Business context and reporting period
This filing is Sysorex Global Holdings Corp.’s unaudited Form 10-Q for the six months ended June 30, 2014, including second-quarter results. The request metadata names XTI Aerospace, Inc., but the supplied filing identifies Sysorex Global Holdings Corp. as the registrant.
Sysorex provides IT solutions and services across commercial IT, government IT, cloud-based analytics and location-based cybersecurity. Results include Lilien and Shoom, acquired in 2013, and AirPatrol, acquired effective April 16, 2014. The company completed a one-for-two reverse stock split in April 2014.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $17.1 million | $14.8 million | $33.5 million | $20.2 million |
| Gross profit | $5.7 million | $3.0 million | $10.0 million | $4.5 million |
| Gross margin | 33.1% | 20.3% | 30.0% | 22.1% |
| Operating loss | $2.4 million | $0.4 million | $3.1 million | $1.4 million |
| Net loss attributable to Sysorex shareholders | $2.4 million | $0.4 million | $3.2 million | $1.9 million |
| Loss per share, basic and diluted | $0.13 | $0.03 | $0.19 | $0.17 |
For the six months, operating cash outflow was $5.5 million, compared with $2.4 million in 2013. Investing activities used $8.6 million, principally for AirPatrol; financing activities provided $17.0 million, primarily from equity raises. Cash increased to $4.9 million from $2.1 million at December 31, 2013.
At June 30, current assets were $25.1 million and current liabilities were $33.2 million, a working capital deficit of $8.1 million. Total liabilities were $40.4 million. Borrowings included $4.6 million drawn on a $6.0 million revolving line, $0.6 million of term loans, and $0.6 million of notes payable. The line’s maturity was extended to April 2016. A $7.8 million current acquisition earnout liability is included in the working capital deficit.
Material changes versus prior period
- Six-month revenue grew 66% year over year, largely reflecting acquired businesses and their additional months of contribution; second-quarter revenue rose about 16%.
- Gross margin improved, partly due to the higher-margin Shoom and AirPatrol businesses and improved product mix in IT Government.
- Losses widened: six-month attributable net loss increased to $3.2 million from $1.9 million. Higher operating costs included $1.2 million of acquisition transaction and financing costs, $1.6 million of intangible amortization, increased compensation and stock-based compensation.
- Adjusted EBITDA, a non-GAAP measure, was positive $0.5 million for the six months, versus $0.3 million a year earlier; it does not represent cash flow or replace GAAP results.
Outlook, risks and unusual items
- Management said existing capital resources were expected to fund planned operations for the next 12 months, but noted possible curtailment of expansion if funding proved insufficient. The company reported operating cash use and a working capital deficit.
- Management expected revenue and cash-flow growth from acquired businesses and U.S. Navy SPAWAR task orders. Expected benefits from the U.S. Army PMSS-3 contract remained uncertain: protests had delayed task orders, and the government requested resubmissions; Sysorex stated there was no assurance it would receive orders.
- The AirPatrol earnout could reach $10 million, subject to its income formula and a $3.5 million AirPatrol net-income threshold over the five quarters ending March 31, 2015. Half is expected in cash and half in stock; the company accrued $7.8 million as the present value of the expected payment.
- AirPatrol’s preliminary purchase-price allocation included substantial acquired intangible assets; final valuations were pending. Management reported no goodwill or intangible-asset impairment for the period.
- Revenue and customer concentration merit attention: two customers represented 16% and 11% of accounts receivable, and three vendors represented approximately 75% of gross accounts payable. Management cited competition, possible technology obsolescence, government funding delays and the need for future financing as risks.
- The filing reported no pending legal proceedings and stated that disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant identity: the supplied filing is for Sysorex Global Holdings Corp., not the company named in the request metadata.
- Track operating cash flow, working capital, receivable collections and vendor payment terms against management’s 12-month liquidity expectation.
- Verify AirPatrol’s performance against the earnout targets and the eventual amount, timing and cash-versus-stock composition of any payment.
- Monitor the status of PMSS-3 protests/resubmissions and actual SPAWAR or other government task-order awards.
- Assess whether acquired businesses deliver the expected revenue, margins and synergies, while considering acquisition costs and ongoing intangible amortization.
- Review final AirPatrol purchase accounting, customer/vendor concentration and any subsequent financing or dilution.