XTI Aerospace, Inc. 10-Q

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2020, as filed with the SEC. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.” Overview of Our Business We are an indoor intelligence company. We capture and turn indoor data into indoor intelligence for smarter, safer and more secure environments for our customers. Our clients use our solutions to secure, digitize and optimize their indoor spaces with our smart office and events apps, positioning, mapping, asset tracking and analytics products. Our indoor intelligence platform uses sensor technology to detect accessible cellular, Wi-Fi, Bluetooth, ultra-wide band ("UWB") and chirp 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 increased visibility, security and business intelligence throughout 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. We experienced a net loss of approximately $33.9 million and $7.5 million for the three months ended September 30, 2021 and 2020, respectively. We experienced a net loss of approximately $32.0 million and $20.9 million for the nine months ended September 30, 2021 and 2020, respectively. The net income/loss for each of the 2021 periods include a gain on the settlement of the Sysorex debt with the issuance of the Sysorex securities to the Company on April 14, 2021 offset by the unrealized loss on the related investment in equity securities as of September 30, 2021. See further details in financial statement notes 14 and 24 included elsewhere in this document. We cannot assure that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we have supplemented the revenues we earned with proceeds from the sale of our equity and debt securities and proceeds from loans and bank credit lines. 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 cost increases and constraints and delays in the receipt of certain components of our hardware 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, customer facilities were closed partially or fully due to local regulations related to managing the pandemic or because of the uncertainty of the customer’s financial position and ability to invest in our technology. Despite these challenges, we were able to realize growth in revenue for the first three quarters of 2021 when compared to the same periods of 2020 as a result of an increase in sales associated with our indoor intelligence platform and additional revenue from the sale of Systat software licenses. We expect that supply chain matters constraints will continue to be a challenge for our hardware products and the impact that COVID-19 will have on general economic conditions is continuously evolving and the ultimate impact the pandemic will have on our results of operations continues to remain uncertain and there are no assurances that we will be able to continue to experience the same growth or not be materially adversely effected. 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 Since 2019, management has pursued a corporate strategic acquisition strategy focused on building and developing its business as the Indoor Intelligence TM provider with the ability to provide 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 furtherance of this strategy, we have 48 Table of Contents completed a series of strategic transactions to enhance our products and solution offerings, including, the acquisition of (1) technologies allowing for wireless device positioning and radio frequency augmentation of video surveillance systems; (2) GPS tracking products, software, technologies, and related intellectual property to provide ground positioning, asset tracking, and situational awareness monitoring for those whose intelligence needs expand outdoors; (3) our indoor mapping solution, Inpixon Mapping, to provide users with the tools to add intelligence to complex indoor spaces by integrating business data with geospatially accurate indoor maps to create relevant views of indoor environments; (4) a suite of on-device “blue dot” indoor location and motion technologies, including patents, trademarks, software and related intellectual property; (5) IoT solutions for real-time location systems (RTLS) and indoor and outdoor positioning solutions utilizing both industry-standard technologies, such as ultra-wideband (UWB), and patented proprietary wireless communication technologies, such as Chirp Spread Spectrum (CSS); (6) a suite of augmented reality, computer vision, localization, navigation, mapping, and 3D reconstruction technologies, including patents, trademarks, software and related intellectual property, and (7) a leading SaaS app platform that enables corporate enterprise organizations to provide a custom-branded, location-aware employee app focused on enhancing the workplace experience and hosting virtual and hybrid events. We believe these transactions have positioned us as a market leader with a comprehensive suite of products and solutions allowing us to provide organizations with actionable indoor intelligence to make their indoor spaces smarter, safer and more secure. We also operate and compete in an industry that is characterized by rapid technological innovation, changing customer needs, evolving industry standards and frequent introductions of new products, product enhancements, services and distribution methods. Our success will depend on our ability to develop expertise with these new products, product enhancements, services and distribution methods and to implement solutions that anticipate and respond to rapid changes in technology, the industry, and customer needs. As a result, in order to continue to respond to rapid changes and required technological advancements we intend to continue to evaluate various strategic transactions including acquisitions of companies with technologies and intellectual property in order to continue to maintain pace with industry demands and if we believe that it will complement our goals in offering a comprehensive Indoor Intelligence platform or otherwise increase shareholder value. 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. If we explore any such opportunities we expect to focus primarily on looking for accretive acquisitions that have business value and operational synergies, however we will also be opportunistic and may consider 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. Recent Events Financings On January 24, 2021, we entered into a Securities Purchase Agreement with an institutional investor, pursuant to which we sold in a registered direct offering, 5,800,000 shares of our common stock, and warrants to purchase up to 19,354,838 shares of common stock at an exercise price of $1.55 per share (the “January 2021 Purchase Warrants”) for a combined purchase price of $1.55 per share and pre-funded warrants to purchase up to 13,554,838 shares of common stock ("January 2021 Pre-funded Warrants") at an exercise price of $0.001 per share, at a purchase price of $1.549 per share for net proceeds of $27.8 million after deducting placement agent commissions and offering expenses. Each January 2021 Purchase Warrant and January 2021 Pre-funded Warrant is exercisable for one share of common stock, is immediately exercisable and will expire five years from the issuance date. The January 2021 Pre-funded Warrants were exercised in full as of February 8, 2021. In addition, the investor exercised its purchase rights for 3,000,000 shares of common stock pursuant to the the January 2021 Purchase Warrant on February 11, 2021. On February 12, 2021, we entered into a Securities Purchase Agreement with an institutional investor, pursuant to which we sold in a registered direct offering, 7,000,000 shares of our common stock, and warrants to purchase up to 15,000,000 shares of common stock at an exercise price of $2.00 per share (the “First February 2021 Purchase Warrants”) for a combined purchase price of $2.00 per share and pre-funded warrants to purchase up to 8,000,000 shares of common stock ("First February 2021 Pre-funded Warrants") at an exercise price of $0.001 per share, at a purchase price of $1.999 per share for net proceeds of $27.8 million after deducting placement agent commissions and offering expenses. Each First February 2021 Purchase Warrant and First February 2021 Pre-funded Warrant is exercisable for one share of common stock, is immediately exercisable and will expire five years from the issuance date. The First February 2021 Pre-funded warrants were exercised in full as of February 18, 2021. 49 Table of Contents On February 16, 2021, we entered into a Securities Purchase Agreement with an institutional investor, pursuant to which we sold in a registered direct offering, 3,000,000 shares of our common stock, and warrants to purchase up to 9,950,250 shares of common stock at an exercise price of $2.01 per share (the “Second February 2021 Purchase Warrants”) for a combined purchase price of $2.01 per share and pre-funded warrants to purchase up to 6,950,250 shares of common stock ("Second February 2021 Pre-funded Warrants") at an exercise price of $0.001 per share, at a purchase price of $2.009 per share for net proceeds of $18.5 million after deducting placement agent commissions and offering expenses. Each Second February 2021 Purchase Warrant and Second February 2021 Pre-funded Warrant is exercisable for one share of common stock, is immediately exercisable and will expire five years from the issuance date. The Second February 2021 Pre-funded warrants were exercised in full as of March 1, 2021. On September 13, 2021, the Company entered into a Securities Purchase Agreement with certain institutional investors named therein, pursuant to which the Company agreed to issue and sell in a registered direct offering (i) up to 58,750 shares of its newly designated Series 7 Convertible Preferred Stock and (ii) related warrants to purchase up to an aggregate of 47,000,000 shares of common stock (the “Warrants”). Each share of Series 7 Convertible Preferred Stock and the related Warrants were sold at a subscription amount of $920, representing an original issue discount of 8% of the Stated Value for an aggregate subscription amount of $54.1 million. The aggregate net proceeds from the offering, after deducting the placement agent fees and other estimated offering expenses, was approximately $50.6 million. Game Your Game Acquisition of Controlling Interest On March 25, 2021, we entered into a Stock Purchase Agreement (the “GYG Purchase Agreement”) with Game Your Game, Inc., a Delaware corporation (“GYG”), and certain selling shareholders (the "Selling Shareholders"), pursuant to which we acquired on April 9, 2021 an aggregate of 522,000 shares of common stock of GYG (the “GYG Shares”), representing 52.2% of the outstanding shares of common stock of GYG on a fully diluted basis, in exchange for $1,666,932 in cash (the “Cash Consideration”), and issued an aggregate of 1,179,077 shares of its common stock, par value $0.001 per share with a value of $1,403,103 (the “Buyer Shares”) for an aggregate purchase price equal to $3,070,035. The Cash Consideration will be used for working capital purposes and to satisfy certain outstanding payroll obligations of GYG. GYG’s business consists of developing and providing solutions using sports data and analytics. In addition, at the closing, Nadir Ali, the Company’s Chief Executive Officer and member of the Company’s board of directors, was appointed as the sole member of GYG’s board of directors. Systat Purchase Option Exercise On February 22, 2021, we entered into a Second Amendment to the 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”) to allow for the exercise of the purchase of the software and other assets underlying the License Agreement (the "Purchase Option") option in whole or in part any time during the purchase option period and to provide for cash consideration in lieu of an assignment of the Sysorex Note at our option. In addition, we exercised our option to purchase a portion of the underlying assets, including certain software, trademarks, solutions, domain names and websites from Systat in exchange for consideration in an amount equal to $900,000. Sysorex Securities Settlement Agreement On April 14, 2021, we entered into a Securities Settlement Agreement (the “SSA”) and a Rights Letter Agreement (the “RLA”), each with Sysorex, whereby Sysorex agreed to satisfy in full its outstanding debt, in the aggregate amount of $9,088,176 as of March 31, 2021, owed to us under that certain secured promissory note, originally dated December 31, 2018, as amended from time to time, and in connection with that certain settlement agreement, dated February 20, 2019, by and among us, Sysorex and Atlas Technology Group, LLC (the “Debt Settlement”). To effect the Debt Settlement, Sysorex agreed to issue to us (i) pursuant to the terms of the SSA, 12,972,189 shares of its common stock, $0.00001 par value per share, and (ii) rights to acquire 3,000,000 additional shares of its common stock pursuant to the terms of the RLA. The Debt Settlement was entered into in connection with Sysorex’s closing of a reverse triangular merger with TTM Digital Assets & Technologies, Inc. In connection with the Debt Settlement, we also entered into a Registration Rights Agreement, dated as of April 14, 2021 (the “RRA”), with Sysorex and certain other shareholders of Sysorex (the “Holders”). Pursuant to the terms of the RRA, Sysorex must, subject to certain limitations, register the resale of the shares of common stock held by us and the Holders, with the SEC, during the period that begins on the 90th day following April 14, 2021. In the event Sysorex fails to register such shares within that timeframe, or otherwise fails to meet its obligations under the RRA, then, subject to certain limitations, the Company and the Holders may be entitled to receive from Sysorex an amount in cash equal to the product of 1.5% multiplied by the value of their shares (as set forth in the RRA), which amount is payable each month for so long as the failure continues. 50 Table of Contents Also, under the RRA, if Sysorex determines to prepare and file with the SEC a registration statement relating to an offering of any of its equity securities, for its own account or the account of others, then the Company and the Holders will have the right, subject to certain limitations, to require Sysorex to include in such registration statement all or any part of the shares of common stock held by them. Nadir Ali, our Chief Executive Officer and a member of our board of directors, resigned as a director of Sysorex, as of May 14, 2021. Nadir Ali entered into a consulting agreement with Sysorex, pursuant to which he agreed to provide certain business services specified in the agreement for the benefit of Sysorex in exchange for shares of Sysorex’s common stock. Visualix Asset Purchase Agreement On April 23, 2021, we entered into an asset purchase agreement (the “Asset Purchase Agreement”) by and among the Company, Visualix GmbH i.L. (the “Visualix”), Darius Vahdat-Pajouh and Michal Bucko (each, a “Founder,” and collectively, the “Founders”), and Future Energy Ventures Management GmbH (“FEVM”) pursuant to which we acquired certain computer vision, robust localization, large-scale navigation, mapping, and 3D reconstruction software technologies and intellectual property (collectively, the “Visualix Assets"). In accordance with the terms of the Asset Purchase Agreement, the Company purchased the Visualix Assets and certain patent applications related to the Visualix Assets from FEVM. In consideration of the transactions contemplated by the Asset Purchase Agreement, the Company: (i) remitted a cash payment in the amount of Fifty Thousand Euros (EUR 50,000) to Visualix; (ii) issued 316,768 shares of Common Stock to Visualix; and (iii) issued 52,795 to shares of Common Stock to FEVM. The Asset Purchase Agreement includes customary representations and warranties, as well as certain covenants, including, inter alia, that the Founders are hired as employees of Inpixon GmbH and Visualix and the Founders shall not, for a period of two (2) years following the closing date, directly or indirectly, compete with the Company in the sectors of Mapping and Localization Technology (as defined in the Asset Purchase Agreement) . CXApp Acquisition On April 30, 2021 (the “Closing Date”), we completed the acquisition (the “Acquisition”) of over 99.9% of the outstanding capital stock of Design Reactor, Inc., dba The CXApp, a California corporation (“The CXApp”), pursuant to the terms of that certain Stock Purchase Agreement, dated as of the Closing Date (the “Purchase Agreement”), by and among us, The CXApp, the sellers set forth on the signature page thereto and each other person who owns outstanding capital stock of The CXApp (“CXApp Shares”) and executes a Joinder to Stock Purchase Agreement (collectively, the “Sellers”), and Leon Papkoff, as Sellers’ Representative (the “Sellers’ Representative”). The CXApp is a leading SaaS app platform that enables corporate enterprise organizations to provide a custom-branded, location-aware employee app focused on enhancing the workplace experience and hosting virtual and hybrid events. On the Closing Date, the Sellers sold all of their CXApp Shares to us in exchange for consideration of (i) approximately $22,500,000 in cash, minus The CXApp’s transaction expenses, plus The CXApp’s closing cash, minus stock option payouts, minus the amount that equals 70% of deferred revenue as of the Closing Date, subject to such other adjustments set forth in the Purchase Agreement, including a post-closing working capital adjustment (such amount, the “Cash Purchase Price”), and (ii) 8,820,239 shares of our common stock, which were valued at approximately $10,000,000 based on a share price of $1.13, which was the closing price of our common stock immediately prior to executing the Purchase Agreement (such shares, the “Purchaser Shares” and together with the Cash Purchase Price, the “Consideration”). In addition, we agreed to pay up to $12,500,000 in contingent earnout payments, subject to certain adjustments (the “Earnout Payment” and together with the Cash Purchase Price and the Purchaser Shares, the “Aggregate Purchase Price”). As of the Closing Date, there was one holder of CXApp Shares that did not sign the Purchase Agreement (the “Non-Signing Seller”). On May 10, 2021, the Company, The CXApp and the Non-Signing Seller executed a Joinder to Stock Purchase Agreement pursuant to which the Company purchased such Non-Signing Seller's CXApp Shares in exchange for approximately $50,000 in cash and 29,299 shares of common stock of the Company. As of such time, the Company now owns 100% of The CXApp. 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 51 Table of Contents and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 3 of the condensed consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. There have been no changes to estimates during the periods presented in the filing. Historically changes in management estimates have not been material. Revenue Recognition We recognize revenue when we transfer control of the promised products or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. We derive our revenue from software as a service, design and implementation services for our Indoor Intelligence systems, and professional services for work performed in conjunction with our systems. Hardware and Software Revenue Recognition For sales of hardware and software products, our performance obligation is satisfied at a point in time when they are shipped to the customer. This is when the customer has title to the product and the risks and rewards of ownership. The delivery of products to our customers occurs in a variety of ways, including (i) as a physical product shipped from our warehouse, (ii) via drop-shipment by a third-party vendor, or (iii) via electronic delivery with respect to software licenses. We leverage drop-ship arrangements with many of our vendors and suppliers to deliver products to customers without having to physically hold the inventory at our warehouse. In such arrangements, we negotiate the sale price with the customer, pay the supplier directly for the product shipped, bear credit risk of collecting payment from our customers and are ultimately responsible for the acceptability of the product and ensuring that such product meets the standards and requirements of the customer. Accordingly, we are the principal in the transaction with the customer and record revenue on a gross basis. We receive fixed consideration for sales of hardware and software products. Our customers generally pay within 30 to 60 days from the receipt of a customer approved invoice. We have elected the practical expedient to expense the costs of obtaining a contract when they are incurred because the amortization period of the asset that otherwise would have been recognized is less than a year. Software As A Service Revenue Recognition With respect to sales of our maintenance, consulting and other service agreements including our digital advertising and electronic services, customers pay fixed monthly fees in exchange for the Company’s service. The Company’s performance obligation is satisfied over time as the digital advertising and electronic services are provided continuously throughout the service period. The Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous access to its service. Professional Services Revenue Recognition Our professional services include milestone, fixed fee and time and materials contracts. Professional services under milestone contracts are accounted for using the percentage of completion method. As soon as the outcome of a contract can be estimated reliably, contract revenue is recognized in the 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 are also contracted on the fixed fee and time and materials basis. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. Our time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. We have elected the practical expedient to recognize revenue for the right to invoice because our right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts including maintenance service provided by in house 52 Table of Contents personnel, we recognize revenue evenly over the service period using a time-based measure because we are providing continuous service. Because our contracts have an expected duration of one year or less, we have elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about the remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three and nine months ended September 30, 2021 and 2020, we did not incur any such losses. These amounts are based on known and estimated factors. License Revenue Recognition The Company enters into contracts with its customers whereby it grants a non-exclusive on-premise license for the use of its proprietary software. The contracts provide for either (i) a one-year stated term with a one-year renewal option (ii) a perpetual term or (iii) a two-year term for students with the option to upgrade to a perpetual license at the end of the term. The contracts may also provide for yearly on-going maintenance services for a specified price, which includes maintenance services, designated support, and enhancements, upgrades and improvements to the software (the “Maintenance Services”), depending on the contract. Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. All software provides customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. The timing of our revenue recognition related to the license revenue stream is dependent on whether the software licensing agreement entered into represents a good or service. Software that relies on an entity’s IP and is delivered only through a hosting arrangement, where the customer cannot take possession of the software, is a service. A software arrangement that is provided through an access code or key represents the transfer of a good. Licenses for on-premises software represents a good and provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. Renewals or extensions of licenses are evaluated as distinct licenses (i.e., a distinct good or service), and revenue attributed to the distinct good or service cannot be recognized until (1) the entity provides the distinct license (or makes the license available) to the customer and (2) the customer is able to use and benefit from the distinct license. Renewal contracts are not combined with original contracts, and, as a result, the renewal right is evaluated in the same manner as all other additional rights granted after the initial contract. The revenue is not recognized until the customer can begin to use and benefit from the license, which is typically at the beginning of the license renewal period. Therefore, we recognize revenue resulting from renewal of licensed software at a point in time, specifically, at the beginning of the license renewal period. We recognize revenue related to Maintenance Services evenly over the service period using a time-based measure because we are providing continuous service and the customer simultaneously receives and consumes the benefits provided by our performance as the services are performed. Design and Implementation Revenue Recognition Design and implementation 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. Contract Balances The timing of our revenue recognition may differ from the timing of payment by our customers. We record a receivable when revenue is recognized prior to payment and we have an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, we record deferred revenue until the performance obligations are satisfied. The Company had deferred revenue of approximately $4.5 million and $1.9 million as of September 30, 2021 and December 31, 2020, respectively, related to cash received in advance for product maintenance services and professional services provided by the Company’s technical staff. The Company expects to satisfy its remaining performance obligations for these maintenance services and professional services, and recognize the deferred revenue and related contract costs over the next twelve months. 53 Table of Contents 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 nine months ended September 30, 2021 and 2020. The benefits to be derived from our acquired intangibles, will take additional financial resources to continue the development of our technology. Management believes our technology has significant long-term profit potential, and to date, management continues to allocate existing resources to the develop products and services to seek returns on its investment. We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, as part of our continued efforts. Although there can be no assurance that these efforts will be successful, we intend to allocate financial and personnel resources when deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, the related development of our technology (resulting in our lack of ability to expand our business), may be subject to significant impairment. As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. The Company will continue to monitor these uncertainties in future periods, to determine the impact. We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the three or nine months ended September 30, 2021 and 2020, 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”) 54 Table of Contents 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, in 2020 through the SYSTAT licensing agreement, the acquisition of certain assets of Ten Degrees, and the acquisition of Nanotron and in 2021 through the acquisition of CXApp, Game Your Game and certain assets of Visualix. Our IPR&D is comprised of AirPatrol, LightMiner, Locality, Jibestream, GTX, SYSTAT, Ten Degrees, Nanotron, CXApp, Game Your Game and Visualix, 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, SYSTAT, Ten Degrees, Nanotron, CXApp, Game Your Game and Visualix technologies. Through September 30, 2021, 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 were also awarded the IoT Security Excellence award by TMC and Crossfire Media. Management remains focused on growing revenue from these products and continues to pursue efforts to recognize the value of the AirPatrol, Locality, Jibestream, GTX, SYSTAT, Ten Degrees, Nanotron, CXApp, Game Your Game and Visualix 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. Goodwill and Indefinite-lived Assets We have recorded goodwill and other indefinite-lived assets in connection with our acquisitions of Shoom, Locality, Jibestream, GTX, the Systat Parties, Nanotron, Game Your Game and CXApp. Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of the acquired company, is not amortized. Indefinite-lived intangible assets are stated at fair value as of the date acquired in a business combination. The recoverability of goodwill is evaluated at least annually and when events or changes in circumstances indicate that the carrying amount may not be recoverable. We analyze goodwill first to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a detailed goodwill impairment test as required. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The Company has determined that the reporting unit is the entire company, due to the integration of the Company’s activities. Events and circumstances for an entity to consider in conducting the qualitative assessment are: • Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets. • Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development. • Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows. • Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. • Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers, contemplation of bankruptcy, or litigation. • Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. 55 Table of Contents • If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers). 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 nine months ended September 30, 2021 and 2020. See “Acquired In-Process Research and Development (“IPR&D”)” for further information. Allowance for Doubtful Accounts We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management’s determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors. As of September 30, 2021 and December 31, 2020, reserves for credit losses included a reserve for doubtful accounts of approximately $0.3 million and $0.2 million, respectively, due to the aging of the items greater than 90 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. 56 Table of Contents The principal assumptions used in applying the Black-Scholes model along with the results from the model were as follows: For the Nine Months Ended September 30, 2021 Risk-free interest rate 0.59% - 0.75% Expected life of option grants 5 years Expected volatility of underlying stock 37.67% - 38.15% Dividends assumption -- During the three months ended September 30, 2021 and 2020, the Company recorded a charge of $0.6 million and $0.3 million, million respectively, for the amortization of employee stock options. During the nine months ended September 30, 2021 and 2020, the Company recorded a charge of $1.4 million and $0.9 million, respectively, for the amortization of employee stock options. R ESULTS OF O PERATIONS Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020 The following table sets forth selected consolidated financial data as a percentage of our revenue and the percentage of period-over-period change: Three Months Ended September 30, 2021 2020 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 4,450 100 % $ 2,554 100 % $ 1,896 74 % Cost of revenues $ 1,186 27 % $ 645 25 % $ 541 84 % Gross profit $ 3,264 73 % $ 1,909 75 % $ 1,355 71 % Operating expenses $ 15,720 353 % $ 8,155 319 % $ 7,565 93 % Loss from operations $ (12,456) (280) % $ (6,246) (245) % $ (6,210) 99 % Net income (loss) $ (33,949) (763) % $ (7,451) (292) % $ (26,498) 356 % Net income (loss) attributable to stockholders of Inpixon $ (33,640) (756) % $ (7,467) (292) % $ (26,173) 351 % * 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 September 30, 2021 were $4.5 million compared to $2.6 million for the comparable period in the prior year for an increase of approximately $1.9 million, or approximately 74%. This increase is primarily attributable to an approximate $1.8 million increase in Indoor Intelligence sales, including our recently acquired smart office app and real time location based technologies, and an increase of approximately $0.1 million of SAVES sales. Cost of Revenues Cost of revenues for the three months ended September 30, 2021 were $1.2 million compared to $0.6 million for the comparable period in the prior year. This increase in cost of revenues of approximately $0.5 million, or approximately 84%, was primarily attributable to the increased sales during the quarter. Gross Profit The gross profit margin for the three months ended September 30, 2021 was 73% compared to 75% for the three months ended September 30, 2020. This decrease in margin is primarily due to the sales mix during the quarter. 57 Table of Contents Operating Expenses Operating expenses for the three months ended September 30, 2021 were $15.7 million and $8.2 million for the comparable period ended September 30, 2020. This increase of approximately $7.6 million is primarily attributable to approximately $3.2 million of Indoor Intelligence operating costs from the CXApp, Game your Game and Nanotron acquisitions, $1.1 million of additional amortization of intangibles and approximately $0.8 million of accrued earn-out compensation expense and approximately $1.4 million of additional stock based compensation expense. Loss From Operations Loss from operations for the three months ended September 30, 2021 was $12.46 million as compared to $6.25 million for the comparable period in the prior year. This increase in loss of approximately $6.2 million was primarily attributable to increased operating expenses described above offset by higher gross profit. Other Income (Expense) Other income/expense for the three months ended September 30, 2021 was a loss of $22.3 million compared to a loss of $1.2 million for the comparable period in the prior year. This increase in loss of approximately $21.1 million is primarily attributable to the unrealized loss of approximately $22.3 million on the Sysorex note. Provision for Income Taxes There was a net income tax benefit of approximately $0.9 million for the three months ended September 30, 2021 primarily related to the reduction in estimated taxes payable due to the losses incurred during the quarter. There was no income tax benefit or expense for the three months ended September 30, 2020. Net Income (Loss) Attributable To Non-Controlling Interest Net income (loss) attributable to non-controlling interest for the three months ended September 30, 2021 and 2020 was a loss of $309,000 and income of $16,000, respectively. This increase in loss of $325,000 was primarily attributable to the loss of Game Your Game. Net Income (Loss) Attributable To Stockholders of Inpixon Net loss attributable to stockholders of Inpixon for the three months ended September 30, 2021 was $33.6 million compared to a loss of $7.5 million for the comparable period in the prior year. This increase in loss of approximately $26.2 million was primarily attributable to the $22.3 million unrealized loss on the Sysorex note and increased operating expenses as described above, offset by the higher gross profit. Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020 The following table sets forth selected consolidated financial data as a percentage of our revenue and the percentage of period-over-period change: For the For the Nine Months Ended September 30, 2021 2020 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 10,857 100 % $ 5,434 100 % $ 5,423 100 % Cost of revenues $ 2,966 27 % $ 1,459 27 % $ 1,507 103 % Gross profit $ 7,891 73 % $ 3,975 73 % $ 3,916 99 % Operating expenses $ 46,060 424 % $ 20,913 385 % $ 25,147 120 % Loss from operations $ (38,169) (352) % $ (16,938) (312) % $ (21,231) 125 % Net income (loss) $ (31,982) (295) % $ (20,919) (385) % $ (11,063) 53 % Net income (loss) attributable to stockholders of Inpixon $ (31,438) (290) % $ (20,944) (385) % $ (10,494) 50 % 58 Table of Contents * 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 nine months ended September 30, 2021 were $10.86 million compared to $5.43 million for the comparable period in the prior year for an increase of approximately $5.4 million, or approximately 100%. This increase is primarily attributable to an approximate $3.8 million increase in Indoor Intelligence sales, including our recently acquired smart office app and real time location based technologies, and an increase of approximately $1.6 million of SAVES sales. Cost of Revenues Cost of revenues for the nine months ended September 30, 2021 were $3.0 million compared to $1.5 million for the comparable period in the prior year. This increase in cost of revenues of approximately $1.5 million, or approximately 103%, was primarily attributable to the increased sales during the quarter. Gross Profit The gross profit margin for the nine months ended September 30, 2021 and 2020 was 73%. Operating Expenses Operating expenses for the nine months ended September 30, 2021 were $46.06 million and $20.91 million for the comparable period ended September 30, 2020. This increase of $25.15 million is primarily attributable to increased operating expenses including approximately $6.8 million of Indoor Intelligence operating costs from the CXApp, Game Your Game and Nanotron acquisitions, additional $0.6 million of acquisition costs, additional $1.3 million of amortization of intangibles, approximately $2.9 million of accrued earnout compensation expense, approximately $7.9 million of additional stock based compensation expense and additional wages, professional fees and infrastructure expenditures as we are scaling for growth. Loss From Operations Loss from operations for the nine months ended September 30, 2021 was $38.2 million as compared to $16.9 million for the comparable period in the prior year. This increase in loss of approximately $21.2 million was primarily attributable to increased operating expenses described above offset by higher gross profit. Other Income (Expense) Other income/expense for the nine months ended September 30, 2021 was income of $7.5 million compared to a loss of $4.1 million for the comparable period in the prior year. This increase in other income of approximately $11.6 million is primarily attributable to a discounted net gain of approximately $49.8 million on the Sysorex note, a $7.5 million benefit from the release of the valuation allowance on the Sysorex note and approximately $1.6 million of interest received on the Sysorex note offset by the $51.3 unrealized loss on the Sysorex note. Provision for Income Taxes There was an income tax provision of approximately $1.4 million for the nine months ended September 30, 2021 related to a current income tax expense of $5.9 million offset by a $4.5 million deferred tax benefit primarily related to acquisition intangibles of Design Reactor. There was an income tax benefit for the nine months ended September 30, 2020 of approximately $87,000 due to the acquisition intangibles and net operating losses of Locality and Jibestream. Net Income (Loss) Attributable To Non-Controlling Interest Net income (loss) attributable to non-controlling interest for the nine months ended September 30, 2021 and 2020 was a loss of $544,000 and income of $25,000, respectively. This increase in loss of $569,000 was attributable to the loss of the Game Your Game entity. Net Income (Loss) Attributable To Stockholders of Inpixon 59 Table of Contents Net income or loss attributable to stockholders of Inpixon for the nine months ended September 30, 2021 was a loss of $31.4 million compared to a loss of $20.9 million for the comparable period in the prior year. This increase in loss of approximately $10.5 million was primarily attributable to the increased operating expenses of approximately $24.8 million as described above offset by the $3.9 million higher gross profit and the $7.5 million release of the valuation allowance on the Sysorex note. Non-GAAP Financial information EBITDA EBITDA is defined as net income (loss) before interest, provision for (benefit from) income taxes, and depreciation and amortization. Adjusted EBITDA is used by our management as the matrix in which it manages the business. It is defined as EBITDA plus adjustments for other income or expense items, non-recurring items and non-cash stock-based compensation. Adjusted EBITDA for the three months ended September 30, 2021 was a loss of $6.7 million compared to a loss of $4.6 million for the prior year period. Adjusted EBITDA for the nine months ended September 30, 2021 was a loss of $18.5 million compared to a loss of $12.4 million for the prior year period. The following table presents a reconciliation of net income (loss) attributable to stockholders of Inpixon, which is our GAAP operating performance measure, to Adjusted EBITDA for the nine months ended September 30, 2021 and 2020 (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) attributable to common stockholders $ (33,640) $ (7,467) $ (31,438) $ (20,944) Adjustments: Non-recurring one-time charges: Loss on exchange of debt for equity — — 30 132 (Recovery) provision for valuation allowance on held for sale loan — 679 (7,345) 1,514 Provision for the valuation allowance related party receivable — — — 648 Gain on related party loan held for sale — — (49,817) — Unrealized loss on equity securities 22,285 — 51,250 — Acquisition transaction/financing costs 93 344 1,098 540 Earnout compensation expense 835 — 2,893 — Professional service fees 418 — 1,189 — Unrealized gains on notes, loans, investments (6) — (497) — Bad debts expense/provision 100 444 100 444 Reserve for inventory obsolescense 300 — 300 — Stock-based compensation - compensation and related benefits 1,664 256 8,813 941 Severance Costs 210 — 210 — Interest expense, net 15 537 (1,191) 1,934 Income tax provision (benefit) (854) — 1,350 (87) Depreciation and amortization 1,903 589 4,541 2,497 Adjusted EBITDA $ (6,677) $ (4,618) $ (18,514) $ (12,381) 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; 60 Table of Contents • 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 the public offering. • We believe that it is useful to provide to investors with a standard operating metric used by management to evaluate our operating performance; and • We believe that the use of Adjusted EBITDA is helpful to compare our results to other companies. Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that: • Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; • Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and • Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information. Proforma Non-GAAP Net Income (Loss) per Share Basic and diluted net income (loss) per share for the for the three months ended September 30, 2021 was a loss of $0.29 compared to a loss of $0.18 for the prior year period. Basic and diluted net income (loss) per share for the nine months ended September 30, 2021 was a loss of $0.31 compared to a loss of $0.90 for the prior year period. The increased loss per share in 2021 was attributable to the changes discussed in our results of operations. 61 Table of Contents Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one time charges including gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering. Proforma non-GAAP net loss per basic and diluted common share for the for the three months ended September 30, 2021 was a loss of $0.05 per share compared to a loss of $0.13 per share for the prior year period. Proforma non-GAAP net loss per basic and diluted common share for the nine months ended September 30, 2021 was a loss of $0.19 per share compared to a loss of $0.64 per share for the prior year period. The following table presents a reconciliation of net loss per basic and diluted share, which is our GAAP operating performance measure, to proforma non-GAAP net loss per share for the periods reflected (in thousands, except per share data): Three Months Ended September 30, For the Nine Months Ended September 30, (thousands, except per share data) 2021 2020 2021 2020 Net loss attributable to common stockholders $ (33,640) $ (7,467) $ (31,438) $ (20,944) Adjustments: Non-recurring one-time charges: Loss on the exchange of debt for equity — — 30 132 (Recovery) provision for valuation allowance on held for sale loan — 679 (7,345) 1,514 Provision for the valuation allowance related party receivable — — — 648 Gain on related party loan held for sale — — (49,817) — Unrealized loss on equity securities 22,285 — 51,250 — Acquisition transaction/financing costs 93 344 1,098 540 Earnout compensation expense 835 — 2,893 — Professional service fees 418 — 1,189 — Unrealized gains on notes, loans, investments (6) — (497) — Bad debts expense/provision 100 444 100 444 Reserve for inventory obsolescense 300 — 300 — Stock-based compensation - compensation and related benefits 1,664 256 8,813 941 Severance Costs 210 — 210 — Amortization of intangibles 1,560 288 3,571 1,811 Proforma non-GAAP net loss (6,181) (5,456) (19,643) (14,914) Proforma non-GAAP net loss per common share - Basic and Diluted (0.05) (0.13) (0.19) (0.64) Weighted Average Shares Outstanding Basic and Diluted 117,753,206 41,544,961 102,387,641 23,203,004 We rely on proforma non-GAAP net income (loss) per share, which is a non-GAAP financial measure: • To review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting; • To compare our current operating results with corresponding periods and with the operating results of other companies in our industry; • As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and 62 Table of Contents • To evaluate internally the performance of our personnel. We have presented proforma non-GAAP net income (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 income (loss) per share as supplemental disclosure because: • We believe proforma non-GAAP net income (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 the public offering. • 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 income (loss) per share is helpful to compare our results to other companies. Liquidity and Capital Resources as of September 30, 2021 Our current capital resources and operating results as of and through September 30, 2021, consist of: 1) an overall working capital surplus of approximately $96.8 million; 2) cash of approximately $66.8 million and short-term investments of approximately $43.2 million; 3) net cash used by operating activities for the nine months ended September 30, 2021 of $24.0 million. The breakdown of our overall working capital deficit is as follows (in thousands): Working Capital Assets Liabilities Net Cash and cash equivalents $ 66,785 $ — $ 66,785 Accounts receivable, net / accounts payable $ 3,432 $ 1,394 $ 2,038 Inventory $ 1,540 $ — $ 1,540 Short-term investments $ 43,223 $ — $ 43,223 Accrued liabilities $ — $ 6,623 $ (6,623) Income tax liabilities $ — 3,509 $ (3,509) Operating lease obligation $ — $ 587 $ (587) Deferred revenue $ — $ 4,474 $ (4,474) Notes and other receivables / Short-term debt $ 888 $ 3,251 $ (2,363) Other $ 1,120 $ 336 $ 784 Total $ 116,988 $ 20,174 $ 96,814 Net cash used in operating activities during the nine months ended September 30, 2021 of $24.0 million consists of a net loss of $32.0 million offset by non-cash adjustments of approximately $2.0 million less net cash changes in operating assets and liabilities of approximately $6.0 million. During the nine months ended September 30, 2021 we raised net proceeds of approximately $128.4 million from the sale of our securities in connection with registered direct offerings and the exercise of warrants. 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 from the issuance date of the financial statements. 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 sale of our securities to support our growth plans. Our business has been impacted by the COVID-19 pandemic and may continue to be impacted. While we have been able to continue operations remotely, we have and continue to experience supply chain cost increases and constraints and delays in the receipt of certain components of our products 63 Table of Contents 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 were in effect for compliance with new rules and regulations resulting from the pandemic, customer facilities were partially or fully closed during the pandemic or because of the uncertainty of the customer’s financial position and ability to invest in our technology. Despite these challenges, including a decline in revenue for certain existing product lines, we were able to realize growth in total revenue for the nine months ended September 30, 2021 when compared to the nine months ended September 30, 2020 as a result of the addition of the SAVES product line, the addition of the RTLS (Nanotron) product line in the fourth quarter of 2020 and the acquisition of the CXApp product line in the second quarter of 2021. The total impact that COVID-19 will have on general economic conditions is continuously evolving and the impact it may continue to have on our results of operations continues to remain uncertain and there are no assurances that we will be able to continue to experience the same growth or not be materially adversely effected. The Company may continue to pursue strategic transactions and may raise such additional capital as needed, using our equity securities and/or cash and debt financings in combinations appropriate for each acquisition. Liquidity and Capital Resources as of September 30, 2021 Compared With September 30, 2020 The Company’s net cash flows used in operating, investing and financing activities for the nine months ended September 30, 2021 and 2020 and certain balances as of the end of those periods are as follows (in thousands): For the Nine Months Ended September 30, 2021 2020 Net cash used in operating activities $ (24,018) $ (15,550) Net cash used in investing activities $ (52,708) $ (4,934) Net cash provided by financing activities $ 125,425 $ 47,053 Effect of foreign exchange rate changes on cash $ 90 $ (42) Net increase in cash and cash equivalents $ 48,789 $ 26,527 As of September 30, 2021 As of December 31, 2020 Cash and cash equivalents $ 66,785 $ 17,996 Working capital surplus $ 96,814 $ 18,208 Operating Activities for the nine months ended September 30, 2021 Net cash used in operating activities during the nine months ended September 30, 2021 was approximately $24.0 million. The cash flows related to the nine months ended September 30, 2021 consisted of the following (in thousands): Net income (loss) $ (31,982) Non-cash income and expenses $ 1,988 Net change in operating assets and liabilities $ 5,976 Net cash used in operating activities $ (24,018) 64 Table of Contents The non-cash income and expense of approximately $2.0 million consisted primarily of the following (in thousands): $ 4,541 Depreciation and amortization expenses (including amortization of intangibles) primarily attributable to the Shoom, AirPatrol, LightMiner, Locality, GTX, Jibestream, Systat, Ten Degrees, Nanotron, Game Your Game, Visualix and CXApp, which were acquired effective August 31, 2013, April 16, 2014, November 21, 2016, May 21, 2019, June 27, 2019, August 15, 2019, June 30, 2020, August 19, 2020, October 6, 2020, April 9, 2021, April 23, 2021 and April 30, 2021, respectively. $ 527 Amortization of right of use asset $ 8,813 Stock-based compensation expense attributable, warrants, restricted stock grants and options issued as part of Company operations $ 30 Loss on exchange of debt for equity $ 224 Amortization of debt discount $ (7,345) Recovery for valuation allowance for held for sale loan (1,627) Accrued interest income, related party 100 Provision for doubtful accounts 300 Provision for inventory obsolescence $ (49,817) Gain on settlement of related party note and receivable $ (4,507) Deferred income tax 51,250 Unrealized loss on equity securities $ (501) Other $ 1,988 Total non-cash expenses The net cash used in the change in operating assets and liabilities aggregated approximately $6.0 million and consisted primarily of the following (in thousands): $ (678) Increase in accounts receivable and other receivables $ (369) Increase in inventory, other current assets and other assets $ (653) Decrease in accounts payable $ 3,510 Increase in accrued liabilities and other liabilities 3,471 Increase in income tax liabilities $ (519) Decrease in operating lease liabilities $ 1,214 Increase in deferred revenue $ 5,976 Net cash used in the changes in operating assets and liabilities Operating Activities for the nine months ended September 30, 2020 Net cash used in operating activities during the nine months ended September 30, 2020 was approximately $15.6 million. The cash flows related to the nine months ended September 30, 2020 consisted of the following (in thousands): Net income (loss) $ (20,919) Non-cash income and expenses 8,281 Net change in operating assets and liabilities (2,912) Net cash used in operating activities $ (15,550) The non-cash income and expense of approximately $8.3 million consisted primarily of the following (in thousands): 65 Table of Contents $ 2,497 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. 322 Amortization of right of use asset 941 Stock-based compensation expense attributable to warrants and options issued as part of Company operations 132 Loss on exchange of debt for equity 2,272 Amortization of debt discount 1,514 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) Deferred income tax $ 74 Other $ 8,281 Total non-cash expenses The net use of cash in the change in operating assets and liabilities aggregated approximately $2.9 million and consisted primarily of the following (in thousands): $ (1,111) Increase in accounts receivable and other receivables (848) Increase in inventory, other current assets and other assets (1,359) Decrease in accounts payable 507 Increase in accrued liabilities and other liabilities (325) Decrease in operating lease liabilities 224 Increase in deferred revenue $ (2,912) Net use of cash used in the changes in operating assets and liabilities Cash Flows from Investing Activities as of September 30, 2021 and 2020 Net cash flows used in investing activities during the nine months ended September 30, 2021 was approximately $52.7 million compared to net cash flows used in investing activities during the nine months ended September 30, 2020 of approximately $4.9 million. Cash flows related to investing activities during the nine months ended September 30, 2021 include $258,000 for the purchase of property and equipment, $857,000 for investment in capitalized software, $63.4 million for the purchase of treasury bills, $2.0 million for the purchase of short term investments, $2.0 million sale of short term investments, $28.0 million sales of treasury bills, $184,000 from the acquisition of Game Your Game, $15.2 million for the acquisition of CXApp, $900,000 for the purchase of the Systat licensing agreement, $268,000 for the issuance of a note receivable and $61,000 for acquisition of Visualix. Cash flows related to investing activities during the nine months ended September 30, 2020 include $2.2 million payment for the Systat Licensing Agreement, $1.5 million payment for the Ten Degrees acquisition, $0.5 million for the purchase of property and equipment and $0.7 million investment in capitalized software. Cash Flows from Financing Activities as of September 30, 2021 and 2020 Net cash flows provided by financing activities during the nine months ended September 30, 2021 was $125.4 million. Net cash flows provided by financing activities during the nine months ended September 30, 2020 was $47.1 million. During the nine months ended September 30, 2021, the Company received incoming cash flows of $77.9 million for the issuance of common stock and warrants, received incoming cash flows of $50.6 million for the issuance of preferred stock and warrants, loaned $117,000 to related parties, paid $1.7 million of taxes related to the net share settlement of restricted stock units, paid a $241,000 liability related to the CXApp acquisition, paid a $467,000 acquisition liability to the pre-acquisition shareholders of Nanotron and paid a $500,000 acquisition liability to the pre-acquisition shareholders of Locality. During the nine months ended September 30, 2020, the Company received incoming cash flows of $44.0 million from the issuance of common stock, $5.0 million of proceeds from promissory notes, and $0.3 million of repayments from related parties offset by $1.8 million of loans to related party, $0.2 million of net repayments to bank facility and paid a $0.3 million acquisition liability to the pre-acquisition shareholders of Locality. 66 Table of Contents 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 report beginning on page F-1. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.