# XTI Aerospace, Inc.: Form 10-Q for the period ended Sep 30, 2014

- Company: [XTI Aerospace, Inc.](/companies/xtia.md) (CIK 1529113)
- Form: 10-Q
- Filed: 2014-11-13
- Accepted by EDGAR: Nov 13, 2014, 16:08 ET
- Period: 2014-09-30
- Accession: 0001213900-14-008050
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529113/000121390014008050/f10q0914_sysorexglobal.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529113/000121390014008050/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $14.3m | us-gaap:Revenues |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $47.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $10.0m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $33.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $4.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-01-01 to 2014-09-30 | $14.3m | us-gaap:GrossProfit |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | −$2.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | −$5.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 9 months, 2014-01-01 to 2014-09-30 | $35.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | −$2.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | −$5.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | −$0.13 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | −$0.33 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | −$6.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $311.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2014-09-30 | $2.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $21.7m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $61.6m | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $23.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $30.9m | us-gaap:Liabilities |
| Long-term debt | at 2014-09-30 | $100.0k | us-gaap:LongTermDebt |
| Short-term borrowings | at 2014-09-30 | $6.1m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2014-09-30 | $32.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,686 characters.

### Forward-Looking Statement Notice

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Sysorex Global Holdings Corp. (“we”, “us”, “our”, “Sysorex” or the “Company”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and; therefore, there can be no assurance the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

### Overview of Our Business

Sysorex provides a variety of IT services and technologies that enable customers to manage, protect and monetize their enterprise assets whether on-premise, in the Cloud, or via mobile devices. The Company’s business focuses primarily on Big Data analytic solutions and services. The recent acquisition of AirPatrol Corporation (“AirPatrol”), a developer of location-based cybersecurity and commercial services systems for mobile devices, on April 18, 2014, has provided the Company with the opportunity to expand its capabilities into location-based detection products. The Company expects that location data from AirPatrol will also drive new data analytic offerings. Historically, our customer base was made up 100% of government agencies. However, with the recent acquisitions in 2013 of Lilien Systems (“Lilien”), an enterprise IT infrastructure solutions and data analytics provider and Shoom, Inc. (“Shoom”), a provider of Cloud-based data analytics and enterprise solutions to the media, publishing, and entertainment industries, our customer base has significantly shifted. Currently, more than 90% of the revenues we earn are from commercial enterprises and less than 10% are from government agencies.

### Our Business Strategy and Products

The acquisitions of Lilien and Shoom have expanded our depth of enterprise service offerings, including Big Data services and Cloud-based advanced analytics. Shoom also provides Sysorex with secure Cloud-based software products, which result in higher gross margins. AirPatrol provides location based technologies for mobile cyber security applications as well as other location-based services. These acquisitions reflect our business strategy, the purpose of which is to transform Sysorex from a services company to a technology company. We believe the acquisitions also provide us with an opportunity for vertical market and geographic expansion. We intend to focus our expansion efforts in the U.S. market but may consider and reserve the right to pursue international acquisitions and business opportunities.

Cyber security and Big Data analytics are the areas we are targeting because we believe, based on industry data, that these are growing market segments. Our plan is to acquire technology companies, some of which may have patented technology, which we believe will give us an advantage over our competitors. However, the IT services and technologies industry is extremely competitive and many of the providers in the industry are extremely large and well financed. Therefore, there is a risk that the technologies we acquire or develop might not be able to compete with the better-financed marketing and sales efforts of our larger competitors or that the technology could become obsolete if our competitors develop better products.

The reliance of federal government agencies on continuing resolution (CR) budgets will continue to impact funding for government contracts and task orders that Sysorex is pursuing, as it has in the past, by delaying payment or decisions on such contract/task order awards. However, our government contracts are currently less than 15% of our total revenues. Such government contracts typically have a three to five year term and we believe that our recent government contract revenues will be indicative of future government contract based revenues. AirPatrol also has a large government service customer base which could also be impacted by any future delays in government funding.

Lilien’s revenues are typically driven by purchase orders that are received on a monthly basis. Approximately 20-25% of these purchase orders are recurring contracts that range from one to five years for warranty and maintenance support. For these contracts the customer is invoiced one time and pays Lilien upfront for the full term of the warranty and maintenance contract. Revenue from these contracts is recognized ratably over the contract period with the unearned revenue recorded as deferred revenue. Lilien has a 30-year history and a high repeat customer rate of approximately 60% annually. Lilien’s revenues are diversified over hundreds of customers and no one customer exceeds 15% of its revenues. Management believes this diversification provides stability to Lilien’s revenue streams.

Shoom’s software-as-a-service (SaaS) contracts are typically performed for periods of one or more years and Shoom has a high customer retention rate. Shoom offers eSolutions including eTearsheets, invoicing, CRM, and other products and services to 750 newspapers in the Cloud. Cloud-based analytics is a growing market that Sysorex intends to pursue beyond the media vertical that Shoom is in today. Shoom has been in business for over 10 years and has been providing its Cloud solutions for over four years.

We believe the accretive impact of our acquisition strategy is becoming evident as the nine months ended September 30, 2014 include nine months of Lilien and Shoom revenues and five and one half months of AirPatrol revenues, resulting in an increase in revenues of approximately $13.7 million as compared to the nine months ended September 30, 2013. We anticipate synergies and operational efficiencies to continue to improve revenues and profitability for Sysorex, Lilien, AirPatrol and Shoom going forward. Sysorex’s U.S. government operations are profitable and this division is expected to grow as a result of the U.S. Navy SPAWAR contract awarded in 2013 and the U.S. Army PMSS-3 Program, which is a $450 million five-year task order based multiple award contract granted to Sysorex earlier this year. The U.S. Navy SPAWAR contract has started releasing task orders in 2014; however, the U.S. Army PMSS-3 Program is currently under automatic stay as some of the un-successful bidders are challenging the agency's selection decision and therefore the government will not be issuing any task orders until the protests are resolved. With the addition of Shoom and AirPatrol we believe that our liquidity will improve significantly as they generate gross margins over 80%. We believe that our shift to technology based business lines like Shoom and AirPatrol, as well as other future acquisitions, will allow us to increase our customer base, grow revenues and improve our gross margin to allow us to achieve profitability.

### Recent Events

### Reverse Stock-Split

In connection with the Company’s initial public offering described below and in order to satisfy the initial listing requirements for The NASDAQ Capital Market, on April 8, 2014, the Company filed a Certificate of Amendment to its Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to effect a one-for-two reverse split (the “Reverse Split”) of the Company’s common stock, with no reduction in authorized capital.

### April 2014 Initial Public Offering

On April 9, 2014, in connection with an offering (the “Offering”) by the Company of an aggregate of 3,333,333 shares (the “Shares”) of the Company’s common stock, at a price to the public of $6.00 per Share, including 166,667 shares sold by a selling stockholder, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Wellington Shields & Co. LLC, and Dougherty & Co. LLC. (collectively, the “Underwriters”), with respect to the sale by the Company and the purchase by the Underwriters of the Shares. The Shares were registered for offer and sold pursuant to an effective Registration Statement on Form S-1 (File No. 333-191648) and a related prospectus.

On April 15, 2014, upon the closing of the Offering, the Company received approximately $17.3 million from the sale of 3,166,666 Shares in the Offering, excluding the Shares sold by the Selling Stockholder, after deducting the underwriting discounts and commissions. The net proceeds of the Offering were used in connection with the acquisition of AirPatrol and will also be used to expand the Company’s sales and marketing efforts, including expanding its Washington, D.C. office, for future strategic acquisitions, and for working capital and other general corporate purposes.

### Nasdaq Listing

On April 10, 2014, in connection with the offering of the Shares described above, the Company’s common stock began trading on The NASDAQ Capital Market, under the symbol “SYRX”.

### AirPatrol Merger

On April 18, 2014, the Company became the holder of 100% of the outstanding capital stock of AirPatrol upon the consummation of the transactions contemplated by that certain Agreement and Plan of Merger by and between the Company and AirPatrol (the “AirPatrol Merger Agreement”). Per Amendment 2 to the AirPatrol Merger Agreement, the AirPatrol acquisition was deemed effective as of April 16, 2014 for accounting purposes. At the closing, the Company (i) paid or initiated actions to pay a total of $8.5 million to various former stockholders, former note holders, former directors, professional service firms and continuing officers, (ii) issued a total of 1.1 million shares of its common stock to former stockholders, directors, and continuing officers of AirPatrol, and to the investment banking firm of AGC Partners, LLC, and (iii) issued 800,000 shares of its common stock into a holdback escrow. A working capital adjustment applied at closing reduced cash consideration by approximately $486,000 and reduced stock merger consideration by 157,192 shares. Additionally, a total of $1.1 million was deducted from cash merger consideration in conjunction with repayment of AirPatrol’s indebtedness to the Company. None of the persons receiving merger consideration from the Company at the closing had any material relationship, other than in respect of the merger transaction, with the Company, its affiliates, directors, officers, or any associate of such directors and officers.

### JOBS Act

Pursuant to Section 107 of the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to opt out of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

### Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, or 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 our 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.

### Revenue Recognition

We provide IT solutions and services to customers with revenues currently derived primarily from the sale of third-party hardware and software products, software, assurance, licenses and other consulting services, including maintenance services. The products and services we sell, and the manner in which they are bundled, are technologically complex and the characterization of these products and services require judgment in order to apply revenue recognition policies. For all of these revenue sources, we determine whether we are the principal or agent in accordance with Accounting Standards Codification Topic, 605-45 Principal Agent Considerations.

We allocate the total arrangement consideration to the deliverables based on an estimated selling price of our products and services and report revenues containing multiple deliverable arrangements under ASC 605-25 “Revenue Arrangements with Multiple Deliverables” (“ASC-605-25”). These multiple deliverable arrangements primarily consist of the following deliverables: third-party computer hardware, third-party software, hardware and software maintenance (a.k.a. support), and third-party services. We determine the estimated selling price using cost plus a reasonable margin for each deliverable, which was based on our established policies and procedures for providing customers with quotes, as well as historical gross margins for our products and services. From time to time our personnel are contracted to perform installation and services for the customer. In situations where we bundle all or a portion of the separate elements, vendor specific objective evidence (VSOE) is determined based on prices when sold separately. Our revenue recognition policies vary based upon these revenue sources and the mischaracterization of these products and services could result in misapplication of revenue recognition polices.

We recognize revenue when the following criteria are met (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Generally, these criteria are met upon shipment to customers with respect to the sales of hardware and software products. With respect to our maintenance and other service agreements, this criterion is met once the service has been provided. Revenue from the sales of our services on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. We recognize revenue for sales of all services on a fixed fee ratably over the term of the arrangement as such services are provided. The Company evaluates whether the revenues it receives from the sale of hardware and software products, licenses, and services, including maintenance and professional consulting services should be recognized on a gross or net basis on a transaction-by-transaction basis. We maintain primary responsibility for the materials and procedures utilized to service our customers, even in connection with the sale of third party-products and maintenance services, as we are responsible for the fulfillment and acceptability of the products and services purchased by our customers. In addition, the nature of the products sold to our customers are such that they need configuration in order to be utilized properly for the purposes intended by the customer and therefore we assume certain responsibility for product staging, configuration, installation, modification, and integration with other client systems, or retain general inventory risk upon customer return or rejection. Our customers rely on us to develop the appropriate solutions and specifications applicable to their specific system and then integrate any such required products or services into their systems. As described above, we are responsible for the day-to-day maintenance and warranty services provided in connection with all of our existing customer relationships, whether such services are ultimately provided directly by the Company and its employees or by the applicable third party service provider. As of the date of this filing, after an evaluation of all of our existing customer relationships, we have concluded that we are the primary obligor to all of our existing customers and therefore recognize all revenues on a gross basis.

### Long-lived Assets

We account for our long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“ASC 360”), which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

- significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows for two consecutive years);
- significant negative industry or economic trends;
- knowledge of transactions involving the sale of similar property at amounts below our carrying value; or
- our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.”

Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.

When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. We concluded there were no triggering events to further measure for impairment during the nine months ended September 30, 2014 or 2013.

We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the nine months ended September 30, 2014 and 2013, which would indicate a revision to the remaining amortization period related to any of our long-lived assets. Accordingly, we believe that the current estimated useful lives of long-lived assets reflect the period over which they are expected to contribute to future cash flows and are therefore deemed appropriate.

### Goodwill and Indefinite-lived Assets

We have recorded goodwill and other indefinite-lived assets in connection with our acquisitions of Lilien, Shoom and AirPatrol. 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. Our goodwill balance and other assets with indefinite lives are evaluated for potential impairment during the fourth quarter of each year and in certain other circumstances. The evaluation of impairment involves comparing the current fair value of the business to the recorded value, including goodwill. To determine the fair value of the business, we utilize both the “income approach”, which is based on estimates of future net cash flows and the “market approach”, which observes transactional evidence involving similar businesses. There was no goodwill impairment for the nine months ended September 30, 2014 and 2013.

### Deferred Income Taxes

In accordance with ASC 740 “Income Taxes” (“ASC 740”), management routinely evaluates the likelihood of the realization of its income tax benefits and the recognition of its deferred tax assets. In evaluating the need for any valuation allowance, management will assess whether it is more likely than not that some portion, or all, of the deferred tax asset may not be realized. Ultimately, the realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which temporary differences become deductible and/or tax credits and tax loss carry-forwards can be utilized. In performing its analyses, management considers both positive and negative evidence including historical financial performance, previous earnings patterns, future earnings forecasts, tax planning strategies, economic and business trends and the potential realization of net operating loss carry-forwards within a reasonable timeframe. To this end, management considered (i) that we have had historical losses in the prior years and cannot anticipate generating a sufficient level of future profits in order to realize the benefits of our deferred tax asset; (ii) tax planning strategies; and (iii) the adequacy of future income as of and for the nine months ended September 30, 2014, based upon certain economic conditions and historical losses through September 30, 2014. After consideration of these factors, management deemed it appropriate to establish a full valuation allowance.

A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s tax filings that do not meet these recognition and measurement standards. For the nine months ended September 30, 2014 and 2013, no liability for unrecognized tax benefits was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the nine months ended September 30, 2014 and 2013.

### Allowance for Doubtful Accounts

We maintain our reserves for credit losses at a level believed by management to be adequate to absorb potential losses inherent in the respective balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than annually. Management’s determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current economic conditions, and other relevant factors.

As of September 30, 2014 and 2013 allowance for credit losses included a general allowance of $740,000 and $133,000, respectively, due to the aging of the items greater than 120 days outstanding and other potential non-collections.

### Business Combinations

We account for business combinations using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. Any changes in the estimated fair values of the net assets recorded for acquisitions prior to the finalization of more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to our condensed consolidated financial results will be adjusted. All acquisition costs are expensed as incurred and in-process research and development costs are recorded at fair value as an indefinite-lived intangible asset and assessed for impairment thereafter until completion, at which point the asset is amortized over its expected useful life. Separately recognized transactions associated with business combinations are generally expensed subsequent to the acquisition date. The application of business combination and impairment accounting requires the use of significant estimates and assumptions.

Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date and are included in our Condensed Consolidated Financial Statements from the acquisition date.

### Stock-Based Compensation

We account for equity instruments issued to non-employees in accordance with accounting guidance, which requires that such equity instruments are recorded at their fair value on the measurement date, which is typically the date the services are performed.

We account for equity instruments issued to employees in accordance with accounting guidance that requires that awards are recorded at their fair value on the date of grant and are amortized over the vesting period of the award. We recognize compensation costs over the requisite service period of the award, which is generally the vesting term of the equity instrument issued.

The Black-Scholes option valuation model is used to estimate the fair value of the options or the equivalent security granted. The model includes subjective input assumptions that can materially affect the fair value estimates. The model was developed for use in estimating the fair value of traded options or warrants. The expected volatility is estimated based on the most recent historical period of time equal to the weighted average life of the options granted.

The principal assumptions used in applying the Black-Scholes model along with the results from the model were as follows:

| Risk-free interest rate Expected life of option grants | Nine Months ended September 30, 2014 2.62-2.82% 7 years | 2013 1.8 – 2.8% 7 years |
| --- | ---: | ---: |
| Expected volatility of underlying stock | 39.4% | 40% |
| Dividends | $- | $- |

The Company issued the following options and warrants during the nine months ended September 30, 2014:

| Date | Pre-Split Options/Warrants Granted | Post-Split Options/Warrants Granted | Exercise Price | Black Sholes Value of Option | Fair Value of Common Stock per Share |
| --- | ---: | ---: | ---: | ---: | ---: |
| 1/27/2014 | 20,000 | 10,000 | $4.74 | $16,600 | $2.03 |
| 4/02/2014 | 220,000 | 110,000 | $5.20 | $261,500 | $5.20 |
| 5/09/2014 |  | 100,000 | $7.50 | $160,200 | $5.55 |
| 5/09/2014 |  | 400,000 | $4.81 | $883,700 | $4.85 |
| 5/09/2014 |  | 25,000 | $4.85 | $54,900 | $4.85 |
| 7/03/2014 |  | 75,000 | $3.79 | $127,800 | $3.79 |

The Company issued the following shares of common stock as compensation during the nine months ended September 30, 2014:

| Date | Pre-Split Common Shares Issued | Post-Split Common Shares Issued | Fair Value of Common Stock per Share | Fair Value of Common Stock Issued |
| --- | ---: | ---: | ---: | ---: |
| 1/24/2014 | 10,000 | 5,000 | $2.03 | $20,300 |
| 4/02/2014 | 33,464 | 16,732 | $5.20 | $87,000 |
| 6/24/2014 |  | 64,000 | $5.00 | $320,000 |
| 7/10/2014 |  | 30,000 | $3.70 | $111,000 |
| 8/1/2014 |  | 7,895 | $3.80 | $30,000 |

37

### Operating Segments

The Company operates in the following business segments as follows:

- IT Commercial: These services include enterprise computing and storage, virtualization, business continuity, networking and information technology business consulting services to commercial organizations.
- IT Government: Information technology and telecommunications solutions and services primarily to government agencies in the United States (Domestic) and Saudi Arabia (Foreign). The operations include systems integration and consulting, including, but not limited to: custom application/software design, architecture and development, data center design and operations services, command control, computer communication, intelligence (C4I) system consulting, program management and security solutions and services.
- eSolutions: Internet based hosting eServices to its customers located in Europe (Foreign), Canada (Foreign) and the United States (Domestic) by providing Cloud-based data analytics and enterprise solutions to the media, publishing, and entertainment industries.
- Location-based Technology: Cybersecurity platform for wireless and cellular devices that can detect, monitor and manage the content and behavior of smartphones, tablets, laptops and other mobile devices based on their location and user.

Prior to the acquisitions of Lilien, Shoom and AirPatrol, Sysorex only operated in the IT Government segment.

### Rounding

All dollar amounts in this section have been rounded to the nearest thousand.

### Results of Operations

#### Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

The following table sets forth selected unaudited consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:

*(In thousands, except percentages)*

|  | Nine Months ended September 30, 2014 Amount | % of Revenues | September 30, 2013 Amount | % of Revenues | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Revenues | $47,748 | 100% | $34,092 | 100% | 40% |
| Cost of net revenues | $33,442 | 70% | $25,855 | 76% | 29% |
| Gross profit | $14,306 | 30% | $8,237 | 24% | 74% |
| Operating expenses | $19,831 | 42% | $10,641 | 31% | 86% |
| Loss from operations | $(5,525) | -12% | $(2,404) | -7% | -129% |
| Net loss | $(5,834) | -12% | $(2,905) | -9% | -100% |
| Net loss attributable to common stockholders | $(5,730) | -12% | $(2,801) | -8% | -105% |

38

### Net Revenues

Net revenues for the nine months ended September 30, 2014 were $47.7 million compared to $34.1 million for the comparable period in the prior year. For the nine months ended September 30, 2014, IT Commercial revenue was $39.7 million compared to $30.4 million for the prior year period as this business sector was acquired March 1, 2013 and only seven months of operations were included in the nine months ended September 30, 2013. IT Government revenue was $3.5 million for the nine months ended September 30, 2014, compared to $3.4 million for the prior year period, and increased slightly due to new contracts and organic growth. Revenue for eSolutions was $3 million during the nine months ended September 30, 2014 and $325,000 during the prior year period as the Company did not do business in this segment prior to the acquisition of Shoom. Location-based Technology Revenue was $1.6 million during the nine months ended September 30, 2014 and $0 during the prior year period as the Company did not do business in this segment prior to the acquisition of AirPatrol.

We expect business revenues from our IT Government segment to increase in 2015 assuming award decisions are made in our favor in connection with several outstanding proposals. We also expect an increase in revenue as a result of introductions to the acquired companies’ customers.

### Costs of Net Revenues

Cost of net revenues for the nine months ended September 30, 2014 was $33.4 million compared to $25.9 million for the prior year period. This increase of $7.5 million was primarily attributable to the Lilien Acquisition effective March 1, 2013 and the inclusion of Lilien’s cost of revenues of $31 million (as compared to seven months of Lilien cost of revenues in the comparable period in 2013 of $24 million), the Shoom Acquisition effective August 31, 2013, and the inclusion of Shoom’s cost of revenues of $600,000 and the AirPatrol acquisition effective April 16, 2014, and the inclusion of AirPatrol’s cost of revenues of $253,000. The costs of revenues for the nine months ended September 30, 2014 related to the IT Government business were $1.6 million as compared to $1.8 million for the prior year period. This slight decrease was due to lower cost of goods related to new contracts with lower costs and higher profit margins. We expect IT Government business cost of revenues to increase during 2015 assuming award decisions are made in our favor in connection with several outstanding proposals.

The gross profit margins for the nine months ended September 30, 2014 and 2013 were 30% and 24%, respectively. IT Commercial gross margin was 22%; gross margin for eSolutions was 80% and gross margin for Location Based Technology was 84% during the nine month period ended September 30, 2014. IT Commercial gross margin was 21% and eSolutions gross margin was 97% during the nine month period ended September 30, 2013. There was no comparable amount for Location Based Technology for the prior year, as the Company did not do business in this segment prior to the acquisition of AirPatrol. The gross margin from IT Government was 54% for the nine months ended September 30, 2014 and 47% during the prior year period. This slight increase is due to new contracts during the period that included a product mix with higher margins. We expect gross profit margins to increase in the future as AirPatrol revenue is expected to increase our overall gross profit margins. (See Note 6 “Acquisition of AirPatrol”).

### Operating Expenses

Operating expenses for the nine months ended September 30, 2014 were $19.8 million compared to $10.6 million for the prior year period. This increase of $9.2 million was primarily attributable to the inclusion of nine months of Lilien’s operating expenses as compared to seven months in the prior period; nine months of Shoom’s operating expenses as compared to one month in the prior period; the inclusion of AirPatrol’s operating expenses for the period; bad debt expense in the IT Government business; increases in non-cash stock based compensation; and additional professional fees and administrative costs associated with being a public company.

### Loss from Operations

Loss from operations for the nine months ended September 30, 2014 was $5.5 million compared to $2.4 million for the prior year period. This increase of $3.1 million was primarily attributable to lower gross margin during the third quarter for Lilien; the net loss for AirPatrol; bad debt expense in the IT Government business; increases in non-cash stock based compensation; and additional professional fees and administrative costs associated with being a public company.

### Other Expense

Other expense for the nine months ended September 30, 2014 was $274,000 compared to $501,000 for the prior year period. The loss in the prior year included a change in fair value of derivative liability expense of $489,000.

### Provision for Income Taxes

Provision for income taxes for the nine months ended September 30, 2014 was $35,000 compared to $0 for the prior year period. This increase of $35,000 is attributable to estimated federal alternative minimum tax paid during the nine months ended September 30, 2014. Deferred tax assets resulting from Company losses are fully reserved as of September 30, 2014 and 2013 since, at present, we have no history of taxable income and it is more likely than not that such assets will not be realized.

### Net Loss Attributable to Non-Controlling Interest

Net loss attributable to non-controlling interest for the nine months ended September 30, 2014 was $104,000 compared to $104,000 for the comparable period in the prior year.

### Net Loss Attributable to Common Stockholders

Net loss attributable to common stockholders for the nine months ended September 30, 2014 was $5.7 million compared to $2.8 million for the comparable period in the prior year. This increase in net loss of $2.9 million was attributable to the changes discussed above.

#### Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

The following table sets forth selected unaudited consolidated financial data as a percentage of our revenue and the percentage of period-over-period change:

*(In thousands, except percentages)*

|  | Three Months ended September 30, 2014 Amount | % of Revenues | September 30, 2013 Amount | % of Revenues | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Revenues | $14,283 | 100% | $13,941 | 100% | 2% |
| Cost of net revenues | $10,008 | 70% | $10,159 | 73% | -1% |
| Gross profit | $4,275 | 30% | $3,782 | 27% | 13% |
| Operating expenses | $6,735 | 47% | $4,794 | 34% | 40% |
| Loss from operations | $(24,61) | -17% | $(1,012) | -7% | -143% |
| Net loss | $(2,549) | -18% | $(936) | -7% | -172% |
| Net loss attributable to common stockholders | $(2,543) | -18% | $(907) | -7% | -180% |

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### Net Revenues

Net revenues for the three months ended September 30, 2014 were $14.3 million compared to $13.9 million for the comparable period in the prior year. For the three months ended September 30, 2014, IT Commercial revenue was $11.8 million compared to $12.5 million for the prior year period. IT Government revenue was $1 million for the three months ended September 30, 2014, and for the prior year period. Revenue for eSolutions was $1 million during the three months ended September 30, 2014 and $325,000 during the prior year period. Location-based Technology Revenue was $480,000 during the three months ended September 30, 2014 and $0 during the prior year period as the Company did not do business in this segment prior to the acquisition of AirPatrol.

### Costs of Net Revenues

Cost of net revenues for the three months ended September 30, 2014 was $10 million compared to $10.2 million for the prior year period. This slight decrease of $151,000 was primarily attributable to increased higher margin data analytic revenues from Lilien offset by the Shoom Acquisition effective August 31, 2013 and the inclusion of Shoom’s cost of revenues of $195,000, and the AirPatrol acquisition effective April 16, 2014 and the inclusion of AirPatrol’s cost of revenues of $128,000. The cost of revenues for the three months ended September 30, 2014 related to the IT Government business were $370,000 as compared to $571,000 for the prior year period due to contracts with lower costs and higher margins.

The gross profit margins for the three months ended September 30, 2014 and 2013 were 30% and 27%, respectively. IT Commercial gross margin was 21%, gross margin for eSolutions was 80% and gross margin for Location-based Technology was 73% during the three month period ended September 30, 2014. IT Commercial gross margin was 24% and gross margin for eSolutions was 97% during the three month period ended September 30, 2013. There are no comparable amounts for Location Based Technology for the prior year, as the Company did not do business in this segment prior to the acquisition of AirPatrol. The gross margin from IT Government was 65% for the three months ended September 30, 2014 and 48% during the prior year period. This slight increase is due to new contracts during the period that included a product mix with higher margins.

### Operating Expenses

Operating expenses for the three months ended September 30, 2014 were $6.7 million compared to $4.8 million for the prior year period. This increase of $1.9 million was primarily attributable to the inclusion of three months of Shoom’s operating expenses as compared to one month in the prior period; the inclusion of AirPatrol’s operating expenses during the third quarter; bad debt expense for the IT Government business; and additional professional fees and administrative costs associated with being a public company.

### Loss from Operations

Loss from operations for the three months ended September 30, 2014 was $2.5 million compared to $1 million for the prior year period. This increase of $1.5 million was primarily attributable to lower gross margin during the quarter for Lilien; the net loss for AirPatrol; bad debt expense for the IT Government business; and additional professional fees and administrative costs associated with being a public company.

### Other Expense

Other expense for the three months ended September 30, 2014 was $88,000 compared to $76,000 for the prior year period.

### Provision for Income Taxes

There was no provision for income taxes for the three months ended September 30, 2014 or 2013. Deferred tax assets resulting from such losses are fully reserved as of September 30, 2014 and 2013 since, at present, we have no history of taxable income and it is more likely than not that such assets will not be realized.

### Net Loss Attributable to Non-Controlling Interest

Net loss attributable to non-controlling interest for the three months ended September 30, 2014 was $6,000 compared to $29,000 for the prior year period. This decrease of $23,000 was attributable to the decrease in losses for Sysorex Arabia and was not material.

### Net Loss Attributable To Common Stockholders

Net loss attributable to common stockholders for the three months ended September 30, 2014 was $2.5 million compared to $907,000 for the prior year period. This increase in net loss of $1.6 million was attributable to the changes discussed above.

### 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, 2014 was a loss of $1.5 million compared to income of $49,000 for the prior year period. Adjusted EBITDA for the nine months ended September 30, 2014 was a loss of $1 million compared to income of $197,000 for the prior year period.

The following table presents a reconciliation of net income/loss attributable to stockholders of Sysorex Global Holdings Corp., which is our GAAP operating performance measure, to Adjusted EBITDA for the fiscal quarters ended September 30, 2014 and 2013 (in thousands):

|  | Three Months Ended September 30, 2014 | 2013 | Nine Months Ended September 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to common stockholders | $(2,542) | $(907) | (5,730) | $(2,801) |
| Adjustments: |  |  |  |  |
| Non-recurring one-time charges: |  |  |  |  |
| Acquisition transaction/financing costs | - | 316 | 855 | 920 |
| Stock-based compensation – acquisition costs | - | - | 340 | 304 |
| Costs associated with public offering | - | 187 | 45 | 274 |
| Gain on settlement of obligations | - | (140) | - | (155) |
| Change in the fair value of derivative liability | - | - | - | 489 |
| Stock-based compensation – compensation and related benefits | 434 | 248 | 938 | 414 |
| Interest expense | 95 | 76 | 307 | 179 |
| Taxes | - | - | 35 | - |
| Depreciation and amortization | 513 | 269 | 2,216 | 573 |
| Adjusted EBITDA | $(1,500) | $49 | (994) | $197 |

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We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:

- To review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;
- To compare our current operating results with corresponding periods and with the operating results of other companies in our industry;
- As a basis for allocating resources to various projects;
- As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and
- To evaluate internally the performance of our personnel.

We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:

- We believe Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, and other non-operating expenses as well as depreciation and amortization which are non-cash expenses;
- 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 Loss per Share

Basic and diluted net loss per share for the three months ended September 30, 2014 was ($0.13) compared to ($0.07) for the prior year period. Basic and diluted net loss per share for the nine months ended September 30, 2014 was ($0.33) compared to ($0.24) for the prior year period. These decreases were attributable to the changes discussed in our results of operations.

Proforma non-GAAP net income (loss) per share is used by our Company’s management as an evaluation tool as it manages the business and is defined as net income (loss) per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one time charges including 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, 2014 was ($0.08) compared to ($0.01) for the prior year period. Proforma non-GAAP net loss per basic and diluted common share for the nine months ended September 30, 2014 was ($0.09) compared to ($0.01) for the prior year period.

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:

*(thousands, except per share data)*

|  | Three Months Ended September 30, 2014 | 2013 | Nine Months Ended September 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to common stockholders | $(2,542) | $(907) | (5,730) | $(2,801) |
| Adjustments: |  |  |  |  |
| Non-recurring one-time charges: |  |  |  |  |
| Acquisition transaction/financing costs | - | 316 | 855 | 920 |
| Stock-based compensation – acquisition costs | - | - | 340 | 304 |
| Costs associated with public offering | - | 187 | 45 | 274 |
| Gain on settlement of obligations | - | (140) | - | (155) |
| Change in the fair value of derivative liability | - | - | - | 489 |
| Stock-based compensation – compensation and related benefits | 434 | 248 | 938 | 414 |
| Amortization of intangibles | 442 | 236 | 2,020 | 492 |
| Proforma non-GAAP net loss | $(1,666) | $(60) | $(1,532) | $(63) |
| Proforma non-GAAP net loss per basic and diluted common share | $(0.08) | $(0.01) | $(0.09) | $(0.01) |
| Weighted average basic and diluted common shares outstanding | 19,624 | 13,064 | 17,593 | 11,682 |

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We rely on proforma non-GAAP net loss per share, which is a non-GAAP financial measure:

- To review and assess the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;
- To compare our current operating results with corresponding periods and with the operating results of other companies in our industry;
- As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and
- To evaluate internally the performance of our personnel.

We have presented proforma non-GAAP net 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 loss per share as supplemental disclosure because:

- We believe proforma non-GAAP net 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 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 proforma non-GAAP net loss per share is helpful to compare our results to other companies.

### Liquidity and Capital Resources as of September 30, 2014 Compared With September 30, 2013

The Company’s net cash flows used in operating, investing and financing activities for the nine months ended September 30, 2014 and 2013 and certain balances as of the end of those periods are as follows (in thousands):

|  | Nine Months Ended September 30, 2014 | 2013 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(6,392) | $(2,606) |
| Net cash provided by (used in) investing activities | (9,761) | 1,066 |
| Net cash provided by financing activities | 16,789 | 5,614 |
| Effect of foreign exchange rate changes on cash | (11) | - |
| Net increase in cash | $625 | $4,074 |
|  | **September 30, 2014** | **December 31, 2013** |
| Cash and cash equivalents | $2,729 | $2,104 |
| Working capital (deficit) | $(2,137) | $(7,605) |

45

### Operating Activities:

Net cash used in operating activities during the nine months ended September 30, 2014 and 2013 were $6.4 million and $2.6 million, respectively. Net cash used in operating activities during the nine months ended September 30, 2014 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(5,834) |
| Non-cash income and expenses | 3,492 |
| Net change in operating assets and liabilities | (4,050) |
| Net cash used in operating activities | $(6,392) |

The net loss of $5.8 million consisted primarily of (in thousands):

|  |  |
| ---: | --- |
| $(1,240) | Expenses attributable to transaction costs of $1.2 million directly related to acquisitions and $45,000 related to our public offering related activities. |
| (321) | Loss attributable to the Lilien operations. These operating results included non-cash charges for amortization of intangible assets totaling $576,000. Otherwise Lilien’s reported operating results would have been a profit of $255,000. |
| 824 | Profit attributable to the Shoom operations. These charges include amortization of intangibles of $408,000. Otherwise Shoom’s reported operating results would have been a profit of $1.2 million. |
| 261 | Profit attributable to information technology solutions services to U.S. and foreign governments. |
| (2,669) | Loss attributable to the AirPatrol operations. These operating results include non-cash charges for amortization of intangible assets totaling $2 million. Otherwise AirPatrol’s operating results would have been a loss of $643,000. |
| (2,689) | A non-cash charge of $938,000 for non-acquisition related stock based compensation expense and all other Company activities of $1.8 million. |
| $(5,834) | Net loss |

As previously discussed, Lilien is an information technology company whose operations complement and significantly expand our current base of business and enable us to provide integrated solutions and services to both government and private organizations. Lilien generated revenues for the twelve months ended December 31, 2013 and 2012 of approximately $49.8 million and $40.6 million, respectively. We anticipate Lilien’s revenues will further increase in 2014 as we expect Lilien’s business to expand into Cloud based data analytic services and as it cross-sells company owned products such as AirPatrol's location-based technology. In that light, we expect Lilien’s gross profits and cash flows to increase during 2014.

We anticipate an increase in revenues and cash flows over the next 12 months as compared to historical periods as a result of the recent AirPatrol acquisition, as well as anticipated revenues expected to be received from our IT Government segment assuming award decisions are made in our favor in connection with several outstanding proposals.

The non-cash income and expenses of $3.5 million consisted primarily of (in thousands):

|  |  |
| ---: | --- |
| $196 | Depreciation expense |
| 2,020 | Amortization of intangibles primarily attributable to the Lilien, Shoom and AirPatrol operations, which were, acquired effective March 1, 2013, August 31, 2013 and April 16, 2014, respectively. |
| 1,279 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations and for the AirPatrol acquisition. |
| (3) | Other |
| $3,492 | Total non-cash income and expenses |

46

The net use of cash due to changes in operating assets and liabilities totaled $4.1 million and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $253 | Decrease in accounts receivable and other receivables |
| (1,916) | Increase in prepaid licenses and maintenance contracts |
| (2,691) | Decrease in accounts payable |
| 2,426 | Increase in deferred revenue |
| (1,312) | Decrease in accrued liabilities and other liabilities |
| (810) | Increase in inventory and other assets |
| $(4,050) | Net use of cash in the changes in operating assets and liabilities |

### Investing Activities:

Net cash used in investing activities during the nine months ended September 30, 2014 was $9.8 million compared to net cash provided of $1.1 million for the prior year period. The net cash used in investing activities during the nine months ended September 30, 2014 was comprised of $8.4 million in connection with the AirPatrol acquisition; $311,000 purchase of property and equipment; $210,000 investment in capitalized software; $1 million loans and advances to other parties; offset by $125,000 proceeds from the redemption of marketable securities.

### Financing Activities:

Net cash provided by financing activities during the nine months ended September 30, 2014 and 2013 were approximately $16.8 million and $5.6 million, respectively. The net cash provided by financing activities during the nine months ended September 30, 2014 was comprised primarily of $2.1 million of net cash from the issuance of common stock to a strategic investor; $16.6 million net cash from a capital raise after deduction of the related costs; $13,000 of net cash from employee option exercises; offset by $1.9 million repayment of the bank facility.

### Liquidity and Capital Resources - General:

Our current capital resources and operating results as of September 30, 2014, as described in the preceding paragraphs, consist of:

1\) An overall working capital deficit of $2.1 million;

2\) Cash of $2.7 million;

3\) A revolving line of credit for up to $6 million with a maturity date of April 16, 2016 of which $4.5 million is utilized;

5\) A term loan for $750,000 with a maturity date of August 27, 2015 of which $500,000 is utilized; and

6\) Net cash used in operating activities year-to-date of $6.4 million.

We believe our total working capital deficit of $2.1 million does not represent a severe impediment to our operations and growth when its principal components are separately identified and analyzed and the growth of our business is taken into account. The breakdown of our overall working capital deficit is as follows (in thousands):

| Working capital | Assets | Liabilities | Net |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $2,729 | $- | $2,729 |
| Accounts receivable, net / accounts payable | 8,545 | 6,374 | 2,171 |
| Notes and other receivables | 2,220 | - | 2,220 |
| Prepaid licenses and maintenance contracts / deferred revenue | 6,398 | 7,863 | (1,465) |
| Short-term debt | - | 6,134 | (6,134) |
| Other | 1,834 | 3,492 | (1,658) |
| Total | $21,726 | $23,863 | $(2,137) |

47

Net accounts receivable exceeds the related accounts payable by $2.2 million. We do not believe there are material collectability issues with respect to our net accounts receivable. In accordance with industry practice, payments to major vendors included in our accounts payable are normally extended until the time the collection of the related sale is received. Deferred revenue exceeds the related prepaid contracts by $1.5 million and will be recognized as the contracts are performed over their respective terms. Notes and other receivables of $2.2 million exceed the difference between other liabilities and assets of $1.7 million. The short-term debt totals $6.1 million, which we believe will not have a material adverse effect on our liquidity in the next twelve months as the principal balance of $500,000 is not due until April 2016, which is more than twelve months from the current balance sheet date of September 30, 2014.

Year-to-date net cash used in operating activities of $6.4 million consists of net cash used in operations of $2.3 million and net cash used of $4.1 million in changes in operating assets and liabilities. We expect net cash used in operations during the remainder of 2014 to decrease as:

1\) The Company received approximately $17.3 million in April 2014, after deducting the underwriting discounts and commissions, in net proceeds from the sale of 3,166,666 shares in a public offering;

2\) The Company completed a $2 million private equity offering from a strategic investor in February 2014;

3\) Sysorex was awarded a $3 million contract of which $1.24 million in revenue is expected to be recognized in 2014;

4\) Lilien, Shoom and AirPatrol complement and significantly expand our current base of business and enable us to provide integrated solutions and services to both government and private organizations globally. In that light, we anticipate increases in revenues and cash flows during 2014.

Consequently, we expect that our current capital resources as of September 30, 2014, as described in the preceding paragraphs, will be sufficient to fund planned operations during the next twelve months. We also expect that as our business expands, cash provided from operations will, over time, eliminate our working capital deficit and provide ongoing improvement in our long-term liquidity.

We have received approximately $17.3 million in equity financing in April 2014 which provided us the funding to close the AirPatrol Corporation acquisition and we may seek future equity financing to provide us with the capital necessary to continue pursuing the acquisition and expansion strategy that we launched with the acquisition of Lilien in March 2013 and, if necessary, to provide working capital to our current operations.

If we are unsuccessful in raising additional capital or obtaining alternative financing during 2014, we may have to postpone or abandon any future acquisitions and expansion plans. However, if our acquisition and expansion plans are required to be postponed or abandoned, we expect that it will have a limited effect on our liquidity or the ongoing operations of Sysorex, Lilien, Shoom and AirPatrol as described above.

### Liquidity and Capital Resources - Bridge Bank Financing Agreement

On March 15, 2013 Sysorex Government Services, Inc. and Lilien Systems entered into a Business Finance Agreement (the “Agreement”) as co-borrowers (the “Borrowers”) with Bridge Bank, NA (the “Bank”) pursuant to which the Borrowers obtained a revolving line of credit for up to $5 million with a maturity date of March 15, 2015. The Agreement was amended on August 29, 2013 (the “First Amendment”) to increase the credit limit to $6 million, and amend the asset coverage ratio to not less than (i) 1.0 to 1.0, tested as at the end of each month, commencing with the month ended July 31, 2013, and (ii) 1.4 to 1.0, tested as at the end of each month, commencing with the month ending September 30, 2013 and the performance-to-plan covenant was amended to state that the combined revenues and net income are not to deviate by more than 20% or $100,000 from the projections of combined revenues and net income approved by Borrowers’ boards of directors with respect to the rolling three month period ended on the date of determination, tested as at June 30, 2013, September 30, 2013, and the end of each month thereafter, commencing with the month ending October 31, 2013.

The Company and its wholly-owned subsidiary, Sysorex Federal Inc., entered into unconditional guarantees of all indebtedness under the Agreement and granted the Bank a continuing security interest in all assets of the Company and its subsidiary. The Company and Sysorex Federal pledged to the Bank all of the capital stock of Lilien Systems, Sysorex Federal and Sysorex Government Services, respectively. Lilien Systems and Sysorex Government Services each entered into an intercreditor subordination agreement subordinating their right of payment to the Bank.

In addition, concurrent with the First Amendment, the Company entered into a term loan for $750,000 which accrues interest at the greater of 5.25% or the Bank’s prime rate plus 2% and matures on August 27, 2016. The Company is obligated to make payments of approximately $42,000 on the first day of each month commencing on April 1, 2014 until the loan amount is paid in full.

The Bank also received (i) warrants to purchase 83,334 (166,667 pre-split) shares of common stock exercisable at $0.90 ($0.45 pre-split) per share in connection with the Agreement on March 20, 2013, and (ii) warrants to purchase 56,250 (112,500 pre-split) shares of common stock exercisable at $2.40 ($1.20 pre-split) per share in connection with the First Amendment on August 29, 2013.

On May 13, 2014 the Company entered into Amendment 2 to the Agreement in connection with the Company’s acquisition of AirPatrol effective as of April 16, 2014. Amendment 2 extended the revolving advances maturity date to April 16, 2016, defined the “Term Advance Maturity Date” as August 27, 2015, approved the acquisition of AirPatrol Corporation and waived any defaults by the Company of the Performance to Plan covenant since August 29, 2013 through the date of Amendment 2.

As of September 30, 2014, the principal amount outstanding under the Agreement was $4.5 million and an additional $500,000 is outstanding under a term loan.

### 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 Pronouncements

For a discussion of recently issued accounting pronouncements, please see Note 3 to our financial statements, which is included in this report in Item 1.

## Market risk

As filed, 147 characters.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

## Controls and procedures

As filed, 1,363 characters.

### Evaluation of Disclosure Controls and Procedures

Based on management’s evaluation (with the participation of our Chief Executive Officer (CEO), who is our principal executive officer and our Chief Financial Officer (CFO), who is our principal financial officer, as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 140 characters.

We incorporate by reference the risk factors included in the prospectus filed with the Securities and Exchange Commission on April 10, 2014.

Filed Nov 13, 2014.
Source: SEC EDGAR, the filing index for accession 0001213900-14-008050. Last ingested by Listed: Nov 6, 2026, 18:14 ET. No prices; not investment advice.