# XTI Aerospace, Inc.: Form 10-Q for the period ended Mar 31, 2016

- Company: [XTI Aerospace, Inc.](/companies/xtia.md) (CIK 1529113)
- Form: 10-Q
- Filed: 2016-05-16
- Accepted by EDGAR: May 16, 2016, 16:15 ET
- Period: 2016-03-31
- Accession: 0001213900-16-013453
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1529113/000121390016013453/f10q0316_sysorexglobal.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1529113/000121390016013453/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $14.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $10.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-01-01 to 2016-03-31 | $3.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2016-01-01 to 2016-03-31 | $587.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | −$4.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $143.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | −$4.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | −$0.17 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$4.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2016-03-31 | $2.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $26.3m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $65.1m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $34.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $46.1m | us-gaap:Liabilities |
| Long-term debt | at 2016-03-31 | $1.1m | us-gaap:LongTermDebt |
| Short-term borrowings | at 2016-03-31 | $8.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2016-03-31 | $20.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 48,716 characters.

### Forward-Looking Statement Notice

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”). In addition to historical information, this discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements, due to a number of factors, including but not limited to, risks described in the section entitled “Risk Factors.” (Unless otherwise stated or the context otherwise requires, the terms “Sysorex” “we,” “us,” “our” and the “Company” refer collectively to Sysorex Global and its wholly-owned subsidiaries.)*

### Overview of Our Business

Sysorex provides data analytics and indoor-location based solutions and services to commercial and government customers worldwide. We have developed a discovery platform that blends data from traditional software and network systems with the growing universe of mobile and Internet-connected things. In doing so, we have created a high velocity, secure and scalable platform that we believe allows customers to evaluate their most complex business issues, helping them to compete successfully in their respective markets. Our analytics products provide turnkey vertical solutions from ETL (extract, transform, load) to BI (business intelligence) to the final visualization of the data. These solutions are available on-premise or in the Cloud.

Our AirPatrol product provides indoor-locationing based on cellular, wifi and Bluetooth signals in one sensor. As far as we know, there is no competitor that can offer all three of these in one product and provide the accuracy and comprehensiveness of our AirPatrol platform. AirPatrol can be used for security applications; retail analytics; asset tracking and a variety of other use-cases. We are expanding the RF signal range that our sensors can detect so that we can detect any type of wireless device whether it be a drone or some RFID or beacon embedded sensor.

Our LightMiner product line has two patents pending. LightMiner Studio is an in-memory, real-time, data analysis system designed to perform very large, highly complex and extremely difficult calculations using off-the-shelf hardware and memory. It supports both traditional SQL-based business intelligence and analytics applications as well as a host of integrated statistical, machine learning and artificial intelligence algorithms allowing it to provide supercomputer-like performance at competitive prices. LightMiner is at the core of our analytics platform and can be used for machine-to-machine (M2M) analytics; consumer analytics; predictive analytics; security; and other data analysis projects. LightMiner fully integrates with our AirPatrol product and, in our opinion, the combined offering is a valuable addition to for the Internet of Things (IoT) market.

Sysorex also provides supporting products and services including enterprise computing and storage, virtualization, business continuity, data migration, custom application development, networking and information technology business consulting services. These allow Sysorex to offer turnkey solutions when requested by customers.

Revenues from our storage and computing segment are primarily driven by purchase orders that are received on a monthly basis. During the three months ended March 31, 2016 approximately 30% of such revenues are based on 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 Sysorex upfront for the full term of the warranty and maintenance contract. Revenue from these contracts is determinable ratably over the contract period with the unearned revenue recorded as deferred revenue and amortized over the contract period.

Our Software-as-a-Service (SaaS) contracts are typically performed for periods of one or more years. Sysorex SaaS products include its Shoom product line for the media and entertainment vertical, cloud based analytics services and other related services.

Our mobile, IoT and data analytics products segment includes our AirPatrol product line and will include sales of our LightMiner products. Sales are expected to grow for AirPatrol products as we expand our offering beyond government customers to commercial companies. Sales cycles proved to be longer than we expected in 2015. The long sales cycles result from customer related issues such as budget and procurement processes but are also because customers found additional use-cases for the products and requested further evaluations.

### Recent Events

### Western Alliance Financing Agreement Amendment

On March 25, 2016, the Company, and certain of its wholly-owned subsidiaries as borrowers, entered into an amendment and waiver (the “Amendment”) to the Business Finance Agreement (the “Financing Agreement”) with Bridge Bank, N.A. as the lender dated as of March 15, 2013, which was amended by the first amendment dated August 29, 2013, the second amendment dated May 13, 2014, the third amendment dated December 31, 2014, the fourth amendment dated May 4, 2015 and the fifth amendment dated October 7, 2015. Pursuant to the Amendment, Western Alliance Bank as successor in interest to Bridge Bank, N.A., waived any non-compliance by the borrowers with respect to the minimum adjusted EBITDA requirements as of December 31, 2015. In addition, the lender and the borrowers agreed that the adjusted EBITDA for the three months ended March 31, 2016 would not be less than $(2,200,000) and on or before April 30, 2016, the borrowers and the lender must agree to additional financial covenants for the fiscal quarters ended June 30, 2016, September 30, 2016 and December 31, 2016. The lender has agreed to extend the April 30, 2016 deadline and the parties are currently negotiating the additional financial covenants.

### 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) shipment (software and hardware) or fulfillment (maintenance) has occurred and applicable 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 criteria 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 systems 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. Based on our evaluation we did not record a charge for impairment for the three months ended March 31, 2016 and 2015.

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 three months ended March 31, 2016 or 2015, 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, AirPatrol and LightMiner. 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 three months ended March 31, 2016 or 2015.

### 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 three months ended March 31, 2016, based upon certain economic conditions and historical losses through March 31, 2016. 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 three months ended March 31, 2016 and 2015, 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 three months ended March 31, 2016 and 2015.

### 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 March 31, 2016 and December 31, 2015, allowance for credit losses included a general allowance of $497,000 and $285,000, 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:

|  | Three Months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Risk-free interest rate | 1.47% | 1.99% |
| Expected life of option grants | 7 years | 7 years |
| Expected volatility of underlying stock | 49.02% | 39.4% |
| Dividends | $-- | $-- |

For the three months ended March 31, 2016 and 2015 the Company incurred stock-based compensation charges of $364,000 and $386,000, respectively.

### Operating Segments

The Company operates in the following business segments:

- Mobile, IoT & Big Data Products: These products currently include our AirPatrol product line (location-based security and marketing platform for wireless and cellular devices that can detect, monitor and manage the content and behavior of smartphones, tablets and other mobile devices based on their location and user); on-premise big data appliance product (Light Miner Studio “LMS”) and will include future Sysorex owned products.
- Storage and Computing: This segment includes third party hardware, software and related maintenance/warranty products and services that Sysorex resells. It includes but is not limited to products for enterprise computing; storage; virtualization; networking; etc.
- SaaS Revenues: These are Software-as-a-Services (SaaS) or Internet based hosted services including the Shoom product line and cloud based big data analytics services (based on our LMS product) and other data science services; analytics services for AirPatrol products and other managed services on a SaaS basis.
- Professional Services: These are general IT services including but not limited to: custom application/software design; architecture and development; project management; C4I system consulting; strategic outsourcing; staff augmentation; data center design and operations services; data migration services and other non-SaaS services.

### Rounding

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

### Results of Operations

### Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

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 March 31, 2016 Amount | % of Revenues | March 31, 2015 Amount | % of Revenues | % Change |
| --- | ---: | ---: | ---: | ---: | ---: |
| Product Revenues | $10,348 | 73% | $10,388 | 74% | 0% |
| Services Revenues | $3,739 | 27% | $3,734 | 26% | 11% |
| Cost of net revenues - Products | $8,042 | 57% | $8,650 | 61% | (7%) |
| Cost of net revenues - Services | $2,098 | 15% | $1,425 | 10% | 77% |
| Gross profit | $3,947 | 28% | $4,047 | 29% | (3%) |
| Operating expenses | $8,129 | 58% | $6,858 | 49% | 18% |
| Loss from operations | $(4,182) | (30%) | $(2,811) | (20%) | 47% |
| Net loss | $(4,306) | (31%) | $(2,905) | (21%) | 46% |
| Net loss attributable to common stockholders | $(4,302) | (31%) | $(2,900) | (21%) | 46% |

### Net Revenues

Net revenues for the three months ended March 31, 2016 were $14.1 million compared to $14.1 million for the comparable period in the prior year. For the three months ended March 31, 2016, Mobile, IoT & Big Data Products revenue was $195,000 compared to $143,000 for the prior year period. Storage and Computing revenue was $10.2 million for the three months ended March 31, 2016, and $10.3 million for the prior year period. SaaS Revenues was $829,000 during the three months ended March 31, 2016 and $973,000 during the prior year period. Professional Services Revenue was $2.9 million during the three months ended March 31, 2016 and $2.7 million during the prior year period.

### Cost of Net Revenues

Cost of net revenues for the three months ended March 31, 2016 was $10.1 million compared to $10.1 million for the prior year period. Mobile, IoT & Big Data Products cost of net revenues was $81,000 for the three months ended March 31, 2016 as compared to $125,000 for the prior period. Storage and Computing cost of net revenues was $8.0 million for the three months ended March 31, 2016, and $8.5 million for the prior year period. SaaS Revenues cost of net revenues was $205,000 during the three months ended March 31, 2016 and $222,000 during the prior year period. Professional Services cost of net revenues was $1.9 million during the three months ended March 31, 2016 and $1.2 million during the prior year period.

The gross profit margin for the three months ended March 31, 2016 was 28% compared to 29% during the three months ended March 31, 2015. Mobile, IoT & Big Data Products gross margins for the three months ended March 31, 2016 and 2015 were 58% and 12%, respectively. Gross margins for the Storage and Computing segment for the three months ended March 31, 2016 and 2015 were 22% and 17%, respectively. Gross margins for SaaS Revenues for the three months ended March 31, 2016 and 2015 were 75% and 77%, respectively. Gross margins for Professional Services revenues for the three months ended March 31, 2016 and 2015 were 35% and 56%, respectively.

### Operating Expenses

Operating expenses for the three months ended March 31, 2016 were $8.1 million compared to $6.9 million for the prior year period. This increase of $1.2 million includes a $316,000 increase in amortization of intangibles and depreciation and the balance was costs of expanding our engineering, sales and marketing operations.

### Loss from Operations

Loss from operations for the three months ended March 31, 2016 was $4.2 million compared to $2.8 for the prior year period. This increase in loss of $1.4 million was primarily attributable to an increase in amortization of intangibles, depreciation and costs of expanding our engineering, sales and marketing operations including hiring more resources in those departments.

### Other Income/Expense

Net other income/expense for the three months ended March 31, 2016 and 2015 were ($124,000) and ($94,000), respectively.

### Provision for Income Taxes

There was no provision for income taxes for the three months ended March 31, 2016 and 2015. Deferred tax assets resulting from such losses are fully reserved as of March 31, 2016 and 2015 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 March 31, 2016 was $4,000 compared to a net loss of $5,000 for the prior year period. This decrease of $1,000 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 March 31, 2016 was $4.3 million compared to $2.9 for the prior year period. This increase in net loss of $1.4 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 March 31, 2016 was a loss of $2,455,000 compared to a loss of $1,336,000 for the prior year period.

The following table presents a reconciliation of net income/loss attributable to stockholders of Sysorex Global, which is our GAAP operating performance measure, to Adjusted EBITDA for the fiscal quarters ended March 31, 2016 and 2015 (in thousands):

|  | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net loss attributable to common stockholders | $(4,302) | $(2,900) |
| Adjustments: |  |  |
| Non-recurring one-time charges: |  |  |
| Acquisition transaction/financing costs | 20 | 76 |
| Change in the fair value of shares to be issued | 1 | -- |
| Stock based compensation – compensation and related benefits | 364 | 386 |
| Interest expense | 143 | 99 |
| Depreciation and amortization | 1,319 | 1,003 |
| Adjusted EBITDA | $(2,455) | $(1,336) |

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 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 March 31, 2016 was ($0.17) compared to ($0.15) for the prior year period. This decrease was 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, the costs associated with the public offering, severance costs and changes in the fair value of shares to be issued.

Proforma non-GAAP net loss per basic and diluted common share for the three months ended March 31, 2016 was ($0.11) compared to ($0.08) 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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net loss attributable to common stockholders | $(4,302) | $(2,900) |
| Adjustments: |  |  |
| Non-recurring one-time charges: |  |  |
| Acquisition transaction/financing costs | 20 | 76 |
| Change in the fair value of shares to be issued | 1 | -- |
| Stock-based compensation – compensation and related benefits | 364 | 386 |
| Amortization of intangibles | 1,056 | 882 |
| Proforma non-GAAP net loss | $(2,861) | $(1,556) |
| Proforma non-GAAP net loss per basic and diluted common share | $(0.11) | $(0.08) |
| Weighted average basic and diluted common shares outstanding | 25,105,705 | 19,765,585 |

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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, costs associated with the public offering, severance costs and changes in the fair value of shares to be issued.
- We believe that it is useful to provide 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 March 31, 2016 Compared With March 31, 2015

The Company’s net cash flows used in operating, investing and financing activities for the three months ended March 31, 2016 and 2015 and certain balances as of the end of those periods are as follows (in thousands):

*(thousands, except per share data)*

|  | Three Months ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(4) | $(2,261) |
| Net cash used in investing activities | (462) | (119) |
| Net cash used in financing activities | (758) | 1,854 |
| Effect of foreign exchange rate changes on cash | 17 | (7) |
| Net decrease in cash | $(1,207) | $(533) |

|  | March 31, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Cash and cash equivalents | $2,853 | $4,060 |
| Working capital (deficit) | $(7,707) | $(4,238) |

### Operating Activities:

Net cash used in operating activities during the three months ended March 31, 2016 and 2015 were $4,000 and $2.3 million, respectively. Net cash used in operating activities during the three months ended March 31, 2016 consisted of the following (in thousands):

|  |  |
| --- | ---: |
| Net loss | $(4,306) |
| Non-cash income and expenses | 1,898 |
| Net change in operating assets and liabilities | 2,404 |
| Net cash used in operating activities | $(4) |

The non-cash income and expenses of $1,898,000 consisted primarily of (in thousands):

|  |  |
| ---: | --- |
| $263 | Depreciation and amortization expense |
| 1,056 | Amortization of intangibles primarily attributable to the Lilien, Shoom, AirPatrol and LightMiner operations, which were acquired effective March 1, 2013, August 31, 2013, April 16, 2014 and April 24, 2015, respectively. |
| 364 | Stock-based compensation expense attributable to warrants and options issued as part of Company operations and prior acquisitions |
| 215 | Other |
| $1,898 | Total non-cash income and expenses |

The net use of cash due to changes in operating assets and liabilities totaled $2,345,000 and consisted primarily of the following (in thousands):

|  |  |
| ---: | --- |
| $787 | Decrease in accounts receivable and other receivables |
| 446 | Decrease in prepaid licenses and maintenance contracts |
| (848) | Decrease in accounts payable |
| 3,371 | Increase in deferred revenue |
| (1,426) | Decrease in accrued liabilities and other liabilities |
| 74 | Decrease in inventory and other assets |
| $2,404 | Net use of cash in the changes in operating assets and liabilities |

32

### Investing Activities:

Net cash used in investing activities during the three months ended March 31, 2016 was $462,000 compared to net cash used in investing activities of $119,000 for the prior year period. The net cash used in investing activities during the three months ended March 31, 2016 was comprised of $48,000 for the purchase of property and equipment and $414,000 investment in capitalized software.

### Financing Activities:

Net cash used in financing activities during the three months ended March 31, 2016 was approximately $758,000. Net cash provided by financing activities for the three months ended March 31, 2015 was $1.9 million. The net cash used in financing activities during the three months ended March 31, 2016 was primarily comprised of $588,000 of repayments to the Credit Facility and $170,000 of repayments to a term loan and other advances payable.

### Liquidity and Capital Resources - General:

Our current capital resources and operating results as of March 31, 2016, as described in the preceding paragraphs, consist of:

1\) An overall working capital deficit of $7.7 million;

2\) Cash of $2.9 million;

3\) The Credit Facility for up to $10 million which we borrow against based on eligible assets with a maturity date of April 29, 2017 of which $8.0 million is utilized;

4\) A term loan for $2,000,000 with a maturity date of April 29, 2018 of which has a $1.4 million balance owed; and

5\) Net cash used in operating activities year-to-date of $4,000.

We believe our total working capital deficit of $7.7 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 | $2,853 | $-- | $2,853 |
| Accounts receivable, net / accounts payable | 10,795 | 8,474 | 2,321 |
| Notes and other receivables | 1,756 | -- | 1,756 |
| Prepaid licenses and maintenance contracts / deferred revenue | 7,460 | 12,992 | (5,532) |
| Short-term debt | -- | 8,828 | (8,828) |
| Other | 3,423 | 3,700 | (277) |
| Total | $26,287 | $33,994 | $(7,707) |

Accounts receivable exceeds the related accounts payable by $2.3 million. We do not believe there are material collectability issues with respect to our accounts receivable. Deferred revenue exceeds the related prepaid contracts by $5.5 million and other liabilities exceed other assets by $277,000. These deficits are expected to be funded by our anticipated cash flow from operations, as described below, over the next twelve months from the date of filing this quarterly report. We do not believe that the Credit Facility, with a balance of $8.0 million at March 31, 2016, and the current portion of the term loan of $667,000 as of March 31, 2016 will have a material adverse effect on our liquidity in the next twelve months as the Credit Facility principal balance is not due until April 2017.

Net cash used in operating activities during the three months ended March 31, 2016 of $4,000 consists of net loss of $4.3 million less non-cash expenses of $1.9 million and net cash provide by changes in operating assets and liabilities of $2.4 million. We expect net cash from operations to increase during 2016 as:

1\) Our services are growing and becoming a larger part of our sales mix. These services generate gross margins of 50-80% and will be a larger contribution to our cash flow in the future.

2\) Sysorex was awarded two large multiple-award government IDIQ Contracts in 2015 and one in 1st Quarter of 2016 (NASA SEWP, NIH CIO-CS and PMSS-3) that enable Sysorex to capture task orders issued by any government agency under these contract vehicles. The Company has captured task orders under the NASA SEWP contract and believes that it will be successful in securing additional task orders under all of these contracts, however there are no assurances that additional task orders under the contracts will ultimately be awarded to the Company. If such task orders are secured, then these contracts will provide the opportunity to increase our revenue and cash flows.

3\) Sysorex is generating revenue from new versions of its AirPatrol product line that will contribute to operating cash flow.

4\) The Company launched its LightMiner product in the first quarter of 2016 which is expected to have 60-70% gross margins and will start contributing to cash-flow this year.

The Company’s capital resources as of March 31, 2016, increased bank facility, net proceeds from the September 25, 2015 offering, higher margin business line expansion and recent contract awards, including prepayments anticipated to be received are expected to be sufficient to fund planned operations during the next twelve months. While the Company also has an effective registration statement on Form S-3 which will allow it to raise additional capital from the sale of its securities, subject to certain limitations for registrants with a market capitalization of less than $75 million, if additional financing is needed we anticipate such financing will come from an increase in our bank facility rather than through a sale of equity, however, our decision will be based on our capital requirements and the terms of the various types of financing that will be available to us when we need it. The information in this Form 10-Q concerning the Company’s Form S-3 registration statement does not constitute an offer of any securities for sale. If these sources do not provide the capital necessary to fund the Company’s operations during the next twelve months, the Company may need to curtail certain aspects of its expansion activities or consider other means of obtaining additional financing, although there is no guarantee that any such additional financing would be available to the Company.

### Liquidity and Capital Resources - Western Alliance Financing Agreement (successor in interest to Bridge Bank N.A.)

On March 25, 2016, the Company, and certain of its wholly-owned subsidiaries as borrowers, entered into an amendment and waiver (the “Amendment”) to the Business Finance Agreement (the “Financing Agreement”) with Bridge Bank, N.A. as the lender dated as of March 15, 2013, which was amended by the first amendment dated August 29, 2013, the second amendment dated May 13, 2014, the third amendment dated December 31, 2014, the fourth amendment dated May 4, 2015 and the fifth amendment dated October 7, 2015. Pursuant to the Amendment, Western Alliance Bank as successor in interest to Bridge Bank, N.A., waived any non-compliance by the borrowers with respect to the minimum adjusted EBITDA requirements as of December 31, 2015. In addition, the lender and the borrowers agreed that the adjusted EBITDA for the three months ended March 31, 2016 would not be less than $(2,200,000) and on or before April 30, 2016, the borrowers and the lender must agree to additional financial covenants for the fiscal quarters ended June 30, 2016, September 30, 2016 and December 31, 2016. The lender has agreed to extend the April 30, 2016 deadline and the parties are currently negotiating the additional financial covenants.

### 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, 2,496 characters.

### Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive and Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective.

### Changes in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

### Limitations of the Effectiveness of Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

## Risk factors

As filed, 156 characters.

We incorporate by reference the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2016.

Filed May 16, 2016.
Source: SEC EDGAR, the filing index for accession 0001213900-16-013453. Last ingested by Listed: Nov 6, 2026, 18:14 ET. No prices; not investment advice.