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, 2021, 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 Inpixon is the Indoor Intelligence™ company. Our solutions and technologies help organizations create and redefine exceptional workplace experiences that enable smarter, safer and more secure environments. We leverage our positioning, mapping, analytics and app technologies to achieve higher levels of productivity and performance, increase safety and security, improve worker and employee satisfaction rates and drive a more connected workplace. We have focused our corporate strategy on being the primary provider of the full range of foundational technologies needed in order to offer a comprehensive suite of solutions that make indoor data available and meaningful to organizations and their employees. Our Indoor Intelligence solutions are used by our customers for a variety of use cases including, but not limited to, employee and visitor experience enhancement through a customer branded app with features such as desk booking, wayfinding and navigation, and the delivery of content to tens of thousands of attendees in hybrid events. Our real time location (RTLS) and asset tracking products offer manufacturing and warehouse logistics optimization and automation, increase workforce productivity, and enhance worker safety and security. In addition to our Indoor Intelligence technologies and solutions, we also offer: • Digital solutions (eTearsheets; eInvoice, and adDelivery) or cloudbased applications and analytics for the advertising, media and publishing industries referred to as Shoom by Inpixon; and • A comprehensive set of data analytics and statistical visualization solutions for engineers and scientists referred to as SAVES by Inpixon. We report financial results for three segments: Indoor Intelligence, Shoom and SAVES. For Indoor Intelligence, we generate revenue from sales of hardware, software licenses and professional services. For Shoom and SAVES we generate revenue from the sale of software licenses. We experienced a net loss of approximately $31.9 million and net income of $2.0 million for the six months ended June 30, 2022 and 2021, respectively. 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. Global Events While the impact of the COVID-19 pandemic is generally subsiding, the lasting impact on our business and results of operations continues to remain uncertain. While we were able to continue operations remotely throughout the pandemic, 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. In addition, to the extent that certain customers continue to be challenged by the lasting effects of the pandemic, we have and may continue to see an impact in the demand of certain products and delays in certain projects and customer orders. While we have been able to realize growth in the three and six months ended June 30, 2022 as compared to the same periods in 2021, the impact that these global events will have on general economic conditions is continuously evolving and the ultimate impact that they will have on our results of operations continues to remain uncertain. There are no assurances that we will be able to continue to experience the same growth or not be materially adversely effected. We anticipate that certain global events, such as the continued impact of the pandemic, the recent military conflict between Russia and Ukraine, and inflation on our customers and partners in regions throughout the world, we expect that supply chain interruptions and constraints, and increased costs on parts, materials and labor may continue to be a challenge for 48 Table of Contents our business. A further discussion of the impact of the COVID-19 pandemic and the Russia and Ukraine conflict 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 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; (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 and (8) an industrial IoT, RTLS, and sensor data services provider. 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. In order to continue to respond to rapid changes and required technological advancements, as well as increase shareholder value, we intend to continue to evaluate various strategic transactions and opportunities that we believe will enhance shareholder value and/or support our commitment to delivering exceptional experiences and continued innovation with technologies that combine the physical and digital worlds with augmented reality and location based technologies. We are primarily focused on identifying potential targets or other opportunities that we believe will increase 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, at the end of last year, our board of directors authorized a review of strategic alternatives, including a possible asset sale, merger with another company or spin-off of one or more of our business units. In this regard, we have received preliminary indications of interest which we are currently evaluating. In addition, we have and may enter into one or more non-binding letters of intent in connection with our due diligence and evaluation process. We may also retain an investment bank as our financial advisor in order to evaluate strategic options that may be available to us. Recent Events Financings At-The-Market (ATM) Program On July 22, 2022, we entered into an Equity Distribution Agreement (the "Sales Agreement") with Maxim (“Maxim”) under which we may offer and sell shares of our common stock having an aggregate offering price of up to $25 million (the “Shares”) from time to time through Maxim, acting exclusively our sales agent (the “Offering”). We intend to use the net proceeds of the Offering primarily for working capital, general corporate purposes or in connection with the execution of our corporate strategy. We are not obligated to make any sales of the Shares under the Sales Agreement and no assurance can be given that we will sell any Shares under the Sales Agreement, or if we do, as to the price or amount of Shares that we will sell, or the date on which any such sales will take place. Note Purchase Agreement and Promissory Note 49 Table of Contents On July 22, 2022, we entered into a note purchase agreement (the “Purchase Agreement”) with Streeterville Capital, LLC (the “Holder”) pursuant to which we issued and sold to the Holder an unsecured promissory note (the “Note”) in an aggregate initial principal amount of approximately $6.5 million (the “Initial Principal Amount”), which is payable on or before the date that is 12 months from the issuance date (the “Maturity Date”). The Initial Principal Amount includes an original issue discount of approximately $1.5 million and $15,000.00 that we agreed to pay to the Holder to cover the Holder’s legal fees, accounting costs, due diligence, monitoring and other transaction costs. In exchange for the Note, the Holder paid an aggregate purchase price of $5 million (the “Transaction”). Interest on the note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the note. We may pay all or any portion of the amount owed earlier than it is due in an amount equal to 115% of the portion of the outstanding balance the Company elects to prepay. Redemption. Beginning on the date that is 6 months from the issuance date and at the intervals indicated below until the Note is paid in full, the Holder shall have the right to redeem up to an aggregate of 1/3 of the initial principal balance of the Note each month (each monthly exercise, a “Monthly Redemption Amount”) by providing written notice (each, a “Monthly Redemption Notice”) delivered to the Company; provided, however, that if the Holder does not exercise any Monthly Redemption Amount in its corresponding month then such Monthly Redemption Amount shall be available for the Holder to redeem in any future month in addition to such future month’s Monthly Redemption Amount. Upon receipt of any Monthly Redemption Notice, the Company shall pay the applicable Monthly Redemption Amount in cash to the Holder within five business days of the Company’s receipt of such Monthly Redemption Notice. Monitoring Fee. If the Note is still outstanding on the date that is six (6) months from the issuance date, then a one-time monitoring fee equal to ten percent (10%) of the then-current outstanding balance shall be added to the Note. Default Events. The Note includes customary event of default provisions, subject to certain cure periods, and provides for a default interest rate of 22%. Upon the occurrence of an event of default (except a default due to the occurrence of bankruptcy or insolvency proceedings (the “Bankruptcy-Related Event of Default”)), the Holder may, by written notice, declare all unpaid principal, plus all accrued interest and other amounts due under the Note to be immediately due and payable. Upon the occurrence of a Bankruptcy-Related Event of Default, without notice, all unpaid principal, plus all accrued interest and other amounts due under the Note will become immediately due and payable at the Mandatory Default Amount. = In addition, at any time while the Note is outstanding, if the Company intends to enter into a financing pursuant to which it will issue securities that (A) have or may have conversion rights of any kind, contingent, conditional or otherwise, in which the number of shares that may be issued pursuant to such conversion right varies with the market price of the Company’s common stock, or (B) are or may become convertible into common stock (including without limitation convertible debt, warrants or convertible preferred stock), with a conversion price that varies with the market price of the common stock, even if such security only becomes convertible following an event of default, the passage of time, or another trigger event or condition (a “Future Offering”), then the Company must first offer such opportunity to the Holder to provide such financing to the Company on the same terms no later than five (5) trading days immediately prior to the trading day of the expected announcement of the Future Offering (the “Right of First Refusal”). If the Holder is unwilling or unable to provide such financing to the Company within five (5) trading days from the Holder’s receipt of notice of the Future Offering from the Company, then the Company may obtain such financing upon the exact same terms and conditions offered by the Company to the Holder, which transaction must be completed within 30 days after the date of the notice. If the Company does not receive the financing within 30 days after the date of the notice, then the Company must again offer the financing opportunity to the Holder as described above, and the process detailed above will be repeated. The Right of First Refusal does not apply to an Exempt Issuance (as defined in the Purchase Agreement) or to a registered offering made pursuant to a registration statement on Form S-1 or Form S-3. In addition, pursuant to the terms of the Purchase Agreement, so long as the Note is outstanding, the Holder has the right to participate in any offering of securities by the Company which contains any term or condition more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder (the “Participation Right”). The Participation Right does not apply in connection with an offering of securities which qualifies as an Exempt Issuance, a transaction under Section 3(a)(10) of the Securities Act of 1933, as amended (the “Securities Act”), a registered offering made pursuant to a registration statement on Form S-1 or Form S-3, or in connection with the satisfaction of outstanding trade payables. Note Exchanges Since the filing of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022 (the “Quarterly Report”), we have issued an aggregate of 9,508,034 shares of common stock to the holder of that certain outstanding promissory note of the Company issued on March 18, 2020 (the “March 2020 Note”), in each case at a price per share equal to 50 Table of Contents the Minimum Price as defined in Nasdaq Listing Rule 5635(d) for a weighted average price per share equal to approximately $0.16 in connection with exchange agreements pursuant to which we and the holder agreed to (i) partition new promissory notes in the form of the March 2020 Note in the aggregate original principal amount equal to approximately $1.6 million and then cause the outstanding balance of the March 2020 Note to be reduced by an aggregate of approximately $1.6 million; and (ii) exchange the partitioned notes for the delivery of the shares of common stock. Investments Debenture On April 27, 2022, the Company entered into and consummated the transactions contemplated by a securities purchase agreement (the “Purchase Agreement”) with an unaffiliated company operating in the insurance technology sector (the “Debenture Seller”), pursuant to which it purchased a 10% Original Issue Discount Senior Convertible Debenture (a “Debenture”) issued by the Debenture Seller in an aggregate principal amount of approximately $6.1 million for a purchase price of $5.5 million. The Purchase Agreement is one of a series of securities purchase agreements which the Debenture Seller has or will enter into under a private placement of Debentures commenced in February 2022. Interest on the Debenture accrues at a rate of 12% per annum, of which 12 months will be guaranteed, and is payable on each conversion date (as to the principal amount being converted) and on the maturity date, in cash, or in shares of Class A common stock of the Debenture Seller upon a conversion of all or a portion of the outstanding principal amount on the Debenture. The Debenture will mature on the date that is 12 months from the original issue date, which may be extended or accelerated pursuant to the terms of the Debenture. GYG Promissory Notes Pursuant to the terms of Securities Purchase Agreements, dated January 18, 2022, March 22, 2022, May 17, 2022 and July 28, 2022, Game Your Game, Inc., a majority owned subsidiary of the Company ("GYG") issued promissory notes in an aggregate principal amount equal to $1,225,000 (the "2022 GYG Notes"), including an aggregate of $861,000 to the Company and $364,000 to a third party. The 2022 GYG Notes are in addition to promissory notes in an aggregate principal amount of $500,000 issued by GYG to the same parties on October 29, 2021 (the "2021 GYG Notes", together with the 2022 GYG Notes, the "GYG Notes"), of which $261,000 was issued to the Company and $239,000 was issued to a third party, All of the GYG Notes have an interest rate of 8% and are due on or before December 31, 2022. The proceeds received from the issuance of the GYG Notes were used to satisfy GYG working capital requirements. CVH Loan On July 1, 2022, we loaned $150,000 to Cardinal Venture Holdings LLC (“CVH”). We are a member of CVH. CVH owns certain interests in the sponsor entity (the “Sponsor”) to a special purpose acquisition corporation (the “SPAC”). The loan bears no interest and is due and payable in full on the earlier of: (i) the date by which the SPAC has to complete a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (a “Business Combination”), and (ii) immediately prior to the date of consummation of the Business Combination of the SPAC, unless accelerated upon the occurrence of an event of default. Nadir Ali, our Chief Executive Officer and director, is also a member in CVH through 3AM, LLC, which may, in certain circumstances, be entitled to manage the affairs of CVH. 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. 51 Table of Contents There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Goodwill, Acquired Intangible Assets and Other Long-Lived Assets - Impairment Assessments We have recorded goodwill and other indefinite-lived assets in connection with our historical acquisitions. 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. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. We have determined that we will operate and report in three reporting units: Indoor Intelligence, Saves, and Shoom. We have selected December 31 as the date to perform our annual goodwill impairment test. Goodwill is the only intangible asset with an indefinite useful life. Circumstances that could indicate impairment and require us to perform a quantitative impairment test include a significant decline in our financial results, a significant decline in our enterprise value relative to our net book value, a sustained decline in our stock price, or an unanticipated change in competition or our market share and a significant change in our strategic plans. As of December 31, 2021, we concluded that our fair value did not exceed our carrying value in our Indoor Intelligence reporting unit and an impairment charge of $14.8 million was recorded. At December 31, 2021, the fair value of the Saves reporting unit exceeded its carrying value by greater than 100%. There is no goodwill assigned to the Shoom reporting unit. Since December 31, 2021, the price of our common stock has declined significantly and may continue to fluctuate in future periods. A sustained decrease in the price of our common stock is one of the qualitative factors to be considered as part of an impairment test when evaluating whether events or changes in circumstances may indicate that it is more likely than not that a potential goodwill impairment exists. Primarily because of the sustained decrease in stock price, we determined there to be trigger indicators of impairment. At June 30, 2022, the Company completed a quantitative test and concluded to record an impairment charge for $7.6 million in goodwill which resulted in remaining goodwill being fully impaired. R ESULTS OF O PERATIONS Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021 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 June 30, 2022 2021 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 4,725 100 % $ 3,453 100 % $ 1,272 37 % Cost of revenues $ 1,396 30 % $ 896 26 % $ 500 56 % Gross profit $ 3,329 70 % $ 2,557 74 % $ 772 30 % Operating expenses $ 23,219 491 % $ 15,850 459 % $ 7,369 46 % Loss from operations $ (19,890) (421) % $ (13,293) (385) % $ (6,597) (50) % Other income (expense) $ (456) (10) % $ 29,994 869 % $ (30,450) (102) % Provision for income taxes $ 16 — % $ (2,195) (64) % $ 2,211 101 % Net (loss) income $ (20,330) (430) % $ 14,506 420 % $ (34,836) (240) % Net income (loss) attributable to stockholders of Inpixon $ (19,872) (421) % $ 14,759 427 % $ (34,631) (235) % * 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 52 Table of Contents Revenues for the three months ended June 30, 2022 were $4.7 million compared to $3.5 million for the comparable period in the prior year for an increase of approximately $1.3 million, or approximately 37%. This increase is primarily attributable to the increase in Indoor Intelligence sales, including our smart office app and real time location based technologies. Cost of Revenues Cost of revenues for the three months ended June 30, 2022 were $1.4 million compared to $0.9 million for the comparable period in the prior year. This increase in cost of revenues of approximately $0.5 million, or approximately 56%, was primarily attributable to the increased sales during the quarter. Gross Profit The gross profit margin for the three months ended June 30, 2022 was 70% compared to 74% for the three months ended June 30, 2021. This decrease in margin is primarily due to the sales mix during the quarter. Operating Expenses Operating expenses for the three months ended June 30, 2022 were $23.2 million and $15.9 million for the comparable period ended June 30, 2021. This increase of approximately $7.4 million is primarily attributable to the $7.6 million of goodwill impairment, increased operating expenses from the CXApp, Game your Game and IntraNav acquisitions as they were acquired during or after the quarter ended June 30, 2021, offset by lower stock based compensation and no earn-out compensation expense in the quarter ended June 30, 2022. Loss From Operations Loss from operations for the three months ended June 30, 2022 was $19.9 million as compared to $13.3 million for the comparable period in the prior year. This increase in loss of approximately $6.6 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 June 30, 2022 was a loss of $0.5 million compared to income of $30.0 million for the comparable period in the prior year. This increase in loss of approximately $30.5 million is primarily attributable to the discounted net gain of approximately $20.9 million on the Sysorex note, a $7.5 million release on the valuation allowance on the Sysorex note and approximately $1.6 million of interest received on the Sysorex note were included in other income for the quarter ended June 30, 2021. Provision for Income Taxes There was a net income tax benefit of approximately $0.02 million for the three months ended June 30, 2022 and an income tax expense of $2.2 million for the three months ended June 30, 2021. Net Income (Loss) Attributable To Non-Controlling Interest Net income (loss) attributable to non-controlling interest for the three months ended June 30, 2022 and 2021 was a loss of $458,000 and $253,000, respectively. This increase in loss of $205,000 was primarily attributable to the increased 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 June 30, 2022 was $19.9 million compared to a income of $14.8 million for the comparable period in the prior year. This increase in loss of approximately $34.6 million was primarily attributable to the other income items in the three months ended June 30, 2021 period including the discounted net gain on the Sysorex note and the release of the valuation allowance on the Sysorex note, offset by increased operating expenses as described above in the three months ended June 30, 2022. Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021 53 Table of Contents 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 Six Months Ended June 30, 2022 2021 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 9,956 100 % $ 6,407 100 % $ 3,549 55 % Cost of revenues $ 2,782 28 % $ 1,780 28 % $ 1,002 56 % Gross profit $ 7,174 72 % $ 4,627 72 % $ 2,547 55 % Operating expenses $ 37,128 373 % $ 30,340 474 % $ 6,788 22 % Loss from operations $ (29,954) (301) % $ (25,713) (401) % $ (4,241) (16) % Other income (expense) $ (1,849) (19) % $ 29,884 466 % $ (31,733) (106) % Provision for income taxes $ (84) (1) % $ (2,204) (34) % $ 2,120 96 % Net (loss) income $ (31,887) (320) % $ 1,967 31 % $ (33,854) (1,721) % Net (loss) income attributable to stockholders of Inpixon $ (31,083) (312) % $ 2,202 34 % $ (33,285) (1,512) % * 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, 2022 were $10.0 million compared to $6.4 million for the comparable period in the prior year for an increase of approximately $3.5 million, or approximately 55%. This increase is primarily attributable to the increase in Indoor Intelligence sales including the addition of the CXApp product line during the second quarter of 2021 and the addition of the IIoT product line in the fourth quarter of 2021. Cost of Revenues Cost of revenues for the six months ended June 30, 2022 were $2.8 million compared to $1.8 million for the comparable period in the prior year. This increase in cost of revenues of approximately $1.0 million, or approximately 56%, was primarily attributable to the increased sales during the quarter. Gross Profit The gross profit margin for the six months ended June 30, 2022 was 72% compared to 72% for the six months ended June 30, 2021. Operating Expenses Operating expenses for the six months ended June 30, 2022 were $37.1 million and $30.3 million for the comparable period ended June 30, 2021. This increase of $6.8 million is primarily attributable to the $7.6 million of goodwill impairment, increased operating expenses from the CXApp, Game your Game and IntraNav acquisitions as they were acquired during or after the quarter ended June 30, 2021, offset by lower stock based compensation and decreased earn-out compensation expense in the six months ended June 30, 2022. Loss From Operations Loss from operations for the six months ended June 30, 2022 was $30.0 million as compared to $25.7 million for the comparable period in the prior year. This increase in loss of approximately $4.2 million was primarily to increased operating expenses described above offset by higher gross profit. Other Income (Expense) Other income/expense for the six months ended June 30, 2022 was a loss of $1.8 million compared to a gain of $29.9 million for the comparable period in the prior year. This increase in other loss of approximately $31.7 million is primarily 54 Table of Contents attributable to the discounted net gain of approximately $20.9 million on the Sysorex note, a $7.5 million release on the valuation allowance on the Sysorex note and approximately $1.6 million of interest received on the Sysorex note were included in other income for the quarter ended June 30, 2021. Provision for Income Taxes There is an income tax expense of approximately $0.1 million and $2.2 million for the six months ended June 30, 2022 and 2021, respectively. Net Income (Loss) Attributable To Non-Controlling Interest Net income (loss) attributable to non-controlling interest for the six months ended June 30, 2022 and 2021 was a loss of $804,000 and $235,000, respectively. This increase in loss of $569,000 was attributable to the increased loss of the Game Your Game entity. Net Loss Attributable To Stockholders of Inpixon Net loss attributable to stockholders of Inpixon six months ended June 30, 2022 was a loss of $31.1 million compared to a income of $2.2 million for the comparable period in the prior year. This increase in loss of approximately $33.3 million was primarily attributable to the other income items in the three months ended June 30, 2021 period including the discounted net gain on the Sysorex note and the release of the valuation allowance on the Sysorex note, offset by increased operating expenses as described above in the six months ended June 30, 2022. 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, 2022 was a loss of $9.9 million compared to a loss of $6.3 million million for the prior year period. Adjusted EBITDA for the six months ended June 30, 2022 was a loss of $18.7 million compared to a loss of $11.8 million for the prior year period. 55 Table of Contents 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, 2022 and 2021 (in thousands): For the Three Months Ended June 30, For the Six Months Ended June 30, 2022 2021 2022 2021 Net (loss) income attributable to common stockholders $ (24,857) $ 14,759 $ (42,219) $ 2,202 Adjustments: Non-recurring one-time charges: Loss on exchange of debt for equity — — — 30 Provision for valuation allowance on held for sale loan — (7,462) — (7,345) Gain on related party loan held for sale — (49,817) — (49,817) Unrealized loss on equity securities (247) 28,965 1,256 28,965 Acquisition transaction/financing costs 147 535 268 1,005 Earnout compensation expense/(benefit) — 2,059 (2,827) 2,059 Accretion of series 7 preferred stock — — 4,555 — Accretion of series 8 preferred stock 6,237 — 6,785 — Deemed dividend for the modification related to series 8 preferred stock — — 2,627 — Deemed contribution for the modification related to warrants issued in connection with series 8 preferred stock — — (1,469) — Amortization premium- modification related to series 8 preferred stock (1,252) — (1,362) — Professional service fees — 422 8 771 Impairment of goodwill 7,570 — 7,570 — Unrealized losses/(gains) on notes, loans, investments 35 (128) 124 (491) Stock-based compensation - compensation and related benefits 741 2,053 2,274 7,149 Severance Costs 10 — 121 — Interest (income)/expense, net (176) (1,555) (178) (1,206) Income tax (benefit)/provision (16) 2,195 84 2,204 Depreciation and amortization 1,870 1,695 3,676 2,638 Adjusted EBITDA $ (9,938) $ (6,279) $ (18,707) $ (11,836) • We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following: • 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 56 Table of Contents 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 three months ended June 30, 2022 was a loss of $0.16 compared to income of $0.13 for the prior year period. The increase in loss per share in 2022 was attributable to the changes discussed in our results of operations. Basic and diluted net income (loss) per share for the six months ended June 30, 2022 was a loss of $0.29 compared to income of $0.02 for the prior year period. The increase in loss per share in 2022 was attributable to the changes discussed in our results of operations. Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one time charges including gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering. Proforma non-GAAP net loss per basic and diluted common share for the three months ended June 30, 2022 was a loss of $0.07 per share compared to a loss of $0.07 per share for the prior year period. Proforma non-GAAP net loss per basic and diluted common share for the six months ended June 30, 2022 was a loss of $0.13 per share compared to a loss of $0.14 per share for the prior year period. 57 Table of Contents 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): For the Three Months Ended June 30, For the Six Months Ended June 30, (thousands, except per share data) 2022 2021 2022 2021 Net (loss) income attributable to common stockholders $ (24,857) $ 14,759 $ (42,219) $ 2,202 Adjustments: Non-recurring one-time charges: Loss on the exchange of debt for equity — — — 30 Provision for valuation allowance on held for sale loan — (7,462) — (7,345) Gain on related party loan held for sale — (49,817) — (49,817) Unrealized loss on equity securities (247) 28,965 1,256 28,965 Acquisition transaction/financing costs 147 535 268 1,005 Earnout compensation expense/(benefit) — 2,059 (2,827) 2,059 Accretion of series 7 preferred stock — — 4,555 — Accretion of series 8 preferred stock 6,237 — 6,785 — Deemed dividend for the modification related to series 8 preferred stock — — 2,627 — Deemed contribution for the modification related to warrants issued in connection with series 8 preferred stock — — (1,469) — Amortization premium- modification related to series 8 preferred stock (1,252) — (1,362) — Professional service fees — 422 8 771 Impairment of goodwill 7,570 — 7,570 — Unrealized losses/(gains) on notes, loans, investments 35 (128) 124 (491) Stock-based compensation - compensation and related benefits 741 2,053 2,274 7,149 Severance Costs 10 — 121 — Amortization of intangibles 1,537 1,361 3,026 2,011 Proforma non-GAAP net loss (10,079) (7,253) (19,263) (13,461) Proforma non-GAAP net loss per common share - Basic and Diluted $ (0.07) $ (0.07) $ (0.13) $ (0.14) Weighted average basic and diluted common shares outstanding 153,519,283 110,040,532 146,052,371 94,577,520 • We rely on proforma non-GAAP net income (loss) per share, which is a non-GAAP financial measure: • To compare our current operating results with corresponding periods and with the operating results of other companies in our industry; • As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and • To evaluate internally the performance of our personnel. We have presented proforma non-GAAP net 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: 58 Table of Contents • 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 June 30, 2022 Our current capital resources and operating results as of and through June 30, 2022, consist of: 1) an overall working capital surplus of approximately $65.2 million; 2) cash of approximately $65.8 million; 3) net cash used by operating activities for the six months ended June 30, 2022 of $19.5 million. The breakdown of our overall working capital surplus as of June 30, 2022 is as follows (in thousands): Working Capital Assets Liabilities Net Cash and cash equivalents $ 65,755 $ — $ 65,755 Accounts receivable, net / accounts payable 2,767 900 1,867 Inventory 1,581 — 1,581 Accrued liabilities — 4,116 (4,116) Operating lease obligation — 600 (600) Deferred revenue — 3,638 (3,638) Notes and other receivables / Short-term debt 6,278 1,911 4,367 Other 3,463 3,486 (23) Total $ 79,844 $ 14,651 $ 65,193 In addition, subsequent to the quarter ended June 30, 2022, we entered into a note purchase agreement pursuant to which we issued a promissory note in an aggregate initial principal amount of $6.5 million in exchange for gross proceeds of $5.0 million. On July 22, 2022, we also entered into an Equity Distribution Agreement pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $25 million. We are not obligated to make any sales under the Equity Distribution Agreement and no assurance can be given we will sell any shares or if we do, as to the price or amount of shares that we will sell, or the date on which any such sales will take place. Contractual Obligations and Commitments Contractual obligations are cash that we are obligated to pay as part of certain contracts that we have entered during our course of business. Our contractual obligations consists of operating lease liabilities and acquisition liabilities that are included in our consolidated balance sheet and vendor commitments associated with agreements that are legally binding. As of June 30, 2022, the total obligation for operating leases is approximately $1.8 million, of which approximately $0.7 million is expected to be paid in the next twelve months. Our vendor commitments are approximately $0.5 million all of which is expected in the next twelve months. As of June 30, 2022, our obligation for acquisition liabilities is approximately $3.5 million of which approximately $3.5 million is expected to be paid in the next twelve months. In addition, any time during the Series 8 Redemption Period, each holder of our Series 8 Shares is entitled to require us to redeem all or part of the Series 8 Shares then held by such holder in cash for a redemption price per share equal to the Series 8 Redemption Amount. Any holder that elects to redeem its shares of Series 8 Preferred Stock will be required to forfeit 50% of the corresponding warrants held by such holder. The aggregate Redemption Amount that we may be required to pay is equal to $53.2 million (which may be increased to $58.5 59 Table of Contents million in the event of certain events of default) plus any accrued but unpaid dividends, liquidated damages and other costs, expenses, or amounts due in respect of the shares, to the extent applicable. As of June 30, 2022, we owed approximately $1.9 million in principal under promissory notes with third parties. This balance excludes intercompany amounts that are eliminated in the financial statements. These notes are payable within the next twelve months and the interest rate charged under the notes range from 8% to 10%. See Note 13 of the Notes to Consolidated Financial Statements included elsewhere in this quarterly Report. Subsequent to the quarter ended June 30, 2022, we issued additional promissory notes in a principal amount of $6.5 million which is payable within the next twelve months for aggregate gross proceeds of $5 million. Net cash used in operating activities during the six months ended June 30, 2022 of $19.5 million consists of a net loss of $31.9 million offset by non-cash adjustments of approximately $12.7 million less net cash changes in operating assets and liabilities of approximately $0.4 million. Although the Company has sustained significant losses during six months ended June 30, 2022, we raised net proceeds of approximately $46.9 million after placement agent commissions and other offering costs from the sale of our Series 8 Preferred Stock and securities in connection with a registered direct offering and in July 2022 raised $5 million in connection with the debt offering described above. The Company has also filed an At-The-Market financing facility that it can access should the Company deem necessary. Given our current cash balances, financing facilities and budgeted cash flow requirements, the Company believes such funds are sufficient to satisfy its working capital needs, capital asset purchases, debt repayments and other liquidity requirements associated with its existing 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. While the impact of the COVID-19 pandemic is generally subsiding, the lasting impact on our business and results of operations continues to remain uncertain. While we were able to continue operations remotely throughout the pandemic, 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. In addition, to the extent that certain customers continue to be challenged by the lasting effects of the pandemic, we have and may continue to see an impact in the demand of certain products and delays in certain projects and customer orders. 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 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 as a result of new rules and regulations resulting from the pandemic, customer facilities being 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. Certain global events, such as the continued impact of the pandemic, the recent military conflict between Russia and Ukraine, and other general economic factors that are beyond our control may impact our results of operations. These factors can include interest rates; recession; inflation; unemployment trends; the threat or possibility of war, terrorism or other global or national unrest; political or financial instability; and other matters that influence our customers spending. Increasing volatility in financial markets and changes in the economic climate could adversely affect our results of operation. We also expect that supply chain interruptions and constraints, and increased costs on parts, materials and labor may continue to be a challenge for our business. While we have been able to realize growth in the three and six months ended June 30, 2022 as compared to the same periods in 2021, the impact that these global events will have on general economic conditions is continuously evolving and the ultimate impact that they will have on our results of operations continues to remain uncertain. 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 transaction. Liquidity and Capital Resources as of June 30, 2022 Compared With June 30, 2021 The Company’s net cash flows used in operating, investing and financing activities for the six months ended June 30, 2022 and 2021 and certain balances as of the end of those periods are as follows (in thousands): 60 Table of Contents For the Six Months Ended June 30, 2022 2021 Net cash used in operating activities $ (19,544) $ (14,163) Net cash provided by (used in) investing activities 37,055 (53,847) Net cash (used in) provided by financing activities (4,163) 74,945 Effect of foreign exchange rate changes on cash (73) (19) Net increase in cash and cash equivalents $ 13,275 $ 6,916 As of June 30, 2022 As of December 31, 2021 Cash and cash equivalents $ 65,755 $ 52,480 Working capital surplus $ 65,193 $ 78,831 Operating Activities for the six months ended June 30, 2022 Net cash used in operating activities during the six months ended June 30, 2022 was approximately $19.5 million. The cash flows related to the six months ended June 30, 2022 consisted of the following (in thousands): Net income (loss) $ (31,887) Non-cash income and expenses 12,734 Net change in operating assets and liabilities (391) Net cash used in operating activities $ (19,544) The non-cash income and expense of approximately $12.7 million consisted primarily of the following (in thousands): $ 3,676 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, CXApp and IntraNav, 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, April 30, 2021, December 9, 2021 respectively. 353 Amortization of right of use asset 2,274 Stock-based compensation expense attributable, warrants, restricted stock grants and options issued as part of Company operations (2,827) Earnout expense valuation benefit (92) Amortization of issued discount 344 Unrealized gain/loss on note (1) Deferred income tax 1,256 Unrealized loss on equity securities 7,570 Impairment of goodwill 181 Other $ 12,734 Total non-cash expenses The net cash used in the change in operating assets and liabilities aggregated approximately $0.4 million and consisted primarily of the following (in thousands): 61 Table of Contents $ 361 Decrease in accounts receivable and other receivables 1,667 Decrease in inventory, other current assets and other assets (1,498) Decrease in accounts payable 502 Increase in accrued liabilities, income tax liabilities and other liabilities (327) Decrease in operating lease liabilities (1,096) Decrease in deferred revenue $ (391) Net cash used in the changes in operating assets and liabilities Operating Activities for the six months ended June 30, 2021 Net cash used in operating activities during the six months ended June 30, 2021 was approximately $14.2 million. The cash flows related to the six months ended June 30, 2021 consisted of the following (in thousands): Net income (loss) $ 1,967 Non-cash income and expenses (24,359) Net change in operating assets and liabilities 8,229 Net cash used in operating activities $ (14,163) The non-cash income and expense of approximately $24.4 million consisted primarily of the following (in thousands): $ 2,632 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. 370 Amortization of right of use asset 7,149 Stock-based compensation expense attributable to warrants 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 (49,817) Gain on settlement of related party note and receivable (4,507) Income tax expense 28,965 Unrealized loss on equity securities (433) Other $ (24,359) Total non-cash expenses The net use of cash in the change in operating assets and liabilities aggregated approximately $8.2 million and consisted primarily of the following (in thousands): $ 532 Decrease in accounts receivable and other receivables (671) Increase in inventory,other current assets and other assets (331) Decrease in accounts payable 2,590 Increase in accrued liabilities and other liabilities 6,711 Increase in income tax liabilities (364) Decrease in operating lease liabilities (238) Decrease in deferred revenue $ 8,229 Net use of cash used in the changes in operating assets and liabilities Cash Flows from Investing Activities as of June 30, 2022 and 2021 62 Table of Contents Net cash flows provided by investing activities during the six months ended June 30, 2022 was approximately $37.1 million compared to net cash flows used in investing activities during the six months ended June 30, 2021 of approximately $53.8 million. Cash flows related to investing activities during the six months ended June 30, 2022 include $0.1 million for the purchase of property and equipment, $0.3 million for investment in capitalized software, $5.5 million for the purchase of a convertible note, and $43.0 million of sales of treasury bills. Cash flows related to investing activities during the six months ended June 30, 2021 include $0.1 million for the purchase of property and equipment, $0.4 million investment in capitalized software, $63.4 million for the purchase of treasury bills, $28.0 million from sales of treasury bills, $15.2 million for the acquisition of CXApp, $0.9 million for the purchase of the Systat licensing agreement, $0.2 million for the purchase of Game Your Game, and $0.1 million for acquisition of Visualix. Cash Flows from Financing Activities as of June 30, 2022 and 2021 Net cash flows used in financing activities during the six months ended June 30, 2022 was $4.2 million. Net cash flows provided by financing activities during the six months ended June 30, 2021 was $74.9 million. During the six months ended June 30, 2022, the Company received incoming cash flows of $46.9 million for the issuance of preferred stock and warrants, paid $49.3 million for the redemption of preferred series 7 stock, paid $1.8 million of the CXApp acquisition liability, received $0.4 million net proceeds from promissory note, and paid $0.3 million for the settlement of employee taxes on restricted stock. During the six months ended June 30, 2021, the Company received incoming cash flows of $77.9 million from the issuance of common stock and warrants, loaned $0.1 million to a related party, paid $1.7 million of taxes related to the net share settlement of restricted stock units, paid a $0.1 million liability related to the CXApp acquisition, paid a $0.5 million acquisition liability to the pre-acquisition shareholders of Nanotron, and paid a $0.5 million acquisition liability to the pre-acquisition shareholders of Locality. 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.