts are based on known and estimated factors.

#### Contract Balances

The timing of our revenue recognition may differ from the timing of payment by our customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had deferred revenue of approximately $173,000 as of March 31, 2019 related to cash received in advance for product maintenance services provided by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for these maintenance services and recognize the deferred revenue and related contract costs over the next twelve months.

### Long-lived Assets

We account for our long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“ASC 360”), 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 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 three months ended March 31, 2019 and 2018.

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 three months ended March 31, 2019 and 2018, 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.

### Acquired In-Process Research and Development (“IPR&D”)

In accordance with authoritative guidance, we recognize IPR&D at fair value as of the acquisition date, and subsequently account for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. Once an IPR&D project has been completed, the useful life of the IPR&D asset is determined and amortized accordingly. If the IPR&D asset is abandoned, the remaining carrying value is written off. During fiscal year 2014, we acquired IPR&D through the acquisition of AirPatrol and in 2015 through the acquisition of the assets of LightMiner. Our IPR&D is comprised of AirPatrol and LightMiner technology, which was valued on the date of the acquisition. It will take additional financial resources to continue development of these technologies.

We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, for further development of the AirPatrol technology. Through March 31, 2019, we have made some progress with raising capital since these acquisitions, building our pipeline and getting industry acknowledgment. We have been recognized by leading industry analysts in a report on leading indoor positioning companies and was also awarded the IoT Security Excellence award by TMC. Management remains focused on growing revenue from these products and continues to pursue efforts to recognize the value of the AirPatrol and LightMiner technologies. 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 IPR&D will be subject to significant impairment.

### Impairment of Long-Lived Assets Subject to Amortization

We amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment indicator exists. We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including our intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize any intangible asset impairment charges for the three month ended March 31, 2019. See “Acquired In-Process Research and Development (“IPR&D”)” for further information.

### 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 March 31, 2019 and December 31, 2018, reserves for credit losses included a reserve for doubtful accounts of approximately $260,000 and $464,000, 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.

For the three months ended March 31, 2019 and 2018, the Company incurred stock-based compensation charges of $890,000 and $286,000, respectively. The principal assumptions used in applying the Black-Scholes model along with the results from the model were as follows:

|  | For the Three Months Ended March 31, 2019 |
| --- | ---: |
| Risk-free interest rate | 2.66% |
| Expected life of option grants | 7 years |
| Expected volatility of underlying stock | 49.65% |
| Dividends assumption | $-- |

During the three months ended March 31, 2019 and 2018, the Company recorded a charge of $648,000 and $206,000, respectively, for the amortization of employee stock options.

### Results of Operations

### Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

The following table sets forth selected 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 March 31, 2019 Amount | % of Revenues | March 31, 2018 Amount | % of Revenues | % Change\* |
| --- | ---: | ---: | ---: | ---: | ---: |
| Revenues | $1,363 | 100% | $849 | 100% | 61% |
| Cost of revenues | $337 | 25% | $265 | 31% | 27% |
| Gross profit | $1,026 | 75% | $584 | 69% | 76% |
| Operating expenses | $5,889 | 432% | $4,364 | 514% | 35% |
| Loss from operations | $(4,863) | (357)% | $(3,780) | (445)% | 29% |
| Net loss | $(5,150) | (378)% | $(6,243) | (735)% | (18)% |
| Net loss attributable to stockholders | $(6,395) | (469)% | $(7,751) | (913)% | (17)% |

\* Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this Item, which may be rounded to the nearest hundred thousand, may not produce the same results.

### Revenues

Revenues for the three months ended March 31, 2019 were $1.4 million compared to $849,000 for the comparable period in the prior year for an increase of $551,000, or approximately 65%. Revenues increased in the first quarter of 2019 over the prior period in 2018 due to an increase in our IPA revenues resulting from an increased focus on the IPA product line. Our increased focus resulted in the addition of a new customer, representing approximately 55% of our revenues for the first quarter of 2019.

### Cost of Revenues

Cost of revenues for the three months ended March 31, 2019 were $337,000 compared to $265,000 for the comparable period in the prior year. This increase of $72,000, or approximately 27%, was primarily attributable to the increase in IPA revenue during the three months ended March 31, 2019.

The gross profit margin for the three months ended March 31, 2019 was 75% compared to 69% for the three months ended March 31, 2018. This increase in margin is primarily due to the increase in higher margin IPA revenue during the three months ended March 31, 2019.

### Operating Expenses

Operating expenses for the three months ended March 31, 2019 were $5.9 million and $4.4 million for the comparable period ended March 31, 2018. This increase of $1.5 million is primarily attributable to higher IT infrastructure costs, compensation, legal and professional fees and non-cash stock based compensation.

### Loss From Operations

Loss from operations for the three months ended March 31, 2019 was $4.9 million as compared to $3.8 million for the comparable period in the prior year. This increase of $1.1 million was primarily attributable to the higher operating expenses during the three months ended March 31, 2019 as discussed in the reporting caption above.

### Other Income/Expense

Other income/expense for the three months ended March 31, 2019 was a loss of $287,000 compared to a loss of $752,000 for the comparable period in the prior year. This decrease in loss of $465,000 is primarily attributable to a $466,000 decrease in interest expense due to lower interest on the Company’s credit facility and promissory notes in the three months ended March 31, 2019 and higher debt discount in the three months ended March 31, 2018.

### Provision for Income Taxes

There was no provision for income taxes for the three months ended March 31, 2019 and 2018 as the Company was in a net taxable loss position. Deferred tax assets resulting from such losses are fully reserved as of March 31, 2019 and 2018 since, at present, the Company has no history of taxable income and it is more likely than not that such assets will not be realized.

### Net Gain and Net Loss Attributable To Non-Controlling Interest

Net loss attributable to non-controlling interest for the three months ended March 31, 2019 was $5,000. Net loss attributable to non-controlling interest for the three months ended March 31, 2018 was $0. This increase in loss of $5,000 was attributable to the loss from Sysorex India and is immaterial.

### Net Loss Attributable To Stockholders of Inpixon

Net loss attributable to stockholders of Inpixon for the three months ended March 31, 2019 was $5.2 million compared to $6.2 million for the comparable period in the prior year. The lower loss of $1.0 million was primarily attributable to higher margin IPA revenue and the $1.7 million loss from deconsolidated operations of the Spin-off during the three months ended March 31, 2018.

### 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 March 31, 2019 was a loss of $2.6 million compared to a loss of $3.4 million for the prior period in 2018.

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 months ended March 31, 2019 and 2018 (in thousands):

|  | For the Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net loss attributable to common stockholders | $(6,395) | (7,751) |
| Adjustments: |  |  |
| Non-recurring one-time charges: |  |  |
| Acquisition transaction/financing costs | 137 | 16 |
| Costs associated with public offering | -- | 81 |
| Gain on the settlement of obligations | -- | (133) |
| Gain on earnout | -- | (577) |
| Gain on the sale of Sysorex Arabia | -- | (23) |
| Change in the fair value of derivative liability | -- | (48) |
| Provision for doubtful accounts | 105 | 116 |
| Severance | -- | 15 |
| Settlement of litigation | 6 | -- |
| Deemed dividend to preferred stockholders | -- | 1,508 |
| Deemed dividend for triggering of warrant down round feature | 1,250 | -- |
| Stock-based compensation - compensation and related benefits | 890 | 286 |
| Interest expense | 356 | 1,283 |
| Depreciation and amortization | 1,043 | 1,836 |
| Adjusted EBITDA | $(2,608) | (3,391) |

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;

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- 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 stock based compensation, amortization of intangibles, change in the fair value of shares to be issued, change in the fair value of derivative liability, impairment of goodwill and one time charges including gain/loss on the settlement of obligations, severance costs, provision for doubtful accounts, acquisition costs and the costs associated with public offerings;
- 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 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 March 31, 2019 was ($1.42) compared to ($73.88) for the prior period in 2018. The decreased loss per share in 2018 was 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 gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering.

Proforma non-GAAP net loss per basic and diluted common share for the three months ended March 31, 2019 was ($0.71) compared to a loss of ($49.45) per share for the prior period in 2018.

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 (in thousands, except per share data):

*(thousands, except per share data)*

|  | For the Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net loss attributable to common stockholders | $(6,395) | $(7,751) |
| Adjustments: |  |  |
| Non-recurring one-time charges: |  |  |
| Acquisition transaction/financing costs | 137 | 16 |
| Costs associated with public offering | -- | 81 |
| Gain on the settlement of obligations | -- | (133) |
| Gain on earnout | -- | (577) |
| Gain on the sale of Sysorex Arabia | -- | (23) |
| Change in the fair value of derivative liability | -- | (48) |
| Provision for doubtful accounts | 105 | 116 |
| Severance | -- | 15 |
| Settlement of litigation | 6 | -- |
| Deemed dividend to preferred stockholders | -- | 1,508 |
| Deemed dividend for triggering of warrant down round feature | 1,250 | -- |
| Stock-based compensation - compensation and related benefits | 890 | 286 |
| Amortization of intangibles | 812 | 1,322 |
| Proforma non-GAAP net loss | $(3,195) | $(5,188) |
| Proforma non-GAAP net loss per basic and diluted common share | $(0.71) | $(49.45) |
| Weighted average basic and diluted common shares outstanding | 4,495,536 | 104,915 |

We rely on proforma non-GAAP net loss per share, which is a non-GAAP financial measure:

- 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 gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with public offerings;
- we believe that it is useful to provide to investors 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.

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### Liquidity and Capital Resources as of March 31, 2019

Our current capital resources and operating results as of and through March 31, 2019, consist of:

1\) an overall working capital deficit of $93,000;

2\) cash of $3.8 million;

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

4\) net cash used by operating activities for the period of $3.5 million.

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

| Working Capital | Assets | Liabilities | Net |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $3,830 | $-- | $3,830 |
| Accounts receivable, net / accounts payable | 1,748 | 1,118 | 630 |
| Notes and other receivables | 68 | -- | 68 |
| Prepaid licenses and maintenance contracts/deferred revenue | -- | 173 | (173) |
| Short-term debt | -- | 3,970 | (3,970) |
| Other | 1,134 | 1,612 | (478) |
| Total | $6,780 | $6,873 | $(93) |

Net cash used in operating activities during the three months ended March 31, 2019 of $3.5 million consists of net loss of $5.2 million offset by non-cash adjustments of $2.5 million less net cash changes in operating assets and liabilities of $809,000.

The Company’s capital resources as of March 31, 2019, availability on the Payplant facility to finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received and funds from higher margin business line expansion will not be sufficient to fund planned operations during the next twelve months from the date the financial statements are issued based on current projections. In addition, the Company is pursuing possible strategic transactions. Therefore, the Company may raise such additional capital as needed, through the issuance of equity, equity-linked or debt securities.

### Going Concern and Management Plans

Our condensed consolidated financial statements as of March 31, 2019 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 March 31, 2019 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 March 31, 2019 do not include any adjustments that might result from the outcome of this uncertainty.

### Liquidity and Capital Resources – Payplant

As of March 31, 2019, the principal amount outstanding under the Loan Agreement was $0.

### Liquidity and Capital Resources as of March 31, 2019 Compared to March 31, 2018

The Company’s net cash flows used in operating, investing and financing activities for the three months ended March 31, 2019 and 2018 and certain balances as of the end of those periods are as follows (in thousands):

|  | For the Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(3,493) | $(10,976) |
| Net cash used in investing activities | (255) | (167) |
| Net cash provided by financing activities | 6,578 | 17,703 |
| Effect of foreign exchange rate changes on cash | (8) | (7) |
| Net increase in cash | $2,822 | $6,553 |

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|  | As of March 31, 2019 | As of December 31, 2018 |
| --- | ---: | ---: |
| Cash and cash equivalents | $3,830 | $1,008 |
| Working capital (deficit) | $(93) | $(3,926) |

### Operating Activities for the three months ended March 31, 2019

Net cash used in operating activities during the three months ended March 31, 2019 was $3.5 million. Net cash used in operating activities during the three months ended March 31, 2018 was $11 million. The cash flows related to the three months ended March 31, 2019 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(5,150) |
| Non-cash income and expenses | 2,467 |
| Net change in operating assets and liabilities | (810) |
| Net cash used in operating activities | $(3,493) |

The non-cash income and expense of $2.5 million consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $1,043 | Depreciation and amortization expenses (including amortization of intangibles) primarily attributable to the Shoom, AirPatrol, and LightMiner and operations, which were acquired effective August 31, 2013, April 16, 2014, and November 21, 2016, respectively. |
| 890 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations and for the AirPatrol acquisition |
| 250 | Amortization of debt discount |
| 17 | Amortization of technology |
| 105 | Provision for doubtful accounts |
| 162 | Other |
| $2,467 | Total non-cash expenses |

The net use of cash in the change in operating assets and liabilities aggregated $810,000 and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $(639) | Increase in accounts receivable and other receivables |
| (169) | Increase in inventory and other assets |
| (12) | Decrease in accounts payable |
| 72 | Increase in accrued liabilities and other liabilities |
| (62) | Decrease in deferred revenue |
| $(810) | Net use of cash in the changes in operating assets and liabilities |

### Operating Activities for the three months ended March 31, 2018

Net cash used in operating activities during the three months ended March 31, 2018 was $11.0 million and consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(6,243) |
| Non-cash income and expenses | 3,179 |
| Net change in operating assets and liabilities | (7,912) |
| Net cash used in operating activities | $(10,976) |

34

The non-cash income and expense of $3.2 million consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $1,836 | Depreciation and amortization expenses (including 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 |
| 1,288 | Adoption of accounting standards |
| (48) | Change in the fair value of derivative liability |
| 286 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations and for the AirPatrol acquisition |
| (133) | Gain on settlement of obligations of vendor liabilities |
| 417 | Amortization of debt discount |
| 17 | Amortization of technology |
| 116 | Provision for doubtful accounts |
| (577) | Gain on earnout |
| (23) | Gain on the sale of Sysorex Arabia |
| $3,179 | Total non-cash expenses |

The net use of cash in the change in operating assets and liabilities aggregated $8.5 million and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $958 | Decrease in accounts receivable and other receivables |
| 6,902 | Decrease in prepaid licenses and maintenance contracts |
| (593) | Increase in inventory and other assets |
| (3,680) | Decrease in accounts payable |
| (3,279) | Decrease in accrued liabilities and other liabilities |
| (8,220) | Decrease in deferred revenue |
| $(7,912) | Net use of cash in the changes in operating assets and liabilities |

### Cash Flows from Investing Activities as of March 31, 2019 and 2018

Net cash flows used in investing activities during the three months ended March 31, 2019 was $255,000 compared to net cash flows used in investing activities during the three months ended March 31, 2018 of $167,000. Cash flows related to investing activities during the three months ended March 31, 2019 include $16,000 for the purchase of property and equipment and $239,000 investment in capitalized software. Cash flows related to investing activities during the three months ended March 31, 2018 include $11,000 for the purchase of property and equipment and $156,000 investment in capitalized software.

### Cash Flows from Financing Activities as of March 31, 2019 and 2018

Net cash flows provided by financing activities during the three months ended March 31, 2019 was $6.6 million. Net cash flows provided by financing activities during the three months ended March 31, 2018 was $17.7 million. During the three months ended March 31, 2019, the Company received incoming cash flows of $10.9 million from the issuance of common stock, preferred stock and warrants, and $652,000 of repayments from a related party offset by $4.9 million of advances to related party, $23,000 of net repayments to the credit line and $1,000 repayments of notes payable. During the three months ended March 31, 2018, the Company received incoming cash flows of $18.9 million from the issuance of common stock, preferred stock and warrants offset by $1.1 million of repayments to the credit line and $113,000 repayments of notes payable.

### 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 Note 3 to our financial statements, which are included in this Form 10-Q in Item 1.

## Controls and procedures

As filed, 2,837 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 has been a change in our internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Effective January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”). ASC 842 requires management to make significant judgments and estimates. As a result, we implemented changes to our internal controls related to lease evaluation for the three months ended March 31, 2019. These changes include updated accounting policies affected by ASC 842 as well as redesigned internal controls over financial reporting related to ASC 842 implementation. Additionally, management has expanded data gathering procedures to comply with the additional disclosure requirements and ongoing contract review requirements.

### 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, 3,427 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 set forth below, there have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2018.

***We have a history of operating losses and working capital deficiency and there is no assurance that we will be able to achieve profitability or raise additional financing.***

We have a history of operating losses and working capital deficiency. We have incurred net losses of approximately $5.2 million and $6.2 million for the three months ended March 31, 2019 and 2018, respectively, which include the net losses of the entities we spun-off on August 31, 2018 of $0 and $1.7 million for the three months ended March 31, 2019 and 2018, respectively. We had a working capital deficiency of approximately $0.09 million and $3.9 million as of March 31, 2019 and December 31, 2018, respectively. The continuation of our Company is dependent upon attaining and maintaining profitable operations and raising additional capital as needed, but there can be no assurance that we will be able to raise any further financing.

Our ability to generate positive cash flow from operations is dependent upon sustaining certain cost reductions and generating sufficient revenues. In that regard, our revenues have increased by approximately 65% for the three months ended March 31, 2019, as compared to the same period for the prior fiscal year as a result of our increased focus on the IPA product line and resulting addition of a new customer. However, our operating expenses increased by $1.5 million for the three months ended March 31, 2019 as compared to the same period for the prior fiscal year as a result of higher IT infrastructure costs, compensation, legal and professional fees and non-cash stock based compensation. As a result, our management continues to evaluate options and strategic transactions and continue to market and promote our new products and technologies, however, there is no guarantee that these efforts will be successful or that we will be able to achieve or sustain profitability. We have funded our operations primarily with proceeds from public and private offerings of our common stock and secured and unsecured debt instruments. Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability, and the terms of the financing transactions that we completed in the past, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings or debt financings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern, and we may have to curtail, or even to cease, certain operations. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.

Filed May 14, 2019.
Source: SEC EDGAR, the filing index for accession 0001213900-19-008618. Last ingested by Listed: Nov 6, 2026, 18:14 ET. No prices; not investment advice.