XTI Aerospace, Inc. (XTIA) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Sysorex Global Earnings Conference Call for the Second Quarter Ended June 30, 2016. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast via over the Internet and is also being recorded for playback purposes. A replay of this call will be available approximately one hour after the end of call through September 11, 2016. I would now like to turn the conference over to Scott Arnold, Managing Director of CorProminence, the Company's Investor Relations firm. Please go ahead, sir.

Thank you, William. Thank you for joining today's conference call to discuss Sysorex Global's corporate development and financial results for the quarter ended June 30, 2016. With us today are Nadir Ali, the Company's CEO, and Kevin Harris, CFO. At 4:05 PM Eastern Time today, Sysorex released financial results for the quarter ended June 30, 2016. If you have not received Sysorex's earnings release, please visit the Investors page at www.sysorex.com. During the course of this conference call, the Company will be making forward-looking statements. The Company cautions you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the Company's future financial results, any statements about plans, strategies or objectives of management for future operations, any statements concerning proposed new products, any statements regarding any anticipated new relationships or agreements any statements regarding expectations for the success of the Company's products in the U.S. and international markets, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions, underlying any of the foregoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Some of these risks are described in the section of today's press release titled Cautionary Note on forward-looking statements and in the public periodic reports the Company files with the Securities and Exchange Commission. Investors or potential investors should read these risks. Sysorex assumes no obligation to update these forward-looking statements to reflect future events or actual outcome and does not intend to do so. In addition, to supplement the GAAP numbers the Company has provided non-GAAP adjusted net loss and net loss per share information in addition to non-GAAP adjusted EBITDA information. The Company believes that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in the Company's financial release. I will now turn the call over to Nadir Ali, Sysorex's CEO.

Thanks, Scott and good afternoon. Welcome to our second quarter 2016 earnings call and thank you for joining us. I'm here today with Kevin Harris, our CFO who will be discussing our financial results for the quarter ended June 30, 2016 after my opening remarks. And I will return to conclude our prepared remarks and field your questions. Sysorex empowers data driven customers with an innovative approach to data analytics, security and the Internet of Things. Sysorex products help clients to improve security, better manage assets and discover fresh opportunities by combining data from both the physical and digital worlds. Sysorex help client to drive real-time value by giving them 100% of their data analyzed up to a 1,000 times faster. Our portfolio products and services deliver innovative technology solutions, tailored specifically for a number of indices and applications from corporate security to real time customer analytics and shopping centers, Sysorex solutions are helping customers worldwide improve decision-making, increase productivity and feel the discoveries of tomorrow. While the second quarter was challenging due to impact of the VAR industry slowdown on our storage and computing segment, we remain optimistic for year-over-year growth in this segment for a couple of reasons. First, we are responding to the shift by expanding into the government vertical to offset the slowdown we see in commercial verticals. This is precisely why we went after the SEWP and CIO-CS contracts, and we expect this will help to grow this segment. Second, this segment cannot be judged on a quarterly basis, as I have discussed on our calls before, purchase orders in this segment can shift from one quarter to the next, if suppliers can't build products and ship within the quarter. Despite the softening in the storage and computing industry, we continue to capture impressive large gov projects with industry leading companies. We recently announced a nearly $2.5 million project from a large California based, beverage manufacturer and distributor to design and deploy a next generation datacenter architecture, developing a virtualized or software defined datacenter that will help the client reduce cost and better respond to its growing data storage and information technology needs. Sysorex will also help the client migrate 20 years of business data from its legacy datacenter to the new one. Adding to the industry trends in storage and computing segments is the fact that Sysorex along with many other technology companies are moving from upfront licensing models to recurring revenue based SaaS models. While it creates long-term recurring revenues, it does impact short-term growth. 2016 will be transformational for Sysorex as we implement our go-to-market strategies with both our AirPatrol and LightMiner products, marking our innovation as the company offering, technologically superior disruptive solutions. We have already book two times more in AirPatrol revenue in the first half of this year than total revenues last year, and expect that to grow further in the second half of the year. Our $400 million AirPatrol contract that we are in the development for installation of an asset tracking and employee management platform for a new plan worker community of 28,000 that is North of Doha in the State of Qatar, signifies distraction and the amounting interest in our unique solutions mix. Doing that also represents significant follow-on business opportunities as well. LightMiner launched at the end of Q1 and is building a solid pipeline that we expect will be strengthened by our recently announced Tableau, a multibillion dollar interactive data visualization company with 1,000s of customers. This could generate significant revenues for the LightMiner pipeline as our sales teams continue to work together. We recently announced the release e-publication, the latest component in our Shoom e-solution suite for newspaper and magazine publishers. This module allows publications to create interactive digital replicas of their print publications, expanding their reach to global readers and those on the go. This additional capability will provide us opportunities to grow Shoom product revenues. We are especially pleased to have just closed on a $5 million convertible-debt financing which provides us the necessary capital to continue our sales and marketing expansion and business growth. Kevin will cover the details of this financing later but I am pleased to have Hillair Capital as the financing partner. They are a Northern California based fund focus on the microcap space with a strong track record of providing companies the financing needed to achieve their business objectives. I believe their investment on us at $1.50 conversion price demonstrates their confidence in our business plan and vision. We believe this financing in addition to expected operating cash flow provides us the runway we need to get to cash flow positive based on our current growth projections. Our vision for the evolution of Sysorex is dramatic as we see Sysorex expand into market shares in the second half of 2016 and into 2017 and beyond. We expect to continue to realize sales growth in our higher margin segments as companies continue to adopt our data analytics and IoT solutions. With that I'll now turn the call over to Kevin to discuss our financial results for the quarter ended June 30, 2016.

Thanks, Nadir. Total revenues for the three months ended June 30, 2016 were 13.3 million compared to 17.7 million for the comparable period in the prior year. The decrease in revenue was 4.4 million is primarily attributable to the storage and computing segment contraction in the quarter ended June 30, 2016. For the three months ended June 30, 2016 Mobile, IoT and big data products revenue was 491,000 compared to 243,000 from the prior year period. Storage and computing revenue was 8.7 million for the three months ended June 30th, and 13.4 million for the prior year period. SaaS revenues were 792,000 during the three months ended June 30th, and 987,000 during the prior year period. Professional services revenue was 3.4 million during the three months ended June 30, 2016 and 3.1 million during the prior year period. Total gross profit for the quarter ended June 30, 2016 was 3.4 million compared to 5.7 million for the comparable period in the prior year. Gross margin for the three months ended June 30, 2016 was 26% compared to 32% during the three months ended June 30, 2015. The decrease in gross margin was primarily attributable to lower gross margin for the storage and computing segment. GAAP net loss attributable to the stockholders for quarter ended June 30, 2016 was 4.2 million compared to 1.7 million for the prior year period. This increase in net loss of 2.5 million was primarily attributable to lower revenue during the quarter and therefore lower gross profit to offset operating expenses. For the quarter ended June 30, 2016 pro forma non-GAAP net loss was 2.8 million compared to a non-GAAP net loss of 225,000 for the prior year period, for the quarter ended June 30, 2016 non-GAAP net loss per share was $0.11 compared to a non-GAAP net loss per share of $0.01 for the prior year period. Non-GAAP net loss per share is defined as net loss per basic and diluted share adjusted for non-cash items including stock-based compensation, amortization of intangibles and one-time charges including change in the fair value of shares to be issued, and acquisition cost. Total adjusted EBITDA for the quarter ended June 30, 2016 was a loss of 2.2 million compared to a gain of 34,000 for prior year period. Non-GAAP adjusted EBITDA is defined as net income or loss before interest, provision for or benefit from income taxes and depreciation and amortization plus adjustment for other income or expense items, non-recurring items and non-cash stock-based compensation. On the balance sheet, we ended the quarter with cash and cash equivalent of approximately 360,000 and total current assets of 25.2 million. Our net cash used in operations was approximately 118,000 for the six months ended June 30, 2016. I would also like a moment to discuss our recent $5 million convertible debt financing. On August 10, 2016 Sysorex announced closing a private placement for aggregate gross proceeds of $5 million pursuant to which it issued $5.7 million in aggregate principal amount of secured convertible debentures and 2,250 shares of series one convertible preferred stock to Hillair Capital Investments LP an accredited institutional investor. The principal in any accrued unpaid interest underlying the debentures is due August 09 of 2018. Subject to limitations and are convertible into shares of common stock of the company at an initial conversion price of $1.50 per share. Interest payments don’t begin until May of 2017 and principal payments begin in November of 2017. The preferred stock is non-voting, with a few exceptions, and are convertible into 1.5 million shares of common stock. This concludes my comments, and now I would like to turn the call back over to Nadir. Nadir?

Thanks, Kevin. Sysorex is positioned more now than ever for strong achievement of our vast potential, having aligned the talent, market-leading technology and capital resources to capture significant market share. Our vision for the future remains one of robust, diversified growth across our products and services as we ramp-up our marketing efforts and increase our client footprint across a growing list of industry sectors. We are confident in our expectations for growth and path to profitability and strident in our collective efforts to achieve the promise that Sysorex represents. With that William, we are ready to open up the call to any questions.

At this time, we have allotted 30 minutes to address questions from participants. [Operator Instructions] First question today will come from David Riedel with Riedel Research. Please go ahead.

Congratulation on the financing, can you tell us a little bit about the relationship with Hillair and how that came to be?

Sure, I’ll start and Kevin feel free to chime in. We have been working with Hillair for the past couple of months through the diligence process. And we believe that we were able to complete a transaction successfully with them, they have a lot of experience in the microcap space and worked with a lot of companies that we are familiar with and have a great reputation. And so we think this was a great financing certainly for Sysorex to position us with the capital we need to continue to grow the business. And we are glad that they believed in our business plan and vision and are as confident as we are in what we have achieved.

Yes, no I agree definitely we enjoyed the time we spent with Hillair over the last couple of months as we spent significant time going through diligent and really doing a deep dive into the business and into the future and where the company is going. And really feel we have established a promising relationship with the company that sees the future that we see for Sysorex. So to have an investor of the caliber of Hillair really kind of take that interest in Sysorex and provide us the capital we need so that we can move and continue to move the company in the direction that Nadir had laid out on the call, it's certainly encouraging for us as a management team.

An unrelated additional question, can you talk a little bit about the status of the government business and sort why you see that ramp and where you see that ramp impacting your business and what the timeframe is?

Sure, so we went after the SEWP and CIO-CS contracts that I mentioned earlier on the call that are specific government wide acquisition vehicles, they are multiyear and multibillion dollar contracting vehicles that have the ceilings available and then task orders are issued against this those have started to ramp-up we expect to see some volume in task orders come out as the government fiscal year comes in at September 30th, but this is the first year of these contracts and as we get into it, five to 10 year contract so we expect more and more task orders to be issued in the near future. And I think that is one of our strategies to grow the storage and computing business that will be more successful because we have a lot of experience in the government space, we know how to capture these task orders and we will leverage those. In addition we recently, earlier this year won the PMSS3 contract with the U.S. Army that is more of a services contract as opposed to products but certainly that can also help to grow the services revenue of our business and contribute to the overall growth.

[Operator Instructions] Our next question is from Scott Reed with Vict10n Capital Strategies. Please go ahead.

So just real quick I did just kind of one of my question is answered so that was nice. But the other question I had is regarding a comment you made I think it was last quarter's call it may have been two quarters ago, but at that time you had expressed some at least some hope that you wouldn’t need to go to a capital markets to raise funding that you might have had some contracts with especially your higher margin business lines where you thought you might be able to get customers to either pre-pay or at least fund enough upfront that you will be able to get along with your current cash balances. I was wondering just if you could give us a little more color on how that heritage might have changed or if it's a matter of not landing contracts or contracts being pushed out or many contracts but having customers just did not put up the capital upfront? And that will do it for me.

Good question, Scott. So the contracts are still in place there is a bit of a timing issue that happened with the pre-payment we talked about a large order in the last call. But that didn’t happen in this quarter and we certainly expect that to help with the cash flow for the Company but we felt that with the additional growth we are expecting and the opportunities ahead in combination with the softening in Q2 that was prudent to provide the Company enough capital to execute on our plans. And so the opportunities we talked about on the last call have not gone away at all. It's just been delayed a little bit but we expect to announce those fairly soon.

This concludes our question-and-answer session. I'd now like to turn the conference back over Nadir Ali for any closing remarks.

Thank you, William. I wish to thank everyone again for your time today. I want to reiterate the enthusiasm and confidence I bring to this call, regarding our future. Sysorex strives to be a leading provider of real time data analytics, IoT and security solutions. We are driving the realization out in the market that our AirPatrol and LightMiner analytics platform solutions are incomparable and drive real long-term value. We’re highly encouraged by the market responses we are experiencing from both clients and prospective customers alike who seek to drive ever more ROI from their data. Thank you.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.