Filing summary
Entity and period: The supplied filing is Sysorex Global’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016, filed August 15, 2016. It does not identify XTI Aerospace; the text provided does not establish the relationship between the two names. Amounts below are in U.S. dollars, generally rounded to millions.
Business context and financial results
Sysorex described its business as data analytics, indoor-location and IoT products, IT hardware and software resale, SaaS, and professional services for commercial and government customers. Its segments were Mobile, IoT & Big Data Products; Storage and Computing; SaaS; and Professional Services.
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $13.3m | $17.7m | $27.4m | $31.8m |
| Gross profit / margin | $3.4m / 26% | $5.7m / 32% | $7.4m / 27% | $9.7m / 31% |
| Operating loss | $(3.9)m | $(1.7)m | $(8.1)m | $(4.5)m |
| Net loss | $(4.2)m | $(1.7)m | $(8.5)m | $(4.6)m |
| Net loss per share, basic and diluted | $(0.17) | $(0.09) | $(0.34) | $(0.23) |
| Adjusted EBITDA, non-GAAP | $(2.2)m | $0.03m | $(4.7)m | $(1.3)m |
Second-quarter revenue declined 25% year over year, mainly as Storage and Computing revenue fell to $8.7m from $13.4m. For the first half, that segment generated $18.8m versus $23.6m. Product revenue fell while service revenue was broadly flat for the half. Management attributed the weaker gross margin primarily to lower Storage and Computing margins; Professional Services margin also declined year over year.
Operating expenses were $7.4m in Q2, essentially unchanged year over year, and $15.5m for the first half, up from $14.2m. The company cited higher amortization and depreciation and investment in engineering and new-product development. Interest expense was $0.4m for the first half, versus $0.2m a year earlier.
Cash flow, debt and liquidity
At June 30, 2016, cash was $0.36m, current assets were $25.2m, current liabilities were $36.1m, and working capital was negative $10.9m (versus negative $4.2m at December 31, 2015). Total debt was approximately $8.0m: $7.1m current and $0.9m long term. Total liabilities were $48.1m and stockholders’ equity was $15.2m.
For the first half, operating cash use was $0.12m, compared with $4.2m in the prior-year period; investing cash use was $0.96m, including $0.82m of capitalized software; and financing cash use was $2.64m, primarily repayment of the revolving facility and term loan. Cash decreased by $3.70m from $4.06m at year-end. Improved operating cash flow benefited from higher accounts payable and deferred revenue, so it should be considered alongside the company’s losses and liquidity position.
The revolving credit facility had a $10m limit, with approximately $6.3m drawn at June 30, 2016, and a stated maturity of April 29, 2017. The lender had granted waivers and forbearance amid covenant and overadvance issues; the parties were still working on certain future financial covenants.
Outlook, material events and risks
- Management said existing capital resources, the bank facility, the August financing, anticipated prepayments, higher-margin business expansion and contract awards were expected to fund planned operations for the next 12 months. It warned that if financing proves insufficient, the company may need to cut costs, curtail expansion or seek additional financing, which may not be available.
- On August 9, 2016, after quarter-end, Sysorex raised $5m in purchase price by issuing an 8% original-issue-discount senior convertible debenture with $5.7m principal, due August 9, 2018, and 2,250 shares of Series 1 convertible preferred stock. Proceeds were intended for debt repayment, accounts payable, business development, capital spending, working capital and general expenses. The debenture is convertible at $1.50 per share subject to limitations, carries required quarterly principal redemptions beginning November 2017, and is secured by a subordinated lien; the preferred stock has conversion, liquidation-priority and anti-dilution rights. These terms create repayment and potential dilution risks.
- An August 5 lender amendment waived defaults and consented to the financing. Sysorex also agreed to pay a $200,000 fee and repay the term advance in connection with the financing.
- Management cited government contract vehicles (NASA SEWP, NIH CIO-CS and PMSS-3), AirPatrol and LightMiner product expansion, and a planned Daruna project as potential growth and cash-flow drivers. The filing’s expected Daruna revenue of $0.5m per month for 15 years and a separate $4m follow-on purchase order were forward-looking expectations, not reported results; management noted task-order awards were not assured.
- Customer and supplier concentration was material: one customer represented 32% of first-half revenue; one vendor represented 53% of gross accounts payable and 62% of first-half purchases. The company also reported customer concentration in receivables.
- Sysorex had classified Saudi Arabia operations as discontinued, with $0.77m of assets held for sale and $2.03m of related liabilities. A $0.75m surety-bond deposit was expected to be released when the associated contract closed out, anticipated during 2016. A prior $0.94m judgment against the Saudi subsidiary had $0.21m repaid, $0.52m expected to be repaid through a surety bond, and $0.21m accrued.
- The filing reported no pending legal proceedings and stated disclosure controls were effective. Management reported no impairment charge for goodwill or long-lived assets in the first half.
Important facts for investors to verify
- Confirm the filer’s identity and its relationship, if any, to XTI Aerospace; the filing itself names Sysorex Global.
- Review the full debenture and preferred-stock documents for conversion, redemption, default, security and dilution terms, and confirm use of proceeds and repayment of the bank term advance.
- Check subsequent liquidity, bank-facility availability, covenant compliance and the status of negotiations for future covenants.
- Assess whether revenue and margins recover from the Storage and Computing contraction, and whether higher-margin products and services scale as management anticipated.
- Evaluate cash conversion, including the contribution of increased accounts payable and deferred revenue, and monitor the working-capital deficit and customer/vendor concentration.
- Verify whether the Daruna project, follow-on order, government task orders, and Saudi surety-bond release occurred as expected.