Form: 10-Q

Quarterly report pursuant to Section 13 or 15(d)

August 14, 2014

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the six months ended June 30, 2014

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-36404

 

SYSOREX GLOBAL HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

 

Nevada   88-0434915
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   Identification No.)

 

3375 Scott Blvd., Suite 440

Santa Clara, CA 95054

(Address of principal executive offices)(Zip Code)

 

(408) 702-2167

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated file. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer o Accelerated filer o
  Non-accelerated filer o Smaller reporting company x
  (Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 19,630,339 shares of common stock, par value $0.001 per share, outstanding as of August 11, 2014.

 

 

 

 

 

 


SYSOREX GLOBAL HOLDINGS CORP.

 

- INDEX -

 

  Page
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements: 3
     
  Condensed Consolidated Balance Sheets 4
     
  Condensed Consolidated Statements of Operations 6
     
  Condensed Consolidated Statements of Comprehensive Loss 7
     
  Condensed Consolidated Statements of Stockholders’ Equity 8
     
  Condensed Consolidated Statements of Cash Flows 9
     
  Notes to Financial Statements 10
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 46
     
Item 4. Controls and Procedures. 46
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings. 46
     
Item 1A. Risk Factors. 46
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 46
     
Item 3. Defaults Upon Senior Securities. 47
     
Item 4. Mine Safety Disclosures. 47
     
Item 5. Other Information. 47
     
Item 6. Exhibits. 48
     
Signatures   49

  

2
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

In the opinion of management, the financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.

 

The results for the period ended June 30, 2014 are not necessarily indicative of the results of operations for the full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in our audited financial statements for the fiscal year ended December 31, 2013 filed in our Form S-1 filed with the Securities and Exchange Commission on April 4, 2014.

 

The information presented in this Form 10-Q reflects our one-for-two reverse stock split, which became effective on April 8, 2014, except as otherwise indicated.

 

3
 

 

SYSOREX GLOBAL HOLDINGS CORP.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

Assets   June 30,     December 31,  
    2014     2013  
    (Unaudited)          
Current Assets                
Cash and cash equivalents   $ 4,932,846     $ 2,103,955  
Marketable securities     -       124,753  
Accounts receivable, net     11,483,320       9,581,041  
Notes receivable     130,000       1,130,000  
Notes receivable, related party     89,599       -  
Other receivables     376,186       247,090  
Inventory     428,155       74,929  
Prepaid expenses     1,042,647       381,583  
Prepaid licenses and maintenance contracts     6,464,099       6,120,261  
Restricted cash     161,429       71,429  
                 
Total Current Assets     25,108,281       19,835,041  
                 
Property and equipment, net     609,850       290,665  
Software development costs, net     189,735       56,840  
Deposits     749,227       749,227  
Restricted cash, net of current portion     428,571       428,571  
Prepaid licenses and maintenance contracts, non-current     5,982,546       4,268,010  
Other assets     124,435       209,662  
Trade name/trademarks, net     4,502,506       2,977,378  
Customer relationships, net     6,993,366       3,085,953  
Developed technology, net     17,402,203       1,265,000  
Non compete agreement, net     543,055       -  
Goodwill     10,516,497       5,707,580  
                 
Total Assets   $ 73,150,272     $ 38,873,927  

 

See accompanying notes.

 

4
 

 

SYSOREX GLOBAL HOLDINGS CORP.

 

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

 

 

    June 30,     December 31,  
    2014     2013  
    (Unaudited)        
Liabilities and Stockholders' Equity            
             
Current Liabilities            
             
 Accounts payable   $ 7,931,687     $ 8,435,100  
 Accrued expenses     1,403,445       1,219,196  
 Accrued compensation and related benefits     1,931,789       2,622,356  
 Deferred revenue     7,907,117       7,402,149  
 Deferred rent, current     1,854       -  
 Due to related parties     -       160,331  
 Advances payable     722,157       722,157  
 Notes payable     477,763       723,042  
 Revolving line of credit     4,581,691       5,697,590  
 Term loan     500,004       458,337  
 Acquisition earnout liability     7,780,000       -  
                 
Total Current Liabilities     33,237,507       27,440,258  
                 
Long Term Liabilities                
Deferred revenue, non-current     6,788,445       4,845,138  
Deferred rent, non-current     40,661       -  
Other long term liabilities     126,456       -  
Notes payable, non-current     100,000       -  
Term loan, non-current portion     124,995       291,663  
                 
Total Liabilities     40,418,064       32,577,059  
                 
Commitments and Contingencies                
                 
Stockholders' Equity                
Preferred stock - $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding     -       -  
Common stock - $0.001 par value; 50,000,000 shares authorized; 19,592,444 and 14,094,532 issued and outstanding     19,593       14,094  
 Additional paid-in capital     51,256,243       21,531,457  
 Due from Sysorex Consulting Inc.     (665,554 )     (665,554 )
 Accumulated other comprehensive income     (5,525 )     3,048  
Accumulated deficit (excluding $2,441,960 reclassified to additional paid in capital in  quasi-reorganization)     (16,294,161 )     (13,105,962 )
                 
Stockholders' Equity Attributable to Sysorex Global Holdings Corp.     34,310,596       7,777,083  
                 
Non- controlling Interest     (1,578,388 )     (1,480,215 )
                 
Total Stockholders' Equity     32,732,208       6,296,868  
                 
Total Liabilities and Stockholders' Equity   $ 73,150,272     $ 38,873,927  

 

See accompanying notes.

 

5
 

 

SYSOREX GLOBAL HOLDINGS CORP.
                         
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 

 

 

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2014     2013     2014     2013  
Revenues, Net   $ 17,144,805     $ 14,788,950     $ 33,464,618     $ 20,150,494  
                                 
Cost of Revenues     11,464,868       11,789,904       23,434,213       15,695,637  
                                 
Gross Profit     5,679,937       2,999,046       10,030,405       4,454,857  
                                 
Operating Expenses                                
Compensation and related benefits     4,050,002       1,982,461       7,295,144       3,071,099  
Professional and legal fees     446,379       423,840       834,349       471,215  
Consulting expenses     177,641       225,628       318,571       294,559  
Occupancy     230,813       103,923       384,802       140,865  
Acquisition transaction/financing costs     1,091,117       -       1,194,978       907,865  
Costs associated with public offering     -       -       44,717       -  
Amortization of intangibles     1,249,165       193,334       1,577,200       256,191  
Other administrative     804,834       500,205       1,445,436       705,447  
                                 
Total Operating Expenses     8,049,951       3,429,391       13,095,197       5,847,241  
                                 
Loss from Operations     (2,370,014 )     (430,345 )     (3,064,792 )     (1,392,384 )
                                 
Other Income (Expense)                                
Other income     12,044       -       25,871       -  
Interest expense     (104,497 )     (58,577 )     (212,451 )     (86,115 )
Interest expense - amortization of debt discount     -       -       -       (16,667 )
Gain on the settlement of obligation     -       14,762       -       14,762  
Change in fair value of derivative liability     -       -       -       (489,168 )
Total Other Income (Expense)     (92,453 )     (43,815 )     (186,580 )     (577,188 )
                                 
Loss before Provision for Income Taxes     (2,462,467 )     (474,160 )     (3,251,372 )     (1,969,572 )
Provision for Income Taxes     -       -       (35,000 )     -  
                                 
Net Loss     (2,462,467 )     (474,160 )     (3,286,372 )     (1,969,572 )
                                 
Net Loss Attributable to Non-controlling Interest     (55,585 )     (38,408 )     (98,173 )     (75,449 )
                                 
Net Loss Attributable to Stockholders of Sysorex Global Holdings Corp.   $ (2,406,882 )   $ (435,752 )   $ (3,188,199 )   $ (1,894,123 )
                                 
Net Loss Per Share - Basic and Diluted   $ (0.13 )   $ (0.03 )   $ (0.19 )   $ (0.17 )
                                 
Weighted Average Shares Outstanding                                
Basic and Diluted     18,641,546       12,552,033       16,455,268       10,979,454  

 

See accompanying notes.

 

6
 

 

SYSOREX GLOBAL HOLDINGS CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

 

  

    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2014     2013     2014     2013  
                         
Net Loss   $ (2,406,882 )   $ (435,752 )   $ (3,188,199 )   $ (1,894,123 )
                                 
Unrealized holding gains in marketable securities including reclassification adjustment of realized gains included in net income     -       -       (3,048 )     -  
Unrealized foreign exchange gain/(loss) from cumulative translation adjustments     (5,525 )     -       (5,525 )     -  
                                 
Comprehensive Loss   $ (2,412,407 )   $ (435,752 )   $ (3,196,772 )   $ (1,894,123 )

 

See accompanying notes.

 

7
 

 

SYSOREX GLOBAL HOLDINGS CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

FOR THE SIX MONTHS ENDED JUNE 30, 2014

(Unaudited)

 

 

 

          Additional     Due from Sysorex     Accumulated Other           Non-     Total  
    Common Stock     Paid-In     Consulting,     Comprehensive     Accumulated     Controlling     Stockholders'  
    Shares     Amount     Capital     Inc.     Income (Loss)     Deficit     Interest     Equity  
                                                 
Balance - January 1, 2014     14,094,532     $ 14,094     $ 21,531,457     $ (665,554 )   $ 3,048     $ (13,105,962 )   $ (1,480,215 )   $ 6,296,868  
                                                                 
Common shares issued for services     85,732       86       427,215                                       427,301  
Common shares issued for cash     400,000       400       2,079,600                                       2,080,000  
Stock options granted to employees for services                     417,098                                       417,098  
Common shares issued for net cash proceeds received from public offering     3,166,666       3,167       16,611,939                                       16,615,106  
Common shares issued for AirPatrol acquisition     1,832,808       1,833       10,175,749                                       10,177,582  
Common shares issued for options exercised     12,539       13       13,185                                       13,198  
Fractional shares issued from reverse stock split     167                                                       -  
Unrealized gain on marketable securities                                     (3,048 )                     (3,048 )
Cumulative translation adjustment                                     (5,525 )                     (5,525 )
Net loss                                             (3,188,199 )     (98,173 )     (3,286,372 )
                                                                 
Balance - June 30, 2014     19,592,444     $ 19,593     $ 51,256,243     $ (665,554 )   $ (5,525 )   $ (16,294,161 )   $ (1,578,388 )   $ 32,732,208  

 

See accompanying notes.

 

8
 

SYSOREX GLOBAL HOLDINGS CORP.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

    For the Six Months Ended  
    June 30,  
    2014     2013  
    (Unaudited)  
Cash Flows from Operating Activities                
Net loss   $ (3,286,372 )   $ (1,969,572 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     125,442       48,269  
Amortization of intangible assets     1,577,200       256,191  
Stock based compensation     844,399       470,177  
Investment income     (3,048 )     -  
Amortization of debt discount     -       16,667  
Change in the fair value of derivative liability     -       489,168  
Changes in operating assets and liabilities:                
Accounts receivable and other receivables     (2,010,377 )     (5,907,119 )
Inventory     (87,265 )     (212,250 )
Prepaid expenses     (661,064 )     17,293  
Prepaid licenses and maintenance contracts     (2,058,374 )     (1,203,969 )
Deposits     -       (170,667 )
Other assets     188,322       (261,100 )
Accounts payable     (1,133,701 )     4,472,467  
Accrued expenses     (567,861 )     (439,741 )
Accrued compensation     (904,099 )     817,880  
Deferred revenue     2,448,275       1,193,670  
Other long term liabilities     (5,413 )     -  
Total Adjustments     (2,247,564 )     (413,064 )
                 
Net Cash Used in Operating Activities     (5,533,936 )     (2,382,636 )
                 
Cash Flows From (Used in) Investing Activities                
Purchase of property and equipment     (193,522 )     (3,153 )
Proceeds from the sale of marketable securities     124,753       -  
Investment in capitalized software     (139,999 )     -  
Cash paid for Lilien     -       (3,000,000 )
Cash acquired in Lilien acquisition     -       1,112,485  
Cash paid for AirPatrol     (8,466,257 )     -  
Cash acquired in AirPatrol acquisition     71,182       -  
Net Cash Flows Used in Investing Activities     (8,603,843 )     (1,890,668 )
                 
Cash Flows from Financing Activities                
Advances from revolving credit line     -       5,000,000  
Repayment of line of credit     (1,115,899 )     -  
Repayment of term loan     (125,001 )     -  
Net proceeds from issuance of common stock     2,080,000       -  
Net proceeds from capital raise     16,615,106       -  
Net proceeds from conversion of employee options     13,198       -  
Repayment of advances to related parties     -       (148,694 )
Repayment of notes payable     (245,279 )     (126,615 )
Repayment of factor     -       (46,426 )
Advance from Duroob Technology     -       332,217  
Advance to related party     (89,599 )     -  
Repayment of advance from Duroob Technology     (160,331 )     -  
Repayment of convertible notes     -       (105,000 )
                 
Net Cash Provided by Financing Activities     16,972,195       4,905,482  
                 
Effect of Foreign Exchange Rate Changes on Cash     (5,525     -  
                 
Net Increase in Cash and Cash Equivalents     2,828,891       632,178  
                 
Cash and Cash Equivalents - Beginning of period     2,103,955       8,301  
                 
Cash and Cash Equivalents - End of period   $ 4,932,846     $ 640,479  
                 
Supplemental Disclosure of cash flow information:                
Cash paid for:                
      Interest   $ 167,086     $ 105,118  
      Income Taxes   $ 35,000     $ 8,001  
                 
Supplemental disclosures for non-cash operating, investing and financing activities:                
Acquisition of Lilien:                
Assumption of assets other than cash   $ -     $ 15,180,332  
Assumption of liabilities   $ -     $ 17,216,770  
Issuance of common stock   $ -     $ 6,000,000  
Acquisition of AirPatrol:                
Assumption of assets other than cash   $ 682,000          
Assumption of liabilities   $ 1,811,000          
Issuance of common stock   $ 10,177,582          
                 
Issuance of common stock for settlement of liability   $ -     $ 1,774,866  

 

See accompanying notes.

 

9
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 1 - Organization and Nature of Business

 

Overview

 

Sysorex Global Holdings Corp. (“SGHC”), through its wholly-owned subsidiaries, AirPatrol Corporation and Airpatrol Research Corporations (“AirPatrol”), Lilien Systems, Shoom, Inc. (“Shoom”), Sysorex Government Services, Inc. (“SGS”), Sysorex Federal, Inc. (“Sysorex Federal”) and majority-owned subsidiary, Sysorex Arabia LLC (“SA”) (collectively the “Company”), provides location based technology, cybersecurity, data analytics, custom application development, cloud solutions, Mobile/BYOD solutions and strategic outsourcing to customers worldwide. The Company is headquartered in California, and has subsidiary offices in Virginia, Maryland, Oregon, Hawaii, State of Washington, California, Vancouver, Canada and Riyadh, Saudi Arabia. 

 

Liquidity

 

As of June 30, 2014, the Company has a working capital deficiency of approximately $8,129,000. Included in that amount is the AirPatrol acquisition earnout liability of $7,780,000 which is the present value of the expected $10,000,000 earnout to be paid to the AirPatrol shareholders in 2015, of which half of the value earned shall be paid in stock and the other half in cash (unless otherwise agreed or required pursuant to the AirPatrol Merger Agreement (defined hereafter)) (see note 6). If AirPatrol’s Net Income (as defined in the AirPatrol Merger Agreement) meets or exceeds $3,500,000 in the five quarters ending March 31, 2015, the Company shall pay to the AirPatrol stockholders an earnout payment equal to (i) AirPatrol Net Income, divided by $5,000,000, times (ii) $10,000,000, provided that the total earnout payment shall not exceed $10,000,000. The cash generated from the AirPatrol profitability target is expected to fund the cash portion of the earnout liability.

 

For the six months ended June 30, 2014 the Company incurred a net loss of approximately $3.3 million and used cash in operations of approximately $5.6 million. Included in the net loss for the six months ended June 30, 2014 is approximately $1.2 million of acquisition transaction costs and approximately $1.6 million of amortization of intangibles.

 

The Company raised approximately $2 million in equity financing from a strategic investor during February 2014 and received approximately $17.7 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 of which it used approximately $8.5 million of cash in the acquisition of AirPatrol (see note 17). The Company’s current capital resources as of June 30, 2014 and the equity financing and contract awards in the first quarter of 2014 are expected to be sufficient to fund planned operations during the succeeding twelve months, if not the company may need to curtail certain of its expansion activities.

  

Note 2 - Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the three and six-month periods ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.  These interim condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and footnotes for the years ended December 31, 2013 and 2012 included in the prospectus filed with the Securities and Exchange Commission on April 10, 2014.

 

Note 3 - Summary of Significant Accounting Policies

 

Significant Accounting Policies

 

The Company's complete accounting policies are described in Note 2 to the Company's audited financial statements and footnotes for the years ended December 31, 2013 and 2012.

 

Principles of Consolidation

 

The condensed consolidated financial statements have been prepared using the accounting records of SGHC and its wholly-owned subsidiaries Sysorex Federal, SGS, Lilien Systems, Shoom, AirPatrol and its majority-owned subsidiary, SA.  All material inter-company balances and transactions have been eliminated.

 

10
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Principles of Consolidation (continued)

 

The Company owns 50.2% of Sysorex Arabia. As of June 30, 2014, SA had minimal cash, approximately $749,000 in deposits, $35,000 in other assets and intercompany balances and debts as disclosed in the following footnotes, with an accumulated deficit of approximately $1,653,000.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during each of the reporting periods.  Actual results could differ from those estimates. The Company’s significant estimates consist of:

 

The valuation of stock-based compensation;
   

The allowance for doubtful accounts; 

   

The valuation of the assets and liabilities acquired from the AirPatrol Acquisition as described in Note 6; 

   
The valuation allowance for the deferred tax asset; and
   
Impairment of intangible assets.

 

Inventory

 

Inventory consisting primarily of finished goods and raw materials is stated at the lower of cost or market utilizing the first-in, first-out method. The Company continually analyzes its slow-moving, excess and obsolete inventories and establishes reserves based on historical and projected sales volumes and anticipated selling prices.  If the Company does not meet its sales expectations, these reserves are increased.  Products that are determined to be obsolete are written down to net realizable value.  As of June 30, 2014 and December 31, 2013, the Company deemed any such allowance nominal.

 

Intangible Assets

 

Intangible assets primarily consist of developed technology, customer lists/relationships, non-compete agreements and trade names and trademarks and are amortized ratably over a range of one to seven years which approximates customer attrition rate and technology obsolescence. The Company assesses the carrying value of its intangible assets for impairment each year. Based on its assessments, the Company did not incur any impairment charges for the six months ended June 30, 2014.

 

The Company develops and utilizes internal software for the processing of data provided by its customers.  Costs incurred in this effort are accounted for under the provisions of FASB ASC 350-40, “Internal Use Software”, whereby direct costs related to development and enhancement of internal use software are capitalized, and costs related to maintenance are expensed as incurred.  The Company capitalizes its direct internal costs of labor and associated employee benefits that qualify as development or enhancement.  These internal use software development costs are amortized over the estimated useful life which management has determined is four years following the year incurred.

 

11
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Goodwill

 

The Company records goodwill and other indefinite-lived assets in connection with business combinations. Goodwill, which represents the excess of acquisition cost over the fair value of the net tangible and intangible assets of acquired companies, is not amortized. Indefinite-lived assets are stated at fair value as of the date acquired in a business combination. The Company’s goodwill balance and other assets with indefinite lives are evaluated for potential impairment annually 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, the Company utilizes 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 impairment for the six months ended June 30, 2014.

 

Deferred Rent Expense

 

The Company has operating leases which contain predetermined increases and rent holidays in the rentals payable during the term of such leases. For these leases, the aggregate rental expense over the lease term is recognized on a straight-line basis over the lease term. The difference between the expense charged to operations in any year and the amount payable under the lease during that year is recorded as deferred rent expense on the Company’s balance sheet, which will reverse over the lease term.

 

Foreign Currency Translation

 

The U.S. dollar is the functional currency of the Company and its subsidiaries. Monetary assets and liabilities denominated in foreign currencies are translated to U.S. dollars at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at the exchange rates in effect at the time of the transactions. Revenues and expenses are translated to U.S. dollars at rates approximating exchange rates in effect at the time of the transactions. Translation exchange gains and losses resulting from the period-end translation of assets and liabilities denominated in foreign currencies are recorded in other comprehensive income or loss, on the statement of equity. Transaction gains or losses are recognized through earnings.

 

Transaction and translation gains and losses were immaterial for the three and six months ended June 30, 2014 and 2013.

 

Comprehensive Income (Loss)

 

The Company reports comprehensive income (loss) and its components in its consolidated financial statements.  Comprehensive income (loss) consists of net loss and foreign currency translation adjustments affecting stockholders’ equity that, under U.S. GAAP, are excluded from net loss.  The difference between net loss as reported and comprehensive income (loss) have historically been immaterial.

 

12
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Revenue Recognition

 

Revenues for the three and six months ended June 30, 2014 and 2013 are comprised of the following:

 

    Three Months ended
June 30,
  Six Months Ended
June 30,
    2014   2013   2014   2013
Resale of hardware   $ 7,377,325     $ 7,421,000     $ 16,213,956     $ 9,712,310  
Resale of software     3,524,775       2,651,347       5,637,010       3,342,353  
Maintenance services     2,973,084       2,517,393       5,602,126       3,347,674  
Professional services contracts – time and materials     248,827       398,046       599,730       716,484  
Professional services contracts – fixed price     2,013,204       1,801,164       3,430,874       3,031,673  
Revenues from digital advertising and electronic services     1,007,590       -         1,980,922       -    
                                 
Total   $ 17,144,805     $ 14,788,950     $ 33,464,618     $ 20,150,494  

 

The Company is a systems integrator and consulting services company that provides IT solutions and services to its customers and recognizes revenue once four criteria are met: (1) persuasive evidence of an arrangement exists, (2) the price is fixed and determinable, (3) delivery (software and hardware) or fulfillment (maintenance) has occurred, and (4) there is reasonable assurance of collection of the sales proceeds (the “Revenue Recognition Criteria”). In addition, the Company also records revenues in accordance with Accounting Standards Codification (“ASC”) Topic 605-45 “Principal Agent Consideration” (“ASC 605-45”). The Company evaluates the sales of products and services on a case by case basis to determine whether the transaction should be recorded gross or net, including, but not limited to, assessing whether or not the Company: 1) is the primary obligor in the transaction; 2) has inventory risk with respect to the products and/or services sold; 3) has latitude in pricing; and 4) changes the product or performs part of the services sold. The Company evaluates whether revenues received 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.  As of the date hereof, the Company has determined that all revenues received should be recognized on a gross basis in accordance with the applicable standards.

 

Cooperative reimbursements from vendors, which are earned and available, are recorded in the period the related advertising expenditure is incurred. Cooperative reimbursements are recorded as a reduction of cost of sales in accordance with ASC Topic 605-50 “Accounting by a Customer (including reseller) for Certain Consideration Received from a Vendor.” Provisions for returns are estimated based on historical sales returns and credit memo analysis which are adjusted to actual on a periodic basis.  The Company receives marketing development funds (MDF) from vendors based on quarterly sales performance to promote the marketing of vendor products and services. The Company must file claims with vendors for these cooperative reimbursements by providing invoices and receipts for marketing expenses. Reimbursements are recorded as a reduction of marketing expenses and other applicable selling general and administrative expenses in the period in which the expenses were incurred.

 

13
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

The Company also enters into sales transactions whereby customer orders contain multiple deliverables, and reports its 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: the Company’s design, configuration, installation, integration, warranty/maintenance and consulting services; and third-party computer hardware, software and warranty maintenance services.   In situations where the Company bundles all or a portion of the separate elements, vendor specific objective evidence (VSOE) is determined based on prices when sold separately.  For the three months ended June 30, 3014 and 2013 revenue recognized as a result of customer contracts requiring the delivery of multiple elements was $12,251,679 and $8,426,363, respectively.  For the six months ended June 30, 2014 and 2013 revenue recognized as a result of customer contracts requiring the delivery of multiple elements was $24,579,520 and $11,277,840, respectively.  

 

Hardware, Software and Licensing Revenue Recognition

 

Generally, the Revenue Recognition Criteria are met with respect to the sales of hardware and software products when they are shipped to the customer.  The delivery of products to our customers occurs in a variety of ways, including (i) as a physical product shipped from the Company’s warehouse, (ii) via drop-shipment by a third-party vendor, or (iii) via electronic delivery with respect to software licenses. The Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its warehouse.  In such arrangements, the Company negotiates the sale price with the customer, pays the supplier directly for the product shipped, bears credit risk of collecting payment from its customers and is ultimately responsible for the acceptability of the product and ensuring that such product meets the standards and requirements of the customer.  As a result, the Company recognizes the sale of the product and the cost of such upon receiving notification from the supplier that the product has shipped. Vendor rebates and price protection are recorded when earned as a reduction to cost of sales or merchandise inventory, as applicable.  Vendor product price discounts are recorded when earned as a reduction to cost of sales. Vendor product sales volume and growth incentive rebates based on total Company quarterly sales are recorded when earned as other income.

 

Maintenance and Professional Services Revenue Recognition

 

With respect to sales of our maintenance, consulting and other service agreements including our digital advertising and electronic services, the Revenue Recognition Criteria is met once the service has been provided. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. The fixed rate includes direct labor, indirect expenses, and profits. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. Anticipated losses are recognized as soon as they become known.  For the three and six months ended June 30, 2014 and 2013 the Company did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term contracts are derived principally with various United States Government agencies, Saudi Arabian Government agencies, and commercial customers.

 

The Company recognizes revenue for sales of all services billed as a fixed fee ratably over the term of the arrangement as such services are provided. Billings for such services that are made in advance of the related revenue recognized are recorded as deferred revenue and recognized as revenue ratably over the billing coverage period.  Amounts received as prepayments for services to be rendered are recognized as deferred revenue.  Revenue from such prepayments is recognized when the services are provided.

 

The Company’s maintenance services agreements permit customers to obtain technical support from the Company and/or the manufacturer and to update, at no additional cost, to the latest technology if new software updates are introduced during the period that the maintenance agreement is in effect. Since the Company assumes certain responsibility for product staging, configuration, installation, modification, and integration with other client systems, retains general inventory risk upon customer return or rejection, and is the most familiar with the customer and its required specifications, it generally serves as the initial contact with the customer with respect to any maintenance services required and therefore will perform all or part of the required service.

 

14
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

Typically, the Company sells maintenance contracts for a separate fee with initial contractual periods ranging from one to three years with renewal for additional periods thereafter. The Company generally bills maintenance fees in advance, records the amounts received as deferred revenue with respect to any portion of the fee for which services have not yet been provided. The Company recognizes the related revenue ratably over the term of the maintenance agreement as services are provided. In situations where the Company bundles all or a portion of the maintenance fee with products, VSOE for maintenance is determined based on prices when sold separately.

 

Customers that have purchased maintenance/warranty services have a right to cancel and receive a refund of the amounts paid for unused services at any time during the service period upon advance written notice to the Company.  Cancellation and refund privileges with respect to maintenance/warranty services lapse as to any period during the term of the agreement for which such services have already been provided.  Customers do not have the right to a refund of paid fees for maintenance/warranty services that the Company has earned and recognized as revenue. Invoices issued for maintenance/warranty services not yet rendered are recorded as deferred revenue and then recognized as revenue ratably over the service period. As a result (1) the warranty and maintenance service fees payable by each customer are separately accounted for in each customer purchase order as a separate line item, and (2) upon the Company’s receipt and acceptance of a request for refund of maintenance/warranty services not yet provided, the Company’s obligation to perform any additional maintenance/warranty services will end. Sales are recorded net of discounts, rebates, and returns.

 

Stock-Based Compensation

 

The Company accounts for options granted to employees by measuring the cost of services received in exchange for the award of equity instruments based upon the fair value of the award on the date of grant.  The fair value of that award is then ratably recognized as expense over the period during which the recipient is required to provide services in exchange for that award.

 

Options and warrants granted to consultants and other non-employees are recorded at fair value as of the grant date and subsequently adjusted to fair value at the end of each reporting period until such options and warrants vest, and the fair value of such instruments, as adjusted, is expensed over the related vesting period.

 

The Company incurred stock-based compensation charges, net of estimated forfeitures of $652,370 and $127,277 for the three month period ended June 30, 2014 and 2013 and $844,399 and $470,177 for the six month period ended June 30, 2014 and 2013, respectively.  The following table summarizes the nature of such charges for the six months then ended:

 

   

For the Three Months Ended
June 30,

 

For the Six Months Ended
June 30,

    2014   2013   2014   2013
Compensation and related benefits   $ 245,369     $ 20,531     $ 417,098     $ 59,131  
Professional and legal fees     87,001       106,746       87,001       106,746  
Acquisition transaction costs     320,000       -         340,300       304,300  
Totals   $ 652,370     $ 127,277     $ 844,399     $ 470,177  

 

Net Loss Per Share

 

The Company computes basic and diluted earnings per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant to the exercise of options and warrants in the calculation of diluted net loss per common shares would have been anti-dilutive.

 

15
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 3 - Summary of Significant Accounting Policies (continued)

 

Net Loss Per Share (continued)

 

The following table summarizes the number of common shares and common share equivalents excluded from the calculation of diluted net loss per common share for the six months ended June 30, 2014 and 2013 after taking into account the one-for two reverse split effective as of April 8, 2014:

 

   

June 30,

2014

   

June 30,

2013

 
             
Options                                                         2,578,658       853,750  
Warrants                                                         411,262       505,012  
                 
Totals                                                         2,989,920       1,358,762  

 

Reclassification

 

Certain accounts in the prior year’s financial statements have been reclassified for comparative purposes to conform with the presentation in the current year’s financial statements. These reclassifications have no effect on previously reported earnings.

 

Recent Accounting Pronouncements

 

The U.S. Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08) in April 2014.  This new standard raises the threshold for disposals to qualify as discontinued operations, allows companies to have significant continuing involvement and continuing cash flows and provides for new and additional disclosures of discontinued operations and individually material disposal transactions.  The Company anticipates adopting the new standard when it becomes effective in the first quarter of 2015. The Company does not expect the adoption of ASU 2014-08 to have a material effect on its condensed consolidated financial statements.

 

The FASB has issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company is currently evaluating the effect of the ASU on its financial position, results of operations and cash flows.

 

The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company is currently evaluating the effect of the ASU on its financial position, results of operations and cash flows.

 

Subsequent Events

 

The Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the condensed consolidated financial statements to determine if any of those events and/or transactions requires adjustment to or disclosure in the condensed consolidated financial statements.

 

Reverse Stock Split

 

The board of directors was authorized by the Company's stockholders to effect a 1-for-2 reverse stock split of its common stock which was effective April 8, 2014.  The financial statements and accompanying notes give effect to the 1-for-2 reverse stock split as if it occurred as of the beginning of the first period presented.

 

16
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 4 - Acquisition of the Business of Lilien LLC

 

On March 20, 2013, the Company entered into an Asset Purchase and Merger Agreement (the “Lilien Agreement”) to acquire substantially all of the assets and liabilities of Lilien LLC and 100% of the stock of Lilien Systems (collectively referred hereafter as “Lilien”) effective as of March 1, 2013. Lilien is an information technology company whose operations complement and significantly expand the Company's current base of business.

 

The purchase price of this acquisition aggregated $9,000,000 and consisted of cash of $3,000,000, and 6,000,000 shares of the Company's common stock deemed to have a fair value of $6,000,000.  The cash consideration of $3,000,000 was obtained by the Company through a borrowing under a credit facility entered into jointly between SGS and Lilien concurrently with and for the express purpose of consummating that acquisition.   Total costs incurred in connection with the Lilien acquisition were $907,865 which consisted primarily of professional fees.

 

Lilien Systems and SGS are co-borrowers on the loan and both guaranteed the debt.  As they are part of the consolidated group of the Company no accounting consideration related to the co-guaranty was deemed necessary since such impact, if any, would be eliminated in consolidation.

 

Additionally, under the terms of the Lilien Agreement, the Company is liable to the former members of Lilien LLC for the payment of additional cash consideration on March 20, 2015 to the extent that they receive less than $1.00 per share from the sale of the 6,000,000 shares of the Company's common stock referred to above (the “Guaranteed Amount”), less customary commissions, on or before March 20, 2015, provided the stockholders are in compliance with the terms and conditions of the lock-up agreement. Notwithstanding the foregoing, in the event that the gross profits for calendar 2013 and 2014 attributable to the Lilien assets are more than 20% below what was forecasted to the Company, the Guaranteed Amount will be proportionately reduced. As of the date of the acquisition and June 30, 2014 the guaranteed amount was de minimis.

 

The acquisition of Lilien was accounted for by the Company under the acquisition method of accounting, whereby assets acquired and liabilities assumed by the Company are recorded at their estimated fair values as of the date of acquisition and the results of operations of the acquired company are consolidated with those of the Company from the date of acquisition. The Company deemed the quoted market prices for those shares not to be a reliable measurement method due to the very limited trading activity in such securities.

 

The purchase price is allocated as follows:

 

Assets Acquired:    
Cash   $ 1,112,485  
Receivables     4,870,471  
Inventory     55,410  
Other current assets (Note A)     852,759  
Prepaid Licenses/Contracts (Note B)     9,146,954  
Property and equipment     254,638  
Trade name/trademarks (Note C)     3,250,000  
Customer relationships (Note C)     2,130,000  
Goodwill     4,544,053  
      26,216,770  
Liabilities Assumed:        
Accounts payable     5,094,390  
Accrued expenses (Note D)     970,139  
Deferred Revenue     11,152,241  
      17,216,770  
Purchase Price   $ 9,000,000  

 

(A) Other current assets consist primarily of $356,000 of rebates receivable, $107,000 of prepaid expenses, $195,000 of unbilled revenues and $153,000 for a working capital settlement adjustment. The asset purchase agreement included a provision for an adjustment to working capital as of the closing date of the transaction.

 

17
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 4 - Acquisition of the Business of Lilien LLC (continued)

 

(B) Prepaid licenses/contracts are payments made by the Company directly to the manufacturer for the maintenance services and are being amortized over the life of the contract

 

(C) The trade name/trademarks and customer relationships are identifiable intangible assets that are being amortized over their useful life of seven years.

 

(D) Accrued expenses consist primarily of $654,000 of accrued compensation, $50,000 of accrued other operational expenses and $35,000 of sales taxes payable.

  

Note 5 - Acquisition of Shoom, Inc.

 

Effective August 31, 2013, the Company entered into an Agreement and Plan of Merger (the “Shoom Agreement”) to acquire 100% of the stock of Shoom, a California based provider of cloud based data analytics and enterprise solutions to the media, publishing, and entertainment industries.

 

The purchase price of this acquisition aggregated $8,107,000 and consisted of cash to be paid of $2,500,000, and 2,762,000 shares of the Company's common stock deemed to have a fair value of $5,607,000. The cash portion was funded by the excess working capital the Company obtained from the Shoom acquisition.  The cash consideration is subject to adjustment under terms of the Shoom Agreement. Total costs incurred for the Shoom acquisition were $316,387 which consisted primarily of professional fees.

 

The acquisition of Shoom was accounted for by the Company under the acquisition method of accounting, whereby assets acquired and liabilities assumed by the Company are recorded at their estimated fair values as of the date of acquisition and the results of operations of the acquired company are consolidated with those of the Company from the date of acquisition. The Company deemed the quoted market prices for those shares not to be a reliable measurement method due to the very limited trading activity in such securities.

 

The purchase price is allocated as follows:

 

Assets Acquired:    
Cash   $ 3,669,000  
Marketable securities     605,000  
Receivables     141,000  
Other assets (Note A)     178,000  
Property and equipment     29,000  
Trade name/trademarks (Note B)     120,000  
Customer relationships (Note B)     1,270,000  
Developed technology (Note C)     1,380,000  
Goodwill     1,164,000  
      8,556,000  
Liabilities Assumed:        
Accounts payable     69,000  
Other current liabilities (Note D)     380,000  
      449,000  
Purchase Price   $ 8,107,000  

  

(A) Other current assets consist primarily of approximately $137,000 of prepaid expenses, $30,000 of other receivables and $11,000 of security deposits.

 

(B) The trade name/trademarks and customer relationships are identifiable intangible assets that are being amortized over their useful life of seven years.

 

(C) The developed technology is an identifiable intangible asset that is being amortized over their useful life of four years.

 

(D) Other current liabilities consist primarily of approximately $136,000 of payroll liabilities and $167,000 of profit sharing liabilities.

 

18
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 6 – Acquisition of AirPatrol Corporation

 

On December 20, 2013, the Company entered into an Agreement of Plan and Merger (the “AirPatrol Merger Agreement”) to acquire 100% of the capital stock of AirPatrol, a company in the mobile cyber-security and location-based services (LBS) space, for a purchase price equal to (a) $10,000,000 in cash, subject to certain adjustments, allocated to and among certain creditors, payees, holders of AirPatrol’s issued and outstanding capital stock and (b) 2,000,000 shares (after giving effect to a reverse stock split) of Company common stock, of which 800,000 shares shall be held in escrow for one year, as security to satisfy any indemnity claims that may be owed by the AirPatrol stockholders to the Company (the “AirPatrol Merger Consideration”). The AirPatrol Merger Consideration also includes an earnout, half of the value of which shall be in stock and the other half in cash (unless otherwise agreed or required pursuant to the AirPatrol Merger Agreement) payable to the stockholders of AirPatrol in 2015 in accordance with the following formula: if for the five quarter period ending March 31, 2015, AirPatrol Net Income meets or exceeds $3,500,000, the Company shall pay to the AirPatrol stockholders an earnout payment equal to (i) AirPatrol Net Income, divided by $5,000,000, times (ii) $10,000,000, provided that the total earnout payment shall not exceed $10,000,000.

 

On April 18, 2014, the parties to the AirPatrol Merger Agreement entered into an Amendment No. 2, pursuant which the Company agreed to (i) modify the working capital adjustment provision of the AirPatrol Merger Agreement, (ii) modify the distribution of the earnout, (iii) enter into a non-competition agreement with the former chairman of the board and significant stockholder of AirPatrol in exchange for allocation of consideration to the former chairman, (iv) modify the AirPatrol retention plan to reduce cash consideration and increase stock consideration paid to an employee of AirPatrol, in addition to other modifications as set forth in the full text of Amendment No. 2.  None of these modifications resulted in any increase to the AirPatrol Merger Consideration.

 

The working capital adjustment provision, which otherwise would have resulted in a deduction entirely from cash merger consideration of approximately $1.27 million, was adjusted so that instead approximately $486,000 was deducted from cash merger consideration, and the balance of approximately $786,000 was deducted from stock merger consideration (resulting in 157,192 fewer shares of Sysorex common stock issued as stock merger consideration at the closing).

 

The merger was consummated on April 18, 2014 with an effective date of acquisition of April 16, 2014, and as a result the Company became the holder of 100% of the outstanding capital stock of AirPatrol.  At the closing, the Company (i) paid or initiated actions to pay a total of $8,466,258 to various former stockholders, former noteholders, former directors, professional service firms and continuing officers, (ii) issued a total of 1,042,809 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 $1,047,781 was deducted from cash merger consideration in conjunction with repayment of AirPatrol’s indebtedness to the Company as described below.

 

Pursuant to a loan agreement dated as of August 30, 2013, the Company loaned AirPatrol $1 million evidenced by a secured promissory note due April 29, 2014, as amended on February 28, 2014. Upon the closing of the merger on April 18, 2014, the note became due and payable. On the closing date, AirPatrol repaid the principal and interest of the note totaling $1,047,781 as a deduction from merger consideration, consisting of $1,000,000 in principal and $47,781 in interest.

 

In connection with this transaction, on May 9, 2014, the Company issued options to purchase 400,000 shares of the Company's common stock to certain employees of AirPatrol at an exercise price of $4.81 per share. These options are exercisable for ten years and vest over four years.

 

The total recorded purchase price for the transaction was $27,472,000 which consisted of the cash paid of $9,514,000, $10,178,000 for the value of stock issued and $7,780,000 for the present value of the $10,000,000 expected earn out payment.

 

Assets Acquired:    
Cash   $ 71,000  
Restricted cash     90,000  
Receivables     21,000  
Inventory     266,000  
Other assets (Note A)     151,000  
Property and equipment     244,000  
Trade name/trademarks (Note B)     1,820,000  
Customer relationships (Note B)     4,460,000  
Developed technology (Note B)     16,810,000  
Non-compete agreements (Note C)     600,000  
Goodwill     4,750,000  
      29,283,000  
Liabilities Assumed:        
Accounts payable and accrued liabilities     630,000  
Other current liabilities (Note D)     949,000  
Other long term liabilities (Note E)     232,000  
      1,811,000  
Purchase Price   $ 27,472,000  

 

(A) Other current assets consist primarily of approximately $32,000 of prepaid expenses and $119,000 of security deposits.

 

19
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 6 – Acquisition of AirPatrol Corporation (continued)

 

(B) The trade name/trademarks, customer relationships and developed technology are identifiable intangible assets that are being amortized over their useful life of seven years.

 

(C) The non-compete agreements are an identifiable intangible asset that is being amortized over their useful life of one and three years.

 

(D)

Other current liabilities consist primarily of approximately $214,000 of payroll liabilities, $564,000 of an advance from SGHC that was settled immediately after closing, $42,000 of deferred rent and $129,000 of unearned revenue. 

 

(E)

Other long term liabilities consist primarily of approximately $132,000 for a furniture lease and a $100,000 note payable.

 

A final valuation of the assets and liabilities and purchase price allocation of AirPatrol has not been completed as of this reporting period. Consequently, the purchase price was preliminarily allocated based upon the asset and liability amounts in AirPatrol's accounting records with the excess classified as intangible assets. These amounts are subject to revision upon the completion of formal studies and valuations which will occur during the third quarter of 2014.

 

Note 7 - Proforma Financial Information

 

The following unaudited proforma financial information presents the consolidated results of operations of the Company, Lilien, Shoom and AirPatrol for the three and six months ended June 30, 2014 and 2013, as if the acquisitions had occurred as of the beginning of the first period presented instead of on March 1, 2013 for Lilien, August 31, 2013 for Shoom and April 16, 2014 for AirPatrol. The proforma information does not necessarily reflect the results of operations that would have occurred had the entities been a single company during those periods.

  

    For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
    2014   2013   2014   2013
Revenues   $ 17,142,302     $ 16,537,973     $ 33,739,296     $ 28,195,380  
Net Loss Attributable to Common Shareholder   $ (1,744,485 )   $ (1,754,122 )   $ (4,829,867 )   $ (5,094,715 )
Weighted Average Number of Common Shares Outstanding, basic and diluted     19,526,357       18,949,755       19,358,272       18,617,494  
Loss per common share – Basic and Diluted   $ (0.09 )   $ (0.09 )   $ (0.25 )   $ (0.27 )

  

20
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 8 – Notes Receivable

 

Secured Promissory Notes

 

On August 30, 2013, the Company loaned $1,000,000 to AirPatrol to support its operations as provided by a Secured Promissory Note issued by AirPatrol (the “AirPatrol Note”).  The AirPatrol Note was due on April 29, 2014, accrued interest at a rate of 8% per annum, and was collateralized by the general assets of the debtor.  This AirPatrol Note was repaid on April 16, 2014 upon the closing of the AirPatrol acquisition.  (See Note 6).

 

On October 14, 2013, the Company loaned $130,000 to IronSky Corporation, a company in the field cyber security solutions to support its operations in accordance with the terms of a Secured Promissory Note (the “IronSky Note”).  The Ironsky Note was due on March 31, 2014, accrues interest at a rate of 8% per annum, and is collateralized by the general assets of the debtor. The Company is in current negotiations with Ironsky about payment and the terms of the note.

 

Notes Receivable, related party

 

On June 19, 2014 AirPatrol entered into a promissory note with a related party of the Company for $89,599. The promissory note is due December 19, 2015 and accrues interest at a rate of 0.33% per annum.

 

Note 9 – Inventory

 

Inventory at June 30, 2014 and December 31, 2013 consisted of the following:

 

    June 30,
2014
  December 31, 2013
         
Raw materials   $ 60,945     $ -    
Finished goods     367,210       74,929  
Total   $ 428,155     $ 74,929  

  

Note 10 - Due from Related Parties

 

Non-interest bearing amounts due on demand from a related party was $665,554 as of June 30, 2014 and December 31, 2013 and consisted primarily of amounts due from Sysorex Consulting, Inc.  As Sysorex Consulting, Inc. is a direct shareholder of and an investor in the Company, the amounts due from Sysorex Consulting, Inc. as of June 30, 2014 and December 31, 2013 have been classified in and as a reduction of stockholders' deficiency.

 

Note 11 - Intangible Assets

 

Lilien Acquisition

 

Balances of the intangible assets that relate to the Lilien acquisition are as follows as of June 30, 2014:

 

    As of June 30, 2014
Amortized Intangible Assets  

Gross
Carrying
Amount

  Accumulated
Amortization
         
Trade name/trademarks   $ 3,250,000     $ (619,039 )
Customer relationships     2,130,000       (405,722 )
Total   $ 5,380,000     $ (1,024,761 )

 

The weighted average remaining amortization period for the Company’s trade names/ trademarks and customer relationships is 3.42 and 2.24 years, respectively.

 

21
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 11 - Intangible Assets (continued)

 

Shoom Acquisition

 

Balances of the intangible assets that relate to the Shoom acquisition are as follows as of June 30, 2014:

 

    As of June 30, 2014
Amortized Intangible Assets  

Gross Carrying

Amount

 

Accumulated

Amortization

                 
Trade name/trademarks   $ 120,000     $ (14,288 )
Customer relationships     1,270,000       (151,190 )
Developed technology     1,380,000       (287,500 )
Total   $ 2,770,000     $ (452,978 )

 

The weighted average remaining amortization period for the Company’s trade names/ trademarks, customer relationships and developed technology are 0.28, 2.98 and 1.49 years, respectively.

 

 

AirPatrol Acquisition

 

Balances of the intangible assets that relate to the AirPatrol acquisition are as follows as of June 30, 2014:

 

    As of June 30, 2014
Amortized Intangible Assets  

Gross Carrying

Amount

  Accumulated
Amortization
         
Trade name/trademarks   $ 1,820,000     $ (54,167 )
Customer relationships     4,460,000       (309,722 )
Developed technology     16,810,000       (500,297 )
Non-compete agreeements     600,000       (56,945 )
Total   $ 23,690,000     $ (921,131 )

 

The weighted average remaining amortization period for the Company’s trade names/ trademarks, customer relationships, developed technology, and non-compete agreements are 0.53, 0.52, 4.9 and 0.06 years, respectively.

 

Aggregate Amortization Expense:

 

Aggregate amortization expense for the three and six months ended June 30, 2014 was $1,249,165 and $1,577,200, respectively.

 

The following table presents the Company’s estimate for total amortization expense for the year ended December 31, 2014 through 2019 and thereafter.

 

Year Ending December 31,   Amount  
2014 (remaining)   $ 2,866,755  
2015                                                         5,655,660  
2016                                                         5,623,579  
2017                                                         4,339,829  
2018                                                         3,628,579  
2019 and thereafter                                                         7,326,728  
Total                                                       $ 29,441,130  

 

22
 

 

SYSOREX GLOBAL HOLDINGS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(UNAUDITED)

 

Note 12 – Goodwill

 

The changes to the carrying amount of goodwill for the six months ended June 30, 2014 are as follows:

 

Balance at January 1, 2014   $ 5,707,580  
         
Measurement period adjustment     59,321  
         
AirPatrol acquisition     4,749,596  
         
Balance at June 30, 2014   $ 10,516,497  

 

The measurement period adjustment of $59,321 relates to an adjustment of the tax attributes associated with the assets acquired in the Shoom, Inc. acquisition.

 

Note 13 - Deferred Revenue

 

Deferred revenue as of June 30, 2014 and December 31, 2013 consisted of the following:

 

    June 30,
2014
  December 31,
2013
Deferred Revenue, current        
Lilien maintenance agreements   $ 7,582,433     $ 7,161,992  
Services to be provided by Shoom     3,866       3,866  
Services to be provided by Sysorex     236,291       236,291  
Services to be provided by AirPatrol     84,527        
Total Deferred Revenue, current