# XTI Aerospace, Inc.: Form 10-Q for the period ended Mar 31, 2020

- Company: [XTI Aerospace, Inc.](/companies/xtia.md) (CIK 1529113)
- Form: 10-Q
- Filed: 2020-05-12
- Accepted by EDGAR: May 12, 2020, 17:22 ET
- Period: 2020-03-31
- Accession: 0001213900-20-011865
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529113/000121390020011865/f10q0320_inpixon.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529113/000121390020011865/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2020-01-01 to 2020-03-31 | $510.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2020-01-01 to 2020-03-31 | $1.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-01-01 to 2020-03-31 | $1.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | −$5.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | −$87.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | −$6.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | −$1.22 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | −$4.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $16.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-03-31 | $6.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-31 | $8.4m | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $20.9m | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $14.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $15.8m | us-gaap:Liabilities |
| Short-term borrowings | at 2020-03-31 | $9.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2020-03-31 | $5.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 59,942 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, 2019, 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-45 reverse split of our common stock effective on January 7, 2020.

### Overview of Our Business

We are an indoor intelligence company. Our business and government customers use our solutions to secure, digitize and optimize their indoor spaces with our positioning, mapping and analytics products. Our indoor intelligence platform uses sensor technology to detect accessible cellular, Wi-Fi, Bluetooth, ultra-wide band “UWB” and radio frequency identification “RFID” signals emitted from devices within a venue providing positional information similar to what global positioning system (“GPS”) satellite systems provide for the outdoors. Combining this positional data with our dynamic and interactive mapping solution and a high-performance analytics engine, yields near real time insights to our customers providing them with visibility, security and business intelligence within their indoor spaces. Our highly configurable platform can also ingest data from our customers’ and other third party sensors, Wi-Fi access points, Bluetooth beacons, video cameras, and big data sources, among others to maximize indoor intelligence. We also 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. Our Indoor Intelligence 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.

Revenues increased in the three months ended March 31, 2020 over the same period in 2019 by approximately 32% primarily due to an increase in revenue from mapping services. The Indoor Intelligence product line does have long sales cycles, which 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 often engage in a pilot program first which prolongs sales cycles and is typical of most emerging technology adoption curves. Indoor Intelligence sales can be licensed-based with government customers but commercial customers may 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 approximately $6.2 million and $5.2 million for the three months ended March 31, 2020 and 2019, respectively. We cannot assure you 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. While we believe that our recent debt financing in which we raised aggregate gross proceeds of $5 million, in addition to the capital raised or that may be raised in connection with sales under our at-the-market equity facility (the “ATM”) in an aggregate amount of up to $50 million, in addition to the availability on the purchase order and receivables financing facility with Payplant, LLC (“Payplant”) to finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received and funds from revenue may be sufficient to fund planned operations for the next 12 months from the date the financial statements are issued, the impact of the COVID-19 pandemic on our business and results of operations is uncertain at this time. We have been able to continue operations remotely and have not seen a significant impact in the demand for certain products including our SaaS or subscription based services and products, certain projects and customer requests have had to be delayed either because they require onsite services which could not be performed while shelter in place orders have been in effect or because of the uncertainty of the customer’s financial position and ability to invest in our technology. However, we have also seen an increase in interest in our indoor intelligence solutions for workplace readiness which is directed at enterprise organizations and government agencies to assist them in optimizing the use of their facilities as well as in developing and monitoring compliance with corporate policies and government regulations for physical distancing, exposure notification, and the identification of high traffic areas for sanitizing and cleaning in order to keep their employees healthier and safer within the workplace. If we are successful in expanding the adoption of our products and services for this solution, we may be able to offset any revenue loss that may be experienced, however, there are no assurances that we will be successful or that we will be able to offset any losses, if realized. In addition, if general economic or other conditions resulting from COVID 19 or other events materiality impact the liquidity of our common stock or ability to access capital from the ATM in addition to our ability to generate revenue from the sales of our products and services, we will not have sufficient funds to support our operations for the next 12 months. The Company is also pursuing possible strategic transactions and may raise such additional capital as needed, using our equity securities, an assignment of our note receivable from Sysorex, Inc. (“Sysorex”) and/or cash and debt financings in combinations appropriate for each acquisition. We cannot assure that we will be able to raise sufficient capital 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 our business as a provider of end-to-end solutions ranging from the collection of data to delivering insights from that data to our customers with a focus on securing, digitizing and optimizing premises with our indoor positioning, mapping and analytics solutions for businesses and governments. In connection with such strategy and to facilitate our long-term growth, we continue to evaluate various strategic transactions and acquisitions of companies with technologies and intellectual property (“IP”) that complement those goals by adding technology, differentiation, customers and/or revenue. We are primarily looking for accretive acquisitions that have business value and operational synergies, but will be opportunistic for other strategic and/or attractive transactions. We believe these complementary technologies will add value to the Company and allow us to provide a comprehensive indoor intelligence platform, offering a one-stop shop to our customers. Candidates with proven technologies that complement our overall strategy may come from anywhere in the world, as long as there are strategic and financial reasons to make the acquisition. In addition, we are also exploring opportunities that will supplement our revenue growth. If we make any acquisitions in the future, we expect that we may pay for such acquisitions using our equity securities, an assignment of our note receivable from Sysorex Inc. (“Sysorex”) and/or cash and debt financings in combinations appropriate for each acquisition. In furtherance of this strategy, over the last year, we enhanced our product offerings and expanded our intellectual property portfolio by completing several strategic transactions, including, the acquisition of (1) 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 and (2) Jibestream Inc. (“Jibestream”), a provider of a highly configurable intelligent indoor mapping platform to expand our suite of products. In addition, we acquired certain GPS products, software, technologies, and intellectual property from GTX Corp (“GTX”), a U.S. based company specializing in GPS technologies.

### Recent Events

### Reverse Stock Split

During the first quarter ended March 31, 2020, on January 7, 2020, we effected a 1-for-45 reverse split of our outstanding common stock.

### Equity Distribution Agreement

On March 3, 2020, we entered into an Equity Distribution Agreement with Maxim Group LLC (“Maxim”) under which we may offer and sell shares of our common stock in connection with the ATM in an aggregate offering amount of up to $50 million from time to time through Maxim, acting exclusively as our sales agent (the “Offering”). We intend to use the net proceeds of the Offering primarily for working capital and general corporate purposes. We may also use a portion of the net proceeds to invest in or acquire businesses or technologies that we believe are complementary to our own. We issued 937,010 shares of common stock during the quarter ended March 31, 2020, in connection with the ATM at per share prices between $1.23 and $2.11, resulting in net proceeds to the Company of approximately $1,328,096, after paying Maxim compensation of approximately $55,337, based on a rate of 4% of the gross sales.

Subsequent to the quarter ended March 31, 2020, we have issued 9,551,636 shares of common stock in connection with the ATM, at per share prices between $1.13 and $1.28, resulting in net proceeds to the Company of approximately $10,622,893 after paying Maxim compensation of approximately $442,621, based on a rate of 4% of the gross sales.

Such sales were made pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-223960), which was filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2018, as amended on May 15, 2018, and declared effective on June 5, 2018 (the “Registration Statement”), and a base prospectus dated as of June 5, 2018 included in the Registration Statement and the prospectus supplement relating to the offering filed with the SEC on March 3, 2020.

### Note Exchanges

During the first quarter ended March 31, 2020, we entered into exchange agreements with a noteholder pursuant to which we issued an aggregate of 1,896,557 shares of common stock in exchange for the satisfaction of an aggregate amount of approximately $4,194,030 of the outstanding balance of promissory notes issued on May 3, 2019 and June 27, 2019 to the holders of such notes at exchange prices between $1.12 and $4.05 per share, in each case at a price per share equal to Nasdaq’s “minimum price” as defined by Nasdaq Listing Rule 5635(d).

Subsequent to the quarter ended March 31, 2020, we entered into exchange agreements pursuant to which we issued an aggregate of 2,019,737 shares of common stock in exchange for the satisfaction of an aggregate amount of approximately $2,256,790 of the outstanding balance of promissory notes issued on December 21, 2018 and August 8, 2019 to the holders of such notes at exchange prices between $1.09 and $1.19 per share.

### Promissory Note

On March 18, 2020, we entered into a note purchase agreement (the “Purchase Agreement”) with Iliad Research & Trading, L.P. (the “Holder”), pursuant to which we issued and sold to the Holder an unsecured promissory note (the “Note”) in an aggregate initial principal amount of $6,465,000.00 (the “Initial Principal Amount”), which is payable on or before the date that is 12 months from the issuance date (the “Maturity Date”). The Initial Principal Amount includes an original issue discount of $1,450,000.00 and $15,000.00 that we 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 $5,000,000.00 (the “Transaction”). The Note is payable on or before the date that is 12 months from the issuance date. 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. We may pay all or any portion of the amount owed earlier than it is due in an amount equal to 115% of the portion of the outstanding balance the Company elects to prepay.

*Redemption.* 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 has 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”); 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 Monthly Redemption Notice, we are required to the applicable Monthly Redemption Amount in cash to the Holder within five business days of receipt.

*Monitoring Fee*. If the Note is still outstanding on the date that is six (6) months from the issuance date, then a one-time monitoring fee equal to ten percent (10%) of the then-current outstanding balance shall be added to the Note.

In addition, at any time while the Note is outstanding, if we intend to enter into a financing pursuant to which we will issue securities that (A) have or may have conversion rights of any kind, contingent, conditional or otherwise, in which the number of shares that may be issued pursuant to such conversion right varies with the market price of the Company’s common stock, or (B) are or may become convertible into common stock (including without limitation convertible debt, warrants or convertible preferred stock), with a conversion price that varies with the market price of the common stock, even if such security only becomes convertible following an event of default, the passage of time, or another trigger event or condition (a “Future Offering”), then we must first offer such opportunity to the Holder on the same terms no later than five (5) trading days immediately prior to the trading day of the expected announcement of the Future Offering (the “Right of First Refusal”). If the Holder is unwilling or unable to provide such financing then we may obtain such financing upon the exact same terms and conditions offered to the Holder, which must be completed within 30 days after the date of the notice. If we do not receive the financing within 30 days after the date of the notice, then we must again offer the financing opportunity to the Holder as described above, and the process detailed above will be repeated. The Right of First Refusal does not apply to an Exempt Issuance (as defined in the Purchase Agreement) or to a registered offering made pursuant to a registration statement on Form S-1 or Form S-3.

### 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 tear-sheets, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital tear-sheets 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.

#### Mapping Services Revenue Recognition

Mapping services revenue is accounted for using the percentage of completion method. As soon as the outcome of a contract can be estimated reliably, contract revenue is recognized in the consolidated statement of operations in proportion to the stage of completion of the contract. Contract costs are expensed as incurred. Contract costs include all amounts that relate directly to the specific contract, are attributable to contract activity, and are specifically chargeable to the customer under the terms of the contract.

#### Professional Services 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, 2020 AND 2019, 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. As of March 31, 2020, the Company had deferred revenue of approximately $692,000 related to software license agreements and approximately $185,000 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, 2020.

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, 2020 and 2019, 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, in 2015 through the acquisition of the assets of LightMiner and in 2019 through the acquisitions of Locality, Jibestream and certain assets of GTX. Our IPR&D is comprised of AirPatrol, LightMiner, Locality, Jibestream and GTX 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, Locality, Jibestream and GTX technologies. Through March 31, 2020, 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, LightMiner, Locality, Jibestream and GTX 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 months ended March 31, 2020. 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, 2020 and December 31, 2019, reserves for credit losses included a reserve for doubtful accounts of approximately $471,000 and $646,000, 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.

The Company incurred stock-based compensation charges of $399,000 and $890,000 for the three months ended March 31, 2020 and 2019, respectively, which are included in general and administrative expenses. The following table summarizes the nature of such charges for the periods then ended (in thousands):

|  | For the Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Compensation and related benefits | $399 | $648 |
| Professional and legal fees | -- | 242 |
| Totals | $399 | $890 |

During the three months ended March 31, 2020 there were no stock options granted to consultants or employees of the Company.

### Results of Operations

### Three months ended March 31, 2020 compared to three months ended March 31, 2019

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, 2020 Amount | % of Revenues | March 31, 2019 Amount | % of Revenues | % Change\* |
| --- | ---: | ---: | ---: | ---: | ---: |
| Revenues | $1,804 | 100% | $1,363 | 100% | 32% |
| Cost of revenues | $510 | 28% | $337 | 25% | 51% |
| Gross profit | $1,294 | 72% | $1,026 | 75% | 26% |
| Operating expenses | $6,860 | 380% | $5,889 | 432% | 16% |
| Loss from operations | $(5,566) | (309)% | $(4,863) | (357)% | 14% |
| Net loss | $(6,168) | (342)% | $(5,150) | (378)% | 20% |
| Net loss attributable to stockholders of Inpixon | $(6,158) | (341)% | $(5,145) | (377)% | 20% |

\* 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, 2020 were $1,804,000 compared to $1,363,000 for the comparable period in the prior year for an increase of $441,000, or approximately 32%. Revenues increased in the first quarter of 2020 over the prior period in 2019 primarily due to an increase in revenue from mapping services, which we did not have in 2019.

### Cost of Revenues

Cost of revenues for the three months ended March 31, 2020 were $510,000 compared to $337,000 for the comparable period in the prior year. This increase of $173,000, or approximately 51%, was primarily attributable to the increase in mapping revenue during the first quarter ended March 31, 2020.

The gross profit margin for the three months ended March 31, 2020 was 72% compared to 75% for the first quarter ended March 31, 2019. This decrease in margin is primarily due to lower margins associated with our mapping services during the first quarter ended March 31, 2020.

### Operating Expenses

Operating expenses for the three months ended March 31, 2020 were $6.9 million and $5.9 million for the comparable period ended March 31, 2019. This increase of approximately $1.0 million is primarily attributable to the additional operating expenses from the Jibestream acquisition and increase in professional fees.

### Loss From Operations

Loss from operations for the three months ended March 31, 2020 was $5.6 million as compared to $4.9 million for the comparable period in the prior year. This increase of approximately $0.7 million was primarily attributable to the higher gross margin offset by higher operating expenses during the three months ended March 31, 2020 as discussed in the reporting caption above.

### Other Income/Expense

Other income/expense for the three months ended March 31, 2020 was a loss of $689,000 compared to a loss of $287,000 for the comparable period in the prior year. This increase in loss of $402,000 is primarily attributable to the increase in interest expense and debt discount on promissory notes in the first quarter ended March 31, 2020.

### Provision for Income Taxes

There was no provision for corporate income taxes for the three months ended March 31, 2020 and 2019 as the Company was in a net taxable loss position. Deferred tax assets resulting from such losses are fully reserved as of March 31, 2020 and 2019 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. The Company recorded an income tax benefit of approximately $87,000 during the three months ended March 31, 2020 for the reduction of the deferred tax liability related to the amortization of the Locality and Jibestream intangibles.

### Net Loss Attributable To Non-Controlling Interest

Net loss attributable to non-controlling interest for the three months ended March 31, 2020 was $10,000 compared to net loss of $5,000 for the comparable period in the prior year. This increase in loss of $5,000 was attributable to the gain from Inpixon 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, 2020 was $6.2 million compared to $5.2 million for the comparable period in the prior year. The higher loss of approximately $1.0 million was primarily attributable to higher gross margin offset by higher operating and interest expense during the first quarter ended March 31, 2020.

### 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, 2020 was a loss of $3.9 million compared to a loss of $2.6 million for the prior period in 2019.

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, 2020 and 2019 (in thousands):

|  | For the Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net loss attributable to common stockholders | $(6,158) | $(6,395) |
| Adjustments: |  |  |
| Non-recurring one-time charges: |  |  |
| Loss on exchange of debt for equity | 86 | -- |
| Settlement of litigation | -- | 6 |
| Acquisition transaction/financing costs | 28 | 137 |
| Provision for doubtful accounts | -- | 105 |
| Deemed dividend for triggering of warrant down round feature | -- | 1,250 |
| Stock-based compensation - compensation and related benefits | 399 | 890 |
| Interest expense, net | 621 | 356 |
| Income tax benefit | (87) | -- |
| Depreciation and amortization | 1,226 | 1,043 |
| Adjusted EBITDA | $(3,885) | $(2,608) |

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, 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.

44

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

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

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

### Proforma Non-GAAP Net Loss per Share

Basic and diluted net loss per share for the three months ended March 31, 2020 was ($1.22) compared to ($64.01) for the prior period in 2019.

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, acquisition costs and the costs associated with public offerings.

Proforma non-GAAP net loss per basic and diluted common share for the three months ended March 31, 2020 was ($0.92) compared to a loss of ($31.98) per share for the prior period in 2019.

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, 2020 | 2019 |
| --- | ---: | ---: |
| Net loss attributable to common stockholders | $(6,158) | $(6,395) |
| Adjustments: |  |  |
| Non-recurring one-time charges: |  |  |
| Loss on the exchange of debt for equity | 86 | -- |
| Settlement of litigation | -- | 6 |
| Acquisition transaction/financing costs | 28 | 137 |
| Provision for doubtful accounts | -- | 105 |
| Deemed dividend for triggering of warrant down round feature | -- | 1,250 |
| Stock-based compensation - compensation and related benefits | 399 | 890 |
| Amortization of intangibles | 1,016 | 812 |
| Proforma non-GAAP net loss | $(4,629) | $(3,195) |
| Proforma non-GAAP net loss per basic and diluted common share | $(0.92) | $(31.98) |
| Weighted average basic and diluted common shares outstanding | 5,038,515 | 99,903 |

45

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.

### Liquidity and Capital Resources as of March 31, 2020

Our current capital resources and operating results as of and through March 31, 2020, consist of:

1\) an overall working capital deficit of $6.2 million;

2\) cash of approximately $6.1 million;

3\) ATM equity facility in an aggregate offering amount of up to $50 million of which we have raised approximately $1.4 million of gross proceeds as of March 31, 2020;

4\) the Payplant credit facility which we may borrow against based on eligible assets with a balance of $0 as of March 31, 2020; and

5\) net cash used by operating activities for the period of $4.5 million.

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

| Working Capital | Assets | Liabilities | Net |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $6,111 | $-- | $6,111 |
| Accounts receivable, net / accounts payable | 1,484 | 1,794 | (310) |
| Operating lease obligation | -- | 634 | (634) |
| Prepaid licenses and maintenance contracts/deferred revenue | -- | 877 | (877) |
| Notes and other receivables / Short-term debt | 76 | 9,028 | (8,952) |
| Other | 704 | 2,215 | (1,511) |
| Total | $8,375 | $14,548 | $(6,173) |

Net cash used in operating activities during the three months ended March 31, 2020 of $4.5 million consists of net loss of $6.2 million offset by non-cash adjustments of $2.7 million less net cash changes in operating assets and liabilities of $1.0 million.

While the Company believes that its recent debt financing, access to capital in connection with the sale of its securities under the ATM, 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 revenue may be sufficient to fund planned operations for the next 12 months from the date the financial statements are issued, the impact of the COVID-19 pandemic on our business and results of operations is uncertain at this time. While we have been able to continue operations remotely and have not seen a significant impact in certain products including our SaaS or subscription based services and products, certain projects and customer requests have had to be delayed either because they require onsite services which could not be performed while shelter in place orders have been in effect or because of the uncertainty of the customer’s financial position and ability to invest in our technology. However, we have also seen an increase in interest in our indoor intelligence solutions for workplace readiness which is directed at enterprise organizations and government agencies to assist them in optimizing the use of their facilities as well as in developing and monitoring compliance with corporate policies and government regulations for physical distancing, exposure notification, and the identification of high traffic areas for sanitizing and cleaning in order to keep their employees healthier and safer within the workplace. If we are successful in expanding the adoption of our products and services for this solution, we may be able to offset any revenue loss that may be experienced, however, there are no assurances that we will be successful or that we will be able to offset any losses, if realized. In addition, if general economic or other conditions resulting from COVID 19 or other events materiality impact the liquidity of our common stock or ability to access capital from the ATM in addition to our ability to generate revenue from the sales of our products and services, there are no assurances that we will have sufficient funds to support our operations for the next 12 months. The Company is also pursuing possible strategic transactions and may raise such additional capital as needed, using our equity securities, an assignment of our note receivable from Sysorex, Inc. (“Sysorex”) and/or cash and debt financings in combinations appropriate for each acquisition.

### Going Concern and Management Plans

Our condensed consolidated financial statements as of March 31, 2020 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, 2020 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, 2020 do not include any adjustments that might result from the outcome of this uncertainty.

### Liquidity and Capital Resources – Payplant

As of March 31, 2020, the principal amount outstanding under the Payplant Loan Agreement was $0.

### Liquidity and Capital Resources as of March 31, 2020 Compared to March 31, 2019

The Company’s net cash flows used in operating, investing and financing activities for the three months ended March 31, 2020 and 2019 and certain balances as of the end of those periods are as follows (in thousands):

|  | For the Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(4,535) | $(3,493) |
| Net cash used in investing activities | (209) | (255) |
| Net cash provided by financing activities | 6,104 | 6,578 |
| Effect of foreign exchange rate changes on cash | (27) | (8) |
| Net increase in cash | $1,333 | $2,822 |

|  | As of March 31, 2020 | As of December 31, 2019 |
| --- | ---: | ---: |
| Cash and cash equivalents | $6,111 | $4,777 |
| Working capital (deficit) | $(6,173) | $(6,975) |

### Operating Activities for the three months ended March 31, 2020

Net cash used in operating activities during the three months ended March 31, 2020 was $4.5 million. The cash flows related to the three months ended March 31, 2020 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(6,168) |
| Non-cash income and expenses | 2,662 |
| Net change in operating assets and liabilities | (1,029) |
| Net cash used in operating activities | $(4,535) |

48

The non-cash income and expense of $2.7 million consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $1,226 | Depreciation and amortization expenses (including amortization of intangibles) primarily attributable to the Shoom, AirPatrol, LightMiner, Locality, GTX, and Jibestream, which were acquired effective August 31, 2013, April 16, 2014, November 21, 2016, May 21, 2019, June 27, 2019, and August 15, 2019, respectively. |
| 157 | Amortization of right of use asset |
| 399 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations |
| 86 | Loss on exchange of debt for equity |
| 868 | Amortization of debt discount |
| (87) | Income tax benefit |
| 13 | Other |
| $2,662 | Total non-cash income |

The net use of cash in the change in operating assets and liabilities aggregated $1.0 million and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $(416) | Increase in accounts receivable and other receivables |
| 78 | Decrease in inventory, other current assets and other assets |
| (568) | Decrease in accounts payable |
| 2 | Decrease in accrued liabilities and other liabilities |
| (156) | Decrease in operating lease liabilities |
| 31 | Decrease in deferred revenue |
| $(1,029) | Net cash used in the changes in operating assets and liabilities |

### 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. 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) |

49

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, LightMiner, Locality, GTX, and Jibestream, which were acquired effective August 31, 2013, April 16, 2014, November 21, 2016, May 21, 2019, June 27, 2019, and August 15, 2019, respectively. |
| 83 | Amortization of right of use asset |
| 890 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations |
| 17 | Amortization of technology |
| 250 | Amortization of debt discount |
| 105 | Provision for doubtful accounts |
| 79 | Other |
| $2,467 | Total non-cash income |

The net use of cash in the change in operating assets and liabilities aggregated $0.8 million and consisted primarily of the following (in thousands):

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

### Cash Flows from Investing Activities as of March 31, 2020 and 2019

Net cash flows used in investing activities during the three months ended March 31, 2020 was $0.2 million compared to net cash flows used in investing activities during the three months ended March 31, 2019 of $0.3 million. Cash flows related to investing activities during the three months ended March 31, 2020 include $193,000 investment in capitalized software and $16,000 for the purchase of property and equipment. Cash flows related to investing activities during the three months ended March 31, 2019 include $239,000 investment in capitalized software and $16,000 for the purchase of property and equipment.

### Cash Flows from Financing Activities as of March 31, 2020 and 2019

Net cash flows provided by financing activities during the three months ended March 31, 2020 was $6.1 million. Net cash flows provided by financing activities during the three months ended March 31, 2019 was $6.6 million. During the three months ended March 31, 2020, the Company received incoming cash flows of $1.3 million from the issuance of common stock, $5.0 million of proceeds from promissory notes, and $0.2 million of repayments from related parties offset by $0.2 million of loans to related party, and $150,000 of net repayments to bank facility. 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 loans to related parties and $23,000 of repayments to bank facility.

### 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, 3,988 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 not effective.

### Changes in Internal Controls

Remediation Measures

In connection with our annual report on Form 10-K for the year ended December 31, 2019, we reported a material weakness in our internal controls over financial reporting resulting from the determination following initial audit procedures that the documentation underlying the preparation of forward projections, which included copies of customer contracts underlying the basis of projecting revenues and support for the projected cost structures associated with determining the fair value of the Sysorex note as of December 31, 2019, was not supportable thereby requiring material adjustments to be made to the carrying value of the note as determined by management as of December 31, 2019. To address the material weakness, during February 2020, we have enhanced our internal technical accounting capabilities by engaging and using third-party advisors to assist in areas requiring specialized technical accounting expertise, including with respect to designing the procedures and processes associated with assessing the fair value of our equity and debt instruments.

While we believe that these actions will be sufficient to remediate the material weakness, it will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by the end of second quarter 2020.

Except as described above, 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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company’s management determined there were no material changes needed to internal controls as a result of the COVID-19 pandemic.

### 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, 11,923 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, 2019.

### Risks Related to our Operations

***Our financial status raises doubt about our ability to continue as a going concern.***

Our cash and cash equivalents were approximately $6.1 million at March 31, 2020, compared with approximately $4.8 million at December 31, 2019. We continue to incur significant operating losses, and management expects that significant on-going operating expenditures will be necessary to successfully implement our business plan and develop and market our products. These circumstances raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements included elsewhere in this Form 10-Q are issued. Implementation of our plans and our ability to continue as a going concern will depend upon our ability to market our technology and raise additional capital.

As a result of the COVID-19 pandemic, U.S. capital markets have experienced extreme volatility and disruption, which has resulted in illiquidity in parts of the capital markets. Despite such disruption, during the quarter ended March 31, 2020, we were able to access capital resources through our ATM program with Maxim, pursuant to which we received net proceeds of approximately $1.3 million and an issuance of a promissory note in an initial principal amount of $6.45 million for cash proceeds of $5.0 million. We have continued to use our ATM program subsequent to the quarter ended March 31, 2020 and management believes that we will be able to continue to do so. Management also believes that the COVID-19 related capital markets disruption will not restrict our access to additional capital resources through possible public or private equity offerings, exchange offers, debt financings, corporate collaborations or other means. In addition, we continue to explore opportunities to strategically monetize our technology and our services, although there can be no assurance that we will be successful with such plans. We have historically been able to raise capital through debt and equity offerings, although no assurance can be provided that we will continue to be successful in the future. If we are unable to raise sufficient capital to fund our operations, we will not be able to pay our obligations as they become due.

***The effects of the COVID-19 pandemic could adversely affect our business, operations, financial condition and results of operations, and the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations remains uncertain.***

The United States and the global community we serve are facing unprecedented challenges posed by the COVID-19 pandemic. The pandemic, and the preventative measures taken in response (including “shelter-in-place” or “stay-at-home” and similar orders issued by international, federal, state or local authorities), have resulted in, and are expected to continue to result in, significant volatility and business and economic disruptions and uncertainty. We have taken steps to protect our employees and we continue to operate all of our services, but the extent to which the effects of the pandemic will impact our business, operations, financial condition and results of operations is uncertain, rapidly changing and hard to predict and will depend on numerous evolving factors that we may not be able to control or predict, including:

- the duration and scope of the pandemic;
- the extent and effectiveness of responsive actions by authorities and the impact of these and other factors on our employees, customers and vendors;
- the impact of the pandemic on our employees, including key personnel;
- the extent to which we are able to maintain and replace critical internet infrastructure components, when necessary;
- any disruption of our supply chain and the impact of such disruptions on our suppliers or our ability to deliver products and services to our customers;
- our continued ability to execute on business continuity plans for the maintenance of our critical internet infrastructure, while most of our employees continue to work remotely; and
- any negative impact on the demand for our services and products resulting from the economic disruption caused by the pandemic and responses thereto.

If we are unable to successfully respond to and manage the impact of the pandemic, and the resulting responses to it, our business, operations, financial condition and results of operations could be adversely impacted.

***We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company, could adversely affect our business, financial condition and results of operations.***

As of April 30, 2020, we have an aggregate outstanding principal and accrued interest balance of approximately $8.8 million underlying the promissory notes issued to Iliad Research and Trading, L.P., Chicago Venture Partners, L.P. and St. George Investments LLC, which are affiliates of each other. These promissory notes mature at different times between March 2020 and May 2020. In addition, Iliad Research and Trading, L.P and Chicago Venture Partners, L.P may, subject to current standstill agreements, require us to redeem 1/3 of the initial principal balance of their promissory notes each month in cash. The ability to meet payment and other obligations under these notes depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control as described in this Form 10-Q. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure debt, exchange debt for other securities, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet debt payment and other obligations, which could have a material adverse effect on our financial condition.

In addition, so long as the notes are outstanding, the holders will have a right of first refusal on more favorable equity-linked financings and will be entitled to participate in certain equity or debt financings, in each case, subject to certain exceptions. The existence of these rights may deter potential financing sources and may lead to delays in our ability to close proposed financings. Any delay or inability to complete a financing when needed could have a material adverse effect on our financial condition.

We may also incur additional indebtedness in the future. If new debt or other liabilities are added to our current consolidated debt levels, the related risks that we now face could intensify.

***We identified a material weakness in our internal control over financial reporting for the year ended December 31, 2019 and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or could have a material adverse effect on our business and trading price of our securities.***

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the Nasdaq Capital Market. Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to perform system and process evaluation and testing of our internal control over financial reporting to allow our management to report on the effectiveness of our internal control over financial reporting.

In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2019, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. The material weakness resulted from a determination following initial audit procedures that the documentation underlying the preparation of forward projections which included copies of customer contracts underlying the basis of projecting revenues and support for the projected cost structures associated with determining the fair value of the Sysorex note as of December 31, 2019 was not supportable thereby requiring material adjustments to be made to the carrying value of the note as determined by management as of December 31, 2019.

To address the material weakness, during February 2020, we enhanced our internal technical accounting capabilities by engaging and using third-party advisors to assist in areas requiring specialized technical accounting expertise, including with respect to designing the procedures and processes associated with assessing the fair value of our equity and debt instruments.

While we believe that these actions will be sufficient to remediate the material weakness, it will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed by June 30, 2020.

Additionally, with each prospective acquisition we may make we will conduct whatever due diligence is necessary or prudent to assure us that the acquisition target can comply with the internal controls requirements of the Sarbanes-Oxley Act. Notwithstanding our diligence, certain internal controls deficiencies may not be detected. As a result, any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist and may in the future discover areas of our internal controls that need improvement.

We cannot assure you that the measures we have taken to date, together with any measures we may take in the future, will be sufficient to avoid potential future material weaknesses. If we are unable to successfully remediate any future material weakness in our internal control over financial reporting, or if we identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a public company, including the requirements of the Sarbanes-Oxley Act. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in identification of additional material weaknesses or significant deficiencies, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

Filed May 12, 2020.
Source: SEC EDGAR, the filing index for accession 0001213900-20-011865. Last ingested by Listed: Nov 6, 2026, 18:14 ET. No prices; not investment advice.