Business Context and Reporting Period
The supplied filing is Sysorex Global’s Form 10-Q for the quarter ended September 30, 2016, signed November 15, 2016. It does not identify XTI Aerospace as the registrant; verify that this is the intended filing. Sysorex provided IT products and services, including storage and computing, professional services, SaaS, and mobile/IoT and big-data products.
Financial Performance and Position
Amounts below are in millions of dollars except per-share data. The filing presents unaudited results for the three and nine months ended September 30.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $11.24 | $14.87 | $38.66 | $46.69 |
| Gross profit / margin | $3.10 / 28% | $4.39 / 30% | $10.49 / 27% | $14.13 / 30% |
| Operating loss | $(4.14) | $(3.12) | $(12.27) | $(7.63) |
| Net loss | $(4.72) | $(3.17) | $(13.20) | $(7.77) |
| Net loss per share | $(0.18) | $(0.16) | $(0.52) | $(0.39) |
- For the nine months, operating cash outflow was $1.14 million, investing cash outflow $1.62 million, and financing cash outflow $0.83 million. Cash declined $3.56 million to $0.51 million.
- At September 30, 2016, working capital deficit was $10.34 million; total assets were $57.02 million and total liabilities $41.94 million. Reported debt included $4.60 million short-term debt and $3.75 million long-term debt, including the convertible debenture.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $2.37 million for Q3 and $7.05 million for the nine months, versus losses of $1.46 million and $2.77 million, respectively, in 2015.
Material Changes Versus Prior Comparable Period
- Nine-month revenue fell 17% year over year, primarily due to Storage and Computing; that segment’s revenue declined to $26.69 million from $33.97 million. Q3 revenue decreased 24%.
- Nine-month gross margin declined to 27% from 30%, while operating expenses rose 5% to $22.76 million. Management attributed higher expenses in part to product development and increased amortization and depreciation.
- Nine-month net loss widened by $5.43 million. Higher operating losses and interest expense contributed; interest expense was $1.04 million versus $0.34 million.
- Cash used in operations improved to $1.14 million from $3.89 million, but cash fell substantially from year-end 2015. The filing attributes operating cash support partly to collections, lower prepaid balances, and higher accounts payable and deferred revenue.
Outlook, Risks, Contingencies, and Unusual Items
- Management said capital resources and expected contract prepayments were expected to fund planned operations for the next twelve months, while warning that if financing is unavailable the company may need to cut costs, curtail expansion, or seek other financing. The company reported a $10.3 million working capital deficit and $0.5 million cash.
- Management cited government IDIQ contracts, AirPatrol and LightMiner products, and a $4 million follow-on Daruna purchase order as potential sources of growth and cash flow. It also described a Daruna project expected to begin in early 2017, estimated at $500,000 monthly for 15 years; these expectations are not guarantees.
- On August 9, 2016, Sysorex issued Hillair an 8% original-issue-discount senior convertible debenture with $5.7 million principal and 2,250 preferred shares for $5.0 million. The debenture converts initially at $1.50 per share, subject to adjustments and a $0.47 floor, and includes scheduled 25% principal redemptions from November 2017 through August 2018. Conversion and redemption terms, defaults, and potential dilution merit attention.
- Western Alliance had waived defaults and provided forbearance under amendments to its credit agreement; the company reported approximately $4.4 million drawn on a credit facility with an April 2017 maturity. The filing also describes covenant negotiations. On November 14, 2016, after quarter-end, Sysorex disclosed a proposed acquisition of Integrio and a conditional GemCap asset-secured revolving facility of up to $10 million, with stated borrowing costs and fees. Closing and funding were subject to conditions.
- Revenue and supply concentration: one customer represented 26% of nine-month revenue and another customer represented 51% of accounts receivable at September 30, 2016; one vendor represented 56% of gross accounts payable. The company also disclosed a $900,000 third-party note receivable due December 31, 2016, with an extension under negotiation.
- Sysorex Arabia was classified as discontinued operations; its liabilities held for sale were $2.04 million, against $0.77 million of assets. A prior $936,000 judgment against the subsidiary included $207,000 accrued at quarter-end. The filing reported no pending legal proceedings against the company or subsidiaries.
- Management reported effective disclosure controls and no material internal-control changes during the quarter. It implemented a cost-cutting program expected to reduce annual operating expenses by approximately $1.8 million. No formal financial guidance was provided.
Important Facts for Investors to Verify
- Confirm the issuer: the source filing is for Sysorex Global, not XTI Aerospace.
- Assess near-term liquidity, credit-facility availability and covenants, and the ability to meet debt and debenture payments.
- Verify whether the November 2016 GemCap facility and Integrio acquisition closed, and their final terms and funding effects.
- Evaluate whether government awards, Daruna-related work, and product expansion produce the revenue and cash flow management expected.
- Review customer and vendor concentration, receivable collectability, the note-receivable extension, and potential dilution from convertible securities.