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, 2022, as filed with the SEC and the recasted audited consolidated financial statements within Exhibit 99.1 on Form 8-k filed with the SEC to reflect the presentation of CXApp operations as discontinued operations to the consolidated financial statements for the years ended December 31, 2022 and 2021. 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 enable smarter, safer and more secure environments. Inpixon customers can leverage our real-time positioning and analytics technologies to achieve higher levels of productivity and performance, increase safety and security, and drive a more connected environment. We specialize in providing real-time location systems (RTLS) for the industrial sector. As the manufacturing industry has evolved, RTLS technology has become a crucial aspect of Industry 4.0. Our RTLS solution leverages cutting-edge technologies such as IoT, AI, and big data analytics to provide real-time tracking and monitoring of assets, machines, and people within industrial environments. With our RTLS, businesses can achieve improved operational efficiency, enhanced safety and reduced costs. By having real-time visibility into operations, industrial organizations can make informed, data-driven decisions, minimize downtime, and ensure compliance with industry regulations. With our RTLS, industrial businesses can transform their operations and stay ahead of the curve in the digital age. Inpixon's full-stack industrial IoT solution provides end-to-end visibility and control over a wide range of assets and devices. It's designed to help organizations optimize their operations and gain a competitive edge in today's data-driven world. The turn-key platform integrates a range of technologies, including RTLS, sensor networks, edge computing, and big data analytics, to provide a comprehensive view of an organization's operations. We help organizations to track the location and status of assets in real-time, identify inefficiencies, and make decisions that drive business growth. Our IoT stack covers all the technology layers, from the edge devices to the cloud. It includes hardware components such as sensors and gateways, a robust software platforms for data management and analysis, and a user-friendly dashboard for real-time monitoring and control. Our solutions also offer robust security features, to help ensure the protection of sensitive data. Additionally, Inpixon's RTLS provides scalability and flexibility, allowing organizations to easily integrate it with their existing systems and add new capabilities as their needs evolve. 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 through our advertising management platform 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 from continuing operations of approximately $30.5 million and approximately $27.1 million for the nine months ended September 30, 2023 and 2022, 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 46 Table of Contents Certain global events, such as the recent military conflict between Russia and Ukraine and Israel and Hamas, and other general economic factors that are beyond our control may impact our results of operations. These factors can include interest rates; recession; inflation; 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 operations. 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. The impact that these global events will have on general economic conditions is continuously evolving and the impact that they will have on our results of operations continues to remain uncertain. There are no assurances that we will not be materially adversely effected. Corporate Strategy Update In order to continue to respond to rapid changes and required technological advancements, as well as increase our shareholder value, we are exploring strategic transactions and opportunities that we believe will enhance shareholder value. Our board of directors has 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. We will also be opportunistic and may consider other strategic and/or attractive transactions, 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 September of 2022, we entered into an Agreement and Plan of Merger in connection with the spin-off and sale of our enterprise apps business which was consummated on March 14, 2023. Additionally, on July 24, 2023, the Company entered into an Agreement and Plan of Merger with XTI Aircraft Company (the "XTI Merger Agreement"). (See " Recent Events - XTI Transaction " below for more details). In addition, on or around the effective time of the merger with XTI we intend to effect a transaction for the divestiture of our Shoom, SAVES and Game Your Game lines of business and investment securities, as applicable, by any lawful means, which may include a sale to one or more third parties, spin off, plan of arrangement, merger, reorganization, or any combination of these. On October 23, 2023, we entered into a Separation and Distribution Agreement (the “Separation Agreement”) with Grafiti Holding Inc., a British Columbia corporation and newly formed wholly-owned subsidiary of Inpixon (“Grafiti”), in connection with the spin-off of Inpixon Limited which operates our SAVES business in the United Kingdom. (See " Recent Events - Spin-off - Grafiti Holding, Inc. " below for more details). We also entered into a Business Combination Agreement (the “Business Combination Agreement”), by and among Inpixon, Damon Motors Inc., a British Columbia corporation (“Damon”), Grafiti, and 1444842 B.C. Ltd., a British Columbia corporation and a newly formed wholly-owned subsidiary of Grafiti (“Amalco Sub”), pursuant to which it is proposed that Amalco Sub and Damon amalgamate under the laws of British Columbia, Canada with the amalgamated company (the “Damon Surviving Corporation”) continuing as a wholly-owned subsidiary of Grafiti (the “Damon Business Combination”). (See " Recent Events - Damon Business Combination " below for more details). Recent Events At-The-Market (ATM) Program On July 22, 2022, we entered into an Equity Distribution Agreement (the “Sales Agreement”) with Maxim Group LLC ("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 as our sales agent (the “ATM Offering”). Maxim is entitled to compensation at a fixed commission rate of 3.0% of the gross sales price per Share sold excluding Maxim's costs and out-of-pocket expenses incurred in connection with its services, including the fees and out-of-pocket expenses of its legal counsel. On June 13, 2023, the Company entered into an amendment to the Sales Agreement with Maxim, pursuant to which the aggregate offering price of the ATM Offering was increased from $25.0 million to approximately $27.4 million. During the nine months ended September 30, 2023, the Company sold 70,375,554 shares of common stock at share prices between $0.139609 and $1.86 per share under the Sales Agreement for gross proceeds of approximately $27.4 million or net proceeds of $26.5 million after deducting the placement agency fees and other offering expenses. The Company is currently subject to the SEC’s “baby shelf rules,” as of April 17, 2023, which prohibits companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period. These rules may limit future issuances of shares by the Company under the Sales Agreement or other offerings pursuant to the Company’s effective shelf registration statement on Form S-3. Note Exchanges and Amendments On May 16, 2023, the Company entered into an amendment (the “July 2022 Note Amendment”) to the July 2022 Note pursuant to which the maturity date was extended from July 22, 2023 to May 17, 2024 (the “July 2022 Note Maturity Date 47 Table of Contents Extension”). In exchange for the July 2022 Note Maturity Date Extension, the Company agreed to pay Streeterville an extension fee in the amount of $0.1 million, which was added to the outstanding balance of the July 2022 Note. On May 16, 2023, the Company entered into an amendment (the “December 2022 Note Amendment”) to the December 2022 Note pursuant to which the maturity date of the December 2022 Note was extended from December 30, 2023 to May 17, 2024 (the “December 2022 Note Maturity Date Extension”). In exchange for the December 2022 Note Maturity Date Extension, the Company agreed to pay the Holder an extension fee in the amount of $0.1 million which was added to the outstanding balance of the December 2022 Note. During the three months ended September 30, 2023, the Company entered into exchange agreements with Streeterville, pursuant to which the Company and Streeterville agreed to: (i) partition new promissory notes in the form of the July 2022 Note equal to approximately $3.2 million and then cause the outstanding balance of the July 2022 Note to be reduced by approximately $3.2 million; and (ii) exchange the partitioned notes for the delivery of 18,144,158 shares of the Company’s common stock, at effective prices between $0.1277 and $0.2272 per share. From October 1, 2023 through the date of this filing, the Company exchanged approximately $1.6 million of the outstanding principal and interest under the July 2022 10% Note Purchase Agreement and Promissory Note for 15,996,373 shares of the Company's common stock at prices from $0.0984 to $0.1044 per share, calculated in accordance with Nasdaq's “minimum price” as defined by Nasdaq Listing Rule 5635(d). Compliance with Nasdaq Continued Listing Requirements On April 14, 2023, the Company received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days beginning on March 2, 2023, and ending on April 13, 2023, the Company no longer meets the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided a period of 180 calendar days, or until October 11, 2023, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. The Company was not able to regain compliance within this 180-day period; however, on October 12, 2023,the Company received notice from Nasdaq that it was granted an additional 180 calendar days, or until April 8, 2024 to regain compliance with the minimum bid price requirement. On November 9, 2023, the Company received notice (the “November 9 Letter”) from Nasdaq that Nasdaq had determined that as of November 8, 2023, the Company’s securities had a closing bid price of $0.10 or less for ten consecutive trading days triggering application of Listing Rule 5810(c)(3)(A)(iii) which states in part: if during any compliance period specified in Rule 5810(c)(3)(A), a company’s security has a closing bid price of $0.10 or less for ten consecutive trading days, the Listing Qualifications Department shall issue a Staff Delisting Determination under Rule 5810 with respect to that security (the “Low Priced Stocks Rule”). As a result, the Staff has issued a letter notifying the Company of its determination to delist the Company’s securities from Nasdaq effective as of the opening of business on November 20, 2023, unless the Company requests an appeal of the Staff’s determination on or prior to November 16, 2023, pursuant to the procedures set forth in the Nasdaq Listing Rule 5800 Series. The Company requested a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the determination described in the November 9 Letter and to address compliance with the Low-Priced Stocks Rule and a hearing was scheduled for February 22, 2024. The Company may cure the bid price deficiency to regain compliance with the Low Priced Stock Rule by effecting a reverse stock split to increase the price per share of its common stock. A reverse stock split also would be expected to allow the Company to regain compliance with the minimum bid price requirement. At a special meeting of stockholders held on September 29, 2023, the Company obtained the necessary stockholder approval of an amendment to the Company’s articles of incorporation to effect a reverse stock split of the Company’s outstanding common stock, at a ratio between 1-for-2 and 1-for-50 (the “Reverse Split Ratio”), to be determined at the discretion of the Company’s board of directors. The Company also intends to seek an increase in the Reverse Split Ratio for the purpose of satisfying the bid price requirements applicable for initial listing applications in connection with the closing of the XTI transaction. The proposed transaction between the Company and XTI is anticipated to close prior to the end of this year and as a result, the Company expects that it will be able to cure the bid price deficiencies in connection with the closing of the XTI transaction. The November 9 Letter has no immediate effect on the listing of the Company’s common stock and its common stock will continue to be listed on the Nasdaq Capital Market under the symbol “INPX”. While the appeal process is pending, the suspension of trading of the Company’s common stock would be stayed and the Company’s common stock would continue to trade on The Nasdaq Capital Market until the hearing process concludes and the Panel issues a written decision. 48 Table of Contents Amendments to By-Laws On September 18, 2023, the Company’s Board of Directors(the “Board”) approved two amendments to the Company’s amended and restated by-laws, as amended (the “By-Laws”), effective as of the date of the Board’s approval (“By-Laws Amendment No. 3” and “By-Laws Amendment No. 4,” respectively), pursuant to NRS 78.120(2) of Chapter 78 of the Nevada Revised Statutes (the “NRS”). By-Laws Amendment No. 3 gives the Board the full power and authority to amend the By-Laws as permitted by the NRS. By-Laws Amendment No. 4 (i) revises certain By-Laws relating to the removal of directors and the filling of vacancies on the Board to be consistent with NRS 78.335 and (ii) reduces the quorum requirement for all meetings of stockholders (unless otherwise provided by the NRS, the Company’s articles of incorporation or the By-Laws) from the presence, in person or by proxy, of a majority of the outstanding shares of stock entitled to vote to the presence, in person or by proxy, of one-third of the outstanding shares of stock entitled to vote, as permitted pursuant to NRS 78.320(1) and Nasdaq Listing Rule 5620(c). May 2023 Warrant Purchase Agreement On May 15, 2023, the Company entered into a Warrant Purchase Agreement (the “Agreement”) with multiple purchasers for the purchase and sale of up to an aggregate of 150,000,000 of warrants (the “May 2023 Warrants”). The Agreement and the May 2023 Warrants were subsequently amended on June 20, 2023. The purchase price for one (1) May 2023 Warrant is $0.01 (the “Per Warrant Purchase Price”). The May 2023 Warrants have an initial exercise price $0.26, payable in cash or the cancellation of indebtedness ( the “Initial Exercise Price”). The exercise price will equal the lower of (i) the Initial Exercise Price and (ii) 90% of the lowest VWAP (as defined in the Agreement) of the Common Stock for the five Trading Days (as defined in the Agreement) immediately prior to the date on which a Notice of Exercise is submitted to the Company (the “Adjusted Exercise Price” and together with the Initial Price, as applicable, the “Exercise Price”); provided, however, that the Adjusted Exercise Price shall not be less than $0.10; and provided further that any exercise of the May 2023 Warrants with an Adjusted Exercise Price will be subject to the Company’s consent unless the trading price of the Common Stock as of the time the Notice of Exercise is delivered to the Company is at least 10% or more above the prior Trading Day’s Nasdaq Official Closing Price. No warrant holder may exercise the May 2023 Warrants to the extent such exercise would cause such warrant holder, together with its affiliates and attribution parties, to beneficially own a number of shares of Common Stock which would exceed 9.99% of the Company’s then outstanding Common Stock following such exercise. Each May 2023 Warrant is immediately exercisable for one share of Common Stock and will expire one year from the issuance date (the “Termination Date”) unless extended by the Company with the consent of the warrant holder. Pursuant to the terms of the May 2023 Warrants, at any time prior to the Termination Date, the Company may, in its sole discretion, redeem any portion of a May 2023 Warrants that have not been exercised, in cash, at the Per Warrant Purchase Price, plus all liquidated damages and other costs, expenses or amounts due in respect of the Warrants (the “ Redemption Amount ”) upon five Trading Days’ written notice to the warrant holder (the “ Redemption Date ”). On the Termination Date, the Company will be required to redeem any portion of the May 2023 Warrants that have not been exercised or redeemed prior to such date through payment of the Redemption Amount in cash. The Company will be required to pay any Redemption Amount within five Trading Days after the Redemption Date or the Termination Date, as applicable. The May 2023 Warrants were issued on May 17, 2023 for aggregate gross proceeds of approximately $1.5 million. The aggregate net proceeds from the offerings, after deducting the placement agent fees and other estimated offering expenses, were approximately $1.4 million. The May 2023 Warrants were determined to be within the scope of ASC 480 as they represent obligations to the Company, as the Company is obligated to redeem any May 2023 Warrants that have not been exercised at the Termination Date. As such, the Company recorded the May 2023 Warrants at fair value on the issuance date. The May 2023 Warrants are subsequently measured as if the May 2023 Warrants were to be settled on the current redemption value with subsequent changes recognized as interest cost. The grant date fair value of the Warrants was determined to be $1.48 million at the date of issuance, and the fair value of the Warrants was determined to be approximately $1.50 million as of September 30, 2023. The fair value of the Warrants are reflected within Warrant Liability on the Condensed Consolidated Balance Sheet, and the change in fair value as interest expense is reported in the Condensed Consolidated Statement of Operations. During July 2023, the Company issued 9,000,000 shares of common stock in connection with the exercise of 9,000,000 warrants with an exercise price of $0.26 per share in connection with the May 2023 warrant offering for which the Company received gross proceeds of approximately $2.3 million. XTI Transaction Merger Agreement 49 Table of Contents On July 24, 2023, the Company entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “XTI Merger Agreement”) by and among Inpixon, Superfly Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Inpixon (“Merger Sub”), and XTI Aircraft Company, a Delaware corporation (“XTI”). The XTI Merger Agreement was unanimously approved by Inpixon’s and XTI’s board of directors. If the XTI Merger Agreement is approved by Inpixon’s and XTI’s stockholders (and the other closing conditions are satisfied or waived in accordance with the Merger Agreement), and the transactions contemplated by the Merger Agreement are consummated, Merger Sub will merge with and into XTI, with XTI surviving the merger as a wholly-owned subsidiary of Inpixon (collectively, the “XTI Proposed Transaction”). In addition, upon the consummation of the XTI Proposed Transaction (the “Closing,” and the date of the Closing, the “Closing Date”), Inpixon will be renamed “XTI Aerospace, Inc.” (the “Name Change”). Inpixon upon the Closing is referred to herein as the “combined company.” Subject to the terms and conditions of the Merger Agreement, at the effective time of the merger (the “Effective Time”): (i) Each share of XTI common stock outstanding immediately prior to the Effective Time (excluding any shares to be canceled pursuant to the Merger Agreement and shares held by holders of XTI common stock who have exercised and perfected appraisal rights) will automatically be converted into the right to receive a number of shares of Inpixon common stock equal to the Exchange Ratio (as described below). Prior to the Effective Time, subject to obtaining the consent of requisite note holders, all outstanding XTI convertible notes will be converted into XTI common stock and will participate in the merger on the same basis as the other shares of XTI common stock, except for (1) a promissory note dated April 1, 2023, in the initial principal amount of $1,817,980, which will be amended to extend the maturity date thereof until no sooner than December 31, 2026 and be assumed by the combined company at the Closing to become convertible into the shares of common stock of the combined company, and (2) a promissory note dated December 31, 2021, in the initial principal amount of $1,007,323, which will provide for, at Closing, payment in cash of $507,323 of the principal plus interest accrued to the date of payment, and the conversion of the remaining $500,000 of outstanding principal into shares of common stock of the combined company (collectively, the “Note Amendments”). (ii) Each option to purchase shares of XTI common stock outstanding and unexercised immediately prior to the Effective Time will be assumed by Inpixon and will become an option, subject to any applicable vesting conditions, to purchase shares of Inpixon common stock with the number of shares of Inpixon common stock underlying the unexercised portions of such options and the exercise prices for such options to be adjusted to reflect the Exchange Ratio. (iii) Each warrant to purchase shares of XTI common stock outstanding and unexercised immediately prior to the Effective Time will be assumed by Inpixon and will become a warrant to purchase shares of Inpixon common stock with the number of shares of Inpixon common stock underlying such warrants and the exercise prices for such warrants will be adjusted to reflect the Exchange Ratio. Subject to adjustment pursuant to the formula for the Exchange Ratio set forth in Exhibit A of the Merger Agreement, the Exchange Ratio will be determined based on (a) the fully diluted capitalization of each of Inpixon and XTI immediately prior to the Effective Time, provided, however, that for this purpose the calculation of Inpixon’s fully diluted capitalization will not take into account any shares of Inpixon common stock issuable after Closing for cash consideration upon conversion, exercise or exchange of derivative securities that are issued by Inpixon in Inpixon Permitted Issuances. “Inpixon Permitted Issuances” are any issuances of common stock or derivative securities by Inpixon for financing or debt cancellation purposes that are permitted under the Merger Agreement and occur after the date of the Merger Agreement but before the Closing. The Exchange Ratio will be subject to certain adjustments to the extent that Inpixon’s Net Cash (as such term is defined on Exhibit A of the Merger Agreement) is greater than or less than $21.5 million and/or any principal and accrued or unpaid interest remains outstanding under those certain promissory notes issued by Inpixon to Streeterville Capital, LLC on July 22, 2022 and December 30, 2022. After application of the Exchange Ratio and subject to those certain adjustments described above, Inpixon stockholders immediately prior to the Effective Time are anticipated to retain approximately 40% of the issued and outstanding capital stock of the combined company and XTI security holders are anticipated to retain approximately 60% of the issued and outstanding capital stock of the combined company. It is expected that Inpixon’s Chief Executive Officer, Nadir Ali, and Chief Financial Officer, Wendy Loundermon, will resign upon the Closing, effective as of the Closing Date. In addition, pursuant to a Financial Advisory and Investment Banking Services Agreement dated May 16, 2023, between Inpixon and Maxim Group LLC (“Maxim”) (the “Maxim Agreement”), as part of compensation for Maxim’s services in connection with the transaction, Inpixon has agreed to pay to Maxim, upon Closing, a cash fee equal to $800,000 (the “Cash 50 Table of Contents Fee”), and to issue to Maxim (or its designees) registered common stock of Inpixon pursuant to the applicable registration statement on Form S-4 for the transaction, if permitted under SEC rules, or unregistered stock if not permitted, equal to the quotient obtained by dividing $1,000,000 by the closing price of Inpixon common stock as reported by Nasdaq on the date immediately preceding the announcement of the transaction, at the closing of the transaction. However, to the extent that Maxim would beneficially own more than 4.99% of the number of shares of Inpixon common stock outstanding immediately after giving effect to such issuance, then Maxim will receive rights to such remaining amount of shares in accordance with a rights to shares agreement, in such form reasonably acceptable to the parties. Based on the closing price of Inpixon common stock as of July 24, 2023, which equals $0.1523 per share, Maxim will be entitled to approximately 6,565,988 shares of Inpixon common stock in connection with the Closing of the XTI Proposed Transaction. These shares will be issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act, if they are not registered. The foregoing description of the Merger Agreement and the XTI Proposed Transaction does not purport to be complete and is qualified in its entirety by the terms and conditions of the Merger Agreement, a copy of which is attached as Exhibit 2.1 to this Form 10-Q and incorporated herein by reference. XTI Promissory Note & Security Agreement Pursuant to the Merger Agreement, on the first calendar day of the month following the date of the Merger Agreement and on the first calendar day of each month thereafter until the earlier of (i) four months following the date of the Merger Agreement and (ii) the Closing Date, Inpixon shall provide loans to XTI on a senior secured basis (each, a “Future Loan”), in such amounts requested by XTI in writing prior to the first calendar day of each such month. Each Future Loan will be in the principal amount of up to $500,000, and the aggregate amount of the Future Loans will be up to $1,775,000 (or such greater amount as Inpixon shall otherwise agree in its sole and absolute discretion). These Future Loans and security will be evidenced by a Senior Secured Promissory Note (the “XTI Promissory Note”) and a Security and Pledge Agreement (the “Security Agreement”). The XTI Promissory Note provides an aggregate principal amount up to $2,313,407, which amount includes the principal sum of $525,000 which Inpixon previously advanced to XTI (the “Existing Loans”, collectively with the Future Loans, the “Inpixon Loans to XTI”) plus accrued interest on such amount, and the aggregate principal amount of the Future Loans. The XTI Promissory Note will bear interest at 10% per annum, compounded annually, and for each Future Loan, beginning on the date the Future Loan is advanced to XTI. The XTI Promissory Note is included in the Company's condensed consolidated balance sheet as of September 30, 2023 in Notes Receivable. On November 14, 2023, the principal amount under the XTI Promissory Note was increased to approximately $3.1 million. As of the date of this filing, the principal balance on the loan to XTI is approximately $2.7 million. The outstanding principal amount under the XTI Promissory Note, together with all accrued and unpaid interest, shall be due and payable upon the earlier of (a) December 31, 2023, (b) when declared due and payable by Inpixon upon the occurrence of an event of default, or (c) within three business days following termination of the XTI Merger Agreement (i) by XTI because the XTI Board adopts a superior proposal prior to delivering the XTI Stockholder Consent, or (ii) by Inpixon because the XTI Board has made a change in recommendation, or XTI has breached or failed to perform in any material respect any of its covenants and agreements regarding obtaining its required stockholder approval or non-solicitation. The XTI Promissory Note will be forgiven and of no further force if the XTI Merger Agreement is terminated by the Inpixon Board because it adopts a superior proposal prior to obtaining the required Inpixon stockholder approval, subject to Inpixon’s rights and remedies under the Promissory Note, the Security Agreement, and the Merger Agreement. If the XTI Merger Agreement is terminated by XTI because the Inpixon Board makes a change in recommendation or Inpixon is in material breach of its covenants and agreements regarding obtaining its required stockholder approval or non-solicitation, the maturity date of the XTI Promissory Note will be extended to December 31, 2024. The Security Agreement grants Inpixon a first priority security interest in and lien upon all of XTI’s property to secure the repayment of the XTI Promissory Note. . Transaction Bonus Plan in connection with Completed Transaction As described in Inpixon’s current report on Form 8-K filed on March 20, 2023, on March 14, 2023, Inpixon completed a reorganization involving the transfer of Inpixon’s CXApp and enterprise app business lines to a subsidiary of Inpixon, followed by a distribution of shares of such subsidiary to Inpixon’s equity holders. The reorganization was followed by a subsequent business combination transaction between such former subsidiary and KINS Technology Group Inc., a special purpose acquisition company which was renamed CXApp, Inc. upon the consummation of the business combination (collectively, the “Completed Transaction”). 51 Table of Contents On July 24, 2023, the compensation committee of the Inpixon Board (the “Committee”) adopted a Transaction Bonus Plan (the “Completed Transaction Bonus Plan”), which is intended to compensate certain current and former employees and service providers for the successful consummation of the Completed Transaction. The Completed Transaction Bonus Plan will be administered by the Committee. It will terminate upon the completion of all payments under the terms of the Completed Transaction Bonus Plan, provided, that the Board may terminate the plan as to any participant prior to the completion of all payment to under participant under the plan. Pursuant to the Completed Transaction Bonus Plan, in connection with the Completed Transaction, ● Participants listed on Schedule 1 of the Completed Transaction Bonus Plan will be eligible for a cash bonus equal to 100% of their aggregate annual base salary in effect as of the end of the year ended December 31, 2022, provided that the participants must execute a customary release of claims and confidentiality agreement. ● Participants listed on Schedule 2 of the Completed Transaction Bonus Plan including Inpixon’s named executive officers Nadir Ali and Wendy Loundermon will be eligible for a cash bonus in an aggregate amount of 4% of the $70,350,000 transaction value of the Completed Transaction, with Mr. Ali and Ms. Loundermon being entitled to 3.5% and 0.5% of such transaction value, respectively. During the three months ended September 30, 2023, the Company paid approximately $3.5 million to the company management and former management under the Transaction Bonus Plan which settled the amount in full and no amounts were owed under the plan as of September 30, 2023. In addition, if a participant becomes entitled to any payments or benefits from the Completed Transaction Bonus Plan or any other amounts (collectively, the “Company Payments Relating to the Completed Transaction Plan”) that are subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Excise Tax”), the company will pay the participant the greater of the following amounts: (i) the Company Payments Relating to the Completed Transaction Plan, or (ii) one dollar less than the amount of the Company Payments Relating to the Completed Transaction Plan that would subject the participant to the Excise Tax, as mutually agreed between the company and the participant. The foregoing description of the Completed Transaction Bonus Plan does not purport to be complete and is qualified in its entirety by the terms and conditions of the Completed Transaction Bonus Plan, a copy of which is attached as Exhibit 10.14 of this Form 10-Q incorporated herein by reference. Transaction Bonus Plan in connection with Future Strategic Transactions On July 24, 2023, the Committee adopted a Transaction Bonus Plan (the “Plan”), which is intended to provide incentives to certain employees and other service providers to remain with Inpixon through the consummation of a Contemplated Transaction or Qualifying Transaction (each as defined below) and to maximize the value of the company with respect to such transaction for the benefit of its stockholders. The Plan will be administered by the Committee. It will automatically terminate upon the earlier of (i) the one-year anniversary of the adoption date, (ii) the completion of all payments under the terms of the Plan, or (iii) at any time by the Committee, provided, however, that the Plan may not be amended or terminated following the consummation of a Contemplated Transaction or Qualifying Transaction without the consent of each participant being affected, except as required by any applicable law. A “Contemplated Transaction” refers to a strategic alternative transaction including an asset sale, merger, reorganization, spin-off or similar transaction (a “Strategic Transaction”) that results in a change of control as defined in the Plan. A Qualifying Transaction refers to a Strategic Transaction that does not result in a change of control for which bonuses may be paid pursuant to the Plan as approved by the Committee. The XTI Proposed Transaction is expected to qualify as a Contemplated Transaction. Pursuant to the Plan, in connection with the closing of a Contemplated Transaction or a Qualifying Transaction, the participants will be eligible to receive bonuses as described below. ● Participants listed on Schedule 1 of the Plan including Inpixon’s named executive officers Nadir Ali, Wendy Loundermon and Soumya Das, will be eligible for a cash bonus equal to 100% of their aggregate annual base salary and target bonus amount at the closing of a Contemplated Transaction and any applicable Qualifying Transaction, provided that the participants must execute a customary release of claims and confidentiality agreement. These bonus amounts will be paid at the closing of each applicable transaction. 52 Table of Contents ● Participants listed on Schedule 2 of the Plan including Inpixon’s named executive officers Nadir Ali and Wendy Loundermon will be eligible for a cash bonus in an aggregate amount of 4% of the applicable Transaction Value (as defined below), with Mr. Ali and Ms. Loundermon being entitled to 3.5% and 0.5% of such Transaction Value, respectively. These bonus amounts will be paid at the closing of each applicable transaction but the pro rata portion attributable to any deferred payments will be paid when those deferred payments become due, within a maximum period of five years from the closing date. “Transaction Value” means the sum of any cash and the fair market value of any securities or other assets or property received by Inpixon or available for distribution to the holders of Inpixon’s equity securities in connection with the applicable transaction as provided for in the definitive agreement governing the applicable transaction, or such value as shall be designated by the Committee. ● Participants listed on Schedule 3 of the Plan including Inpixon’s named executive officers Nadir Ali, Wendy Loundermon and Soumya Das, will be eligible for equity-based grants, such as options or restricted stock, on such terms and upon such date as the Committee may determine. ● In the sole discretion of the Committee, receipt or eligibility for receipt by a participant of a transaction bonus in respect of a Contemplated Transaction shall not preclude such participant from receiving or being eligible to receive an additional transaction bonus in respect of a Qualifying Transaction. If a participant becomes entitled to any payments or benefits from the Plan or any other amounts (the “Company Payments Relating to the Plan”) that are subject to the Excise Tax, the company will pay the participant the greater of the following amounts: (i) the Company Payments Relating to the Plan, or (ii) one dollar less than the amount of the Company Payments Relating to the Plan that would subject the participant to the Excise Tax, as mutually agreed between the company and the participant. The foregoing description of the Plan does not purport to be complete and is qualified in its entirety by the terms and conditions of the Plan, a copy of which is attached as Exhibit 10.15 to this Form 10-Q and is incorporated herein by reference. During the three months ended September 30, 2023, the Company did not pay or accrue any bonuses under the Plan in connection with future strategic transactions. Spin-off - Grafiti Holding, Inc. On October 23, 2023, Inpixon entered into a Separation and Distribution Agreement (the “Separation Agreement”) with Grafiti Holding Inc., a British Columbia corporation and newly formed wholly-owned subsidiary of Inpixon (“Grafiti”), pursuant to which Inpixon plans to transfer to Grafiti all of the outstanding shares of Inpixon Ltd., a United Kingdom (the “UK”) limited company that operates Inpixon’s SAVES line of business in the UK (“Inpixon UK”), such that Inpixon UK will become a wholly-owned subsidiary of Grafiti (the “Reorganization”). Following the Reorganization and subject to conditions in the Separation Agreement, Inpixon will spin off Grafiti (the “Spin-off”) by distributing to Inpixon stockholders and certain securities holders as of a record date to be determined (the “Participating Security holders”) on a pro rata basis all of the outstanding common shares of Grafiti (the “Grafiti Common Shares”) owned by Inpixon (the “Distribution”), subject to certain lock-up restrictions and subject to registration of the Grafiti Common Shares pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or the Securities Act of 1933, as amended (the “Securities Act”), as further described below. Damon Business Combination On October 23, 2023, Inpixon also entered into a Business Combination Agreement (the “Business Combination Agreement”), by and among Inpixon, Damon Motors Inc., a British Columbia corporation (“Damon”), Grafiti, and 1444842 B.C. Ltd., a British Columbia corporation and a newly formed wholly-owned subsidiary of Grafiti (“Amalco Sub”), pursuant to which it is proposed that Amalco Sub and Damon amalgamate under the laws of British Columbia, Canada with the amalgamated company (the “Damon Surviving Corporation”) continuing as a wholly-owned subsidiary of Grafiti (the “Damon Business Combination”). The Damon Business Combination is subject to material conditions, including approval of the Damon Business Combination by securities holders of Damon, approval of the issuance of Grafiti Common Shares to Damon securities holders pursuant to the Damon Business Combination Agreement by a British Columbia court after a hearing upon the fairness of the terms and conditions of the Business Combination Agreement as required by the exemption from registration provided by Section 3(a)(10) under the Securities Act, and approval of the listing of the Grafiti Common Shares on the Nasdaq Stock Market (“Nasdaq”) after giving effect to the Damon Business Combination. Upon the consummation of the Damon Business Combination (the “Closing”), both Inpixon UK and the Damon Surviving Corporation will be wholly-owned subsidiaries of Grafiti, which will adopt a new name as determined by Damon. Grafiti, after the Closing, is referred to herein as the “combined 53 Table of Contents company.” Pursuant to the Business Combination Agreement, the parties will take all necessary action so that at the Closing, the board of directors of the combined company will consist of such directors as Damon may determine, subject to the independent requirements under the Nasdaq rules, and provided that at least one director will be nominated by Grafiti. Holders of Grafiti Common Shares, including Participating Security holders and management that hold Grafiti Common Shares immediately prior to the closing of the Damon Business Combination, are anticipated to retain approximately 18.75% of the outstanding capital stock of the combined company determined on a fully diluted basis, which includes up to 5% in equity incentives which may be issued to Inpixon management. On October 23, 2023, Inpixon purchased a convertible note from Damon in an aggregate principal amount of $3.0 million (the “Bridge Note”) together with the Bridge Note Warrant (as defined below) pursuant to a private placement, for a purchase price of $3.0 million. The Bridge Note has a 12% annual interest rate, payable on the maturity date, which is twelve months from June 16, 2023. The full principal balance and interest on the Bridge Note will automatically convert into common shares of Damon upon the public listing of Damon or a successor issuer thereof on a national securities exchange (a “Public Company Event”). The number of shares issued upon conversion due to a Public Company Event will equal the quotient obtained by dividing (x) the outstanding principal and unpaid accrued interest on the date of a Public Company Event (or within ten trading days of a direct listing), if any, by (y) the lesser of the then applicable Conversion Price or Public Company Event Conversion Price, each as defined in the Bridge Note. The Bridge Note will contain customary covenants relating to Damon’s financials and operations. Inpixon will receive a five-year warrant to purchase 1,096,321 Damon Common Shares in connection with the Bridge Note (“Bridge Note Warrant”) at an exercise price as defined in the Bridge Note Warrant, in each case subject to adjustments for dividends, splits and subsequent equity sales by Damon. The Bridge Note Warrant contains a cashless exercise option if the warrant shares are not covered by an effective registration statement within 180 days following the consummation of the Public Company Event, and also a full ratchet price protection feature. If the Damon Business Combination is consummated, the Bridge Note will be converted into Grafiti Common Shares and the Bridge Note Warrant will become exercisable for Grafiti Common Shares. 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. 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, 2022 and the recasted audited consolidated financial statements within Exhibit 99.1 on Form 8-k filed with the SEC to reflect the presentation of CXApp operations as discontinued operations to the consolidated financial statements for the years ended December 31, 2022 and 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 54 Table of Contents Intelligence, SAVES, and Shoom. As of September 30, 2023, the Company's previously recorded goodwill has been fully impaired. R ESULTS OF O PERATIONS Three Months Ended September 30, 2023 compared to the Three Months Ended September 30, 2022 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, 2023 2022 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 2,016 100 % $ 2,435 100 % $ (419) (17) % Cost of revenues $ 451 22 % $ 756 31 % $ (305) (40) % Gross profit $ 1,565 78 % $ 1,679 69 % $ (114) (7) % Operating expenses $ 10,647 528 % $ 7,142 293 % $ 3,505 49 % Loss from operations $ (9,082) (450) % $ (5,463) (224) % $ (3,619) (66) % Other expense $ (1,763) (87) % $ (5,409) (222) % $ 3,646 67 % Provision for income taxes $ (3) — % $ — — % $ (3) — % Net loss from continuing operations $ (10,848) (538) % $ (10,872) (446) % $ 24 — % Loss from discontinued operations, net of tax $ — — % $ (7,121) (292) % $ 7,121 100 % Net loss attributable to stockholders of Inpixon $ (10,384) (515) % $ (17,591) (722) % $ 7,207 41 % * 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, 2023 were $2.0 million compared to $2.4 million for the comparable period in the prior year for a decrease of approximately $0.4 million, or approximately 17%. This decrease is primarily attributable to the decrease in Indoor Intelligence sales due to longer sales cycles. Cost of Revenues Cost of revenues for the three months ended September 30, 2023 were $0.5 million compared to $0.8 million for the comparable period in the prior year. This decrease in cost of revenues of approximately $0.3 million, or approximately 40%, was primarily attributable to lower cost of revenues on the SAVES product line and lower revenue in the IIOT business. Gross Profit The gross profit margin for the three months ended September 30, 2023 was 78% compared to 69% for the three months ended September 30, 2022. This increase in margin is primarily due to lower cost of goods on the SAVES and indoor intelligence product lines during the year. Operating Expenses Operating expenses for the three months ended September 30, 2023 were $10.6 million and $7.1 million for the comparable period ended September 30, 2022. This increase of approximately $3.5 million is primarily attributable to the acquisition and transaction costs incurred in the three months ended September 30, 2023. 55 Table of Contents Other Income (Expense) Other income/expense for the three months ended September 30, 2023 was a loss of $1.8 million compared to a loss of $5.4 million for the comparable period in the prior year. This decrease in loss of approximately $3.6 million is primarily attributable to the unrealized loss on the FOXO shares in the three months ended September 30, 2022. Provision for Income Taxes The provision for income tax for the three months ended September 30, 2023 and 2022 was immaterial. Loss from Discontinued Operations, net of tax Loss from discontinued operations, net of tax, for the three months ended September 30, 2023 was zero compared to $7.1 million for the comparable period in the prior year. There is no loss from discontinued operations in the three months ended September 30, 2023 as those operations were spun off in the three months ended March 31, 2023 period. Nine Months Ended September 30, 2023 compared to the Nine Months Ended September 30, 2022 The following table sets forth selected condensed consolidated financial data as a percentage of our revenue and the percentage of period-over-period change: For the Nine Months Ended September 30, 2023 2022 (in thousands, except percentages) Amount % of Revenues Amount % of Revenues $ Change % Change* Revenues $ 7,177 100 % $ 7,660 100 % $ (483) (6) % Cost of revenues $ 1,632 23 % $ 2,409 31 % $ (777) (32) % Gross profit $ 5,545 77 % $ 5,251 69 % $ 294 6 % Operating expenses $ 29,466 411 % $ 25,799 337 % $ 3,667 14 % Loss from operations $ (23,921) (333) % $ (20,548) (268) % $ (3,373) (16) % Other expense $ (4,090) (57) % $ (6,524) (85) % $ 2,434 37 % Provision for income taxes $ (2,488) (35) % $ (22) — % $ (2,466) — % Net loss from continuing operations $ (30,499) (425) % $ (27,094) (354) % $ (3,405) (13) % Loss from Discontinued Operations, Net of Tax $ (4,856) (68) % $ (22,786) (297) % $ 17,930 79 % Net loss attributable to stockholders of Inpixon $ (34,224) (477) % $ (48,674) (635) % $ 14,450 30 % * Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations in this item, which may be rounded to the nearest hundred thousand, may not produce the same results. Revenues Revenues for the nine months ended September 30, 2023 were $7.2 million compared to $7.7 million for the comparable period in the prior year for an decrease of approximately $0.5 million, or approximately 6%. This decrease is primarily due to longer sales cycles of the IIOT business. Cost of Revenues Cost of revenues for the nine months ended September 30, 2023 and 2022 were $1.6 million and $2.4 million, respectfully. This decrease in cost of revenues of approximately $0.8 million, or approximately 32%, was primarily attributable to lower cost of revenues on the SAVES product line and lower revenue in the IIOT business. Gross Profit The gross profit margin for the nine months ended September 30, 2023 was 77% compared to 69% for the nine months ended September 30, 2022. This increase in gross profit margin is primarily due to lower cost of goods on the SAVES product line during the year. 56 Table of Contents Operating Expenses Operating expenses for the nine months ended September 30, 2023 were $29.5 million and $25.8 million for the comparable period ended September 30, 2022. This increase of $3.7 million is primarily attributable the acquisition costs and transactions costs in the nine months ended September 30, 2023 offset by the $2.0 million attributable to goodwill impairment in the nine months ended September 30, 2022. Other (Expense) Income Other expense for the nine months ended September 30, 2023 was a loss of $4.1 million as compared to a loss of $6.5 million for the nine months ended September 30, 2022. The nine months ended September 30, 2023 included higher interest expense on short term debt and the nine months ended September 30, 2022 included an approximate $7.1 million unrealized loss on FOXO and Sysorex equity securities. Provision for Income Taxes Income tax expense totaled approximately $2.5 million and $0.02 million for the nine months ended September 30, 2023 and 2022, respectively. The income tax expense in the nine months ended September 30, 2023 includes a $2.6 million deferred tax expense to increase the valuation allowance, which is offset by a current tax benefit of $0.1 million, due to the Enterprise Apps Spin-off. Loss from Discontinued Operations, Net of Tax Loss from discontinued operations, net of tax for the nine months ended September 30, 2023 was $4.9 million compared to a loss of $22.8 million for the nine months ended September 30, 2022. The decrease in loss from discontinued operations was $17.9 million from the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 because the enterprise apps spin off occurred in March 2023, therefore there are only 3 months of discontinued operations in the nine months ended September 30, 2023 and nine months of discontinued operations in the nine months ended September 30, 2022. Additionally, the September 2022 period of discontinued operations includes approximately $5.5 million of goodwill impairment which is offset by a $2.8 million earnout compensation benefit. 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, 2023 was a loss of $4.1 million compared to a loss of $1.4 million for the prior year period. Adjusted EBITDA for the nine months ended September 30, 2023 was a loss of $14.0 million compared to a loss of $9.4 million for the prior year period. 57 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 nine months ended September 30, 2023 and 2022 (in thousands): For the Three Months Ended September 30, For the Nine Months Ended September 30, 2023 2022 2023 2022 Net loss attributable to Common Stockholders $ (10,384) $ (22,631) $ (34,224) $ (64,850) Loss from discontinued operations, net of tax — 7,121 4,856 22,786 Interest expense, net 818 234 4,300 65 Income tax provision 3 — 2,488 22 Depreciation and amortization 433 705 1,277 2,123 EBITDA (9,130) (14,571) (21,303) (39,854) Adjusted for: Non-recurring one-time charges: Unrealized (gain)/loss on equity securities (5,791) 5,854 (5,733) 7,110 Realized loss on equity securities 6,692 151 6,692 151 Unrealized gain on note — 153 — 325 Acquisition transaction/financing costs 1,656 2 2,343 254 Professional service fees — — — 8 Impairment of goodwill — — — 2,030 Transaction costs 1,527 — 2,970 — Accretion of Series 7 Preferred Stock — — — 4,555 Accretion of Series 8 Preferred Stock — 6,305 — 13,089 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 — (1,265) — (2,626) Distribution of equity method investment shares to employees as compensation — — 666 — Gain on equity securities — — (1,142) — Loss on exchange of debt for equity 124 — 124 — Unrealized foreign exchange (gains)/losses 354 1,019 209 1,143 Bad debts expense/provision — — 24 — Reserve for inventory obsolescense (8) — 8 — Stock-based compensation - compensation and related benefits 227 688 797 2,962 Severance costs 244 239 371 301 Adjusted EBITDA $ (4,105) $ (1,425) $ (13,974) $ (9,394) • 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; 58 Table of Contents • 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 loss per share for the three months ended September 30, 2023 was $0.16 compared to loss of $10.21 for the prior year period. Basic and diluted net loss per share for the nine months ended September 30, 2023 was $0.96 compared to loss of $31.08 for the prior year period. 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, 59 Table of Contents 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 September 30, 2023 was $0.08 per share compared to a loss of $0.84 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, 2023 was a loss of $0.60 per share compared to a loss of $4.78 per share for the prior year period. 60 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 September 30, For the Nine Months Ended September 30, (thousands, except per share data) 2023 2022 2023 2022 Net loss attributable to stockholders of Inpixon $ (10,384) $ (22,631) $ (34,224) $ (64,850) Adjustments: Non-recurring one-time charges: Loss from discontinued operations, net of tax — 7,121 4,856 22,786 Unrealized (gain)/loss on equity securities (5,791) 5,854 (5,733) 7,110 Realized loss on equity securities 6,692 151 6,692 151 Unrealized gain on note — 153 — 325 Acquisition transaction/financing costs 1,656 2 2,343 254 Professional service fees — — — 8 Impairment of goodwill — — — 2,030 Transaction costs 1,527 — 2,970 — Accretion of Series 7 Preferred Stock — — — 4,555 Accretion of Series 8 Preferred Stock — 6,305 — 13,089 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 — (1,265) — (2,626) Distribution of equity method investment shares to employees as compensation — — 666 — Gain on equity securities — — (1,142) — Loss on exchange of debt for equity 124 — 124 — Unrealized foreign exchange (gains)/losses 354 1,019 209 1,143 Bad debts expense/provision — — 24 — Reserve for inventory obsolescence (8) — 8 — Stock-based compensation - compensation and related benefits 227 688 797 2,962 Severance costs 244 239 371 301 Amortization of intangibles 221 511 671 1,640 Proforma non-GAAP net loss $ (5,138) $ (1,853) $ (21,368) $ (9,964) Proforma non-GAAP net loss per common share - Basic and Diluted $ (0.08) $ (0.84) $ (0.60) $ (4.78) Weighted average basic and diluted common shares outstanding 65,840,189 2,216,544 35,845,916 2,086,633 • 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; 61 Table of Contents • 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: • 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, 2023 Our current capital resources and operating results as of and through September 30, 2023, consist of: 1) an overall working capital surplus of approximately $3.0 million; 2) cash and cash equivalents of approximately $13.5 million; 3) net cash used by operating activities for the nine months ended September 30, 2023 of $25.1 million. The breakdown of our overall working capital surplus as of September 30, 2023 is as follows (in thousands): Working Capital Assets Liabilities Net Cash and cash equivalents $ 13,489 $ — $ 13,489 Accounts receivable, net / accounts payable 1,560 1,920 (360) Inventory 3,355 — 3,355 Accrued liabilities — 3,569 (3,569) Operating lease obligation — 198 (198) Deferred revenue — 1,315 (1,315) Notes and other receivables / Short-term debt 2,210 11,165 (8,955) Warrant liability — 1,410 (1,410) Other 1,949 — 1,949 Total $ 22,563 $ 19,577 $ 2,986 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 62 Table of Contents September 30, 2023, the total obligation for capitalized operating leases is approximately $0.4 million, of which approximately $0.2 million is expected to be paid in the next twelve months. As of September 30, 2023, we owed approximately $11.2 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 10 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. In addition, as of September 30, 2023, we have accrued a liability for outstanding warrants, of $1.4 million. Each warrant is immediately exercisable for one share of Common Stock and will expire one year from the issuance date in May 2023 unless extended by the Company with the consent of the warrant holder. See Note 15 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q. As part of the XTI merger transaction, the Company agreed to provide XTI with $2.3 million in exchange for a senior secured promissory note. On November 14, 2023, the principal amount under this note was increased to approximately $3.1 million. As of September 30, 2023, the Company has provided approximately $2.0 million in principal of that balance. In addition, the Company agreed to make a best effort to have $10 million cash on hand at closing, inclusive of the $2.3 million convertible note. Additionally, at the signing of the business combination agreement with Damon on October 23, 2023, the Company agreed to and purchased a convertible note from Damon in an aggregate principal amount of $3.0 million. Net cash used in operating activities during the nine months ended September 30, 2023 of $25.1 million consists of a net loss of $35.4 million offset by non-cash adjustments of approximately $8.9 million less net cash changes in operating assets and liabilities of approximately $1.4 million. Although the Company has sustained significant losses during nine months ended September 30, 2023, in addition to the cash we had on hand, we raised gross proceeds of approximately $27.4 million in connection with the ATM Offering described above and received $2.3 million from warrants exercised since January 1, 2023. 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 conditions may materially 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. Certain global events, such as 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; 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 operations. 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. The impact that these global events will have on general economic conditions is continuously evolving and the impact that they will have on our results of operations continues to remain uncertain. There are no assurances that we will 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 The Company’s net cash flows used in operating, investing and financing activities for the nine months ended September 30, 2023 and 2022 and certain balances as of the end of those periods are as follows (in thousands): For the Nine Months Ended September 30, 2023 2022 Net cash used in operating activities $ (25,090) $ (26,943) Net cash (used in) provided by investing activities (1,829) 36,748 Net cash provided financing activities 20,185 902 Effect of foreign exchange rate changes on cash (12) (34) Net (decrease)/increase in cash and cash equivalents $ (6,746) $ 10,673 63 Table of Contents As of September 30, 2023 As of December 31, 2022 Cash and cash equivalents $ 13,489 $ 10,235 Working capital surplus $ 2,986 $ 5,152 Operating Activities for the nine months ended September 30, 2023 Net cash used in operating activities during the nine months ended September 30, 2023 was approximately $25.1 million. The cash flows related to the nine months ended September 30, 2023 consisted of the following (in thousands): Net loss $ (35,355) Non-cash income and expenses 8,905 Net change in operating assets and liabilities 1,360 Net cash used in operating activities $ (25,090) The non-cash income and expense of approximately $8.9 million consisted primarily of the following (in thousands): $ 2,310 Depreciation and amortization expenses 206 Amortization of right of use asset 797 Stock-based compensation expense attributable, warrants, restricted stock grants and options issued as part of Company operations 2,103 Amortization of debt discount (1,142) Gain on settlement of FOXO 666 Distribution of equity method investment shares to employees as compensation 2,591 Deferred income tax (5,733) Unrealized gain on equity securities 6,692 Realized loss on sales of equity securities 291 Other $ 8,781 Total non-cash expenses The net cash used in the change in operating assets and liabilities aggregated approximately $1.4 million and consisted primarily of the following (in thousands): $ (652) Increase in accounts receivable and other receivables 162 Decrease in inventory, prepaid expenses and other current assets and other assets (372) Decrease in accounts payable 1,899 Increase in accrued liabilities, income tax liabilities and other liabilities (207) Decrease in operating lease liabilities 530 Increase in deferred revenue $ 1,360 Net cash used in the changes in operating assets and liabilities Operating Activities for the nine months ended September 30, 2022 Net cash used in operating activities during the nine months ended September 30, 2022 was approximately $26.9 million. The cash flows related to the nine months ended September 30, 2022 consisted of the following (in thousands): 64 Table of Contents Net loss $ (49,880) Non-cash income and expenses 22,192 Net change in operating assets and liabilities 745 Net cash used in operating activities $ (26,943) The non-cash income and expense of approximately $22.2 million consisted primarily of the following (in thousands): $ 5,567 Depreciation and amortization expenses 536 Amortization of right of use asset 2,962 Stock-based compensation expense attributable to warrants and options issued as part of Company operations (2,827) Earnout payment expense 121 Amortization of debt discount 1,870 Unrealized gain/loss on note (791) Loss on conversion of note receivable (278) Accrued interest income, related party 5 Provision for doubtful accounts (1) Deferred income tax 7,110 Unrealized loss on equity securities 7,570 Impairment of goodwill 348 Other $ 22,192 Total non-cash expenses The net use of cash in the change in operating assets and liabilities aggregated approximately $0.7 million and consisted primarily of the following (in thousands): $ 336 Decrease in accounts receivable and other receivables 571 Decrease in inventory, prepaid expenses and other current assets and other assets 237 Increase in accounts payable 1,021 Increase in accrued liabilities, income tax liabilities and other liabilities (505) Decrease in operating lease liabilities (915) Decrease in deferred revenue $ 745 Net use of cash used in the changes in operating assets and liabilities Cash Flows from Investing Activities as of September 30, 2023 and 2022 Net cash flows used in investing activities during the nine months ended September 30, 2023 was approximately $1.8 million compared to net cash flows provided by investing activities during the nine months ended September 30, 2022 of approximately $36.7 million. Cash flows related to investing activities during the nine months ended September 30, 2023 include $0.1 million for the purchase of property and equipment, $0.1 million for investment in capitalized software, $2.0 million for the issuance of a note receivable, $0.3 million from the sales of securities and $0.2 million of proceeds from a note receivable. Cash flows related to investing activities during the nine months ended September 30, 2022 include $0.2 million for the purchase of property and equipment, $0.6 million investment in capitalized software, $5.5 million for the purchase of a convertible note, $0.2 million from the sales of equity securities, $0.2 million for the issuance of a note receivable and $43.0 million from sales of treasury bills. Cash Flows from Financing Activities as of September 30, 2023 and 2022 Net cash flows provided by financing activities during the nine months ended September 30, 2023 was $20.2 million. Net cash flows provided by financing activities during the nine months ended September 30, 2022 was $0.9 million. During the nine months ended September 30, 2023, the Company received incoming cash flows of $0.1 million from a promissory note, received $26.5 million from a registered direct offering, received $1.4 million from the issuance of warrants, received $2.3 million from the exercise of warrants, paid $0.2 million of the CXApp acquisition liability, and distributed $10.0 million to the 65 Table of Contents shareholders related to the spin-off of CXApp. During the nine months ended September 30, 2022, the Company received incoming cash flows $46.9 million for the issuance of preferred stock, paid $49.3 million for the redemption of preferred series 7 stock, paid $2.0 million of the CXApp acquisition liability, received $5.5 million of net proceeds from promissory notes and paid $0.3 million of taxes related to the net share settlement of restricted stock units. 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.