UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 2015 

OR

 

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

(Exact name of registrant as specified in its charter)

 

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

 

2479 E. Bayshore Road

Suite 195

Palo Alto, CA 94303

(Address of principal executive offices)

(Zip Code)

 

(408) 702-2167

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class  

Name of each exchange on

which each is registered

Common Stock, par value $.0001   NASDAQ Capital Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes       No  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes       No  

 

 

 

 

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       No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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       No  

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

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

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

As of June 30, 2015, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last sale price of the common equity was $20,074,733.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

As of March 21, 2016, the issuer has 25,354,863 and 25,116,035 shares of common stock, par value $.001, issued and outstanding, respectively.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant's Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2015.

 

 

 

 

 

 

SYSOREX GLOBAL

 

TABLE OF CONTENTS

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT 2
   
PART I  
   
ITEM 1: BUSINESS 3
   
ITEM 1A: RISK FACTORS 14
   
ITEM 1B: UNRESOLVED STAFF COMMENTS 43
   
ITEM 2: PROPERTIES 43
   
ITEM 3: LEGAL PROCEEDINGS 44
   
ITEM 4: MINE SAFETY DISCLOSURES 44
   
PART II  
   
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 44
   
ITEM 6: SELECTED FINANCIAL DATA. 45
   
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 46
   
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 61
   
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 62
   
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 63
   
ITEM 9A: CONTROLS AND PROCEDURES 63
   
ITEM 9B: OTHER INFORMATION 64
   
PART III  
   
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 65
   
ITEM 11: EXECUTIVE COMPENSATION 65
   
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 65
   
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 65
   
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES 65
   
PART IV  
   
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES 66

 

  1  
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

CONTAINED IN THIS REPORT

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may,” or other similar expressions in this report. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; and projected expenses and financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

 

  our limited cash and our history of losses;

 

  our ability to achieve profitability;

 

  our limited combined operating history;

 

  emerging competition and rapidly advancing technology in our industry that may outpace our technology;

 

  customer demand for the products and services we develop;

 

  the impact of competitive or alternative products, technologies and pricing;

 

  our ability to manufacture any products we develop;

 

  general economic conditions and events and the impact they may have on us and our potential customers;

 

  our ability to obtain adequate financing in the future;

 

  our ability to continue as a going concern;

 

  our success at managing the risks involved in the foregoing items; and

 

  other factors discussed in this report.

 

The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.

 

  2  
 

 

PART I

 

ITEM 1: BUSINESS

 

(Unless otherwise stated or the context otherwise requires, the terms “Sysorex” “we,” “us,” “our” and the “Company” refers collectively to Sysorex Global , f/k/a Sysorex Global Holdings Corp., and its wholly-owned subsidiaries.)

 

Introduction

 

Sysorex provides data analytics and location based solutions and services to commercial and government customers worldwide. We have developed a new kind of discovery platform that blends data from traditional software and network systems with the growing universe of mobile and Internet of Things (IoT). In doing so we have created a high velocity, secure and scalable platform that we believe allows our customers to evaluate their most complex business issues, and compete successfully in their respective markets. Our products are designed to help customers derive real time value by combining both the physical and digital worlds.

 

Our data analytics products integrate with our AirPatrol product line, which includes technology for enterprises, government agencies, developers, and services providers aimed at improving mobile security, improving information access and boosting application engagement by adding location-based delivery and management by collecting data from any wireless device in close proximity (Cellular, WiFi, BLE, RFID, etc.) and extending to any connected device in the Internet of Things (IoT) landscape. We believe our products can deliver critical information at the right time based on our integrated solutions allowing us to uniquely blend the real world and the digital world. We believe our AirPatrol product line is also well positioned for the Cyber Security market as a mobile device management and detection technology solution. We believe our location accuracy of less than 10-feet and ability to capture all RF frequencies is unmatched. Detecting rogue devices that could be a security threat to an enterprise or government agency and then providing accurate location of that device is an important security application for our customers. Our AirPatrol product line has two patents and several others pending worldwide.

 

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.

 

Corporate Strategy

 

Management is focused on transforming Sysorex from its legacy systems integration business to a data analytics products business providing turnkey solutions from collection of data to delivering insights from that data to our customers.  We have successfully acquired certain technology/IP related to the IT industry and may complete additional strategic acquisitions in the future to expand our products and services. Management believes acquiring products/IP will add value to the Company and may allow us to command a higher market valuation or sales price should there be a sale or a spinoff. We are seeking opportunities with the following profiles:

 

  ●  Innovative and commercially proven technologies primarily in Big Data analytics, cyber-security, IoT, Cloud and mobile/bring your own device (“BYOD”).
     
  Companies with proven technologies that are complementary to the Company’s overall strategy. We are looking at companies primarily in the United States.  However, we may expand our search into other geographies such as India, Europe and beyond, if there are significant strategic and financial reasons to do so.

 

An important element of our mergers and acquisitions strategy is to acquire companies with complementary capabilities/technologies and an established customer base in each of the above categories.  We believe that the customer base of each potential acquisition will also present an opportunity to cross-sell our existing solutions.

 

  3  
 

 

We intend to acquire these innovative technologies and established, reputable IT services companies, using restricted common stock, cash and debt financing in combinations appropriate for each potential acquisition.

 

Industry Overview

 

Worldwide Big Data Technology and Services market is estimated to grow to $48.6 billion in 2019, representing a compound annual growth rate (“CAGR”) of 23.1% over the period of 2014-2019 (Source: http://www.idc.com/getdoc.jsp?containerId=prUS40560115).

 

Big Data Analytics market is expected to grow to about $13.9 billion by 2017, at a CAGR of 54.9% from 2012 to 2017 (Source: cloudtimes.org/2013/06/25/hadoop-as-a-service-market-growing/).

  

The Internet of Things is a Massive Disruptive Force. Growth in “Connected” Devices Leading to Explosive Growth in Data – 20 billion devices growing to 50 billion by 2020-Royal Bank of Canada.

 

According to a new report by Allied Market Research titled, "Global Mobile Security Market, Solution, Types, OS, Trends, Opportunities, Growth and Forecast, 2013 - 2020", the global Mobile Security Market would reach $34.8 billion by 2020, registering a CAGR of 40.8% during 2014 - 2020. 

 

Worldwide Cybersecurity market estimated at $63.7 billion in 2012 and is projected to grow at an 11.3% CAGR to $120.1 billion by 2017 (Source: Global Cyber Security Market 2013 – 2023, ASD Media Reports).

 

According to industry sources, Cloud based business analytics and business intelligence is expected to grow from $5.2 billion in 2013 to $16.52 billion in 2018 at a 25.8% CAGR (Source: PRWeb Article - Cloud Analytics Market is Growing at an Estimated CAGR of 25.8% & to Reach $16.52 Billion by 2018 - New Report by Markets and Markets April 2, 2013) . 

 

The U.S. Government spends approximately $80 billion in IT annually and this level of spending is expected to continue at a 3% CAGR, compared with 6% historically in the first decade of the 21st Century (Source: Market Research Media - U.S. Federal IT Market Forecast 2013-2018).

 

Corporate Structure

 

In 2015 Sysorex had five operating subsidiaries:  (i) Sysorex Federal, Inc. (100% ownership) (“Sysorex Federal”) and its wholly owned subsidiary Sysorex Government Services, Inc. (“Sysorex Government” or “Sysorex Government Services”) based in Herndon, Virginia, which focuses on the U.S. Federal Government market; (ii) Lilien Systems (100% ownership) (“Lilien”) based in Larkspur, California; (iii) Shoom, Inc. (100% ownership) (“Shoom”) based in Encino, California, (iv) AirPatrol Corporation (100% ownership) (“AirPatrol”) based in Maple Lawn, Maryland and its wholly owned subsidiary AirPatrol Research Corp. based in Coquitlam, British Columbia, and (v) Sysorex Arabia LLC (50.2% ownership) (“Sysorex Arabia”) based in Riyadh, Saudi Arabia. On December 4, 2015, the board of directors of the Company resolved by unanimous written consent to carry out a series of reorganization transactions to streamline the organizational structure of the Company and its direct and indirect subsidiaries. See “Corporate History”.

 

Effective January 1, 2016 Sysorex has three operating subsidiaries: (i) Sysorex USA (100% ownership) based in Larkspur, California and its wholly-owned subsidiary Sysorex Government based in Herndon, Virginia, which focuses on the U.S. Federal Government market; (ii) Sysorex Canada Corp. based in Coquitlam, British Columbia; and (iii) Sysorex Arabia LLC (50.2% ownership) based in Riyadh, Saudi Arabia (which is contemplated to be dissolved later this year).

 

  4  
 

 

These consolidated subsidiaries operate 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.

 

Mr. Nadir Ali is the President and Chief Executive Officer (“CEO”) of Sysorex and the subsidiaries except for Sysorex Government where he is the sole Director. Ms. Wendy Loundermon is President of Sysorex Government.  Future acquisitions may be operated as separate business units or merged into one of the existing subsidiaries depending on its business focus. Although the subsidiaries are separate legal entities, the Company is structured by function and organized to operate in an integrated fashion as one business.

 

Corporate History

 

The Company was formed in Nevada in April 1999, under the name Liquidation Bid, Inc.  It changed its name to Softlead, Inc. on September 9, 2003.

 

On March 1, 2011 by a majority vote of shareholders at a special meeting, the Company elected to change its name to Sysorex Global Holdings Corp.; effect a 1-for-20 reverse split of its stock; increase the authorized shares to 30,000,000 and acquire the Sysorex operational businesses. On June 2, 2011, the Company effected a 1-for-20 reverse split and changed its name to Sysorex Global Holdings Corp.

 

On July 29, 2011, the Company acquired all of the stock of the U.S. Federal Government business of Sysorex (Sysorex Federal and its subsidiary Sysorex Government) and 50.2% of the stock of the operating unit of Sysorex engaged in Saudi Arabian Government contracts (Sysorex Arabia, LLC). The acquisition was based on a share exchange, with Sysorex shareholders being issued 14,600,000 restricted common shares of the Company in exchange for stock of the three operating entities.

 

The Company recapitalized itself by amending its Articles of Incorporation on August 3, 2011 and increased its authorized common stock to 30,000,000 shares, with a par value $0.001 per share, which was approved at the Shareholder Meeting on March 1, 2011. On September 1, 2011, the Board of Directors and the majority shareholders authorized the increase of the authorized shares from 30,000,000 to 40,000,000; however, the filing of the Amendment to the Articles of Incorporation was not filed with the State of Nevada until April, 2012.

 

  5  
 

 

On March 20, 2013, the Company completed the acquisition of the assets of Lilien LLC, for an aggregate purchase price of $9,000,000 in accordance with the terms and conditions of an Asset Purchase and Merger Agreement (the “APMA”), effective March 1, 2013.  The purchase price consisted of $3,000,000 in cash and 3,000,000 shares of restricted common stock of Sysorex deemed to have a fair value of $6,000,000, or $2.00 per share, issued to the members of Lilien, LLC (the “Former Lilien Members”) in exchange for all of the outstanding capital stock of Lilien Systems, Inc. (“Lilien” and the “Lilien Acquisition”).  The cash consideration of $3,000,000 was obtained by the Company under a credit facility entered into for the purpose of completing the acquisition.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, the Company contingently guaranteed (the “Guaranty”) to the Former Lilien Members the net sales price of $2.00 per share (as adjusted) for a two year period following the closing, provided the Former Lilien Members complied with the terms and conditions of the lock-up agreement.  At the end of the two-year Guaranty period, the Former Lilien Members had an option within ten days after the Guaranty period to put all, but not less than all, of their unsold shares to the Company, for the price of $2.00 per unsold share.  None of the Former Lilien Members exercised that option.

 

Under the APMA, the Former Lilien Members were entitled to any excess cash above $1,000,000, provided both Lilien’s net worth immediately preceding the closing was greater than $1,000,000 and its net worth less excess cash of at least $1,000,000 was greater than $1,000,000.  As a result of a post-closing adjustment, Lilien’s net worth was less than $1,000,000 and the Former Lilien Members refunded $153,000 to the Company, subject to further adjustment. The refund was subsequently adjusted to $38,750 and settled.

 

Lilien Systems is based in Larkspur, California and an information technology company, which significantly expanded the Company’s operations providing it a Big Data analytics platform and enterprise infrastructure capabilities. Lilien delivers right-fit information technology solutions that help organizations reach their next level of business advantage. Lilien brings unsurpassed commitment, a highly qualified and educated staff of data scientists and computer engineers, premier technology certifications, key manufacturer partnerships, and business vision to its solutions in enterprise computing and storage, virtualization, business continuity, networking and IT business consulting.  Lilien Systems was renamed Sysorex USA effective January 1, 2016.

 

Effective upon the completion of the Lilien Acquisition, Geoffrey Lilien, Bret Osborn and Dhruv Gulati were elected to Sysorex Global’s then existing Board of Directors of three persons. Mr. Osborn and Mr. Gulati subsequently resigned as directors; however, they currently serve as the Chief Sales Officer and Executive Vice President, respectively, of Sysorex USA f/k/a Lilien Systems.

 

Effective August 23, 2013, the Board of Directors and the majority shareholders authorized the increase of the authorized common shares from 40,000,000 to 50,000,000.

 

Effective August 31, 2013, the Company acquired 100% of the stock of Shoom. Pursuant to an Agreement and Plan of Merger dated as of August 31, 2013, a wholly owned subsidiary of Sysorex was merged with and into Shoom which continued its existence as a wholly-owned subsidiary of Sysorex. Sysorex issued approximately 1,381,000 shares of its common stock to the former shareholders of Shoom, plus their pro rata share of $2,500,000 cash consideration, subject to adjustment based on the Net Worth (as defined in the Agreement of Plan and Merger) of Shoom as of August 31, 2013 compared with $6,038,020, the net worth of Shoom on July 31, 2013. Of this amount, approximately 250,000 shares of Sysorex common stock, plus approximately $500,000 of the cash consideration is being held in escrow for the benefit of the former Shoom stockholders, pro rata, for one year as security to satisfy any claim for indemnity claims, other than tax matters for which there is a seven-year escrow. As of December 31, 2015 all the escrow shares have been released to the former Shoom stockholders and approximately $352,000 remains in the escrow for tax matters to be released pro-rata over the next five years. All of the Company’s 1,381,000 shares issued in the Shoom Acquisition were restricted and subject to lock-up agreements for a six-month period which ended on October 8, 2014. In addition, the Company issued stock options to Shoom employees to purchase an aggregate of 100,000 shares of Sysorex common stock.

 

Shoom is based in Encino, California and a provider of Cloud based data analytics and enterprise solutions to the media, publishing and entertainment industries. Management believes based on its knowledge of the industry that Shoom is a leading provider of Cloud based data analytics and enterprise solutions to the media, publishing and entertainment industries with approximately 675 active publications in North America. Shoom specializes in providing comprehensive and integrated Internet/intranet based information services and electronic delivery systems to its expanding client base around the world.  Shoom has been in business and providing its Cloud solutions for over 15 years.  Shoom was merged into Sysorex USA effective January 1, 2016.

 

On April 8, 2014, the Company effected a one-for-two reverse split of the Company’s common stock, with no reduction in authorized capital.  

 

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On April 9, 2014, the Company consummated its initial public offering of 3,166,666 shares of common stock, which raised net proceeds of approximately $17.7 million, after deducting the underwriting discounts and commissions.  Simultaneously the Company listed its common stock for trading on the Nasdaq Capital Market.

 

Effective April 18, 2014, the Company acquired 100% of the stock of AirPatrol Corporation, a company in the  mobile cyber-security and location-based services space with leading-edge solutions and proprietary intellectual property (“AirPatrol” and the “AirPatrol Acquisition”), in accordance with the terms and conditions of an Agreement and Plan of Merger (the “Merger Agreement”), dated December 20, 2013, as amended on February 28, 2014 for an aggregate purchase price equal to (a) $10,000,000 in cash, subject to certain adjustments, allocated to and among certain creditors, payees and holders of AirPatrol’s issued and outstanding capital stock and (b) 2,000,000 shares of Company’s common stock, of which 800,000 was held in escrow for one year, as security to satisfy any indemnity claims that may be owed by the AirPatrol shareholders to the Company (the “Merger Consideration”). The Merger Consideration included 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 Merger Agreement) payable to the shareholders of AirPatrol in 2015 in accordance with the following formula: if for the five quarter period ending March 31, 2015, AirPatrol Net Income (as defined in the Merger Agreement) meets or exceeds $3,500,000, the Company shall pay to the AirPatrol shareholders 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 Company consummated the AirPatrol Acquisition, and on the closing date paid adjusted Merger Consideration of $8,466,258 in cash, and 1,842,809 shares of common stock (800,000 shares of which were deposited into a holdback escrow for indemnity purposes).

 

On May 30, 2014 the Company and AirPatrol entered into a Waiver and Amendment No. 3 to the Agreement and Plan of Merger (this “Waiver and Amendment”) which was a post-closing waiver and amendment to the Merger Agreement.  The fees of the shareholder representative of AirPatrol, Shareholder Representative Services LLC (the “Representative”) were inadvertently not paid by AirPatrol, and not reflected as an AirPatrol merger expense at the time of closing.  Upon execution and delivery of the Waiver Amendment, the Company paid $37,500, representing the total amount of the engagement fee owed to the Representative.

 

The total recorded purchase price for the transaction was $19.7 million which consisted of $9.5 million cash paid and $10.2 million for the value of stock. The Company evaluated the fair value of the contingent earn out liability and determined nothing was owed. During 2015 an agreement was reached between the Company and the Representative regarding the 800,000 shares that were deposited in the holdback escrow whereby the sum of 561,172 shares were authorized to be released to the AirPatrol shareholders and 238,828 shares were released to the Company for cancellation.

 

AirPatrol is a company in the mobile cyber-security and location-based services space with leading-edge solutions and proprietary intellectual property. AirPatrol develops indoor device locationing, monitoring and management technologies for mobile devices operating on WiFi, cellular and wideband RF networks. AirPatrol has two product lines ZoneDefense and ZoneAware. AirPatrol’s products and technologies deliver solutions to address an exploding global location-based mobile security and services (LBS) market estimated to be more than $8.12 billion in 2014 and $39.8 billion by 2019, growing at 37.5% (marketandmarket.com, 2014). It also serves as a location-based services, sales and marketing system. In these cases, the security platform connects to third party apps on a user’s mobile device that provide functions such as location-based offers, discounts and suggestive selling, VIP service functions (for hotels, resorts, casinos, etc.), and location-based information delivery such as mobile-based guided tours of historic sites, points of interest and museums, shopping center maps, building floor plans and so on. AirPatrol has been awarded one patent in 2015 and two patents in 2014 and has 10 patents currently pending world-wide in the areas of context-aware policy management, RF detection, cellular monitoring, end node network applications for mobile devices and related technologies. Customers for the products are big box retailers, healthcare facilities, property managers (malls, shopping centers, etc.), hotels and resorts, gaming operators and government agencies. These products require no app installation for anonymous collection of behavioral data such as traffic flow, entry and exit patterns, length of stay and other business intelligence and analytics functions. AirPatrol was merged into Sysorex USA effective January 1, 2016.

 

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On April 24, 2015, in accordance with the terms and conditions of an Asset Purchase Agreement (the “APA”), the Company completed the acquisition of substantially all of the assets of LightMiner Systems, Inc. (“LightMiner”), which is in the business of developing and commercializing in-memory SQL databases (the “Acquisition”). At closing, the Company paid $19,000 in cash to the owner (the “Owner”) of approximately 19% of LightMiner’s outstanding securities prior to closing and agreed to issue to LightMiner or its designees upon the one year anniversary of the closing (the “First Anniversary”), shares of the Company’s common stock in an amount equal to the quotient of (A) $3,200,000 (the “Purchase Price”) divided by (B) the Sysorex Weighted Average Price (as defined below) as of the fifth trading day prior to the First Anniversary (the “Seller Stock Consideration”), less a hold back of Seller Stock Consideration having an aggregate value of $567,150, as determined by the Sysorex Weighted Average Price, for the purpose of satisfying indemnification obligations of LightMiner. The Sysorex Weighted Average Price means the volume-weighted daily average of the price of the Company’s common stock for the twenty (20) trading days immediately prior to the date of determination; however, the price may not be less than $2.00 per share.

 

The Company also agreed to issue to the Owner an aggregate of 127,000 restricted shares of common stock (the “Owner Stock Consideration”) with a fair value of $286,000 at the date of closing on the First Anniversary and issue to the Owner an option to purchase up to 100,000 shares of Company’s common stock in accordance with the terms and conditions of the Company’s 2011 Employee Stock Incentive Plan, as amended, pursuant to an at-will employment offer letter. In addition, the Company agreed to issue to another pre-acquisition principal of LightMiner additional shares of the Company’s common stock equal to $200,000 divided by the Sysorex Weighted Average Price; however, the price may not be less than $2.00 per share.

 

LightMiner is in the business of developing and commercializing in-memory SQL databases. The assets acquired from LightMiner include 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.

 

On September 25, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley & Co., LLC, as representative of the several underwriters named therein (the “Underwriters”), relating to the issuance and sale of 5,250,000 shares of the Company’s common stock, par value $0.001 per share. The price to the public in this offering was $1.00 per share. Under the terms of the Underwriting Agreement, the Company also granted the Underwriters an option, exercisable for 30 days from the closing date, to purchase up to an additional 787,500 shares at the public offering price. The offering was made pursuant to the Company’s registration statement on Form S-3 (Registration Statement No. 333-204159) filed with the Securities and Exchange Commission and declared effective May 28, 2015 and a related prospectus supplement filed with the Securities and Exchange Commission. The offering closed September 30, 2015. After deducting underwriting discounts and commissions and offering expenses, the net proceeds from the offering were approximately $4.7 million. 

 

On December 4, 2015 and effective January 1, 2016, the Company’s Board of Directors resolved by unanimous written consent to carry out the following reorganization transactions: (1) statutory mergers of AirPatrol and Shoom with and into Lilien, pursuant to which Lilien is the surviving corporation and changed its name to “Sysorex USA”; and (2) a short-form statutory merger of the Company with a newly-formed wholly-owned Nevada corporation, pursuant to which the Company changed its name to “Sysorex Global”. Immediately prior to the consummation of these mergers, the Company carried out an (i) an assignment from AirPatrol to the Company of all shares of capital stock of AirPatrol Research Corp. (“AirPatrol Research”), pursuant to which AirPatrol Research became a direct subsidiary of the Company; (ii) the amendment of AirPatrol Research’s Notice of Articles to change its name to “Sysorex Canada Corp.”; (iii) the dissolution and winding up of Sysorex Federal, in which Sysorex Federal assigned and transferred all of its assets, including all outstanding shares of capital stock of Sysorex Government, to the Company, and the Company assumed Sysorex Federal’s debts and liabilities; (iv) an assignment from the Company to Lilien of all outstanding shares of capital stock of Sysorex Government, pursuant to which Sysorex Government became a direct subsidiary of Lilien.

 

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Sysorex Products and Services

 

  LightMiner Analytics Platform — is an advanced solution for aggregating and mining multi-terabyte Big Data sets in real time for instant insights. Cloud-based so there’s nothing to install and fully scalable to meet even the most demanding business requirements. Sysorex Quick Start analytics modules are available for a variety of industry verticals and applications.
     
  ●  Data Science and Advanced Analytics Consulting Services — are backed by our data science and analytics team that develops data driven solutions for the most complex challenges. Our team’s extensive experience and unique strategies allow it to leverage Big Data in new ways to uncover hidden insights and create new business opportunities.
     
  ●     AirPatrol for Security (formerly ZoneDefense) - a mobile security and detection product that locates devices operating within a monitored area, determines their compliance with network security policies for that zone, and then can trigger policy modification of device apps and/or features - either directly or via third party mobile device, application and network management tools.
     
  ●     AirPatrol for Retail (formerly ZoneAware) - a commercial product for enabling location and/or context-based marketing services and information delivery to mobile devices based on zones as small as 10 feet or as large as a square mile. The monitored areas may include a building, a campus, a mall, and outdoor regions like a downtown.  Unlike other mobile locationing technologies, AirPatrol technologies use passive sensors that work over both cellular and WiFi networks and offer device locationing and zone-based app and information delivery accurate to within 10 feet. Additionally, unlike geo-fencing systems, AirPatrol technologies are capable of simultaneously enabling different policies and delivering different apps or information to multiple devices within the same zone based on contexts such as the type of device, the device user and time of day.
     
  ●      Shoom Product Line (eTearsheets; eInvoice, AdDelivery, ePaper) - the Shoom products are Cloud based applications and analytics for the Media & Publishing industry. These products also generate critical data analytics for its customers.
     
  ●         Enterprise Infrastructure Solutions and Services — help organizations tackle challenges and accelerate business goals by implementing best of breed technology solutions. Sysorex believes its deep expertise in a broad range of infrastructure solutions, from storage and Big Data solutions to converged infrastructure and cyber security, delivers impactful results for its clients.
     
  ●     IT Services — from enterprise architecture design to custom application development, Sysorex offers a full scope of information technology development and implementation services. With expertise in a broad range of IT practices including project design and management, systems integration, outsourcing, independent validation and verification, cyber security and more.

 

Market Size

 

Worldwide, companies and organizations are expected to spend a combined $3.8 trillion on hardware, software, IT services and telecommunications in 2014 with an approximate 3.1% growth rate over the next five years (Source: Gartner, Inc. January 2014 Forecast.)

 

Worldwide Big Data Technology and Services market is estimated to grow to $48.6 billion in 2019, representing a compound annual growth rate (“CAGR”) of 23.1% over the period of 2014-2019 (Source: http://www.idc.com/getdoc.jsp?containerId=prUS40560115)

 

The big data and analytics market will reach $125 billion worldwide in 2015, according to IDC. (Source: http://whatsthebigdata.com/2015/01/02/2015-predictions-for-the-big-data-analytics-market/).    

 

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The Internet of Things is a Massive Disruptive Force. Growth in “Connected” Devices Leading to Explosive Growth in Data – 20 billion devices growing to 50 billion by 2020-Royal Bank of Canada.

 

According to a new report by Allied Market Research titled, "Global Mobile Security Market, Solution, Types, OS, Trends, Opportunities, Growth and Forecast, 2013 - 2020", the global Mobile Security Market would reach $34.8 billion by 2020, registering a CAGR of 40.8% during 2014 - 2020. 

  

The Worldwide Cybersecurity market estimated at $81.4 billion in 2016 due to the inexorable rise of cyber-attacks worldwide.  (Source:https://www.asdreports.com/market-research-report-262240/cyber-security-market-report)

  

According to industry sources, Cloud based business analytics and business intelligence is expected to grow to $23.1 billion in 2020.  (Source:http://www.marketsandmarkets.com/PressReleases/cloud-based-business-analytics.asp).

 

Government IT Services and Solutions Market

 

The U.S. government spends approximately $80 billion on IT annually.  This spending is expected to continue at a 3% growth rate vs. 6% historically because of the government’s budget challenges.  (Source: Market Research Media - U.S. Federal IT Market Forecast 2013-2018.) Security of all forms, especially cyber-security, are significant growth areas (Source: Market Research Media - U.S. Federal Cyber Security Market Forecast 2013-2018) and Sysorex intends to increase its role in this sector.  Sysorex Government is servicing U.S. Government customers in both civilian and defense agencies. Sysorex Government provides a variety of IT solutions and services (custom application development, project management, systems integration, etc.) through its various government contract vehicles including our GSA Schedule, SPAWAR, TEIS-III, SEWP, and others. Sysorex Government serves as a prime and subcontractor depending on the contract. We believe Sysorex Government is also well positioned to win foreign military sales contracts leveraging the Sysorex Group presence overseas.

 

Through Sysorex Government, the Company enters into various types of contracts with our customers, such as Indefinite Delivery Indefinite Quantity (IDIQ), Cost-Plus-Fixed-Fee (CPFF) Level of Effort (LOE), Cost-Plus-Fixed-Fee (CPFF) Completion, Cost-reimbursement (CR), Firm-Fixed-Price (FFP), Fixed-Price Incentive (FPI) and Time-and-materials (T&M).

 

IDIQ contracts provide for an indefinite quantity of services or stated limits of supplies for a fixed period. They are used when the customer cannot determine, above a specified minimum, the precise quantities of supplies or services that the government will require during the contract period. IDIQs help streamline the contract process and speed service delivery. IDIQ contracts are most often used for service contracts and architect-engineering services. Awards are usually for base years and option years. The customer places delivery orders (for supplies) or task orders (for services) against a basic contract for individual requirements. Minimum and maximum quantity limits are specified in the basic contract as either a number of units (for supplies) or as dollar values (for services).

 

CPFF LOE contracts will be issued when the scope of work is defined in general terms requiring only that the contractor devote a specified LOE for a stated time period.  A CPFF completion contract will be issued when the scope of work defines a definite goal or target which leads to an end product deliverable (e.g., a final report of research accomplishing the goal or target).

 

CR contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer and are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

 

FFP contracts will be issued when acquiring supplies or services on the basis of definite or detailed specifications and fair and reasonable prices can be established at the outset.

 

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FPI target delivery contracts will be issued when acquiring supplies or services on the basis of reasonably definite or detailed specifications and cost can be reasonably predicted at the outset wherein the cost risk will be shared. A firm target cost, target profit, and profit adjustment formula will be negotiated to provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk.

 

T&M contracts provide for acquiring supplies or services on the basis of (1) direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit; and (2) actual cost for materials.   A customer may use this contract when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.

 

Sales and Marketing

 

Sysorex utilizes direct marketing through approximately 47 outside and inside sales representatives, who are compensated with a base salary and some sales positions receive incentive plans such as commission or bonus plans. Sysorex utilizes webinars, conferences, tradeshows and other direct and indirect marketing activities to generate demand for its products and services. Sysorex also has extensive relationships with channel partners to directly engage with customers and to perform the installation services. Sysorex trains its partners and has its own channel/partner managers to support and augment partners as needed.  

 

Sysorex has built a core competency in bidding on government requests for proposals. It utilizes its internal bid and proposal team as well as consultants to prepare the proposal responses for Government clients. Sysorex also uses business development, sales and account management employees or consultants and expects to increase these departments as the Company grows.

 

Customers

 

Sysorex has worked with over 1,000 customers company-wide since inception. These customers including federal and international government agencies to enterprise customers in retail, manufacturing, life sciences, bio-tech, high-tech, agriculture, financial services, state and local government, utilities, media & entertainment, telecom and many other verticals. A partial list of recent customers include:

 

  - Healthnet

 

  - Gilead Sciences

 

  - Dow Jones Local Media Group

 

  - Gannett

 

  - RockStar Games

 

  - Hewelett Packard

 

  - Evault

 

  - Hawaii Electric

 

  - Hearst Corporation

 

  - E&J Gallo Winery

 

  - U.S. Army

 

  - U.S. Navy

 

 

-

Business Wire

     
  - Premera Blue Cross
     
  - City of Seattle

 

Competition

 

Sysorex faces competition from different companies, both small and large, for different parts of its business. The management team at Sysorex has 30 plus years of experience in these areas and knows how to compete against start-ups as well as larger businesses. In the Big Data analytics space, these competitors and sometimes partners could include, HP, IBM, Splunk, Fusion Storm, Global Inc., Bear Data, LLC.

 

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Our AirPatrol products compete with WiFi based detection companies such as Aruba, Cisco, Euclid Analytics and other smaller companies. However, these companies can only do WiFi detection and therefore we believe cannot get the accuracy that AirPatrol can. AirPatrol has partnered or replaced some of these types of companies because it offers WiFi, cellular, RFID, blue-tooth, etc. and approximately sub-10-feet in location accuracy.  Mobile device management companies like AirWatch, Mobile Iron and Good Technology have also integrated with AirPatrol instead of developing competing products. MerlinOne and PressTeligence have part of our Shoom products functionality but usually only provide information for the specific customer and not for their competitors or for the industry.

 

In our government services sector there are large systems integrators and defense contractors as well as small businesses, 8a, Women-owned, Veteran Disabled, Alaskan Native, etc. Some of these competitors include global defense and IT service companies including IBM Global Services, LogicaCMG, CSC, ATOS Origins, Northrop Grumman, Raytheon IT Services and SAIC.  

 

This complex landscape of domestic and multi-national services companies creates a challenging environment. However, Sysorex has a successful history and brand that it believes it can leverage. Our strategy is to be a global services provider with a focus in two high growth markets cyber-security and data analytics.

 

Intellectual Property

 

The Company currently does not have any legally filed trademarks for the name Sysorex. The Company owns trademarks relating to products and services of AirPatrol Corporation, in addition to three patents and ten pending patents world-wide. The awarded patents were issued September 23, 2015, September 23, 2014 and September 16, 2014.Sysorex is investigating a trademark for its name and is actively seeking future acquisitions, which may involve the acquisition of intellectual property.  Management believes that use of the Company’s intellectual property does not infringe upon any rights held by other parties.

 

Employees

 

As of March 21, 2016, Sysorex has 127 employees, including 2 part-time employees. This includes 6 officers, 47 sales people, 4 marketing people, 53 technical/engineering people and 17 finance & administration persons. None of our employees are subject to collective bargaining agreements.

 

Emerging Growth Company

 

As a company with less than $1.0 billion in revenue during our most recently completed fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:

 

  Reduced disclosure about our executive compensation arrangements;

 

  No non-binding shareholder advisory votes on executive compensation or golden parachute arrangements;

 

  Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting; and

 

Reduced disclosure of financial information in this report, limited to two years of audited financial information and two years of selected financial information.

 

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As a smaller reporting company, each of the foregoing exemptions is currently available to us. We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues as of the end of a fiscal year, if we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission, or if we issue more than $1.0 billion of non-convertible debt over a three-year-period.

 

The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision.  Therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Corporate Information

 

Our principal executive offices are located at 2479 E. Bayshore Road, Suite 195, Palo Alto, CA 94303, and our telephone number is (408) 702-2167. Our subsidiaries maintain offices in Herndon Virginia, Larkspur California, Honolulu Hawaii, Bellevue Washington, Beaverton Oregon, Carlsbad California, Encino California, Maple Lawn Maryland and Coquitlam, British Columbia.  Our Internet website is www.sysorex.com.  The information on, or that can be accessed through, our website is not part of this report, and you should not rely on any such information in making any investment decision relating to our common stock.

 

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ITEM 1A: RISK FACTORS

 

We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock, you should carefully consider the risks described below, together with the other information included in this report.

 

The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize, that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and investors in our common stock may lose all or part of their investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

 

Risks Related to Our Consolidated Operations

 

We have recently completed several acquisitions since 2013, including Lilien, Shoom, AirPatrol and LightMiner, which may make it difficult for potential investors to evaluate our future consolidated business.

 

We completed the Lilien Acquisition on March 20, 2013, the Shoom Acquisition on September 6, 2013, the AirPatrol Acquisition on April 16, 2014 (Effective January 1, 2016, Shoom and AirPatrol were merged into Lilien, which changed its name to Sysorex USA), and the LightMiner acquisition on April 24, 2015. Our limited combined operating history makes it difficult for potential investors to evaluate our business or prospective operations or the merits of an investment in our securities. We are subject to the risks inherent in the financing, expenditures, complications and delays characteristic of a newly combined business. These risks are described below under the risk factor titled “Any future acquisitions that we may make could disrupt our business, cause dilution to our stockholders and harm our business, financial condition or operating results.” In addition, while the former members of Lilien, and the shareholders of Shoom and AirPatrol have indemnified the Company from any undisclosed liabilities there may not be adequate resources to cover such indemnity. Furthermore, there are risks that the vendors, suppliers and customers of these acquired entities may not renew their relationships for which there is no indemnification. Accordingly, our business and success faces risks from uncertainties inherent to developing companies in a competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain profitability.

 

Our ability to successfully execute our business plan may require additional debt or equity financing, which may otherwise not be available on reasonable terms or at all.

 

As of December 31, 2015, we had $4.1 million of cash on hand.  On March 15, 2013, we entered into a revolving credit line for up to $5,000,000 from Bridge Bank, N.A. n/k/a Western Alliance Bank, which was increased to $10,000,000 with a $2,000,000 term loan on May 4, 2015.  As of December 31, 2015, the Company owed $8.6 million under its revolving credit line which matures April 29, 2017 and $1.6 million under the term loan which matures April 29, 2018.  According to our business plan we may need additional debt or equity financing. Future financings through equity offerings by us will be dilutive to existing stockholders.  Also, the terms of securities we may issue in future capital transactions may be more favorable to new investors than our current investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities. We may also issue incentive awards under employee equity incentive plans, which may have additional dilutive effects.  We may also be required to recognize non-cash expenses in connection with certain securities we may issue in the future such as convertible notes and warrants, which would adversely impact our financial condition and results of operations. Our ability to obtain needed financing may be impaired by factors, including the condition of the economy and capital markets, both generally and specifically in our industry, and the fact that we are not profitable, which could impact the availability or cost of future financing. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, we may need to reduce our operations accordingly.

 

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Failure to manage or protect growth may be detrimental to our business because our infrastructure may not be adequate for expansion.

 

The Lilien, Shoom, AirPatrol and LightMiner Acquisitions require a substantial expansion of the Company’s systems, workforce and facilities (Effective January 1, 2016, Shoom and AirPatrol were merged into Lilien, which changed its name to Sysorex USA). We may fail to adequately manage our anticipated future growth. The substantial growth in our operations as a result of the Lilien, Shoom, AirPatrol and LightMiner Acquisitions is expected to place a significant strain on our administrative, financial and operational resources, and increase demands on our management and on our operational and administrative systems, controls and other resources.  For instance Lilien (n/k/a Sysorex USA)’s growth strategy includes broadening its service and product offerings, implementing an aggressive marketing plan and employing leading technologies.  There can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand.  We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems.

 

To the extent we acquire other businesses, we will also need to integrate and assimilate new operations, technologies and personnel.  The integration of new personnel will continue to result in some disruption to ongoing operations. The ability to effectively manage growth in a rapidly evolving market requires effective planning and management processes. We will need to continue to improve operational, financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force.  There can be no assurance that the Company would be able to accomplish such an expansion on a timely basis. If the Company is unable to affect any required expansion and is unable to perform its contracts on a timely and satisfactory basis, its reputation and eligibility to secure additional contracts in the future could be damaged. The failure to perform could also result in contract terminations and significant liability. Any such result would adversely affect the Company’s business and financial condition.

 

We will need to increase the size of our organization, and we may experience difficulties in managing growth, which could hurt our financial performance.

 

In addition to employees hired from Lilien, Shoom, AirPatrol and LightMiner (who have all become employees of Sysorex USA since January 1, 2016) and any other companies which we may acquire in the future, we anticipate that we will need to expand our employee infrastructure for managerial, operational, financial and other resources at the parent company level.  Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively.

 

In order to manage our future growth, we will need to continue to improve our management, operational and financial controls and our reporting systems and procedures. All of these measures will require significant expenditures and will demand the attention of management. If we do not continue to enhance our management personnel and our operational and financial systems and controls in response to growth in our business, we could experience operating inefficiencies that could impair our competitive position and could increase our costs more than we had planned. If we are unable to manage growth effectively, our business, financial condition and operating results could be adversely affected.

 

The reorganization transactions we carried out in 2015 may cause us to be in a technical breach of certain third-party agreements.

 

In 2015, we carried out a series of reorganization transactions to streamline the organizational structure within the Company and both its direct and indirect subsidiaries. Although these transactions occurred solely within the Company and its subsidiaries, there still may have been an obligation to either provide notice and/or seek consent from certain third parties pursuant to the contracts we have with these parties. We have reviewed and addressed these requirements; however, our failure to comply with any of these notice or consent requirements may have left us in a technical breach, thus possibly subjecting us to potential liabilities or an early termination under the applicable contracts. As of the date of this filing there are no known breaches.

 

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Our business depends on experienced and skilled personnel, and if we are unable to attract and integrate skilled personnel, it will be more difficult for us to manage our business and complete contracts.

 

The success of our business depends on the skill of our personnel. Accordingly, it is critical that we maintain, and continue to build, a highly experienced management team and specialized workforce, including software programs and sales professionals. Competition for personnel, particularly those with expertise in government consulting and a security clearance, is high, and identifying candidates with the appropriate qualifications can be costly and difficult. We may not be able to hire the necessary personnel to implement our business strategy given our anticipated hiring needs, or we may need to provide higher compensation or more training to our personnel than we currently anticipate.  In addition, our ability to recruit, hire and indirectly deploy former employees of the U.S. Government is subject to complex laws and regulations, which may serve as an impediment to our ability to attract such former employees.

 

Our business is labor intensive and our success depends on our ability to attract, retain, train and motivate highly skilled employees, including employees who may become part of our organization in connection with our acquisitions. The increase in demand for consulting, technology integration and managed services has further increased the need for employees with specialized skills or significant experience in these areas. Our ability to expand our operations will be highly dependent on our ability to attract a sufficient number of highly skilled employees and to retain our employees and the employees of companies that we have acquired. We may not be successful in attracting and retaining enough employees to achieve our desired expansion or staffing plans. Furthermore, the industry turnover rates for these types of employees are high and we may not be successful in retaining, training or motivating our employees. Any inability to attract, retain, train and motivate employees could impair our ability to adequately manage and complete existing projects and to accept new client engagements. Such inability may also force us to increase our hiring of independent contractors, which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and financial resources to monitoring and managing our workforce. Our future success will depend on our ability to manage the levels and related costs of our workforce.

 

In the event we are unable to attract, hire and retain the requisite personnel and subcontractors, we may experience delays in completing contracts in accordance with project schedules and budgets, which may have an adverse effect on our financial results, harm our reputation and cause us to curtail our pursuit of new contracts. Further, any increase in demand for personnel may result in higher costs, causing us to exceed the budget on a contract, which in turn may have an adverse effect on our business, financial condition and operating results and harm our relationships with our customers.

 

We have allocated a portion of the net proceeds of our initial public offering to expand our business, in part, through future acquisitions, but we may not be able to identify or complete suitable acquisitions, which could harm our financial performance.

 

Acquisitions are a significant part of our growth strategy.  On April 9, 2014 we raised net proceeds of $16.6 million in our initial public offering from the sale of 3,166,666 shares.  Out of the net proceeds of our initial public offering we utilized approximately $8.5 million for the AirPatrol Acquisition.  We continually review, evaluate and consider potential investments and acquisitions.  In such evaluations, we are required to make difficult judgments regarding the value of business opportunities and the risks and cost of potential liabilities.  We plan to use acquisitions of companies or technologies to expand our project skill sets and capabilities, expand our geographic markets, add experienced management and increase our product and service offerings. Although we have identified several acquisition considerations, we may be unable to implement our growth strategy if we cannot reach agreement with acquisition targets on acceptable terms or arrange required financing for acquisitions on acceptable terms.  If we cannot make acquisitions to expand our business, our future financial performance could be harmed.  In addition, the time and effort involved in attempting to identify acquisition candidates and consummate acquisitions may divert members of our management from the operations of our company, which could also harm our business and results of operations.

 

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Any future acquisitions that we may make could disrupt our business, cause dilution to our stockholders and harm our business, financial condition or operating results.

 

If we are successful in consummating acquisitions, those acquisitions could subject us to a number of risks, including, but not limited to:

 

  the purchase price we pay and/or unanticipated costs could significantly deplete our cash reserves or result in dilution to our existing stockholders;  
     
  we may find that the acquired company or technologies do not improve our market position as planned;  

 

  we may have difficulty integrating the operations and personnel of the acquired company, as the combined operations will place significant demands on the Company’s management, technical, financial and other resources;
     
  key personnel and customers of the acquired company may terminate their relationships with the acquired company as a result of the acquisition;
     
  we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;
     
  we may assume or be held liable for risks and liabilities (including environmental-related costs) as a result of our acquisitions, some of which we may not be able to discover during our due diligence investigation or adequately adjust for in our acquisition arrangements;
     
  our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
     
  we may incur one-time write-offs or restructuring charges in connection with the acquisition;
     
  we may acquire goodwill and other intangible assets that are subject to amortization or impairment tests, which could result in future charges to earnings; and
     
  we may not be able to realize the cost savings or other financial benefits we anticipated.

  

We cannot assure you that we will successfully integrate the business of Sysorex USA (combining the businesses of Lilien, Shoom, AirPatrol and LightMiner) or profitably manage any future acquired business. In addition, we cannot assure you that, following any acquisition, our continued business will achieve sales levels, profitability, efficiencies or synergies that justify the acquisition or that the acquisition will result in increased earnings for us in any future period. These factors could have a material adverse effect on our business, financial condition and operating results.

 

Insurance and contractual protections may not always cover lost revenue, increased expenses or liquidated damages payments, which could adversely affect our financial results.

 

Although we maintain insurance and intend to obtain warranties from suppliers, obligate subcontractors to meet certain performance levels and attempt, where feasible, to pass risks we cannot control to our customers, the proceeds of such insurance, warranties, performance guarantees or risk sharing arrangements may not be adequate to cover lost revenue, increased expenses or liquidated damages payments that may be required in the future.

 

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If we are unable to comply with certain financial and operating restrictions in our credit facilities, we may be limited in our business activities and access to credit or may default under our credit facilities

 

Pursuant to our existing credit facility with Bridge Bank, N.A. n/k/a Western Alliance Bank, all of the Company’s and our subsidiaries’ assets, other than excluded and future projects, are secured with our senior lender.  As of December 31, 2015 the Company owed approximately $8.6 million under its revolving line of credit and $1.6 million under a term loan.  Provisions in our credit facilities and debt instruments impose restrictions or require prior approval on our ability, and the ability of certain of our subsidiaries to, among other things:

 

  incur additional debt; 
     
  pay cash dividends and make distributions; 
     
  make certain investments and acquisitions; 
     
  guarantee the indebtedness of others or our subsidiaries; 

 

  redeem or repurchase capital stock;

 

  create liens or encumbrances; 
     
  enter into transactions with affiliates; 
     
  engage in new lines of business; 
     
  sell, lease or transfer certain parts of our business or property; 
     
  incur obligations for capital expenditures; 
     
  issue additional capital stock of the Company or any subsidiary of the Company; 
     
  acquire new companies and merge or consolidate.

 

These agreements also contain other customary covenants, including covenants that require us to meet specified financial ratios and financial tests. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and cause us to be unable to borrow under our credit facilities and debt instruments. In addition to preventing additional borrowings under these agreements, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under these agreements, which would require us to pay all amounts outstanding.  If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us or at all.  Our failure to repay our bank indebtedness would result in the bank foreclosing on all or a portion of our assets and force us to curtail our operations.

 

We may be subject to damages resulting from claims that the Company or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

 

Upon completion of any acquisitions by the Company, we may be subject to claims that our acquired companies and their employees may have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of former employers or competitors.  Litigation may be necessary to defend against these claims.  Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.  If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel.  A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain products, which could severely harm our business.

 

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The loss of our Chief Executive Officer or other key personnel may adversely affect our operations.

 

The Company’s success depends to a significant extent upon the operation, experience, and continued services of certain of its officers, including our CEO, as well as other key personnel. While our CEO and key personnel are employed under employment contracts, there is no assurance we will be able to retain their services. The loss of our CEO or several of the other key personnel could have an adverse effect on the Company. If our CEO or other executive officers were to leave we would face substantial difficulty in hiring a qualified successor and could experience a loss in productivity while any successor obtains the necessary training and experience. Furthermore, we do not maintain “key person” life insurance on the lives of any executive officer and their death or incapacity would have a material adverse effect on us. The competition for qualified personnel is intense, and the loss of services of certain key personnel could adversely affect our business.

 

Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our customers, which could damage our reputation and adversely affect our revenues and profitability.

 

Any system or service disruptions, on our hosted Cloud infrastructure or those caused by ongoing projects to improve our information technology systems and the delivery of services, if not anticipated and appropriately mitigated, could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner. We are also subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, cyber security threats, natural disasters, power shortages, terrorist attacks or other events, which could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our future results could be adversely affected.

 

Customer systems failures could damage our reputation and adversely affect our revenues and profitability.

 

Many of the systems and networks that we develop, install and maintain for our customers on premise or host on our infrastructure involve managing and protecting personal information and information relating to national security and other sensitive government functions. While we have programs designed to comply with relevant privacy and security laws and restrictions, if a system or network that we develop, install or maintain were to fail or experience a security breach or service interruption, whether caused by us, third-party service providers, cyber security threats or other events, we may experience loss of revenue, remediation costs or face claims for damages or contract termination. Any such event could cause serious harm to our reputation and prevent us from having access to or being eligible for further work on such systems and networks. Our errors and omissions liability insurance may be inadequate to compensate us for all of the damages that we may incur and, as a result, our future results could be adversely affected.

 

Our financial performance could be adversely affected by decreases in spending on technology products and services by our public sector customers.

 

Our sales to our public sector customers are impacted by government spending policies, budget priorities and revenue levels. Although our sales to the federal government are diversified across multiple agencies and departments, they collectively accounted for approximately 12% and 13% of 2015 and 2014 net sales, respectively. An adverse change in government spending policies (including budget cuts at the federal level), budget priorities or revenue levels could cause our public sector customers to reduce their purchases or to terminate or not renew their contracts with us, which could adversely affect our business, results of operations or cash flows.

 

  19  
 

 

Our business could be adversely affected by the loss of certain vendor partner relationships and the availability of their products.

 

We purchase products for resale from vendor partners, which include OEMs, software publishers, and wholesale distributors. For the year ended December 31, 2015, approximately 78% of our revenue was from purchases from vendor partners as defined above. We are authorized by vendor partners to sell all or some of their products via direct marketing activities. Our authorization with each vendor partner is subject to specific terms and conditions regarding such things as sales channel restrictions, product return privileges, price protection policies and purchase discounts.  In the event we were to lose one of our significant vendor partners, our business could be adversely affected.

 

We have entered, and expect to continue to enter, into joint venture, teaming and other arrangements, and these activities involve risks and uncertainties.  A failure of any such relationship could have material adverse results on our business and results of operations.

 

We have entered, and expect to continue to enter, into joint venture, teaming and other arrangements. These activities involve risks and uncertainties, including the risk of the joint venture or applicable entity failing to satisfy its obligations, which may result in certain liabilities to us for guarantees and other commitments, the challenges in achieving strategic objectives and expected benefits of the business arrangement, the risk of conflicts arising between us and our partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business arrangements. A failure of our business relationships could have material adverse results on our business and results of operations.

 

Our business and operations expose us to numerous legal and regulatory requirements and any violation of these requirements could harm our business.

 

We are subject to numerous federal, state and foreign legal requirements on matters as diverse as data privacy and protection, employment and labor relations, immigration, taxation, anticorruption, import/export controls, trade restrictions, internal and disclosure control obligations, securities regulation and anti-competition. Compliance with diverse and changing legal requirements is costly, time-consuming and requires significant resources.  We are also focused on expanding our business in certain identified growth areas, such as health information technology, energy and environment, which are highly regulated and may expose us to increased compliance risk. Violations of one or more of these diverse legal requirements in the conduct of our business could result in significant fines and other damages, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these regulations or contractual obligations related to regulatory compliance in connection with the performance of customer contracts could also result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to compete for certain work and allegations by our customers that we have not performed our contractual obligations.

 

If we do not adequately protect our intellectual property rights, we may experience a loss of revenue and our operations may be materially harmed.

 

We have not registered copyrights on any of the software we have developed. We rely upon confidentiality agreements signed by our employees, consultants and third parties to protect our intellectual property. We cannot assure you that we can adequately protect our intellectual property or successfully prosecute actual or potential infringement of our intellectual property rights. Also, we cannot assure you that others will not assert rights in, or ownership of, trademarks and other proprietary rights of ours or that we will be able to successfully resolve these types of conflicts to our satisfaction. Our failure to protect our intellectual property rights may result in a loss of revenue and could materially adversely affect our operations and financial condition.

 

  20  
 

 

Our performance and ability to compete are dependent to a significant degree on our proprietary technology. Our proprietary software is protected by common law copyright laws, as opposed to registration under copyright statutes.  Common law protection may be narrower than that which we could obtain under registered copyrights.  As a result, we may experience difficulty in enforcing our copyrights against certain third party infringements.  As part of our confidentiality-protection procedures, we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation and other proprietary information.  There can be no assurance that the steps we have taken will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable.  The laws of other countries may afford us little or no protection of our intellectual property.  We also rely on a variety of technology that we license from third parties.  There can be no assurance that these third party technology licenses will continue to be available to us on commercially reasonable terms, if at all. The loss of or inability to maintain or obtain upgrades to any of these technology licenses could result in delays in completing software enhancements and new development until equivalent technology could be identified, licensed or developed and integrated.  Any such delays would materially and adversely affect our business.

 

The growth of our business is dependent on increasing sales to our existing clients and obtaining new clients, which, if unsuccessful, could limit our financial performance.

 

Our ability to increase revenues from existing clients by identifying additional opportunities to sell more of our products and services and our ability to obtain new clients depends on a number of factors, including our ability to offer high quality products and services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing departments. If we are not able to continue to increase sales of our products and services to existing clients or to obtain new clients in the future, we may not be able to increase our revenues and could suffer a decrease in revenues as well.

 

Our business depends on the continued growth of the market for IT products and services, which is uncertain.

 

Our IT products and services solutions are designed to address the growing markets for off-premises services (including migrations, consolidations, Cloud computing and disaster recovery), technology integration services (including storage and data protection services and the implementation of virtualization solutions) and managed services (including operational support and client support). These markets are still evolving. Competing technologies and services or reductions in corporate spending may reduce the demand for our products and services.

 

Decreases, or slow growth, in the newspaper publishing industry may negatively impact our results from operation as it relates to our Cloud based applications and analytics for media and publishing.

 

The newspaper industry as a whole is experiencing challenges to maintain and grow print circulation and revenues. This results from, among other factors, increased competition from other media, particularly the growth of electronic media, and shifting preferences among some consumers to receive all or a portion of their news other than from a newspaper. The customer base for our Cloud based applications and analytics for media and publishing is focused on the newspaper publishing industry and therefore sales from this operating sector will be subject to the future of the newspaper industry.

 

Our competitiveness depends significantly on our ability to keep pace with the rapid changes in IT. Failure by us to anticipate and meet our clients’ technological needs could adversely affect our competitiveness and growth prospects.

 

We operate and compete in an industry characterized by rapid technological innovation, changing client needs, evolving industry standards and frequent introductions of new products, product enhancements, services and distribution methods. Our success depends on our ability to develop expertise with these new products, product enhancements, services and distribution methods and to implement IT solutions that anticipate and respond to rapid changes in technology, the IT industry, and client needs. The introduction of new products, product enhancements and distribution methods could decrease demand for current products or render them obsolete. Sales of products and services can be dependent on demand for specific product categories, and any change in demand for or supply of such products could have a material adverse effect on our net sales if we fail to adapt to such changes in a timely manner.

 

  21  
 

 

We operate in a highly competitive market and we may be required to reduce the prices for some of our products and services to remain competitive, which could adversely affect our results of operations.

 

Our industry is developing rapidly and related technology trends are constantly evolving. In this environment, we face significant price competition from our competitors. We may be unable to offset the effect of declining average sales prices through increased sales volumes and/or reductions in our costs. Furthermore, we may be forced to reduce the prices of the products and services we sell in response to offerings made by our competitors. Finally, we may not be able to maintain the level of bargaining power that we have enjoyed in the past when negotiating the prices of our services.

 

We face substantial competition from other national, multi-regional, regional and local value-added resellers and IT service providers, some of which may have greater financial and other resources than we do or that may have more fully developed business relationships with clients or prospective clients than we do. Many of our competitors compete principally on the basis of price and may have lower costs or accept lower selling prices than we do and, therefore, we may need to reduce our prices. In addition, manufacturers may choose to market their products directly to end-users, rather than through IT solutions providers such as us, and this could adversely affect our business, financial condition and results of operations.

 

Our profitability is dependent on the rates we are able to charge for our products and services. The rates we are able to charge for our products and services are affected by a number of factors, including:

 

  our clients’ perceptions of our ability to add value through our services;
     
  introduction of new services or products by us or our competitors;
     
  our competitors’ pricing policies;
     
  our ability to charge higher prices where market demand or the value of our services justifies it;
     
  procurement practices of our clients; and
     
  general economic and political conditions.

 

If we are not able to maintain favorable pricing for our products and services, our results of operations could be adversely affected.

 

Sales of our IT products and services are subject to quarterly and seasonal variations that may cause significant fluctuations in our operating results, therefore period-to-period comparisons of our operating results may not be reliable predictors of future performance.

 

The timing of our revenues can be difficult to predict. Our sales efforts involve educating our clients about the use and benefit of the products we sell and our services and solutions, including their technical capabilities and potential cost savings to an organization. Clients typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle, which typically lasts several months, and may last a year or longer. We spend substantial time, effort and money on our sales efforts without any assurance that our efforts will produce any sales during a given period.

 

In addition, many of our clients spend a substantial portion of their IT budgets in the second half of the year. Other factors that may cause our quarterly operating results to fluctuate include changes in general economic conditions and the impact of unforeseen events. We believe that our revenues will continue to be affected in the future by cyclical trends. As a result, you may not be able to rely on period-to-period comparisons of our operating results as an indication of our future performance.

 

  22  
 

 

A delay in the completion of our clients’ budget processes could delay purchases of our products and services and have an adverse effect on our business, operating results and financial condition.

 

We rely on our clients to purchase products and services from us to maintain and increase our earnings, and client purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. If sales expected from a specific client are not realized when anticipated or at all, our results could fall short of public expectations and our business, operating results and financial condition could be materially adversely affected.

 

The profit margins from our IT products and services depend, in part, on the volume of products and services sold.  A failure to achieve increases in our profit margins in the future could have a material adverse effect on our financial condition and results of operations.

 

Given the significant levels of competition that characterize the IT reseller market, it is unlikely that we will be able to increase gross profit margins through increases in sales of IT products alone. Any increase in gross profit margins from this operating sector in the future will depend, in part, on the growth of our higher margin businesses such as IT consulting and professional services. In addition, low margins increase the sensitivity of our results of operations to increases in costs of financing. Any failure by us to maintain or increase our gross profit margins could have a material adverse effect on our financial condition and results of operations.

 

Any failures or interruptions in our services or systems could damage our reputation and substantially harm our business and results of operations.

 

Our success depends in part on our ability to provide reliable remote services, technology integration and managed services to our clients.  The operations of our IT products and services as well as our Cloud based applications and analytics are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failure, terrorist attacks and similar events. We could also experience failures or interruptions of our systems and services, or other problems in connection with our operations, as a result of:

 

  damage to or failure of our computer software or hardware or our connections;
     
  errors in the processing of data by our systems;
     
  computer viruses or software defects;
     
  physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events;
     
  increased capacity demands or changes in systems requirements of our clients; and
     
  errors by our employees or third-party service providers.

 

Any interruptions in our systems or services could damage our reputation and substantially harm our business and results of operations. While we maintain disaster recovery plans and insurance with coverage we believe to be adequate, claims may exceed insurance coverage limits, may not be covered by insurance or insurance may not continue to be available on commercially reasonable terms.

 

Some of our services and solutions involve storing and replicating mission-critical data for our clients and are highly technical in nature. If client data is lost or corrupted, our reputation and business could be harmed.

 

Our IT data center and technology integration services and software-as-a-service solutions include storing and replicating mission-critical data for our clients. The process of storing and replicating that data within their data centers or at our facilities is highly technical and complex. If any data is lost or corrupted in connection with the use of our products and services, our reputation could be seriously harmed and market acceptance of our IT solutions could suffer. In addition, our solutions have contained, and may in the future contain, undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has been in use by clients. Any errors, defects or security vulnerabilities discovered in our solutions after use by clients could result in loss of revenues, loss of clients, increased service and warranty cost and diversion of attention of our management and technical personnel, any of which could significantly harm our business. In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our service offerings and solutions.

 

  23  
 

 

We do not have long-term recurring revenue generating contracts with our clients that utilize our IT products and services, and such clients may cease providing new purchase orders at any time or reduce the amount of purchases they make that would depress the revenues we receive from our IT products and services and harm our results of operations.

 

Our operations depend upon our relationships with our clients. Revenues from out IT products and services are typically driven by purchase orders received every month. The majority of revenues from our IT products and services come from one time purchase orders that do not guarantee any future recurring revenues.  Approximately twenty five percent of such revenues are recurring and based on contracts that range from 1-5 years for warranty and maintenance support.  For these contracts the customer is invoiced one time and pays up front 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. Clients with these type of contacts may cease providing new purchase orders at any time, may elect not to renew such contracts, cancel and request a refund of maintenance/warranty services that have not yet been provided (upon 30 days advance written notice) or reschedule purchases. If clients cease providing us with new purchase orders, diminish the services purchased from us, cancel executed purchase orders or delay future purchase orders, revenues received from the sale of our IT products and services would be negatively impacted, which could have a material adverse effect on our business and results of operations. There is no guarantee that we will be able to retain or generate future revenue from our existing clients or develop relationships with new clients.

 

There is a risk that we could lose a large client without being able to find a ready replacement.

 

The loss of any large client, the failure of any large client to pay its accounts receivable on a timely basis or a material reduction in the amount of purchases made by any large client could have a material adverse effect on our business, financial position, results of operations and cash flows.

 

Consolidation in the industries that we serve or from which we purchase could adversely affect our business.

 

Some of the clients we serve may seek to achieve economies of scale by combining with or acquiring other companies. If two or more of our current clients combine their operations, it may decrease the amount of work that we perform for these clients. If one of our current clients merges or consolidates with a company that relies on another provider for its consulting, systems integration and technology, or outsourcing services, we may lose work from that client or lose the opportunity to gain additional work. If two or more of our suppliers merge or consolidate operations, the increased market power of the larger company could also increase our product costs and place competitive pressures on us. Any of these possible results of industry consolidation could adversely affect our business.

 

The loss of any key manufacturer or distributor relationships, or related industry certifications, could have an adverse effect on our business.

 

As part of our end-to-end IT solutions, we are authorized resellers of the products and services of leading IT manufacturers and distributors. In many cases, we have achieved the highest level of relationship the manufacturer or distributor offers. In addition, our employees hold certifications issued by these manufacturers and by industry associations relating to the configuration, installation and servicing of these products. We differentiate ourselves from our competitors by the range of manufacturers and distributors we represent, the relationship level we have achieved with these manufacturers and distributors and the scope of the manufacturer and industry certifications our employees hold. There can be no assurance that we will be able to retain these relationships with our manufacturers and distributors, that we will be able to retain the employees holding these manufacturer and industry certifications, or that our employees will maintain their manufacturer or industry certifications. The loss of any of these relationships or certifications could have a material adverse effect on our business.

 

  24  
 

 

We may experience a reduction in the incentive programs offered to us by our vendors.  Any such reduction could have a material adverse effect on our business, results of operations and financial condition.

 

We receive payments and credits from vendors, including consideration pursuant to volume sales incentive programs and marketing development funding programs. These programs are usually of finite terms and may not be renewed or may be changed in a way that has an adverse effect on us. Vendor funding is used to offset, among other things, inventory costs, cost of goods sold, marketing costs and other operating expenses. Certain of these funds are based on our volume of net sales or purchases, growth rate of net sales or purchases and marketing programs. If we do not grow our net sales or if we are not in compliance with the terms of these programs, there could be a material negative effect on the amount of incentives offered or paid to us by vendors. No assurance can be given that we will continue to receive such incentives or that we will be able to collect outstanding amounts relating to these incentives in a timely manner, or at all. Any sizeable reduction in, the discontinuance of, or a significant delay in receiving or the inability to collect such incentives, particularly related to incentive programs with one of our largest partners, Hewlett-Packard Company, could have a material adverse effect on our business, results of operations and financial condition. If we are unable to react timely to any fundamental changes in the programs of vendors, including the elimination of funding for some of the activities for which we have been compensated in the past, such changes would have a material adverse effect on our business, results of operations and financial condition.

 

We may need additional cash financing and any failure to obtain cash financing, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.

 

Our management believes that current consolidated cash and cash flow from operations should be sufficient to meet our anticipated consolidated cash needs for at least the next 12 months from the date of filing this report assuming we meet our revenue and gross profit estimates. We may, however, require additional cash resources due to changed business conditions, revenue delays in any of our businesses or other future developments, including any new lines of business we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may need to seek additional financing to support our operating. If we are unable to raise the required cash, our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges could be limited.

 

We rely on inventory financing and vendor credit arrangements for our daily working capital and certain operational functions, the loss of which could have a material adverse effect on our future results.

 

We rely on inventory financing and vendor financing arrangements for daily working capital and to fund equipment purchases for our technology sales business. The loss of any of our inventory financing or vendor credit financing arrangements, a reduction in the amount of credit granted to us by our vendors, or a change in any of the material terms of these arrangements could increase our need for and the cost of working capital and have a material adverse effect on our future results. These credit arrangements are discretionary on the part of our creditors and require the performance of certain operational covenants. There can be no assurance that we will continue to meet those covenants and failure to do so may limit availability of, or cause us to lose, such financing. There can be no assurance that such financing will continue to be available to us in the future on acceptable terms.

 

If we cannot collect our receivables or if payment is delayed, our business may be adversely affected by our inability to generate cash flow, provide working capital or continue our business operations.

 

Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for products received from us and any work performed by us. The timely collection of our receivables allows us to generate cash flow, provide working capital and continue our business operations. Our clients may fail to pay or delay the payment of invoices for a number of reasons, including financial difficulties resulting from macroeconomic conditions, or lack of an approved budget.  An extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. If we are unable to timely collect our receivables from our clients for any reason, our business and financial condition could be adversely affected.

 

  25  
 

 

If our location based security and detection and context aware marketing products fail to satisfy customer demands or to achieve increased market acceptance our results of operations, financial condition and growth prospects could be materially adversely affected.

 

The market acceptance of our products, particularly our location based security and detection and context aware marketing products are critical to our continued success. Demand for these products is affected by a number of factors beyond our control, including continued market acceptance, the timing of development and release of new products by competitors, technological change, and growth or decline in the mobile device management market. We expect the proliferation of mobile devices to lead to an increase in the data security demands of our customers, and our products may not be able to scale and perform to meet those demands. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of these products, our business operations, financial results and growth prospects will be materially and adversely affected.

 

Our inventory management systems and related supply chain tools may not be able to forecast accurately and effectively manage supply of our products. If we ultimately determine that we have excess supply, we may have to reduce our prices and write-down inventory, which in turn could result in lower gross margins. If actual component usage and product demand are lower than the forecast, losses on manufacturing commitments in excess of forecasted demand may be accrued.

 

Any production interruptions for any reason, such as a natural disaster, epidemic, capacity shortages, or quality problems, at one of our manufacturing partners would negatively affect sales of product lines manufactured by that manufacturing partner and adversely affect our business and operating results.

 

Defects, errors, or vulnerabilities in our location based security and detection products or services or the failure of such products or services to prevent a security breach, could harm our reputation and adversely impact our results of operations.

 

Because our location based security products and services are complex, they have contained and may contain design or manufacturing defects or errors that are not detected until after their commercial release and deployment by customers. Defects may cause such products to be vulnerable to advanced persistent threats (APTs) or security attacks, cause them to fail to help secure information or temporarily interrupt customers’ networking traffic. Because the techniques used by hackers to access sensitive information change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques and provide a solution in time to protect customers’ data. In addition, defects or errors in our subscription updates or products could result in a failure to effectively update customers’ hardware products and thereby leave customers vulnerable to APTs or security attacks.

 

Any defects, errors or vulnerabilities in our products could result in:

 

  Expenditure of significant financial and product development resources in efforts to analyze, correct, eliminate, or work-around errors or defects or to address and eliminate vulnerabilities;
     
  Delayed or lost revenue;
     
  Loss of existing or potential customers or partners;
     
  Increased warranty claims compared with historical experience, or increased cost of servicing warranty claims, either of which would adversely affect gross margins; and
     
  Litigation, regulatory inquiries, or investigations that may be costly and harm our reputation

 

  26  
 

 

Our Cloud strategy, including our Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS) and Data as a Service (DaaS) offerings, may adversely affect our revenues and profitability.

 

We offer customers a full range of consumption models including the deployment of our products via our cloud based SaaS, PaaS, IaaS and DaaS offerings. These business models continue to evolve, and we may not be able to compete effectively, generate significant revenues or maintain the profitability of our cloud offerings. Additionally, the increasing prevalence of cloud and SaaS delivery models offered by us and our competitors may unfavorably impact the pricing of our on-premises enterprise software offerings and our cloud offerings, and has a dampening impact on overall demand for our on-premises software product and service offerings, which could reduce our revenues and profitability, at least in the near-term. If we do not successfully execute our cloud computing strategy or anticipate the cloud computing needs of our customers, our reputation as a cloud services provider could be harmed and our revenues and profitability could decline.

 

Our cloud offerings are generally purchased by customers on a subscription basis and revenues from these offerings are generally recognized ratably over the term of the subscriptions. The deferred revenue that results from sales of our cloud offerings may prevent any deterioration in sales activity associated with our cloud offerings from becoming immediately observable in our consolidated statement of operations. This is in contrast to revenues associated with our new software licenses arrangements whereby new software licenses revenues are generally recognized in full at the time of delivery of the related software licenses. We incur certain expenses associated with the infrastructures and marketing of our cloud offerings in advance of our ability to recognize the revenues associated with these offerings. As customer demand for our cloud offerings increases, we experience volatility in our reported revenues and operating results due to the differences in timing of revenue recognition between our new software licenses arrangements and cloud offering arrangements.

 

Our current research and development efforts may not produce successful products or features that result in significant revenue, cost savings or other benefits in the near future.  If we do not realize significant revenue from our research and development efforts, our business and operating results could be adversely affected.

 

Developing products and related enhancements in our field is expensive.   Investments in research and development may not result in significant design improvements, marketable products or features or may result in products that are more expensive than anticipated.  We may not achieve the cost savings or the anticipated performance improvements expected, and we may take longer to generate revenue from products in development, or generate less revenue than expected.

 

Our future plans include significant investments in research and development and related product opportunities. Our management believes that we must continue to dedicate a significant amount of resources to research and development efforts to maintain a competitive position. However, we may not receive significant revenue from these investments in the near future, or these investments may not yield the expected benefits, either of which could adversely affect our business and operating results.

 

Misuse of our products could harm our reputation.

 

Our products, particularly our location based security and detection and context aware marketing may be misused by customers or third parties that obtain access to such products. For example, these products could be used to protect information kept by criminals from government agencies. Such use of these products for censorship could result in negative press coverage and negatively affect our reputation.

 

If the general level of advanced attacks declines, or is perceived by current or potential customers to have declined, this could harm our location based security and detection operating segment, and our financial condition, operating results and growth prospects.

 

Our location based security and detection operating segment is substantially dependent upon enterprises and governments recognizing that APTs and other security attacks are pervasive and are not effectively prevented by legacy security solutions. High visibility attacks on prominent enterprises and governments have increased market awareness of the problem of APTs and security attacks and help to provide an impetus for enterprises and governments to devote resources to protecting against attacks, such as testing our platform, purchasing it, and broadly deploying it within their organizations. If APTs and other security attacks were to decline, or enterprises or governments perceived that the general level of attacks has declined, our ability to attract new customers and expand its offerings for existing customers could be materially and adversely affected, which would, in turn, have a material adverse effect on our financial condition, results of operations and growth prospects.

 

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If our location based security and detection products do not effectively interoperate with our customers’ IT infrastructure, installations could be delayed or cancelled, which would harm our financial condition, operating results and growth prospects.

 

Our products must effectively interoperate with our customers’ existing or future IT infrastructure, which often has different specifications, utilizes multiple protocol standards, deploys products from multiple vendors, and contains multiple generations of products that have been added over time. As a result, when problems occur in a company’s infrastructure, it may be difficult to identify the sources of these problems. If we find errors in the existing software or defects in the hardware used in our customers’ infrastructure, we may have to modify its software or hardware so that our products will interoperate with the infrastructure of our customers. In such cases, our products may be unable to provide significant performance improvements for applications deployed in the infrastructure of our customers. These issues could cause longer installation times for our products and could cause order cancellations, either of which would adversely affect our business, results of operations and financial condition.  In addition, other customers may require products to comply with certain security or other certifications and standards.  If our products are late in achieving or fail to achieve compliance with these certifications and standards, or competitors sooner achieve compliance with these certifications and standards, we may be disqualified from selling our products to such customers, or may otherwise be at a competitive disadvantage, either of which would harm our business, results of operations, and financial condition.

 

Failure to protect our intellectual property rights could adversely affect our financial condition, operating results and growth prospects.

 

The success of our business depends, in part, on our ability to protect proprietary methods and technologies that we develop under patent and other intellectual property laws of the United States so that we can prevent others from using our inventions and proprietary information.  If Sysorex or our subsidiaries fail to protect intellectual property rights adequately, competitors might gain access to our technology, and our business might be adversely affected. However, defending our intellectual property rights might entail significant expenses. Any patents issued in the future may not provide us with any competitive advantages, and our patent applications may never be granted. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are complex and often uncertain.  Our inability to protect our property rights could adversely affect our financial condition, operating results and growth prospects.

 

We may not be able to successfully integrate the business and operations of entities that we have acquired or may acquire in the future into our ongoing business operations, which may result in our inability to fully realize the intended benefits of these acquisitions, or may disrupt our current operations, which could have a material adverse effect on our business, financial position and/or results of operations.

 

We are in the process of integrating the operations of Lilien, AirPatrol, Shoom and LightMiner into Sysorex USA, and this process involves complex operational, technological and personnel-related challenges, which are time-consuming and expensive and may disrupt our ongoing business operations.  Furthermore, integration involves a number of risks, including, but not limited to:

 

  difficulties or complications in combining the companies' operations;
     
  differences in controls, procedures and policies, regulatory standards and business cultures among the combined companies;
     
  the diversion of management's attention from our ongoing core business operations;

 

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  increased exposure to certain governmental regulations and compliance requirements;
     
  the potential loss of key personnel;
     
  the potential loss of key customers or suppliers who choose not to do business with the combined business;
     
  difficulties or delays in consolidating the acquired companies’ technology platforms, including implementing systems designed to continue to ensure that the Company maintains effective disclosure controls and procedures and internal control over financial reporting for the combined company and enable the Company to continue to comply with U.S. GAAP and applicable U.S. securities laws and regulations;
     
  unanticipated costs and other assumed contingent liabilities;
     
  difficulty comparing financial reports due to differing financial and/or internal reporting systems;
     
  making any necessary modifications to internal financial control standards to comply with the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder; and/or
     
  possible tax costs or inefficiencies associated with integrating the operations of the combined company.

 

These factors could cause us to not fully realize the anticipated financial and/or strategic benefits of the previous acquisitions and the recent reorganization, which could have a material adverse effect on our business, financial condition and/or results of operations.

 

Even if we are able to successfully operate the businesses of Lilien, Shoom, AirPatrol and LightMiner within Sysorex, we may not be able to realize the revenue and other synergies and growth that we anticipate from the previous acquisitions and the recent reorganization in the time frame that we currently expect, and the costs of achieving these benefits may be higher than what we currently expect, because of a number of risks, including, but not limited to:

 

  the possibility that the acquisition may not further our business strategy as we expected;
     
  the possibility that we may not be able to expand the reach and customer base for the acquired companies current and future products as expected;
     
  the possibility that the carrying amounts of goodwill and other purchased intangible assets may not be recoverable; and
     

As a result of these risks, the acquisitions and integration may not contribute to our earnings as expected, we may not achieve expected revenue synergies or our return on invested capital targets when expected, or at all, and we may not achieve the other anticipated strategic and financial benefits of the acquisitions and the reorganization.

 

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A significant portion of the purchase price for our acquisition of Lilien, Shoom, AirPatrol and LightMiner is allocated to goodwill and intangible assets that are subject to periodic impairment evaluations. An impairment loss could have a material adverse impact on our financial condition and results of operations.

 

The Company acquired $4.5 million of goodwill and $5.4 million of intangibles assets relating to our acquisition of Lilien, $1.2 million of goodwill and $2.8 million of intangibles assets relating to our acquisition of Shoom, $7.4 million of goodwill and $13.3 million of intangibles assets relating to our acquisition of AirPatrol and $3.5 million of intangible assets relating to our acquisition of LightMiner. As required by current accounting standards, we review intangible assets for impairment either annually or whenever changes in circumstances indicate that the carrying value may not be recoverable.  The risk of impairment to goodwill is higher during the early years following an acquisition. This is because the fair values of these assets align very closely with what we paid to acquire the reporting units to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value (typically referred to as “headroom”) is smaller at the time of acquisition.  Until this headroom grows over time, due to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges.  When impairment charges are triggered, they tend to be material due to the size of the assets involved.  Our business would be adversely affected, and impairment of goodwill could be triggered, if any of the following were to occur: higher attrition rates than planned as a result of the competitive environment or our inability to provide products and services that are competitive in the marketplace, lower-than-planned adoption rates by customers, higher-than-expected expense levels to provide services to clients, and changes in our business model that may impact one or more of these variables.

 

Our acquisitions may expose us to additional liabilities, and insurance and indemnification coverage may not fully protect us from these liabilities.

 

Upon completion of acquisitions, we may be exposed to unknown or contingent liabilities associated with the acquired entity, and if these liabilities exceed our estimates, our results of operations and financial condition may be materially and negatively affected.  

 

The risks arising with respect to the historic business and operations of Lilien, Shoom, AirPatrol and LightMiner may be different from what we anticipate, which could significantly increase the costs and decrease the benefits of the acquisition and materially and adversely affect our operations going forward.

 

Although we performed significant financial, legal, technological and business due diligence with respect to Lilien, Shoom, AirPatrol and LightMiner (which have been combined into Sysorex USA), we may not have appreciated, understood or fully anticipated the extent of the risks associated with the acquisitions.  As mentioned above, we have secured indemnification for certain matters from the former equity holders of Lilien, Shoom and AirPatrol in order to mitigate the consequences of breaches of representations, warranties and covenants under the merger agreements and the risks associated with historic operations, including those with respect to compliance with laws, accuracy of financial statements, financial reporting controls and procedures, tax matters and undisclosed liabilities, and certain matters known to us. We believe that the indemnification provisions of the merger agreements, together with the holdback escrow (in the case of AirPatrol, Shoom and LightMiner) and insurance policies that we and Lilien, Shoom and AirPatrol (which all merged into Sysorex USA) have in place will limit the economic consequences of the issues we have identified in our due diligence to acceptable levels. Notwithstanding our exercise of due diligence and risk mitigation strategies, the risks of the acquisition and the costs associated with these risks may be greater than we anticipate. We may not be able to contain or control the costs associated with unanticipated risks or liabilities, which could materially and adversely affect our business, liquidity, capital resources or results of operations.

 

We depend on the U.S. Government for a substantial portion of our business and government budget impasses together with changes in government defense spending could have adverse consequences on our financial position, results of operations and business.

 

A substantial portion of our U.S. revenues from our operations have been from and will continue to be from sales and services rendered directly or indirectly to the U.S. Government. Consequently, our revenues are highly dependent on the Government’s demand for computer systems and related services. Our revenues from the U.S. Government largely result from contracts awarded to us under various U.S. Government programs, primarily defense-related programs with the Department of Defense (DoD), as well as a broad range of programs with the Department of Homeland Security, the Intelligence Community and other departments and agencies.  Cost cutting including through consolidation and elimination of duplicative organizations and insurance has become a major initiative for DoD.  The funding of our programs is subject to the overall U.S. Government budget and appropriation decisions and processes which are driven by numerous factors, including geo-political events and macroeconomic conditions.  It is expected that U.S. Government spending on IT will decrease from 6% CAGR during the first decade of the 21st Century to 3%.  (Source:  Market Research Media - U.S. Federal IT Market Forecast 2013-2018).  The overall level of U.S. defense spending increased in recent years for numerous reasons, including increases in funding of operations in Iraq and Afghanistan.  However, with the winding down of both wars, defense spending levels are becoming increasingly difficult to predict and are expected to be affected by numerous factors. Such factors include priorities of the Administration and the Congress, and the overall health of the U.S. and world economies and the state of governmental finances.

 

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The Budget Control Act of 2011 enacted 10-year discretionary spending caps which are expected to generate over $1 trillion in savings for the U.S. Government, a substantial portion of which comes from DoD baseline spending reductions. In addition, the Budget Control Act of 2011 provides for additional automatic spending cuts (referred to as “sequestration”) totaling $1.2 trillion over nine years which were implemented beginning in the U.S. Government fiscal year ending September 30, 2013 (GFY13). These reduction targets will further reduce DoD and other federal agency budgets. Although the Office of Management and Budget has provided guidance to agencies on implementing sequestration cuts, there remains much uncertainty about how exactly sequestration cuts will be implemented and the impact those cuts will have on contractors supporting the government. We are not able to predict the impact of future budget cuts, including sequestration, on our Company or our financial results. However, we expect that budgetary constraints and concerns related to the national debt will continue to place downward pressure on DoD spending levels and that implementation of the automatic spending cuts without change will reduce, delay or cancel funding for certain of our contracts - particularly those with unobligated balances - and programs and could adversely impact our operations, financial results and growth prospects.

 

A significant reduction in defense spending could have long-term consequences for our size and structure. In addition, reduction in government priorities and requirements could impact the funding, or the timing of funding, of our programs, which could negatively impact our results of operations and financial condition.  In addition, we are involved in U.S. Government programs, which are classified by the U.S. Government and our ability to discuss these programs, including any risks and disputes and claims associated with and our performance under such programs, could be limited due to applicable security restrictions.

 

The U.S. Government Systems integration business is intensely competitive and we may not be able to win government bids when competing against much larger companies, which could reduce our revenues.

 

Large computer systems integration contracts awarded by the U.S. Government are few in number and are awarded through a formal competitive bidding process, including IDIQ, GSA Schedule and other multi-award contracts. Bids are awarded on the basis of price, compliance with technical bidding specifications, technical expertise and, in some cases, demonstrated management ability to perform the contract. There can be no assurance that the Company will win and/or fulfill additional contracts. Moreover, the award of these contracts is subject to protest procedures and there can be no assurance that the Company will prevail in any ensuing legal protest. The Company’s failure to secure a significant dollar volume of U.S. Government contracts in the future would adversely affect our Sysorex Government Services subsidiary.

 

The U.S. Government Systems integration business is intensely competitive and subject to rapid change. The Company competes with a large number of systems integrators, hardware and software manufacturers, and other large and diverse companies attempting to enter or expand their presence in the U.S. Government market. Many of the existing and potential competitors have greater financial, operating and technological resources than the Company. The competitive environment may require us to make changes in our pricing, services or marketing. The competitive bidding process involves substantial costs and a number of risks, including significant cost and managerial time to prepare bids and proposals for contracts that may not be awarded to us, or that may be awarded, but for which we do not receive meaningful revenues. Accordingly, our success depends on our ability to develop services and products that address changing needs and to provide people and technology needed to deliver these services and products. To remain competitive, we must consistently provide superior service, technology and performance on a cost-effective basis to our customers.  Our response to competition could cause us to expend significant financial and other resources, disrupt our operations, strain relationships with partners, any of which could harm our business and/or financial condition.

 

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Sysorex Government’s financial performance is dependent on our ability to perform on our U.S. Government contracts, which are subject to termination for convenience, which could harm our results of operations and financial condition.

 

Sysorex Government’s financial performance is dependent on our performance under our U.S. Government contracts.  The Company’s strategy is to pursue a limited number of relatively large contracts. As a result, prior to the Lilien Acquisition, the Company derived a significant portion of its revenues from a small number of contracts. Government customers have the right to cancel any contract at their convenience. An unanticipated termination of, or reduced purchases under, one of the Company’s major contracts whether due to lack of funding, for convenience or otherwise, or the occurrence of delays, cost overruns and product failures could adversely impact our results of operations and financial condition.  If one of our contracts were terminated for convenience, we would generally be entitled to payments for our allowable costs and would receive some allowance for profit on the work performed. If one of our contracts were terminated for default, we would generally be entitled to payments for our work that has been accepted by the government. A termination arising out of our default could expose us to liability and have a negative impact on our ability to obtain future contracts and orders. Furthermore, on contracts for which we are a subcontractor and not the prime contractor, the U.S. Government could terminate the prime contract for convenience or otherwise, irrespective of our performance as a subcontractor.  The termination or cancellation of U.S. Government contracts, no matter what the reason, could harm our results of operations and financial condition.

 

Our failure to comply with a variety of complex procurement rules and regulations could result in our being liable for penalties, including termination of our U.S. Government contracts, disqualification from bidding on future U.S. Government contracts and suspension or debarment from U.S. Government contracting that could adversely affect our financial condition.

 

We must comply with laws and regulations relating to the formation, administration and performance of U.S. Government contracts, which affect how we do business with our customers and may impose added costs on our business. U.S. Government contracts generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. Government, department-specific regulations that implement or supplement DFAR, such as the DoD’s Defense Federal Acquisition Regulation Supplement (DFARS) and other applicable laws and regulations. We are also subject to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations; the Procurement Integrity Act, which regulates access to competitor bid and proposal information and government source selection information, and our ability to provide compensation to certain former government officials; the Civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. Government for payment or approval; and the U.S. Government Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. Government contracts. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions to the value of contracts, contract modifications or termination, and the assessment of penalties and fines and lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. Government agencies such as the Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA). These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of and a contractor’s compliance with its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. During the term of any suspension or debarment by any U.S. Government agency, contractors can be prohibited from competing for or being awarded contracts by U.S. Government agencies. The termination of any of the Company’s significant Government contracts or the imposition of fines, damages, suspensions or debarment would adversely affect the Company’s business and financial condition.

 

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The U.S. Government may adopt new contract rules and regulations or revise its procurement practices in a manner adverse to us at any time.

 

Our industry has experienced, and we expect it will continue to experience, significant changes to business practices as a result of an increased focus on affordability, efficiencies, and recovery of costs, among other items. U.S. Government agencies may face restrictions or pressure regarding the type and amount of services that they may obtain from private contractors. Legislation, regulations and initiatives dealing with procurement reform, mitigation of potential conflicts of interest and environmental responsibility or sustainability, as well as any resulting shifts in the buying practices of U.S. Government agencies, such as increased usage of fixed price contracts, multiple award contracts and small business set-aside contracts, could have adverse effects on government contractors, including us. Any of these changes could impair our ability to obtain new contracts or renew our existing contracts when those contracts expire and are subject to a renewed bidding process. Any new contracting requirements or procurement methods could be costly or administratively difficult for us to implement and could adversely affect our future revenues, profitability and prospects.

 

We may incur cost overruns as a result of fixed priced government contracts, which would have a negative impact on our operations.

 

Most of our U.S. Government contracts are multi-award, multi-year IDIQ task order based contracts, which generally provide for fixed price schedules for products and services, have no pre-set delivery schedules, have very low minimum purchase requirements, are typically competed over among multiple awardees and force us to carry the burden of any cost overruns. Due to their nature, fixed-priced contracts inherently have more risk than cost reimbursable contracts.  If we are unable to control costs or if our initials cost estimates are incorrect, we can lose money on these contracts. In addition, some of our contracts have provisions relating to cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits. Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of operations.  The U.S. Government has the right to enter into contract with other suppliers, which may be competitive with the Company’s IDIQ contracts. The Company also performs fixed priced contracts under which the Company agrees to provide specific quantities of products and services over time for a fixed price.  Since the price competition to win both IDIQ and fixed price contracts is intense and the costs of future contract performance cannot be predicted with certainty, there can be no assurance as to the profits, if any, that the Company will realize over the term of such contracts.

 

Misconduct of employees, subcontractors, agents and business partners could cause us to lose existing contracts or customers and adversely affect our ability to obtain new contracts and customers and could have a significant adverse impact on our business and reputation.

 

Misconduct could include fraud or other improper activities such as falsifying time or other records and violations of laws, including the Anti-Kickback Act. Other examples could include the failure to comply with our policies and procedures or with federal, state or local government procurement regulations, regulations regarding the use and safeguarding of classified or other protected information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations relating to environmental, health or safety matters, bribery of foreign government officials, import-export control, lobbying or similar activities, and any other applicable laws or regulations. Any data loss or information security lapses resulting in the compromise of personal information or the improper use or disclosure of sensitive or classified information could result in claims, remediation costs, regulatory sanctions against us, loss of current and future contracts and serious harm to our reputation. Although we have implemented policies, procedures and controls to prevent and detect these activities, these precautions may not prevent all misconduct, and as a result, we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees, subcontractors, agents or business partners could damage our reputation and subject us to fines and penalties, restitution or other damages, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting with federal, state or local government agencies, any of which would adversely affect our business, reputation and our future results.

 

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We may fail to obtain and maintain necessary security clearances, which may adversely affect our ability to perform on certain U.S. government contracts and depress our potential revenues.

 

Many U.S. government programs require contractors to have security clearances. Depending on the level of required clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain necessary security clearances, we may not be able to win new business, and our existing clients could terminate their contracts with us or decide not to renew them. To the extent we are not able to obtain and maintain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively rebid on expiring contracts, as well as lose existing contracts, which may adversely affect our operating results and inhibit the execution of our growth strategy.

 

Our future revenues and growth prospects could be adversely affected by our dependence on other contractors.

 

If other contractors with whom we have contractual relationships either as a prime contractor or subcontractor eliminate or reduce their work with us, or if the U.S. Government terminates or reduces these other contractors’ programs, does not award them new contracts or refuses to pay under a contract our financial and business condition may be adversely affected. Companies that do not have access to U.S. Government contracts may perform services as our subcontractor and that exposure could enhance such companies’ prospect of securing a future position as a prime U.S. Government contractor which could increase competition for future contracts and impair our ability to perform on contracts.

 

We may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, our hiring of a subcontractor’s personnel or the subcontractor’s failure to comply with applicable law. Current uncertain economic conditions heighten the risk of financial stress of our subcontractors, which could adversely impact their ability to meet their contractual requirements to us. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor or higher tier subcontractor may be jeopardized. Significant losses could arise in future periods and subcontractor performance deficiencies could result in our termination for default. A termination for default could eliminate a revenue source, expose us to liability and have an adverse effect on our ability to compete for future contracts and task orders, especially if the customer is an agency of the U.S. Government.

 

Sysorex Arabia is currently without contracts and is unable to repay its indebtedness, which could have an adverse impact on our financial condition.

 

As of December 31, 2015, Sysorex Arabia had minimal cash and assets being carried at their estimate realized value of approximately $772,000. Sysorex Arabia had an accumulated deficit balance of approximately $1.7 million. Sysorex Arabia is currently without business. Sysorex Arabia also has aging liabilities due to vendors, employees, social insurance payments, and partners amounting to approximately $2.0 million and owes $900,000 to Sysorex Global. This is primarily a result of the OCC Data Center project as revenue and cash-flow projections did not materialize because of delays and its ultimate cancellation.  Sysorex Arabia is working with local suppliers on payment plans.

 

Sysorex Arabia has a judgment in the amount of $800,000 for non-performance by a Sysorex partner.  That amount has been paid by the partner and Sysorex Arabia is waiting for the Saudi Courts to remove this judgment and release it from any claims. Sysorex Arabia has taken on several loans to finance the losses to date and to pay some liabilities.  In the event that any unsatisfied claims are made against the Company, this could have a material adverse effect on our financial condition if not resolved satisfactorily, as Sysorex Arabia would not be expected to satisfy its liabilities.

 

The assets and liabilities of Sysorex Arabia are shown as held for sale as the Company’s management decided to close Saudi Arabia , the business activities of which have been shifted to resellers and strategic partners in the region.

 

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Our international business exposes us to geo-political and economic factors, regulatory requirements and other risks associated with doing business in foreign countries.

 

Our foreign operations pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address. We have foreign operations in the Middle East and expect to do business in South Asia.  These risks differ from and potentially may be greater than those associated with our domestic business.

 

Our international business is sensitive to changes in the priorities and budgets of international customers and geo-political uncertainties, which may be driven by changes in threat environments and potentially volatile worldwide economic conditions, various regional and local economic and political factors, risks and uncertainties, as well as U.S. foreign policy. Our international sales are subject to U.S. laws, regulations and policies, including the International Traffic in Arms Regulations (ITAR) and the Foreign Corrupt Practices Act (see below) and other export laws and regulations. Due to the nature of our products, we must first obtain licenses and authorizations from various U.S. Government agencies before we are permitted to sell our products outside of the U.S. We can give no assurance that we will continue to be successful in obtaining the necessary licenses or authorizations or that certain sales will not be prevented or delayed. Any significant impairment of our ability to sell products outside of the U.S. could negatively impact our results of operations and financial condition.

 

Our international sales are also subject to local government laws, regulations and procurement policies and practices which may differ from U.S. Government regulations, including regulations relating to import-export control, investments, exchange controls and repatriation of earnings, as well as to varying currency, geo-political and economic risks. Our international contracts may include industrial cooperation agreements requiring specific in-country purchases, manufacturing agreements or financial support obligations, known as offset obligations, and provide for penalties if we fail to meet such requirements. Our international contracts may also be subject to termination at the customer’s convenience or for default based on performance, and may be subject to funding risks. We also are exposed to risks associated with using foreign representatives and consultants for international sales and operations and teaming with international subcontractors, partners and suppliers in connection with international programs.  As a result of these factors, we could experience award and funding delays on international programs and could incur losses on such programs, which could negatively impact our results of operations and financial condition.

 

We are also subject to a number of other risks including:

 

  the absence in some jurisdictions of effective laws to protect our intellectual property rights; 
     
  multiple and possibly overlapping and conflicting tax laws; 
     
  restrictions on movement of cash; 
     
  the burdens of complying with a variety of national and local laws; 
     
  political instability; 
     
  currency fluctuations; 
     
  longer payment cycles; 
     
  restrictions on the import and export of certain technologies; 
     
  price controls or restrictions on exchange of foreign currencies; and 
     
  trade barriers.

 

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Our international operations are subject to special U.S. government laws and regulations, such as the Foreign Corrupt Practices Act, and regulations and procurement policies and practices, including regulations to import-export control, which may expose us to liability or impair our ability to compete in international markets.

 

Our international operations are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. We have operations and deal with governmental customers in countries known to experience corruption, including certain countries in the Middle East and in the future, the Far East. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants or contractors that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. We are also subject to import-export control regulations restricting the use and dissemination of information classified for national security purposes and the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work.

 

As a U.S. defense contractor we are vulnerable to security threats and other disruptions that could negatively impact our business.

 

As a U.S. defense contractor, we face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, and threats to physical security. These types of events could disrupt our operations, require significant management attention and resources, and could negatively impact our reputation among our customers and the public, which could have a negative impact on our financial condition, results of operations and liquidity.  We are continuously exposed to cyber-attacks and other security threats, including physical break-ins. Any electronic or physical break-in or other security breach or compromise may jeopardize security of information stored or transmitted through our information technology systems and networks. This could lead to disruptions in mission-critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Although we have implemented policies, procedures and controls to protect against, detect and mitigate these threats, we face advanced and persistent attacks on our information systems and attempts by others to gain unauthorized access to our information technology systems are becoming more sophisticated. These attempts include covertly introducing malware to our computers and networks and impersonating authorized users, among others, and may be perpetrated by well-funded organized crime or state sponsored efforts. We seek to detect and investigate all security incidents and to prevent their occurrence or recurrence. We continue to invest in and improve our threat protection, detection and mitigation policies, procedures and controls. In addition, we work with other companies in the industry and government participants on increased awareness and enhanced protections against cyber security threats. However, because of the evolving nature and sophistication of these security threats, which can be difficult to detect, there can be no assurance that our policies, procedures and controls have or will detect or prevent any of these threats and we cannot predict the full impact of any such past or future incident. We may experience similar security threats to the information and technology systems that we develop, install or maintain under customer contracts. Although we work cooperatively with our customers and other business partners to seek to minimize the impacts of cyber and other security threats, we must rely on the safeguards put in place by those entities. Any remedial costs or other liabilities related to cyber or other security threats may not be fully insured or indemnified by other means. Occurrence of any of these security threats could expose us to claims, contract terminations and damages and could adversely affect our reputation, ability to work on sensitive U.S. Government contracts, business operations and financial results.

 

Difficult conditions in the global capital markets and the economy generally may materially adversely affect our business and results of operations, and we do not expect these conditions to improve in the near future.

 

Our results of operations are materially affected by conditions in the global capital markets and the economy generally, both in the U.S. and elsewhere around the world.  Weak economic conditions generally, sustained uncertainty about global economic conditions, concerns about future U.S. government budget impasses or a prolonged or further tightening of credit markets could cause our customers and potential customers to postpone or reduce spending on technology products or services or put downward pressure on prices, which could have an adverse effect on our business, results of operations or cash flows.  Concerns over inflation, energy costs, geopolitical issues and the availability of credit, in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices and wavering business and consumer confidence, have precipitated an economic slowdown and a global recession. Domestic and international equity markets have been experiencing heightened volatility and turmoil. These events and the continuing market upheavals may have an adverse effect on our business. In the event of extreme prolonged market events, such as the global economic recovery, we could incur significant losses.

 

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Risks Related to Our Securities

 

We are eligible to be treated as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this report. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the Commission following the date we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves 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.

 

Our directors and executive officers beneficially own a significant number of shares of our common stock. Their interests may conflict with our outside stockholders, who may be unable to influence management and exercise control over our business.

 

As of the date of this filing, our executive officers and directors beneficially own approximately 31% of our shares of common stock on a fully diluted basis.  As a result, our executive officers and directors may be able to:  elect or defeat the election of our directors, amend or prevent amendment to our articles of incorporation or bylaws, effect or prevent a merger, sale of assets or other corporate transaction, and control the outcome of any other matter submitted to the shareholders for vote. Accordingly, our outside stockholders may be unable to influence management and exercise control over our business.

 

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We do not intend to pay cash dividends to our stockholders, so it is unlikely that stockholders will receive any return on their investment in our Company prior to selling stock in the Company.

 

We have never paid any dividends to our common stockholders as a public company. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future. If we determine that we will pay cash dividends to the holders of our common stock, we cannot assure that such cash dividends will be paid on a timely basis. The success of your investment in the Company will likely depend entirely upon any future appreciation.  As a result, you will not receive any return on your investment prior to selling your shares in our Company and, for the other reasons discussed in this “Risk Factors” section, you may not receive any return on your investment even when you sell your shares in our Company.

 

Anti-Takeover, Limited Liability and Indemnification Provisions

 

Some provisions of our articles of incorporation and bylaws may deter takeover attempts, which may inhibit a takeover that stockholders consider favorable and limit the opportunity of our stockholders to sell their shares at a favorable price.

 

Under our articles of incorporation, our Board of Directors may issue additional shares of common or preferred stock.  Our Board of Directors has the ability to authorize “blank check” preferred stock without future shareholder approval. This makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares and/or any other transaction that might otherwise be deemed to be in their best interests, and thereby protects the continuity of our management and limits an investor’s opportunity to profit by their investment in the Company.  Specifically, if in the due exercise of its fiduciary obligations, the Board of Directors were to determine that a takeover proposal was not in our best interest, shares could be issued by our Board of Directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:

 

  diluting the voting or other rights of the proposed acquirer or insurgent stockholder group,
     
  putting a substantial voting bloc in institutional or other hands that might undertake to support the incumbent Board of Directors, or
     
  effecting an acquisition that might complicate or preclude the takeover.

 

Nevada Anti-Takeover Law may discourage acquirers and eliminate a potentially beneficial sale for our stockholders.

 

We are subject to the provisions of Section 78.438 of the Nevada Revised Statutes concerning corporate takeovers.  This section prevents many Nevada corporations from engaging in a business combination with any interested stockholder, under specified circumstances. For these purposes, a business combination includes a merger or sale of more than 5% of our assets, and an interested stockholder includes a stockholder who owns 10% or more of our outstanding voting stock, as well as affiliates and associates of these persons.  Under these provisions, this type of business combination is prohibited for three years following the date that the stockholder became an interested stockholder unless:

 

  the transaction in which the stockholder became an interested stockholder is approved by the Board of Directors prior to the date the interested stockholder attained that status;

 

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  on consummation of the transaction that resulted in the stockholder’s becoming an interested stockholder, the interested stockholder owned at least 90% of the voting stock of the corporation outstanding at the time the transaction was commenced, excluding those shares owned by persons who are directors and also officers; or
     
  on or subsequent to that date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least a majority of the outstanding voting stock that is not owned by the interested stockholder.

 

This statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

 

Our indemnification of our officers and directors may cause us to use corporate resources to the detriment of our stockholders.

 

Our articles of incorporation eliminate the personal liability of our directors for monetary damages arising from a breach of their fiduciary duty as directors to the fullest extent permitted by Nevada law.  This limitation does not affect the availability of equitable remedies, such as injunctive relief or rescission.  Our articles of incorporation require us to indemnify our directors and officers to the fullest extent permitted by Nevada law, including in circumstances in which indemnification is otherwise discretionary under Nevada law.

 

Under Nevada law, we may indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant or respondent in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the person:

 

  conducted himself or herself in good faith, reasonably believed, in the case of conduct in his or her official capacity as our director or officer, that his or her conduct was in our best interests, and, in all other cases, that his or her conduct was at least not opposed to our best interests; and
     
  in the case of any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful.

 

These persons may be indemnified against expenses, including attorneys’ fees, judgments, fines, including excise taxes, and amounts paid in settlement, actually and reasonably incurred by the person in connection with the proceeding.  If the person is found liable to the corporation, no indemnification will be made unless the court in which the action was brought determines that the person is fairly and reasonably entitled to indemnity in an amount that the court will establish.

 

Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us under the above provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

The obligations associated with being a public company require significant resources and management attention, which may divert from our business operations.

 

Following consummation of our initial public offering, we became subject to the reporting requirements of the Exchange Act, and The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports, proxy statements, and other information. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.  Our Chief Executive Officer and Chief Financial Officer are required to certify that our disclosure controls and procedures are effective in ensuring that material information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We will need to hire additional financial reporting, internal controls and other financial personnel in order to enhance appropriate internal controls and reporting procedures.  As a result, we will incur significant legal, accounting and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our selling, general and administrative expenses.

 

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Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting.  In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies.  Additionally, in the event we are no longer a smaller reporting company, as defined under the Exchange Act, and we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act of 2002, then we may not be able to obtain the independent registered public accountants' certifications required by that act, which may preclude us from keeping our filings with the SEC current, and interfere with the ability of investors to trade our securities and our shares to continue to be listed on the Nasdaq Capital Market. This annual report does not include a report of management's assessment regarding internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

 

If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.  Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud.  If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed.  With each prospective acquisition we may make we will conduct whatever due diligence is necessary or prudent to assure us that the acquisition target can comply with the internal controls requirements of the Sarbanes-Oxley Act.  Notwithstanding our diligence, certain internal controls deficiencies may not be detected.  As a result, any internal control deficiencies may adversely affect our financial condition, results of operations and access to capital.  We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal controls that need improvement.

 

Public company compliance may make it more difficult to attract and retain officers and directors.

 

The Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations may make it more difficult and expensive for us to maintain our director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.

 

Our stock price may be volatile.

 

The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:

 

  our ability to execute our business plan and complete prospective acquisitions;
     
  changes in our industry;
     
  competitive pricing pressures;
     
  our ability to obtain working capital financing;

 

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  additions or departures of key personnel;
     
  limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock;
     
  sales of our common stock (particularly following effectiveness of this registration statement);
     
  operating results that fall below expectations;
     
  regulatory developments;
     
  economic and other external factors;
     
  period-to-period fluctuations in our financial results;
     
  our inability to develop or acquire new or needed technologies;

 

  the public’s response to press releases or other public announcements by us or third parties, including filings with the SEC;
     
  changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our common stock;
     
  the development and sustainability of an active trading market for our common stock; and
     
  any future sales of our common stock by our officers, directors and significant stockholders.

 

In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

Our shares of common stock may be thinly traded, and the price may not reflect our value, and there can be no assurance that there will be an active market for our shares of common stock either now or in the future.

 

Our shares of common stock are thinly traded, our common stock is available to be traded and is held by a small number of holders, and the price may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on the perception of our operating business, among other things.  We will take certain steps including utilizing investor awareness campaigns, investor relations firms, press releases, road shows and conferences to increase awareness of our business. Any steps that we might take to bring us to the awareness of investors may require that we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business, and trading may be at an inflated price relative to the performance of the Company due to, among other things, the availability of sellers of our shares. If an active market should develop, the price may be highly volatile. Because there is currently a relatively low per-share price for our common stock, many brokerage firms or clearing firms are not willing to effect transactions in the securities or accept our shares for deposit in an account. Many lending institutions will not permit the use of low priced shares of common stock as collateral for any loans.

 

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Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

 

If our stockholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period under Rule 144, or shares issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and, in anticipation of which, the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

In general, a non-affiliated person who has held restricted shares for a period of six months, under Rule 144, may sell into the market our common stock all of their shares, subject to the Company being current in its periodic reports filed with the SEC.  As of March 21, 2016, approximately 16,041,934 shares of common stock of the 25,116,035 shares outstanding were free trading. In our case an affiliate of the Company may sell an amount equal to the greater of 1% of the outstanding shares or the average weekly number of our shares sold in the last four weeks prior to such sale.  Such sales may be repeated once every three months, and any of the restricted shares may be sold by a non-affiliate without any restriction after they have been held six months.

 

Sales of substantial amounts of our common stock in the public market by the selling stockholders, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.  Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

 

In addition, as of December 31, 2015, there were 561,262 shares subject to outstanding warrants, 4,753,049 shares subject to outstanding options (including 625,000 outside of our plan), 15,000 shares accrued as compensation for services but not issued, 1,827,000 shares accrued for the LightMiner acquisition and an additional 2,002,984 shares (as amended) reserved for future issuance under our Amended and Restated 2011 Employee Stock Incentive Plan that will become, or have already become, eligible for sale in the public market to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act.

 

If we are unable to satisfy the continued listing requirements of The NASDAQ Stock Market, our common stock could be delisted and the price and liquidity of our common stock may be adversely affected.

 

Our common stock may lose value and our common stock could be delisted from NASDAQ due to several factors or a combination of such factors. While our common stock is currently listed on The NASDAQ Stock Market, there can be no assurance that we will be able to maintain such listing. To maintain the listing of our common stock on The NASDAQ Stock Market, we are required to meet certain listing requirements, including, among others, a requirement to maintain a minimum closing bid price of $1.00 per share. If our common stock trades below the $1.00 minimum closing bid price requirement for 30 consecutive business days or if we do not meet other listing requirements, we may be notified by NASDAQ of non-compliance. On November 30, 2015, we received a notice from Nasdaq, indicating that, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Notice”).

 

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until May 30, 2016, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Nasdaq Staff that we will not be able to cure the deficiency, or if we are otherwise not eligible, Nasdaq will provide notice to us that our common stock will be subject to delisting.

 

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The Notice does not result in the immediate delisting of the Company’s common stock from the Nasdaq Capital Market. The Company intends to monitor the closing bid price of the Company’s common stock and consider its available options in the event that the closing bid price of the Company’s common stock remains below $1 per share. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other listing requirements. As of the date of this report we have not regained compliance. There can be no assurance that we would pursue a reverse stock split or be able to obtain the approvals necessary to effect a reverse stock split. In addition, there can be no assurance that, following any reverse stock split, the per share trading price of our common stock would remain above $1.00 per share or that we would be able to continue to meet other listing requirements. If our common stock is delisted, market liquidity for our common stock could be severely affected and our stockholders’ ability to sell their shares of our common stock could be limited. A delisting of our common stock from NASDAQ would negatively affect the value of our common stock. A delisting of our common stock could also adversely affect our ability to obtain financing for our operations and could result in the loss of confidence in our company.

 

ITEM 1B: UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2: PROPERTIES

 

The Company’s executive offices are located at 2479 E. Bayshore Road, Suite 195, Palo Alto, CA 94303; Tel (408) 702-2167. The Company entered into a 64-month lease for the facility commencing in October 2014 at a monthly base rent of $14,000 for approximately 4,377 square feet of office space, which expires January 31, 2020.

 

Sysorex Government’s office is located at 13800 Coppermine Road, Suite 300, Herndon, VA 20171 under a shared office lease which ends July 2016. Monthly rental is $175.

 

Sysorex USA’s executive offices (f/k/a Lilien Systems) are located at:

 

17 E. Sir Francis Drake Blvd., Suite 110 Larkspur, CA 94939. The monthly rental is $22,000 for approximately 6,632 square feet of office space under a lease, which expires on July 31, 2016 with three one-year options to extend.

 

6345 Balboa Boulevard, Suite 247, Encino, CA 91316.  The monthly rental is currently $10,780 for approximately 5,986 square feet of office space under a lease, which expires on July 31, 2017 with a five-year option to extend. We pay the landlord a pro rata share of 11.9196% for operating costs.

 

8171 Maple Lawn Blvd., Suite 310, Maple Lawn, MD 20759.  The monthly rental is currently $14,000 under a lease, which expires December 31, 2018 with a five-year option to extend.  We pay the landlord a pro rata share of 6.10% for operating costs. This office space is currently being subleased for $10,767 per month through December 31, 2018. 

 

Sysorex USA’s sales offices are located at:

 

841 Bishop Street, Suite 2208, Honolulu, HI 96813. The monthly base rental is currently $2,000 under a lease, which expires on August 31, 2016.

 

11235 SE 6th Street, Suite 155, Bellevue, WA 98804. The monthly base rental is currently $6,000 under a lease, which expires on April 30, 2018.

 

10260 SW Greenburg Road, 4th Floor, Portland, OR 97223. The monthly base rental is currently $379 under a lease, which expires on July 31, 2016.

 

2175 Salk Avenue, Suite 150, Carlsbad, CA 92008. The monthly base rental is $9,000 under a lease, which expires on September 14, 2017.

  

Sysorex Canada Corp. f/k/a AirPatrol Research Corp. has an office located at 2963 Glen Drive, Suite 405, Coquitlam, BC V3P 2B7.  The monthly rental is currently $7,600 CAD under a lease which includes a pro rata share of the operating costs of $3,500 CAD.  The lease expires on September 30, 2018 with a five-year option to extend.

 

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During 2014 Sysorex Arabia LLC maintained an office at Akaria Center, Building 1, Suite 302-2, Riyadh, Saudi Arabia.  The lease called for annual rent of approximately $16,000 and expired in the first quarter 2015. The Company did not renew the lease.

 

We believe that each of our properties is suitable and adequate for the operations conducted therein.

 

ITEM 3: LEGAL PROCEEDINGS

 

 From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. No legal proceedings, government actions, administrative actions, investigations or claims are currently pending against us or involve the Company which, in the opinion of the management of the Company, could reasonably be expected to have a material adverse effect on its business or financial condition.

 

There are no proceedings in which any of the directors, officers or affiliates of the Company, or any registered or beneficial holder of more than 5% of the Company’s voting securities, is an adverse party or has a material interest adverse to that of the Company.

 

ITEM 4: MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

  

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded under the symbol “SYRX” on the Nasdaq Capital Market.  Prior to our initial public offering on April 8, 2014, our common stock was previously quoted on the OTC Pink market under the symbol “SYRX.” The following table sets forth the high and low sales prices on Nasdaq following our listing on the Nasdaq Capital Market, and prior to such time, the historical high and low bid prices for our common stock for the periods indicated as reported by the OTC Markets. The bid quotations reported by the OTC Markets reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. All prices reflect the 1-for-2 reverse stock split effected on April 8, 2014.

 

Period   High     Low  
Year Ended December 31, 2015            
October 1, 2015 through December 31, 2015   $ 1.30     $ 0.54  
July 1, 2015 through September 30, 2015   $ 2.02     $ 0.99  
April 1, 2015 through June 30, 2015   $ 3.07     $ 1.06  
January 1, 2015 through March 31, 2015   $ 2.30     $ 1.07  
                 
Year Ended December 31, 2014                
October 1, 2014 through December 31, 2014   $ 4.09     $ 0.98  
July 1, 2014 through September 30, 2014   $ 4.45     $ 2.75  
April 1, 2014 through June 30, 2014   $ 6.21     $ 3.44  
January 1, 2014 through March 31, 2014   $ 6.50     $ 2.25  

 

Holders of Record

 

According to our transfer agent, as of March 17, 2016 we had approximately 600 shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name. Our stock transfer agent is Corporate Stock Transfer Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209.

 

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Dividends

 

We have not declared nor paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future.  The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended December 31, 2015.

 

Recent Issuances of Unregistered Securities

 

On October 1, 2015, the Company issued 10,000 shares of common stock to a consultant under the terms of a consulting services agreement which were fully vested upon date of grant.

 

On October 5, 2015, the Company issued 56,500 shares of common stock to consultants under the terms of a consulting services agreements which were fully vested upon date of grant.

 

On December 29, 2015, the Company issued 20,715 shares of common stock to a director under the terms of a director services agreement which were fully vested upon date of grant.

 

The shares were issued in a transaction that was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering.  The Company relied on the representations made by the stockholder.  No commissions were paid and no underwriter or placement agent was involved in this transactions.

 

Use of Proceeds

 

On September 25, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley & Co., LLC, as representative of the several underwriters named therein (the “Underwriters”), relating to the issuance and sale of 5,250,000 shares of the Company common stock, par value $0.001 per share. The price to the public in this offering was $1.00 per share. Under the terms of the Underwriting Agreement, the Company also granted the Underwriters an option, exercisable for 30 days from the closing date, to purchase up to an additional 787,500 shares at the public offering price. The offering was made pursuant to the Company’s registration statement on Form S-3 (Registration Statement No. 333-204159) filed with the Securities and Exchange Commission and declared effective May 28, 2015 and a related prospectus supplement filed with the Securities and Exchange Commission.

 

The offering closed September 30, 2015. After deducting underwriting discounts and commissions and offering expenses, the net proceeds from the offering were approximately $4.7 million.  The net proceeds from the offering were used for general corporate purposes, which included business development activities, capital expenditures, working capital and general and administrative expenses.

 

ITEM 6: SELECTED FINANCIAL DATA.

 

As a smaller reporting company we are not required to provide this information.

 

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ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Form 10-K 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.”

 

 Except where indicated, all share and per share data in this section, as well as the consolidated financial statements, reflect the reverse stock split effected on April 8, 2014.

 

Overview of Our Business

 

Sysorex Global (“Sysorex” or the “Company”) provides data analytics and indoor-location based solutions and services to commercial and government customers worldwide. We have developed a new kind of discovery platform that blends data from traditional software and network systems with the growing universe of mobile and Internet of Things (IoT). In doing so we have created a high velocity, secure and scalable platform that we believe allows our customers to evaluate their most complex business issues, and compete successfully in their respective markets. Our products are designed to help customers derive real time value by combining both the physical and digital worlds. These products and services operate and report among the following segments: Mobile, IoT & Big Data Products, Storage and Computing, SaaS Revenues, and Professional Services.

 

Sysorex’s data analytics products integrate with our AirPatrol product line, which focuses on collecting data from any wireless device in close proximity (Cellular, WiFi, BLE, RFID, etc.). We believe we can provide the right information at the right time based on our integrated solutions allowing us to uniquely blend the real world and the digital world. We believe that our AirPatrol product line is also well positioned in the Cyber Security market as mobile device management and detection technology. We believe that our location accuracy of sub 10-feet and our ability to capture all RF frequencies is unmatched. Detecting rogue devices that could be a security threat to an enterprise or government agency and then providing accurate location of that device is an important security application for our customers. Our AirPatrol product line has three patents and ten others pending worldwide.

 

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.

 

Our Storage and Computing segment revenues are typically driven by purchase orders that are received on a monthly basis. Approximately 21% of the revenues from these purchase orders are recurring contracts that range from one to five years for warranty and maintenance support. For these contracts the customer is invoiced one time and pays 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. We have a 30-year history and a high repeat customer rate of approximately 50-60% annually. Our revenues are diversified over hundreds of customers and typically no one customer exceeds 15% of revenues however from time to time a large order from a customer could put it temporarily above 15%. We have one customer that was approximately 25% for the year ending December 31, 2015 but we don’t anticipate that this customer will continue to maintain that percentage as our revenues expand across other customers in 2016. Management believes this diversification provides stability to our revenue streams.

 

Our Software-as-a-Service (SaaS) contracts are typically performed for periods of one or more years and we have a high customer retention rate. Sysorex SaaS product include: eTearsheets, invoicing, CRM, and other products and services to approximately 675 newspapers in the Cloud. Cloud or SaaS based analytics is a growing market that Sysorex intends to pursue beyond the media vertical that we are in today.

 

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Our Mobile, IoT and Big Data sales are expected to grow significantly in 2016; however 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 also because of the early stages of indoor-locationing technology and the learning curve required for customers to implement such solutions. This is improving with the increased presence and awareness of beacon and wi-fi locationing technologies in the market.

 

Our Professional Services group provides consulting services ranging from enterprise architecture design to custom application development to data modeling. Sysorex offers a full scope of information technology development and implementation services. With expertise in a broad range of IT practices including project design and management, systems integration, outsourcing, independent validation and verification, cyber security and more.

 

Events such as budget impasses and sequestration in the federal government could impact government customer funding for projects that our IT Government segment is pursuing by delaying payment or decisions on contract/task order awards, as the Company has experienced with prior awards. However, our government contracts are currently approximately 12% of our total revenues. Such government contracts typically have a three to five year term and we believe that our recent government contract revenues will be indicative of future government contract based revenues. 

 

Recent Events 

 

Reverse Stock-Split

 

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

 

April 2014 Initial Public Offering

 

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

 

On April 15, 2014, upon the closing of the Offering, the Company received approximately $16.6 million from the sale of 3,166,666 Shares in the Offering, excluding the Shares sold by the selling stockholder, after deducting the underwriting discounts, fees and commissions.  The net proceeds of the Offering were used in connection with the acquisition of AirPatrol and will also be used to expand the Company’s sales and marketing efforts, including expanding its Washington, D.C. office, for future strategic acquisitions, and for working capital and other general corporate purposes.

 

Nasdaq Listing 

 

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

 

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September 2015 Public Offering

 

On September 25, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with B. Riley & Co., LLC, as representative of the several underwriters named therein (the “Underwriters”), relating to the issuance and sale of 5,250,000 shares of the Company common stock, par value $0.001 per share. The price to the public in this offering was $1.00 per share. Under the terms of the Underwriting Agreement, the Company also granted the Underwriters an option, exercisable for 30 days from the closing date, to purchase up to an additional 787,500 shares at the public offering price. The offering was made pursuant to the Company’s registration statement on Form S-3 (Registration Statement No. 333-204159) filed with the Securities and Exchange Commission and declared effective May 28, 2015 and a related prospectus supplement filed with the Securities and Exchange Commission.

 

The offering closed September 30, 2015. After deducting underwriting discounts and commissions and offering expenses, the net proceeds from the offering were approximately $4.7 million.  The net proceeds from the offering were used for general corporate purposes, which included business development activities, capital expenditures, working capital and general and administrative expenses.

 

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 2 of the audited financial statements for the years ended December 31, 2015 and 2014. 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.

 

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We recognize revenue when the following criteria are met (1) persuasive evidence of an arrangement exists; (2) shipment (software or 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.

 

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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 years ended December 31, 2015 and, 2014.

 

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 years ended December 31, 2015 and 2014 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 years ended December 31, 2015 and 2014.

 

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 year ended December 31, 2015, based upon certain economic conditions and historical losses through December 31, 2015. 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. As of December 31, 2015 and 2014, 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 years ended December 31, 2015 and 2014.

 

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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 December 31, 2015 and 2014, allowance for credit losses included an allowance for doubtful accounts of approximately $285,000 and $9,000, 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 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 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 average of historical volatilities for industry peers.

 

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

    December 31,
2015
  December 31,
2014
Risk-free interest rate   1.73% to 2.27%   2.29% to 2.82%
Expected life of option grants   7 years   7 years
Expected volatility of underlying stock   39.4% to 51.45%   38.1% to 39.4%
Dividends   -   -

 

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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.

 

Results of Operations

 

Year Ended December 31, 2015 compared to the Year Ended December 31, 2014

 

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

 

    Twelve Months ended        
    December 31, 2015     December 31, 2014        
(in thousands, except percentages)   Amount     % of
Revenues
    Amount     % of
Revenues
    %
Change
 
                                         
Product Revenues   $ 51,381       77 %   $ 50,044       79 %     3 %
Services Revenues   $ 15,576       23 %   $ 12,905       21 %     21 %
Cost of net revenues - Products   $ 40,763       61 %   $ 38,906       62 %     5 %
Cost of net revenues - Services   $ 6,865       10 %   $ 5,303       8 %     29 %
Gross profit   $ 19,329       29 %   $ 18,740       30 %     3 %
Operating expenses   $ 30,770       46 %   $ 26,446       42 %     16 %
Loss from operations   $ (11,441 )     (17 %)   $ (7,706 )     (12 %)     48 %
Net loss   $ (11,728 )     (18 %)   $ (7,652 )     (12 %)     53 %
Net loss attributable to common stockholders   $ (11,718 )     (18 %)   $ (7,536 )     (12 %)     55 %

 

Revenues

 

Revenues for the year ended December 31, 2015 were $67.0 million compared to $62.9 million for the comparable period in the prior year. The increase of $4.1 million, or approximately 6.5% is primarily associated with growth in the Storage and Computing and Professional Services segments. Mobile, IoT & Big Data Products revenue for the year ended December 31, 2015 was $1.7 Million compared to $1.9 million for the prior year period. Storage and Computing revenue was $50 million for the year ended December 31, 2015, and $48.3 million for the prior year period. SaaS Revenue was $3.7 million during the year ended December 31, 2015 and $4 million during the prior year period. Professional Services Revenue was $11.6 million during the year ended December 31, 2015 and $8.7 million during the prior year period.

 

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Cost of Revenues

 

Cost of revenues for the year ended December 31, 2015 was $47.6 million compared to $44.2 million for the comparable period in the prior year. This increase of $3.4 million, or approximately 7.7%, was primarily attributable to higher sales. Sysorex Mobile, IoT & Big Data Products cost of net revenues was $510,000 for the year ended December 31, 2015 as compared to $406,000 for the prior year period. Storage and Computing cost of net revenues was $40.3 million for the year ended December 31, 2015, and $38.6 million for the prior year period. SaaS Revenues cost of net revenues was $824,000 during the year ended December 31, 2015 and $801,000 during the prior year period. Professional Services cost of net revenues was $6 million during the year ended December 31, 2015 and $4.4 million during the prior year period.

 

The gross profit margin for the year ended December 31, 2015 was 29% compared to 30% for the year ended December 31, 2014. This slight difference in margin is based on the sales mix. Sysorex Mobile, IoT & Big Data Products gross margins for the year ended December 31, 2015 and 2014 were 69% and 79%, respectively. For the year ended December 31, 2015, Mobile, IoT & Big Data Products margin was lower in part due to the write off of obsolete inventory in the first quarter of 2015. Gross margins for the Storage and Computing segment for the year ended December 31, 2015 and 2014 were 19% and 20%, respectfully. Gross margins for SaaS Revenues for the year ended December 31, 2015 and 2014 were 78% and 80%, respectively. Gross margins for Professional Services revenues for the year ended December 31, 2015 and 2014 were 48% and 50%, respectively.

 

Operating Expenses

 

Operating expenses for the year ended December 31, 2015 were $30.8 million and $26.4 million for the comparable period ended December 31, 2014. This increase of $4.4 million includes a $1.4 Million 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 year ended December 31, 2015 was $11.4 million as compared to$7.7 million for the comparable period in the prior year. This increase of $3.7 million was primarily attributable to an increase in amortization of intangibles, depreciation and costs of expanding our engineering, sales and marketing operations.

 

Other Income/Expense

 

Other income/expense consisted primarily of interest expense, gain on the settlement of obligations and change in the fair value of shares to be issued. Interest expense for the years ended December 31, 2015 and 2014 were $448,000 and $387,000, respectively. The increase of $61,000 was primarily attributable to the increase in term loan in 2015 and higher revolving line of credit balance. Loss on the settlement of obligation for the year ended December 31, 2015 of $85,000 was from the settlement of a Canadian tax claim. Gain on settlement of obligation for the year ended December 31, 2014 of $394,000 represents trade payables that have been cancelled or reduced as a result of settlement or the operation of law. For the year ended December 31, 2015, other income/expense included a non-cash gain of $211,000 for a decrease in fair value of shares to be issued for the LightMiner acquisition.

 

Provision for Income Taxes

 

The was no provision for income taxes for the years ended December 31, 2015 and 2014 as we were in a net taxable loss position. Deferred tax assets resulting from such losses are fully reserved as of December 31, 2015 and 2014 since, at present we have no history of taxable income and it is more likely than not that such assets will not be realized.

 

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Net Loss Attributable To Non-Controlling Interest

 

Net loss attributable to non-controlling interest for the years ended December 31, 2015 and December 31, 2014 were $10,000 and $116,000, respectively. This decrease in loss of $106,000 was attributable to lower loss incurred at Sysorex Arabia due to operations winding down.

 

Net Loss Attributable To Stockholders of Sysorex Global

 

Net loss attributable to stockholders of Sysorex Global for the year ended December 31, 2015 was $11.7 million compared to $7.5 million for the comparable period in the prior year. This increase in loss of $4.2 million was attributable to the changes described for the various reporting captions 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 year ended December 31, 2015 was a loss of $3.4 million compared to a loss of $1.9 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 year ended December 31, 2015 and 2014 (in thousands):

 

    Years Ended
December 31,
 
      2015       2014  
Net loss attributable to common stockholders   $ (11,718 )   $ (7,536 )
Adjustments:                
Non-recurring one-time charges:                
Provision for doubtful accounts     1,205       --  
Acquisition transaction/financing costs     355       676  
Stock-based compensation – acquisition costs     --       340  
Costs associated with public offering     46       45  
Other – severance costs     307       --  
Change in the fair value of shares to be issued     (211 )     --  
Gain on settlement of obligations     85       (394 )
Stock-based compensation – compensation and  related benefits     1,424       1,382  
Interest expense     448       387  
Depreciation and amortization     4,647       3,205  
Adjusted EBITDA   $ (3,412 )   $ (1,895 )

 

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;

 

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  As a basis for allocating resources to various projects;

 

  As a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and

 

  To evaluate internally the performance of our personnel.

 

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

 

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

 

  We believe that it is useful to provide to investors with a standard operating metric used by management to evaluate our operating performance; and

 

  We believe that the use of Adjusted EBITDA is helpful to compare our results to other companies.

 

Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:

 

  Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

  Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

  Adjusted EBITDA does not reflect income or other taxes or the cash requirements to make any tax payments; and

 

  Other companies in our industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative measure.

 

Because of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.

 

  55  
 

 

Proforma Non-GAAP Net Loss per Share

 

Basic and diluted net loss per share for the twelve months ended December 31, 2015 was ($0.55) compared to ($0.42) 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 gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering.

 

Proforma non-GAAP net loss per basic and diluted common share for the twelve months ended December 31, 2015 was ($0.21) compared to a loss of ($0.14) per share 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 (in thousands, except per share data):

 

    Years Ended
December 31,
 
      2015       2014  
Net loss attributable to common stockholders   $ (11,718 )   $ (7,536 )
Adjustments:                
Non-recurring one-time charges:                
Provision for doubtful accounts     1,205       --  
Acquisition transaction/financing costs     355       676  
Stock-based compensation – acquisition costs     --       340  
Costs associated with public offering     46       45  
Other – severance costs     307       --  
Change in the fair value of shares to be issued     (211 )     --  
Gain on settlement of obligations     85       (394 )
Stock-based compensation – compensation and related benefits     1,424       1,382  
Amortization of intangibles     3,994       2,913  
Proforma non-GAAP net loss   $ (4,513 )   $ (2,574 )
Proforma non-GAAP net loss per basic and diluted common share   $ (0.21 )   $ (0.14 )
Weighted average basic and diluted common shares outstanding     21,181,407       18,111,210  

  

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 gain on the settlement of obligations, severance costs, provision for doubtful accounts, change in the fair value of shares to be issued, acquisition costs and the costs associated with the public offering.

 

  56  
 

 

  We believe that it is useful to provide to investors 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 December 31, 2015

 

Our current capital resources and operating results as of and through December 31, 2015, consist of:

 

  1) An overall working capital deficit of $4.2 million;
     
  2) Cash of $4.1 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 $8.6 million is utilized;
     
  4) A term loan for $2,000,000 with a maturity date of April 29, 2018 which has a $1.6 million balance owed; and
     
  5) Net cash used in operating activities year-to-date of $8.2 million.

 

We believe our total working capital deficit of $4.2 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):

 

    Current     Current        
Working capital     Assets         Liabilities       Net  
Cash   $ 4,060     $ --     $ 4,060  
Accounts receivable / accounts payable     12,209       9,320       2,889  
Notes and other receivables     1,340       --       1,340  
Prepaid licenses and contracts / deferred revenue     7,509       9,095       (1,586 )
Short term debt     --       9,417       (9,417 )
Other     3,494       5,018       (1,524 )
Net   $ 28,612     $ 32,850     $ (4,238 )

 

Accounts receivable exceeds the related accounts payable by $2.9 million. We do not believe there are material collectability issues with respect to our accounts receivable. Deferred revenue exceeds the related prepaid contracts by $1.6 million and other liabilities exceed other assets by $1.5 million. These deficits are expected to be funded by our anticipated cash flow from operations, as described below, over the next twelve months. We do not believe that the Credit Facility, with a balance of $8.6 million at December 31, 2015, and the current portion of the term loan of $667,000 as of December 31, 2015 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.

 

  57  
 

 

Net cash used in operating activities during the year ended December 31, 2015 of $8.2 million consists of net loss of $11.7 million less non-cash expenses of $6.6 million and net cash used of $3.1 million in changes in operating assets and liabilities. 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 (NASA SEWP and NIH CIO-CS) 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 both 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 is launching 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 December 31, 2015, increased bank facility effective April 29, 2015, higher margin business line expansion and recent contract awards are expected to be sufficient to fund planned operations during the next twelve months from the date of this filing. 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. The information in this Form 10-K 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.)

 

Reference is made to the March 15, 2013 Business Finance Agreement by and among Lilien, Sysorex Government, as co-borrowers and Bridge Bank, N.A. (the “Bank”) under which the borrowers obtained a revolving line of credit for up to $5,000,000 with a maturity date of March 15, 2015 (the “Financing Agreement”), which was amended by the first amendment dated August 29, 2013, the second amendment dated May 13, 2014, and the third amendment dated December 31, 2014.

 

On May 4, 2015 (effective as of April 29, 2015), the Company and Bridge Bank entered into the fourth amendment to the Financing Agreement to add the Company, Sysorex Federal, AirPatrol and Shoom as borrowers under the agreement, amend certain financial covenants, increase the credit limit to $10.0 million and provide for a second term loan of $2 million which matures on April 29, 2017 and April 29, 2018, respectively. $167,000 of the term loan was used to pay off the balance of the initial term loan under a previous amendment. The term loan accrues interest at Bridge Bank's prime rate plus 2%. As of December 31, 2015 the interest rate was 5.50%. The Company will make payments of $56,000 on the term loan on the first day of each month commencing on May 1, 2015 until the loan amount is paid in full. The balance due on the term loan is scheduled to be paid in full during the year ending December 31, 2018.

 

On October 7, 2015, the Company, and certain of its wholly-owned subsidiaries as co-borrowers, entered into the fifth amendment (the “Fifth Amendment”), effective as of September 30, 2015, to the Financing Agreement, with Western Alliance Bank, as successor in interest to Bridge Bank, N.A. Pursuant to the Fifth Amendment, the original lender, Bridge Bank, N.A., was replaced by Western Alliance Bank, as successor in interest to Bridge Bank, N.A. and the lender under the Financing Agreement. The Fifth Amendment also amended certain financial covenants of the borrowers required by the Financing Agreement. All other terms remained the same.

 

As of December 31, 2015, the principal amount outstanding under the Financing Agreement was $8.6 million with $1.6 million outstanding under a term loan.

 

  58  
 

 

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 Financing Agreement, with Western Alliance Bank. Pursuant to the Amendment, the lender 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 six 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.

 

Liquidity and Capital Resources as of December 31, 2015 Compared With December 31, 2014

 

The Company’s net cash flows used in operating, investing and financing activities for the year ended December 31, 2015 and 2014 and certain balances as of the end of those periods are as follows (in thousands):

 

    Years Ended
December 31,
 
      2015       2014  
Net cash used in operating activities   $ (8,201 )   $ (4,537 )
Net cash used in investing activities     (1,550 )     (10,396 )
Net cash provided by financing activities     10,534       16,074  
Effect of foreign exchange rate changes on cash     49       (17 )
Net increase in cash   $ 832     $ 1,124  

 

     

December 31,

2015

      December 31,
2014
 
Cash and cash equivalents   $ 4,060     $ 3,228  
Working capital (deficit)   $ (4,238 )   $ (2,813 )

 

Operating Activities for the year ended December 31, 2015

 

Net cash used in operating activities during the years ended December 31, 2015 and 2014 were $8.2 million and $4.5 million, respectively.  The net negative cash flows related to the year ended December 31, 2015 consisted of the following (in thousands):

 

Net loss   $ (11,728 )
Non-cash income and expenses     6,586  
Net change in operating assets and liabilities     (3,059 )
Net cash used in operating activities   $ (8,201 )

 

The non-cash income and expense of $6.6 million consisted primarily of the following (in thousands):

 

$ 4,647     Depreciation and amortization expenses (including 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.
  1,424     Stock-based compensation expense attributable to warrants and options issued as part of Company operations and for the AirPatrol acquisition.
  1,205     Provision for doubtful accounts
  (695 )   Treasury shares received upon settlement of escrow
  5     Other
$ 6,586     Total non-cash expenses

 

  59  
 

 

The net use of cash in the change in operating assets and liabilities aggregated $3.1 million and consisted primarily of the following (in thousands):

 

$ (5,239   Increase in accounts receivable and other receivables
  (744 )   Increase in prepaid licenses and maintenance contracts
  (586 )   Increase in inventory and other assets
  1,944     Increase in accounts payable
  439     Inrease in accrued liabilities and other liabilities
  1,127     Increase in deferred revenue
$ (3,059 )   Net use of cash in the changes in operating assets and liabilities

 

Operating Activities for the year ended December 31, 2014

 

Net cash flows related to operating activities during the year ended December 31, 2014 was negative $4.5 million and consisted of the following (in thousands):

 

$ (7,652 )   Net loss
  4,596     Non-cash expenses
  (1,481 )   Net change in operating assets and liabilities
$ (4,537 )   Net cash used in operating activities

 

The non-cash income and expense of $4.6 million consisted primarily of the following (in thousands):

 

$ 3,206     Depreciation and amortization expenses (including amortization of intangibles) primarily attributable to the Lilien, Shoom and AirPatrol operations, which were acquired effective March 1, 2013, August 31, 2013 and April 16, 2014, respectively.
  1,723     Stock-based compensation expense attributable to warrants and options issued as part of Company operations and for the AirPatrol acquisition.
  (394 )   Gain on settlement of obligations
  61     Other
$ 4,596     Total non-cash expenses

 

The net use of cash in the change in operating assets and liabilities aggregated $1.5 million and consisted primarily of the following (in thousands):

 

$ 998     Decrease in accounts receivable and other receivables
  (2,963 )   Increase in prepaid licenses and maintenance contracts
  (946 )   Increase in inventory and other assets
  (1,204 )   Decrease in accounts payable
  (989 )   Decrease in accrued liabilities and other liabilities
  3,623     Increase in deferred revenue
$ (1,481 )   Net use of cash in the changes in operating assets and liabilities

 

  60  
 

 

Cash Flows from Investing Activities as of December 31, 2015 and 2014

 

Net cash flows used in investing activities during 2015 was $1.6 million compared to net cash flows used in investing activities during 2014 of $10.4 million.  Cash flows related to investing activities during the year ended December 31, 2015 include $355,000 for the purchase of property and equipment, $1.2 million investment in capitalized software and $19,000 for the purchase of LightMiner. The Cash flows related to investing activities during the year ended December 31, 2014 included $9.6 million in connection with the AirPatrol acquisition, $1 million for the purchase of property and equipment, $950,000 of advances to third parties, $235,000 investment in capitalized software, offset by $1.1 million in loan repayments received and $125,000 for the redemption of marketable securities.

 

Cash Flows from Financing Activities as of December 31, 2015 and 2014

 

Net cash flows from financing activities during the years ended December 31, 2015 and 2014 were $10.5 million and $16.1 million, respectively. The positive cash flows related to the year ended December 31, 2015 were primarily comprised of $4.7 million advances from the credit line, $2 million advance from the term loan and $4.7 million from the September 2015 capital raise offset by a $764,000 repayment of the term loan and $71,000 repayment of notes payable. The positive cash flows related to the year ended December 31, 2014 were comprised primarily of $16.6 million from capital raised from the initial public offering and $2.1 million from proceeds from issuance of common stock, offset by $2.2 million in repayments of line of credit and term loan, and $460,000 in repayments of notes payable.

 

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 2 to our financial statements, which are included in this report beginning on page F-1.

 

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide this information.

 

  61  
 

 

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

SYSOREX GLOBAL

INDEX TO FINANCIAL STATEMENTS

 

   

Page No.

ANNUAL FINANCIAL INFORMATION    
     
Report of Independent Registered Public Accounting Firm   F-1
Consolidated Balance Sheets at December 31, 2015 and 2014   F-2
Consolidated Statements of Operations for the years ended December 31, 2015 and 2014   F-3
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2015 and 2014   F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015 and 2014   F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014   F-6
Notes to Consolidated Financial Statements   F-7

 

  62  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors of

 

Sysorex Global

 

We have audited the accompanying consolidated balance sheets of Sysorex Global and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sysorex Global and Subsidiaries as of December 31, 2015 and 2014, and the results of its operations, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Marcum LLP

New York, NY

March 30, 2015

 

F-1

 

 

SYSOREX GLOBAL

 

CONSOLIDATED BALANCE SHEETS

 

(In thousands, except number of shares and par value data)

 

 

  December 31,     December 31,  
    2015     2014  
    (Audited)     (Audited)  
Assets            
Current Assets            
Cash and cash equivalents   $ 4,060     $ 3,228  
Accounts receivable, net     12,209       8,223  
Note receivable, related party     -       90  
Notes and other receivables     1,340       1,293  
Inventory     755       610  
Prepaid licenses and maintenance contracts     7,509       7,151  
Assets held for sale     772       15  
Prepaid assets and other current assets     1,967       1,451  
                 
Total Current Assets     28,612       22,061  
                 
Prepaid licenses and maintenance contracts, non-current     6,586       6,200  
Property and equipment, net     1,392       1,308  
Software development costs, net     1,281       278  
Intangible assets, net     17,161       17,676  
Goodwill     13,166       13,166  
Assets held for sale, non-current     -       763  
Other assets     517       608  
                 
Total Assets   $ 68,715     $ 62,060  

 

 The accompanying notes are an integral part of these financial statements.

 

F-2

 

 

SYSOREX GLOBAL

 

CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

(In thousands, except number of shares and par value data)

 

 

    December 31,     December 31,  
    2015     2014  
    (Audited)     (Audited)  
Liabilities and Stockholders' Equity            
             
Current Liabilities            
Accounts payable   $ 9,320     $ 7,290  
Accrued liabilities     2,992       2,406  
Deferred revenue     9,095       8,453  
Short-term debt     9,417       4,696  
Liabilities held for sale     2,026       2,029  
Total Current Liabilities     32,850       24,874  
                 
Long Term Liabilities                
Deferred revenue, non-current     7,666       7,181  
Long-term debt     1,226       100  
Other liabilities     542       684  
Acquisition liability - LightMiner     3,475       -  
Total Liabilities     45,759       32,839  
                 
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; 25,309,863 and 19,707,262 issued and 25,071,035 and 19,707,262 outstanding at December 31, 2015 and 2014, respectively     25       20  
Additional paid-in capital     58,226       52,122  
Treasury stock, at cost, 238,828 shares     (695 )     -  
Due from Sysorex Consulting Inc.     (666 )     (666 )
Accumulated other comprehensive income     31       (18 )
Accumulated deficit (excluding $2,442 reclassified to additional paid in capital in quasi-reorganization)     (32,359 )     (20,641 )
                 
Stockholders' Equity Attributable to Sysorex Global Holdings Corp.     24,562       30,817  
                 
Non- controlling Interest     (1,606 )     (1,596 )
                 
Total Stockholders' Equity     22,956       29,221  
                 
Total Liabilities and Stockholders' Equity   $ 68,715     $ 62,060  

 

The accompanying notes are an integral part of these financial statements. 

 

F-3

 

 

SYSOREX GLOBAL

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share data)

 

 

    For the Years Ended  
    December 31,  
    2015     2014  
  (Audited)  
Revenues      
Products   $ 51,381     $ 50,044  
Services     15,576       12,905  
Total Revenues     66,957       62,949  
                 
Cost of Revenues                
Products     40,763       38,906  
Services     6,865       5,303  
Total Cost of Revenues     47,628       44,209  
                 
Gross Profit     19,329       18,740  
                 
Operating Expenses                
Research and development     635       616  
Sales and marketing     11,531       9,966  
General and administrative     14,255       11,935  
Acquisition related costs     355       1,016  
Amortization of intangibles     3,994       2,913  
                 
Total Operating Expenses     30,770       26,446  
                 
Loss from Operations     (11,441 )     (7,706 )
                 
Other Income (Expense)                
Interest expense     (448 )     (387 )
Other income     35       47  
Gain (Loss) on the settlement of obligation     (85 )     394  
Change in fair value of shares to be issued     211       -  
                 
Total Other Income (Expense)     (287 )     54  
                 
Loss before Provision for Income Taxes     (11,728 )     (7,652 )
Provision for Income Taxes     -       -  
                 
Net Loss     (11,728 )     (7,652 )
                 
Net Loss Attributable to Non-controlling Interest     (10 )     (116 )
                 
Net Loss Attributable to Stockholders of Sysorex Global Holdings Corp.   $ (11,718 )   $ (7,536 )
                 
Net Loss Per Share - Basic and Diluted   $ (0.55 )   $ (0.42 )
                 
Weighted Average Shares Outstanding                
Basic and Diluted     21,181,407       18,111,210  

 

The accompanying notes are an integral part of these financial statements.

 

F-4

 

 

SYSOREX GLOBAL

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

(In thousands)

 

 

    For the Years Ended  
    December 31,  
    2015     2014  
    (Audited)  
             
Net Loss   $ (11,728 )   $ (7,652 )
                 
Unrealized foreign exchange gain/(loss) from cumulative translation adjustments     49       (18 )
Unrealized holding gains in marketable securities including reclassification adjustment of realized gains included in net income     -       (3 )
                 
Comprehensive Loss   $ (11,679 )   $ (7,673 )

  

The accompanying notes are an integral part of these financial statements.

 

F-5

 

 

SYSOREX GLOBAL

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2015 

(Audited)

 

(In thousands, except per share data)

 

 

    Common Stock    

 Additional

Paid-In

    Treasury Stock    

Due from Sysorex

Consulting,
   

Accumulated Other

Comprehensive
    Accumulated    

Non-

Controlling
   

Total

Stockholders'
 
    Shares     Amount     Capital     Shares     Amount     Inc.     Income (Loss)     Deficit     Interest     Equity  
                                                             
Balance - January 1, 2014     14,094,532     $ 14     $ 21,531       -     $ -     $ (666 )   $ 3     $ (13,105 )   $ (1,480 )   $ 6,297  
                                                                                 
Common shares issued for services     206,536       -       680       -       -       -       -       -       -       680  
Common shares issued for cash     400,000       -       2,080       -       -       -       -       -       -       2,080  
Stock options granted to employees for services     -       -       1,043       -       -       -       -       -       -       1,043  
Common shares issued for net cash proceeds received from public offering     3,166,666       4       16,611       -       -       -       -       -       -       16,615  
Common shares issued for AirPatrol acquisition     1,832,808       2       10,176       -       -       -       -       -       -       10,178  
Acquisition shares adjustment     (5,986 )     -       (12 )     -       -       -       -       -       -       (12 )
Common shares issued for options exercised     12,539       -       13       -       -       -       -       -       -       13  
Fractional shares issued from reverse stock split     167       -       -       -       -       -       -       -       -       -  
Unrealized gain on marketable securities     -       -       -       -       -       -       (3 )     -       -       (3 )
Cumulative translation adjustment     -       -       -       -       -       -       (18 )     -       -       (18 )
Net loss     -       -       -       -       -       -       -       (7,536 )     (116 )     (7,652 )
                                                                                 
Balance - December 31, 2014     19,707,262     $ 20     $ 52,122     $ -     $ -     $ (666 )   $ (18 )   $ (20,641 )   $ (1,596 )   $ 29,221  
                                                                                 
Common shares issued for services     351,240       -       455     -       -       -       -       -       -       455  
Stock options granted to employees and consultants for services     -       -       958       -       -       -       -       -       -       958  
Warrants granted to consultants for services     -       -       11       -       -       -       -       -       -       11  
Returned shares from AirPatrol holdback     -       -       -       (238,828 )     (695 )     -       -       -       -       (695 )
Options exercised on a cashless basis     1,361       -       (0 )     -       -       -       -       -       -       -  
Common shares issued for net cash proceeds from a public offering     5,250,000       5       4,680       -       -       -       -       -       -       4,685  
Cumulative translation adjustment     -       -       -       -       -       -       49       -       -       49  
Net loss     -       -       -       -       -       -       -       (11,718 )     (10 )     (11,728 )
Balance - December 31, 2015     25,309,863     $ 25     $ 58,226       (238,828 )   $ (695 )   $ (666 )   $ 31     $ (32,359 )   $ (1,606 )   $ 22,956  

 

The accompanying notes are an integral part of these financial statements.

 

F-6

 

 

SYSOREX GLOBAL

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

    For the Years Ended  
    December 31,  
    2015     2014  
    (Audited)  
Cash Flows from Operating Activities            
Net loss   $ (11,728 )   $ (7,652 )
Adjustment to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     653       293  
Amortization of intangible assets     3,994       2,913  
Stock based compensation     1,424       1,723  
Acquisition shares adjustment     -       (12 )
Loss/(gain) on settlement of obligations     85       (394 )
Amortization of deferred financing costs     23       91  
Change in fair value of shares to be issued     (211 )     -  
Compensation expense, note receivable related party     90       -  
Provision for doubtful accounts     1,032       (14 )
Treasury shares received upon settlement of escrow     (695 )     -  
Other     18       (4 )
                 
Changes in operating assets and liabilities:                
Accounts receivable and other receivables     (5,066 )     997  
Inventory     (145 )     (269 )
Other current assets     (510 )     (922 )
Prepaid licenses and maintenance contracts     (744 )     (2,963 )
Other assets     69       245  
Accounts payable     1,944       (1,204 )
Accrued liabilities     586       (1,498 )
Deferred revenue     1,127       3,623  
Other liabilities     (147 )     510  
Total Adjustments     3,527       3,115  
                 
Net Cash Used in Operating Activities     (8,201 )     (4,537 )
                 
Cash Flows Used in Investing Activities                
Purchase of property and equipment     (355 )     (1,053 )
Proceeds from the sale of marketable securities     -       125  
Investment in capitalized software     (1,176 )     (235 )
Investment in LightMiner     (19 )     -  
Advance to employee     -       (90 )
Advances to third parties     -       (950 )
Repayment of notes receivable from third parties     -       180  
Cash paid for AirPatrol     -       (9,514 )
Cash acquired in AirPatrol acquisition     -       71  
Repayment of loans to other parties     -       1,000  
Change in restricted cash     -       70  
Net Cash Flows Used in Investing Activities     (1,550 )     (10,396 )
                 
Cash Flows provided by Financing Activities                
Advances (repayment) of line of credit     4,682       (1,799 )
Repayment of advance from Duroob Technology     -       (160 )
Repayment of term loan     (764 )     (375 )
Advances from term loan     2,000       -  
Advances from related party     2       -  
Net proceeds from issuance of common stock     -       2,080  
Net proceeds from capital raise     4,685       16,615  
Net proceeds from conversion of employee options     -       13  
Repayment of notes payable     (71 )     (300 )
                 
Net Cash Provided by Financing Activities     10,534       16,074  
                 
Effect of Foreign Exchange Rate on Changes on Cash     49       (17 )
                 
Net Increase in Cash and Cash Equivalents     832       1,124  
                 

Cash and Cash Equivalents - Beginning of year

    3,228       2,104  
                 

Cash and Cash Equivalents - End of year

  $ 4,060     $ 3,228  
                 
Supplemental Disclosure of cash flow information:                
Cash paid for:                
Interest   $ 426     $ 311  
Income Taxes     -       -  
                 
Supplemental disclosures for non-cash operating, investing and financing activities:                
Acquisition of AirPatrol:                
Assumption of assets other than cash     -     $ 843  
Assumption of liabilities     -     $ 1,811  
Issuance of common stock     -     $ 10,178  
                 
Asset Acquisition of LightMiner:                
Assumption of assets other than cash   $ 225       -  
Assumption of assets - developed technology and export license   $ 3,479       -  

 

The accompanying notes are an integral part of these financial statements.

 

F-7

 

 

SYSOREX GLOBAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

 

Note 1 - Organization and Nature of Business

 

Overview

 

Sysorex Global, f/k/a Sysorex Global Holdings Corp., through its wholly-owned subsidiaries, AirPatrol Corporation (“AirPatrol”), Shoom, Inc. (“Shoom”), Lilien Systems (“Lilien”) (effective January 1, 2016, AirPatrol and Shoom were merged into Lilien, which changed its name to “Sysorex USA”), Sysorex Government Services, Inc. (“SGS” or “Sysorex Government Services”), Sysorex Canada Corp., f/k/a AirPatrol Research Corp. (“AirPatrol Canada”), .and the majority-owned subsidiary, Sysorex Arabia LLC (“SA” or “Sysorex Arabia”) (collectively the “Company”), provides big data analytics and location based products and related services for the cyber-security and Internet of Things markets. 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. 

 

Effective April 16, 2014, and as more fully described in Note 5, the Company acquired AirPatrol, a Maryland based provider of mobile cyber-security and location-based service solutions.

 

On April 24, 2015, and as more fully described in Note 4, the Company completed the acquisition of substantially all of the assets of LightMiner Systems, Inc. which is in the business of developing and commercializing in-memory SQL databases.

 

Liquidity

 

As of December 31, 2015 the Company has a working capital deficiency of approximately $4.2 million. For the year ended December 31, 2015 the Company incurred a net loss of approximately $11.7 million and utilized cash in operations of approximately $8.2 million.

 

On May 4, 2015 but effective as of April 29, 2015, the Company amended its bank line of credit to increase the credit limit to $10 million and provide for a second term loan of up to $2 million of which $167,000 was used to pay off the balance of the initial term loan. The Company also sold 5,250,000 shares of its common stock at a price of $1.00 per share on September 25, 2015. After deducting underwriting discounts and commissions and offering expenses, the net proceeds from the offering were approximately $4.7 million. Additionally, the Company was awarded two large IDIQ (indefinite delivery/indefinite quantity) government vehicles as a prime contractor in April 2015. While the Company believes that it will be successful in securing task orders under the contracts and will generate revenue, there are no assurances that any task orders under the contracts will ultimately be awarded to the Company.  The Company is launching its LightMiner product in the first quarter of 2016 which is expected to have 60-70% gross margins and we anticipate will start contributing to cash-flow this year. Additionally the Company is expecting AirPatrol product sales to increase significantly this year which is expected to generate higher gross margins and improve cash-flow. 

 

The Company’s capital resources as of December 31, 2015, increased bank facility, higher margin business line expansion and recent contract awards are expected to be sufficient to fund planned operations during the next twelve months from the date of filing this annual report. 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.  The information in these consolidated financial statements 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 from the date of the filing of the annual report, 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.

 

F-8

 

 

SYSOREX GLOBAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

 

Note 2 - Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The consolidated financial statements have been prepared using the accounting records of Sysorex Global and its wholly-owned subsidiaries in 2015, Sysorex Federal, Inc., Sysorex Government Services, Inc., Lilien Systems, Shoom, Inc., AirPatrol Corporation and AirPatrol Canada as of April 16, 2014 and its majority-owned subsidiary, Sysorex Arabia LLC.  All material inter-company balances and transactions have been eliminated.

 

The Company owns 50.2% of Sysorex Arabia. As of December 31, 2015 there is $772,000 reported as assets held for sale and $2,026,000 as liabilities held for sale. The Company’s Board of Directors authorized management on October 29, 2015 to close its Saudi Arabia legal entity at an appropriate time and manner as business activities have been shifted to resellers and strategic partners in the region. During the year ended December 31, 2015 and 2014 Sysorex Arabia had immaterial operations.

 

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 the assets and liabilities acquired from AirPatrol and LightMiner as described in Note 3 and Note 4, respectively;
     
  The valuation of stock-based compensation;