# XTI Aerospace, Inc.: Form 10-Q for the period ended Jun 30, 2020

- Company: [XTI Aerospace, Inc.](/companies/xtia.md) (CIK 1529113)
- Form: 10-Q
- Filed: 2020-08-14
- Accepted by EDGAR: Aug 14, 2020, 16:25 ET
- Period: 2020-06-30
- Accession: 0001213900-20-022280
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529113/000121390020022280/f10q0620_inpixon.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529113/000121390020022280/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $305.0k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $814.0k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2020-04-01 to 2020-06-30 | $771.0k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-01-01 to 2020-06-30 | $2.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $1.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $2.6m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | −$5.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | −$10.7m | us-gaap:OperatingIncomeLoss |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | −$87.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | −$7.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | −$13.5m | us-gaap:NetIncomeLoss |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | −$10.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $39.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-06-30 | $39.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $42.5m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $56.8m | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $12.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $13.1m | us-gaap:Liabilities |
| Short-term borrowings | at 2020-06-30 | $5.5m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2020-06-30 | $43.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,334 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.

Our Indoor Intelligence product line has 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 $7.3 million and $5.2 million for the three months ended June 30, 2020 and 2019, respectively, and a net loss of $13.5 million and $10.4 million for the six months ended June 30, 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. During the first quarter of 2020, we raised $5 million in gross proceeds in connection with a debt financing and during the quarter ended June 30, 2020, we raised net proceeds of approximately $40 million, in connection with sales under our at-the-market equity facility (the “ATM”) In addition, we may raise approximately $110 million of additional capital resulting in aggregate gross proceeds of $150 million under the ATM, however, general economic or other conditions resulting from COVID-19 or other events materially may impact the liquidity of our common stock or our ability to continue to access capital from the ATM to support our growth plans. Given our cash balances and budgeted cash flow requirements, we believe we have sufficient funds to support ongoing operations for the next twelve months.

### Effects of COVID-19

The impact of the COVID-19 pandemic on our business and results of operations continues to remain uncertain at this time. While we have been able to continue operations remotely, we have experienced supply chain constraints and delays in the receipt of certain components of our products impacting delivery times for our products. We have also seen some impact in the demand of certain products and delays in certain projects and customer orders 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. These factors have resulted in a decrease in our revenue during the quarter ended June 30, 2020, when compared to the same period of last year. However, due to the growth in revenue experienced in the first quarter of 2020, revenue growth during the first six months of 2020 is substantially the same when compared to the same six month period of 2019. In addition, while certain anticipated second quarter projects were initially delayed by customers, following the end of the quarter we received a substantial purchase order for our sensors from a significant customer and have also secured certain reseller partnerships focused on increasing 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 and or other solutions, and are able to add to our revenue growth through the completion of strategic transactions, we may be able to offset any revenue loss that may be experienced due to any constraints resulting from the pandemic or other general economic conditions, however, there are no assurances that we will be successful or that we will be able to offset any losses, if realized.

A further discussion of the impact of the COVID-19 pandemic on our business is set forth below in Part II, Item 1A. Risk Factors.

### 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 including acquisitions of companies with technologies and intellectual property (“IP”) that complement those goals by adding technology, differentiation, customers and/or revenue. Some of these opportunities may offer us the ability to enhance our technology and product offerings, expand our verticals and/or our international presence and global footprint. 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. In addition, we may seek to expand our capabilities around security, artificial intelligence, augmented reality and virtual reality or other high growth sectors. 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. 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 that we believe may increase overall shareholder value, which may include, but not be limited to other alternative investment opportunities, such as minority investments. joint ventures or special purpose acquisition companies. If we make any acquisitions in the future, we expect that we may pay for such acquisitions with cash, equity securities and/or debt in combinations appropriate for each acquisition. In addition, we may consider an assignment of our remaining note receivable from Sysorex Inc. (“Sysorex”). 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. Recently, we acquired an exclusive, worldwide license to market, distribute and develop the SYSTAT and SigmaPlot software suite of products from Systat Software, Inc.

### Recent Events

### Systat License Acquisition

On June 19, 2020, we entered into an exclusive license to market, distribute, and develop the SYSTAT and SigmaPlot software suite of products (the “License Grant”) pursuant to the terms and conditions of that certain Exclusive Software License and Distribution Agreement, as amended on June 30, 2020 (as amended, the “License Agreement”), with Cranes Software International Ltd. (“Cranes”) and Systat Software, Inc. (“Systat,” and together with Cranes, the “Systat Parties”). In accordance with the terms of the License Agreement, on June 30, 2020 (the “Closing Date”), we acquired the License Grant, effective as of June 1, 2020, and we partitioned a portion of that certain promissory note (the “Sysorex Note”) issued to us by Sysorex, Inc. (“Sysorex”), into a new note in an amount equal to $3 million in principal plus accrued interest (the “Closing Note”) and assigned the Closing Note and all rights and obligations thereunder to Systat in accordance with the terms and conditions of that certain Promissory Note Assignment and Assumption Agreement. An additional $3.3 million of the principal balance underlying the Sysorex Note will be partitioned and assigned to Systat as consideration payable for the rights granted under the license as follows: (i) $1.3 million on the three month anniversary of the Closing Date; (ii) $1.0 million on the six month anniversary of the Closing Date; and (iii) $1.0 million on the nine month anniversary of the Closing Date. . Each assignment under the Sysorex Note will be represented by new secured promissory notes and our right to any repayment under the Sysorex Note will be subordinate and junior to Sysorex’s obligation to make any payment to Systat unless we have exercised our right to offset any losses against such assigned notes as permitted in the License Agreement. In addition, we paid the remaining cash consideration of $2.2 million for the License Grant on July 8, 2020.

In connection with the License Grant, the Systat Parties provided us with equipment for us to use at no additional cost for a minimum period of six months following the Closing Date. In addition, we have the right, but not the obligation, to assume all of the Systat Parties’ rights, interests, and obligations under the Systat Customer Contracts and the Systat Distribution Agreements (as such terms are defined in the License Agreement). We are also entitled to any customer maintenance revenue, new license fees, or license renewal fees, received by any of the Systat Parties after June 1, 2020 in connection with the Systat Customer Contracts and/or Systat Distribution Agreements assigned to and assumed by us in connection with the License Agreement. The License Grant will remain in effect for a period of 15 years following the Closing Date (the “Term”), unless terminated sooner upon mutual written consent of Systat and us or upon termination by either for the other party’s specified breach.

At any time during the first 5-year period of the Term, we may exercise our option to purchase the Software, Software Source, User Documentation, Systat Intellectual Property, Customer Information and Equipment (as such terms are defined in the License Agreement) from the Systat Parties in exchange for an assignment of our right to receive an additional $1.0 million in principal under the Sysorex Note.

In connection with the License Grant, the Company expanded its operations into the United Kingdom and Germany. As a result of such expansion, the Company formed Inpixon Limited, a new wholly owned subsidiary in the United Kingdom, and established Inpixon GmbH, a wholly owned subsidiary incorporated under the laws of Germany.

The Company determined that the License Grant does not constitute an acquisition of a significant amount of assets and, as such, financial statements related to the License Agreement, including pro forma financial statements are not required to be reported with respect to such License Grant.

### 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, which was increased on June 19, 2020 to $150 million pursuant to an amendment to the EDA, from time to time through Maxim, acting exclusively as our sales agent (the “ATM”). We intend to use the net proceeds of the ATM 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 29,033,036 shares of common stock during the quarter ended June 30, 2020, in connection with the ATM at per share prices between $1.13 and $2.02, resulting in net proceeds to the Company of approximately $40.5 million, after paying offering expenses and Maxim compensation of approximately $1.7 million, which is based on a rate of 4% of the gross sales of each sale for the first $50 million of shares and 3.25% for any remaining sales.

Subsequent to the quarter ended June 30, 2020, we have issued 1,604,312 shares of common stock in connection with the ATM, at per share prices between $1.5064 and $1.5134, resulting in net proceeds to the Company of approximately $2.3 million after paying offering expenses and Maxim compensation of approximately $97,000, which is based on a rate of 4% of the gross sales of each sale for the first $50 million of shares and 3.25% for any remaining 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 ATM filed with the SEC on March 3, 2020, as supplemented by the prospectus supplement filed with the SEC on June 22, 2020.

### Note Exchanges

During the quarter ended June 30, 2020, we entered into exchange agreements with noteholders pursuant to which we issued an aggregate of 3,889,990 shares of common stock in exchange for the satisfaction of an aggregate amount of approximately $4.6 million of the outstanding balance of promissory notes issued on December 21, 2018, August 8, 2019, September 17, 2019 and November 22, 2019 to the holders of such notes at exchange prices between $1.09 and $1.362 per share, in each case at a price per share equal to Nasdaq’s “minimum price” as defined by Nasdaq Listing Rule 5635(d).

### 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 and six months ended June 30, 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 June 30, 2020, the Company had deferred revenue of approximately $1,446,000 related to software license agreements and approximately $63,000 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 and six months ended June 30, 2020 and 2019.

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 and six months ended June 30, 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, in 2019 through the acquisitions of Locality, Jibestream and certain assets of GTX and in 2020 through the SYSTAT licensing agreement. Our IPR&D is comprised of AirPatrol, LightMiner, Locality, Jibestream, GTX and SYSTAT 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, GTX and SYSTAT technologies. Through June 30, 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, GTX and SYSTAT 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 and six months ended June 30, 2020 and 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 June 30, 2020 and December 31, 2019, reserves for credit losses included a reserve for doubtful accounts of approximately $ 467,000 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 $286,000 and $858,000 for the three months ended June 30, 2020 and 2019, respectively, and $685,000 and $1,748,000 for the six months ended June 30, 2020 and 2019 respectively, which are included in general and administrative expenses. Key weighted-average assumptions used to apply this pricing model during the six months ended June 30, 2020 were as follows:

|  | For the Six Months Ended June 30, 2020 |
| --- | ---: |
| Risk-free interest rate | 0.33% |
| Expected life of stock option grants | 5 years |
| Expected volatility of underlying stock | 34.43% |
| Dividends assumption | $ – |

### Results of Operations

### Three months ended June 30, 2020 compared to three months ended June 30, 2019

*(in thousands, except percentages)*

|  | For the Three Months Ended June 30, 2020 Amount | % of Revenues | June 30, 2019 Amount | % of Revenues | % Change\* |
| --- | ---: | ---: | ---: | ---: | ---: |
| Revenues | $1,076 | 100% | $1,491 | 100% | (28)% |
| Cost of revenues | $305 | 28% | $391 | 26% | (22)% |
| Gross profit | $771 | 72% | $1,100 | 74% | (30)% |
| Operating expenses | $5,899 | 548% | $5,825 | 391% | 1% |
| Loss from operations | $(5,128) | (477)% | $(4,725) | (317)% | 9% |
| Net loss | $(7,304) | (679)% | $(5,231) | (351)% | 40% |
| Net loss attributable to stockholders of Inpixon | $(7,323) | (681)% | $(5,240) | (351)% | 40% |

\* 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 June 30, 2020 were $1,076,000 compared to $1,491,000 for the comparable period in the prior year for a decrease of $415,000, or approximately 28%. Revenues decreased in the second quarter of 2020 over the prior period in 2019 primarily attributable to a delay in an anticipated customer order for our sensors from a significant customer that resulted from office closures in connection with responding to government imposed “shelter-in place” orders in connection with the COVID-19 pandemic.

### Cost of Revenues

Cost of revenues for the three months ended June 30, 2020 were $305,000 compared to $391,000 for the comparable period in the prior year. This decrease of $86,000, or approximately 22%, was primarily attributable to the lower sales described above.

### Gross Profit

The gross profit margin for the three months ended June 30, 2020 was 72% compared to 74% for the second quarter ended June 30, 2019. This decrease in margin is primarily due to lower margins associated with our mapping services during the second quarter ended June 30, 2020.

### Operating Expenses

Operating expenses for the three months ended June 30, 2020 were $5.9 million and $5.8 million for the comparable period ended June 30, 2019. This increase of approximately $0.1 million is primarily attributable to the increased operating expenses from the Jibestream acquisition.

### Loss From Operations

Loss from operations for the three months ended June 30, 2020 was $5.1 million as compared to $4.7 million for the comparable period in the prior year. This increase in loss of approximately $0.4 million was primarily attributable to the lower revenues during the second quarter of 2020 as compared to the same period of last year.

### Other Income/Expense

Other income/expense for the three months ended June 30, 2020 was a loss of $2,176,000 compared to a loss of $506,000 for the comparable period in the prior year. This increase in loss of $1,670,000 is primarily attributable to the increase in interest expense and debt discount on promissory notes, a $835,000 valuation allowance adjustment due to the uncertainty of being repaid in connection with note receivable from Sysorex and a $628,000 valuation allowance for related party receivable in connection with obligations from a settlement agreement related to our spin-off of Sysorex in 2018.

### Provision for Income Taxes

There was no provision for corporate income taxes for the three months ended June 30, 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 June 30, 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.

### Net Income Attributable To Non-Controlling Interest

Net income attributable to non-controlling interest for the three months ended June 30, 2020 was $19,000 compared to net income of $9,000 for the comparable period in the prior year. This increase in income of $10,000 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 June 30, 2020 was $7.3 million compared to $5.2 million for the comparable period in the prior year. The higher loss of approximately $2.1 million was primarily attributable to the lower revenues received this quarter as compared to the same period of last year, additional interest expense and debt discount on promissory notes, a $835,000 valuation allowance adjustment due to the uncertainty of being repaid in connection with note receivable from Sysorex and a $628,000 valuation allowance for related party receivable from a settlement agreement.

### Six months ended June 30, 2020 compared to six months ended June 30, 2019

*(in thousands, except percentages)*

|  | For the Six Months Ended June 30, 2020 Amount | % of Revenues | June 30, 2019 Amount | % of Revenues | % Change\* |
| --- | ---: | ---: | ---: | ---: | ---: |
| Revenues | $2,880 | 100% | $2,854 | 100% | 1% |
| Cost of revenues | $814 | 28% | $727 | 26% | 12% |
| Gross profit | $2,066 | 72% | $2,127 | 75% | (3)% |
| Operating expenses | $12,759 | 443% | $11,714 | 410% | 9% |
| Loss from operations | $(10,693) | (371)% | $(9,587) | (336)% | 12% |
| Net loss | $(13,469) | (468)% | $(10,380) | (364)% | 30% |
| Net loss attributable to stockholders of Inpixon | $(13,478) | (468)% | $(10,384) | (364)% | 30% |

\* 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 six months ended June 30, 2020 were $2,880,000 compared to $2,854,000 for the comparable period in the prior year for an increase of $26,000, or only approximately 1%, which was primarily attributable to the impact of the COVID-19 pandemic on our business.

### Cost of Revenues

Cost of revenues for the six months ended June 30, 2020 were $814,000 compared to $727,000 for the comparable period in the prior year. This increase of $87,000, or approximately 12%, was primarily attributable to the increase in lower margin mapping revenue in 2020.

### Gross Profit

The gross profit margin for the six months ended June 30, 2020 was 72% compared to 75% for the six months ended June 30, 2019. This decrease in margin is primarily due to lower margins associated with our mapping services during the six months ended June 30, 2020.

### Operating Expenses

Operating expenses for the six months ended June 30, 2020 were $12.8 million and $11.7 million for the comparable period ended June 30, 2019. This increase of approximately $1.1 million is primarily attributable to the increased operating expenses from the Jibestream acquisition.

### Loss From Operations

Loss from operations for the six months ended June 30, 2020 was $10.7 million as compared to $9.6 million for the comparable period in the prior year. This increase in loss of approximately $1.1 million was primarily attributable to the lower revenues in the second quarter of 2020 as compared to the same period in 2019 and the increased operating expenses from the Jibestream acquisition.

### Other Income/Expense

Other income/expense for the six months ended June 30, 2020 was a loss of $2,863,000 compared to a loss of $793,000 for the comparable period in the prior year. This increase in loss of approximately $2,070,000 is primarily attributable to the increase in interest expense and debt discount on promissory notes, a $835,000 valuation allowance adjustment due to the uncertainty of being repaid in connection with note receivable from Sysorex and a $628,000 valuation allowance for related party receivable from a settlement agreement.

### Provision for Income Taxes

There was no provision for corporate income taxes for the six months ended June 30, 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 June 30, 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 six months ended June 30, 2020 for the reduction of the deferred tax liability related to the amortization of the Locality and Jibestream intangibles.

### Net Income Attributable To Non-Controlling Interest

Net income attributable to non-controlling interest for the six months ended June 30, 2020 was $9,000 compared to net income of $4,000 for the comparable period in the prior year. This increase in income 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 six months ended June 30, 2020 was $13.5 million compared to $10.4 million for the comparable period in the prior year. The higher loss of approximately $3.1 million was primarily attributable to the lower revenues received this quarter as compared to the same period last year, additional interest expense and debt discount on promissory notes, a $835,000 valuation allowance adjustment due to the uncertainty of being repaid in connection with note receivable from Sysorex and a $628,000 valuation allowance for related party receivable from a settlement agreement.

### 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 June 30, 2020 was a loss of $3.9 million compared to a loss of $1.9 million for the prior period in 2019. Adjusted EBITDA for the six months ended June 30, 2020 was a loss of $7.8 million compared to a loss of $4.5 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 and six months ended June 30, 2020 and 2019 (in thousands):

|  | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to common stockholders | $(7,323) | $(5,240) | $(13,478) | $(11,634) |
| Adjustments: |  |  |  |  |
| Non-recurring one-time charges: |  |  |  |  |
| Loss on exchange of debt for equity | 47 | 160 | 132 | 160 |
| Provision for valuation allowance for held for sale loan | 835 | -- | 835 | -- |
| Provision for the valuation allowance for related party receivable | 648 | -- | 648 | -- |
| Settlement of litigation | -- | -- | -- | 6 |
| Acquisition transaction/financing costs | 169 | 510 | 196 | 647 |
| Costs associated with public offering | -- | 50 | -- | 50 |
| Severance | -- | 100 | -- | 100 |
| Provision for doubtful accounts | -- | -- | -- | 105 |
| Deemed dividend for triggering of warrant down round feature | -- | -- | -- | 1,250 |
| Stock-based compensation - compensation and related benefits | 286 | 858 | 685 | 1,748 |
| Interest expense, net | 777 | 508 | 1,397 | 864 |
| Depreciation and amortization | 682 | 1,117 | 1,908 | 2,160 |
| Income tax benefit | -- | (2) | (87) | (2) |
| Adjusted EBITDA | $(3,879) | $(1,939) | $(7,764) | $(4,546) |

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.

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;

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- 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 June 30, 2020 was ($0.32) compared to ($25.47) for the prior period in 2019. Basic and diluted net loss per share for the six months ended June 30, 2020 was ($0.97) compared to ($75.99) 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 June 30, 2020 was ($0.21) compared to a loss of ($13.33) per share for the prior period in 2019. Proforma non-GAAP net loss per basic and diluted common share for the six months ended June 30, 2020 was ($0.68) compared to a loss of ($38.76) 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):

|  | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to common stockholders | $(7,323) | $(5,240) | $(13,478) | $(11,634) |
| Adjustments: |  |  |  |  |
| Non-recurring one-time charges: |  |  |  |  |
| Loss on exchange of debt for equity | 47 | 160 | 132 | 160 |
| Provision for valuation allowance for held for sale loan | 835 | -- | 835 | -- |
| Provision for the valuation allowance for related party receivable | 648 | -- | 648 | -- |
| Settlement of litigation | -- | -- | -- | 6 |
| Acquisition transaction/financing costs | 169 | 510 | 196 | 647 |
| Costs associated with public offering | -- | 50 | -- | 50 |
| Severance | -- | 100 | -- | 100 |
| Provision for doubtful accounts | -- | -- | -- | 105 |
| Deemed dividend for triggering of warrant down round feature | -- | -- | -- | 1,250 |
| Stock-based compensation - compensation and related benefits | 286 | 858 | 685 | 1,748 |
| Amortization of Intangibles | 508 | 820 | 1,524 | 1,633 |
| Proforma non-GAAP net loss | $(4,830) | $(2,742) | $(9,458) | $(5,935) |
| Proforma non-GAAP net loss per basic and diluted common share | $(0.21) | $(13.33) | $(0.68) | $(38.76) |
| Weighted average basic and diluted common shares outstanding | 22,823,976 | 205,730 | 13,931,245 | 153,108 |

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;

46

- 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 June 30, 2020

Our current capital resources and operating results as of and through June 30, 2020, consist of:

1\) an overall working capital of $30.0 million;

2\) cash of approximately $39.5 million;

3\) ATM equity facility in an aggregate offering amount of up to $150 million of which we have raised approximately $42 million of net proceeds as of June 30, 2020;

4\) the Payplant credit facility which we may borrow against based on eligible assets with a balance of $0 as of June 30, 2020; and

5\) net cash used by operating activities for the period of $10.4 million.

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

| Working Capital | Assets | Liabilities | Net |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $39,458 | $– | $39,458 |
| Accounts receivable, net / accounts payable | 1,155 | 630 | 525 |
| Operating lease obligation | – | 589 | (589) |
| Prepaid licenses and maintenance contracts/deferred revenue | – | 1,509 | (1,509) |
| Notes and other receivables / Short-term debt | 160 | 5,523 | (5,363) |
| Acquisition liability | – | 2,950 | (2,950) |
| Other | 1,684 | 1,254 | 430 |
| Total | $42,457 | $12,455 | $30,002 |

Net cash used in operating activities during the six months ended June 30, 2020 of $10.4 million consists of net loss of $13.5 million offset by non-cash adjustments of $6.4 million less net cash changes in operating assets and liabilities of approximately $3.3 million.

During the first quarter of 2020, we raised $5 million in gross proceeds in connection with a debt financing and during the quarter ended June 30, 2020, we raised net proceeds of approximately $40 million during the quarter ended June 30, 2020, in connection with sales under the ATM. Given our current cash balances and budgeted cash flow requirements, the Company believes such funds are sufficient to support ongoing operations for the next 12 months. In addition, we may continue to raise up to an aggregate of $150 million in gross proceeds under the ATM, however, general economic or other conditions resulting from COVID 19 or other events materially may impact the liquidity of our common stock or our ability to continue to access capital from the ATM to support our growth plans. In addition, the impact of the COVID-19 pandemic on our business and results of operations continues to remain uncertain at this time. While we have been able to continue operations remotely we have experienced supply chain constraints and delays in the receipt of certain components of our products impacting delivery times for our products, we have also seen some impact in the demand of certain products including our SaaS or subscription based services and products, delays in certain projects and customer requests 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, which resulted in a decrease in our revenue during the quarter ended June 30, 2020, when compared to the same period of last year. However, due to the growth in revenue experienced in the first quarter of 2020, revenue growth during the six months of 2020 is substantially the same when compared to the six month period of 2019. In addition, while certain anticipated second quarter projects were initially delayed by customers, we recently received a substantial purchase order for our sensors from a significant customer and 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 and or other solutions, we may be able to offset any revenue loss that may be experienced due to any constraints that may result from the pandemic or other general economic conditions, however, there are no assurances that we will be successful or that we will be able to offset any losses, if realized. The Company is also pursuing possible strategic transactions and may raise such additional capital as needed, using our equity securities, an assignment of the remaining note receivable from Sysorex and/or cash and debt financings in combinations appropriate for each acquisition.

### Liquidity and Capital Resources – Payplant

As of June 30, 2020, the principal amount outstanding under the Payplant Loan Agreement was $0.

### Liquidity and Capital Resources as of June 30, 2020 Compared to June 30, 2019

The Company’s net cash flows used in operating, investing and financing activities for the six months ended June 30, 2020 and 2019 and certain balances as of the end of those periods are as follows (in thousands):

|  | For the Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(10,369) | $(6,568) |
| Net cash used in investing activities | (472) | (963) |
| Net cash provided by financing activities | 45,537 | 8,073 |
| Effect of foreign exchange rate changes on cash | (15) | 31 |
| Net increase in cash | $34,681 | $573 |

|  | As of June 30, 2020 | As of December 31, 2019 |
| --- | ---: | ---: |
| Cash and cash equivalents | $39,458 | $4,777 |
| Working capital (deficit) | $30,002 | $(6,975) |

### Operating Activities for the six months ended June 30, 2020

Net cash used in operating activities during the six months ended June 30, 2020 was $10.4 million. The cash flows related to the six months ended June 30, 2020 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(13,469) |
| Non-cash income and expenses | 6,375 |
| Net change in operating assets and liabilities | (3,275) |
| Net cash used in operating activities | $(10,369) |

48

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

|  |  |
| ---: | --- |
| $1,908 | 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. |
| 356 | Amortization of right of use asset |
| 685 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations |
| 132 | Loss on exchange of debt for equity |
| 1,909 | Amortization of debt discount |
| 835 | Provision for the valuation allowance for held for sale loan |
| 648 | Provision for the valuation allowance for related party receivable |
| (32) | Accrued interest income, related party |
| (87) | Income tax benefit |
| 21 | Other |
| $6,375 | Total non-cash income |

The net use of cash in the change in operating assets and liabilities aggregated a decrease of approximately $3.3 million and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $(107) | Increase in accounts receivable and other receivables |
| (896) | Increase in inventory, other current assets and other assets |
| (1,539) | Decrease in accounts payable |
| (476) | Increase in accrued liabilities and other liabilities |
| (362) | Decrease in operating lease liabilities |
| 105 | Increase in deferred revenue |
| $(3,275) | Net cash used in the changes in operating assets and liabilities |

### Operating Activities for the six months ended June 30, 2019

Net cash used in operating activities during the six months ended June 30, 2019 was $6.6 million. The cash flows related to the six months ended June 30, 2019 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(10,380) |
| Non-cash income and expenses | 5,194 |
| Net change in operating assets and liabilities | (1,382) |
| Net cash used in operating activities | $(6,568) |

The non-cash income and expense of $5.2 million consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $2,160 | 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. |
| 164 | Amortization of right of use asset |
| 1,748 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations |
| 160 | Loss on exchange of debt for equity |
| 33 | Amortization of technology |
| 798 | Amortization of debt discount |
| 105 | Provision for doubtful accounts |
| 26 | Other |
| $5,194 | Total non-cash income |

The net use of cash in the change in operating assets and liabilities aggregated $1.4 million and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $(1,198) | Increase in accounts receivable and other receivables |
| (236) | Increase in inventory, other current assets and other assets |
| 132 | Increase in accounts payable |
| (13) | Decrease in accrued liabilities and other liabilities |
| (67) | Decrease in deferred revenue |
| $(1,382) | Net cash used in the changes in operating assets and liabilities |

49

### Cash Flows from Investing Activities as of June 30, 2020 and 2019

Net cash flows used in investing activities during the six months ended June 30, 2020 was approximately $0.5 million compared to net cash flows used in investing activities during the six months ended June 30, 2019 of approximately $1.0 million. Cash flows related to investing activities during the six months ended June 30, 2020 include $433,000 investment in capitalized software and $39,000 for the purchase of property and equipment. Cash flows related to investing activities during the six months ended June 30, 2019 include $465,000 investment in capitalized software, $250,000 investment in GTX, $204,000 investment in Locality, and $44,000 for the purchase of property and equipment.

### Cash Flows from Financing Activities as of June 30, 2020 and 2019

Net cash flows provided by financing activities during the six months ended June 30, 2020 was approximately $47.7 million. During the six months ended June 30, 2020, the Company received incoming cash flows of $41.8 million from the issuance of common stock, $5.0 million of proceeds from promissory notes, $2.0 million of acquisition liability repayments, $0.2 million of repayments from related parties, and $1,000 from notes payable proceeds offset by $1.0 million of loans to related party and $150,000 of net repayments to bank facility. Net cash flows provided by financing activities during the six months ended June 30, 2019 was $8.1 million. During the six months ended June 30, 2019, the Company received incoming cash flows of $10.9 million from the issuance of common stock, preferred stock and warrants, $4.5 million of net proceeds from promissory notes and $1.7 million of repayments from a related party offset by $8.9 million of loans to related parties, $23,000 of repayments to bank facility, and $1,000 of notes payable repayment.

### 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, 3,795 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 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, 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. We have tested these measures and believe these measures have enabled us to remediate the underlying control deficiency that gave rise to the previously disclosed material weakness.

As a result, and in connection with the preparation of this Form 10-Q, management, with the participation of our Principal Executive Officer and Principal Financial Officer, 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

### Remediation Measures

With the exception of the remediation efforts 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 June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company’s management determined that 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, 18,637 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

***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 June 30, 2020, we have an aggregate outstanding principal and accrued interest balance of approximately $6.7 million underlying the promissory note issued to Iliad Research and Trading, L.P. (“Iliad”). This promissory note matures in March 2021. In addition, Iliad 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 this note 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 note is outstanding, the holder 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.

We have remediated this material weakness during the quarter ended 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.

***Domestic and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, broadly defined and rapidly evolving. Such regulation could directly restrict portions of our business or indirectly affect our business by constraining our customers’ use of our technology and services or limiting the growth of our markets.***

Federal, state, municipal and/or foreign governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, and regulations covering user privacy, data security, technologies that are used to collect, store and/or process data, and/or the collection, use, processing, transfer, storage and/or disclosure of data associated with individuals. The categories of data regulated under these laws vary widely, are often broadly defined, and subject to new applications or interpretation by regulators. The uncertainty and inconsistency among these laws, coupled with a lack of guidance as to how these laws will be applied to current and emerging indoor positioning analytics technologies, creates a risk that regulators, lawmakers or other third parties, such as potential plaintiffs, may assert claims, pursue investigations or audits, or engage in civil or criminal enforcement. These actions could limit the market for our services and technologies or impose burdensome requirements on our services and/or customers’ use of our services, thereby rendering our business unprofitable.

### Risks Related to the Systat License Grant

***We may not be able to successfully integrate the License Grant, or retain the existing customer base, which may result in our inability to fully realize the intended benefits of the Systat transactions. In addition the integration of the sale of these software products into our business operation may disrupt our current operations, which could have a material adverse effect on our business, financial position and/or results of operations.***

During the second quarter, we acquired the license to use, modify, develop, market and distribute certain software owned or licensed by the Systat Parties. Incorporating the marketing and distribution of this software on a worldwide basis into our operations may result in operational, technological and personnel-related challenges, which are time-consuming and expensive and may disrupt our ongoing business operations. Furthermore, integration involves a number of risks, including, but not limited to:

- difficulties or complications in combining the acquired technologies, equipment and personnel into our operations;
- differences in controls, procedures and policies, regulatory standards and business cultures between the acquired personnel and our current personnel;
- the diversion of management’s attention from our ongoing core business operations;
- the potential loss of key personnel;
- the potential loss of key customers or suppliers who choose not to do business with us;
- difficulties or delays in consolidating the acquired technologies; and/or
- unanticipated costs and other assumed contingent liabilities.

These factors could cause us to not fully realize the anticipated financial and/or strategic benefits of the transactions, which could have a material adverse effect on our business, financial condition and/or results of operations.

***Several of our directors may be deemed to be interested parties in the transactions by virtue of their relationships with Sysorex, Cranes, or Systat. These interrelationships may create, or appear to create, conflicts of interest.***

Nadir Ali, our chief executive officer and director, is also a director of Sysorex, the issuer of the Sysorex Note that was assigned as consideration for the transactions. Mr. Ali’s dual roles may create conflicts of interest between Mr. Ali’s obligations to our company and its shareholders and his obligations to Sysorex and its shareholders. For example, Mr. Ali may be in a position to influence whether Sysorex complies with its obligations under the note purchase agreement pursuant to which the promissory note was issued, and whether we lend additional amounts to Sysorex, waive defaults or accelerate such indebtedness or take other steps as a secured creditor in a manner that may be viewed as contrary to the best interests of either our company or Sysorex and their respective stockholders. Any such decision may also affect Systat the holder of a substantial portion of the indebtedness under the note purchase agreement.

***There is substantial risk that Cranes may be forced into involuntary bankruptcy or receivership because it is defending several petitions from creditors seeking to wind-up its business, it is subject to considerable potential fines from Indian regulators, and owes significant amounts in taxes to Indian tax authorities.***

Should Cranes be forced into bankruptcy or receivership, Cranes would likely reduce or discontinue its operations, and its assets and those of its subsidiaries could be sold to the benefit of creditors or to satisfy statutory amounts due to Indian authorities and regulators. Creditors of Cranes and Indian authorities may also seek to, in some circumstances, terminate, unwind or void, licensing agreements between Cranes and other entities, including its subsidiaries,. Should Cranes be forced into bankruptcy or receivership, our rights and remedies under the License Agreement may be impaired or inadequate, including our ability to purchase the software licensed thereunder. The bankruptcy of Cranes would only affect us to the extent that it affects the License Agreement, and the indemnification obligations thereunder, or the License Grant. For example, creditors of Cranes or Indian authorities could seek to withdraw authorization or otherwise void the License Agreement, in whole or in part, between us and Cranes, thereby depriving us of the intellectual property licenses thereunder. If we are unable to remedy the situation under the applicable circumstances, such an event would cause substantial harm to our business and any of our operations to the extent that they rely on or are structured around such licensed intellectual property.

***We may not realize the full benefit of the License Grant if the licensed material has less market appeal than expected.***

In addition to designing and developing our own products and services, we evaluate various strategic transactions and acquisitions of companies with technologies and intellectual property that complement our products and services by adding technology, differentiation, customers and/or revenue. 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. We anticipate that the License Grant will result in an increase in our revenues; however, there can be no assurance that we will be able to retain the existing customer base or expand the technologies and products licensed from Systat with existing customers and finding new customers to sell our products and services to. This may require increasingly sophisticated and costly sales efforts and may not result in additional sales. In addition, the rate at which our customers purchase additional products and services, and our ability to attract new customers, depends on a number of factors, including the perceived need for indoor mapping products and services, as well as general economic conditions. If our efforts to sell additional products and services are not successful, our business may suffer.

***If we fail to comply with our obligations in our intellectual property licenses, we could lose license rights that may important to our business and results of operations.***

The License Agreement imposes certain obligations on us. If we fail to comply with the terms and obligations of the License Agreement, including the obligation to assign a portion of our right to repayment from the Sysorex Note in accordance with the schedule set forth in the License Agreement, our rights may be reduced or terminated, in which event we may not be able to develop and market any product that is covered by the License Grant. Termination of the License Grant for failure to comply with such obligations or for other reasons, or reduction or elimination of our licensed rights under it, may result in our having to negotiate new or reinstated licenses on less favorable terms or cause us to enter into a new license for a similar intellectual property. The occurrence of such events could materially harm our business and financial condition.

***If we do not adequately protect our intellectual property rights received in connection with the License Agreement, we may experience a loss of revenue and our operations and growth prospects may be materially harmed.***

The Systat Parties have represented to us that the licensed intellectual property is legally and beneficially owned or licensed by the Systat Parties. Although we are not aware of any infringement claims, it is possible that such claims are made during the Term. While the Systat Parties have agreed to indemnify us in connection with any losses or claims relating to any infringement of the licensed intellectual property, any loss of the intellectual property rights could result in a loss of revenue and our operations and growth prospects may be materially harmed.

Filed Aug 14, 2020.
Source: SEC EDGAR, the filing index for accession 0001213900-20-022280. Last ingested by Listed: Nov 6, 2026, 18:14 ET. No prices; not investment advice.