XTI Aerospace, Inc. (XTIA) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Sysorex Global Earnings Conference Call for the Quarter-Ended September 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] A replay of the call will be available approximately one hour after the end of call through December 14, 2016. I would like to now turn the conference over to Scott Arnold, Managing Director of Core IR, the Company's Investor Relation firm. Please go ahead.

Thank you, Gary. Thank you for joining today's conference call to discuss Sysorex Global's corporate development and financial results for the quarter ended September 30, 2016. With us today are Nadir Ali, the Company's CEO; and Kevin Harris, CFO. At 4:05 P.M. Eastern Time today, Sysorex released financial results for the quarter ended September 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 statements that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or any 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 anticipating new relationships or agreements, any statements regarding expectations with the success of the company's products in U.S. and international markets, any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions underlying any forgo [ph]. These statements are based on expectations and assumptions as of the date of this conference call and is 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 the public periodic reports accompany files with the Securities and Exchange Commission. Investors and potential investors should read these risks. Sysorex assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. In addition, to supplement the GAAP numbers the companies have 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 manful supplemental information and are helpful in assessing our historical and future performance. A single 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. Nadir?

Thanks, Scott and good afternoon, everyone. Welcomes to our third quarter 2016 earnings call and corporate update, and thank you for joining us. I'm joined on the call today by Kevin Harris, our CFO, who will be discussing our financial results for the quarter ended September 30, 2016 after my opening remarks. And I will return to conclude our prepared remarks and fill your questions. Sysorex empowers data driven customers with an innovative approach to data analytics, security and Internet of Things. Sysorex products helps client improve security, better manage assets, and discover fresh opportunities by combining data from both, the physical and digital world. We help clients derive real-time value by giving them 100% of their data analyzed up to 1000 times faster. Our portfolio of products and services deliver innovative technologies solutions tailored specifically for a number of industries 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 fuel discoveries of tomorrow. Now as many of you know, we didn't start with these solutions I just described. We have been building these over the past couple of years and is certainly the key to the future success of our company. However, a majority of our revenue today continues to be from our VAR business which is reported in our numbers, primarily in the storage and computing segment. The VAR industry has been undergoing changes, John Donnelly of the VAR Guide talks about certain core products of VARs are more vulnerable than others. Storage, for example, represents a significant piece of revenue for VARs. A quick look at AWS's revenue numbers and the momentum shows that the storage business will be hit harder in the next few years as companies like NetApp and AMC struggle to keep their data center business. The trickledown effect on VARs will be felt. In addition, the recent evolution of SaaS subscription pricing models has significantly changed and challenged the VAR channel as it currently stands. Donnelly points out that SaaS companies have yet to crack the code on integrating with channel partners. These friends are also impacting our VAR business and contributed to the softening of revenues and margins in our storage and computing segment in the third quarter. However, I agree with Donnelly that there are ways to weather this storm and come out stronger. Some VARs or resellers are working on building and branding their cloud reselling strategy. This approach works for better for much larger VARs but it is a low margin business. We at Sysorex have chosen two distinct but complementary strategies to address these challenges. The first strategy is to acquire proprietary technology such as AirPatrol and like minor to truly transform the company from VAR to a technology company. This is the key long-term success factor for the company and gives us the opportunity for higher growth and margin profile. This approach also leverages our VAR customer base and allows us to provide a higher value proposition into those customers. I will come back later in this discussion to discuss the progress we are making on this front. Our second strategy was to expand our VAR business into the public sector to offset the declines we see with customers in the private sector. I have talked about this approach on many calls in the past and that's why we started bidding on government contracts like SOP [ph] and CIOCS over the past couple of years. Expansion into the government space doesn't happen overnight because the government has lengthy retirement cycles, it takes time to getting past performance qualifications and you need to hire a dedicated sales reps to build customer relationships. However, in the long run the government continues to buy significant volumes of products and services from VARs and this approach balances our mix of government and commercial customers, and allows us to invest in our propitiatory technologies which is the ultimate goal. To expedite the progress on this second strategy in a public sector, we recently moved on an opportunistic acquisition that was presented to us. As you saw with the announcement this afternoon, Sysorex has signed a definitive agreement to acquire certain aspects and liabilities of Integrio Technologies and expects to close on the acquisition shortly. Integrio Technologies is a 20 plus year old company having reported in Virginia with approximately 40 employees, roughly half of which are engineers build to project, a dozen or so folks in sales and project management and the balance in administration overhead. Integrio is an IT integration and engineering company that provides cutting edge solutions for network performance, secure wireless infrastructure, software application lifecycle support, and physical cyber security. Let me touch upon why this pending transaction makes so much sense for Sysorex going onward. Taking our storage and computing and our professional services segments into the government sector has been underway as we see the need to increase our government customer base to offset the decline we are seeing in commercial verticals. The Integrio acquisition helps us address this problem more aggressively, although we are adding in lower margin VAR revenue to the mix, Integrio does provide Sysorex with contracts and relationships with strategic customers such as the FBI, Department of Justice, U.S. Army, the Bureau of Prisons, and others which are prime targets for our AirPatrol and LightMiner products. It also gives us past performance qualifications allowing us to bid on many more task orders than we could before. It gives us significant portfolio of contracts that capture a high volume of task orders and provides us with additional sales engineers and consultants with extensive telecom and networking experience that we can train on AirPatrol and LightMiner. Integrio has generated revenues over $40 million per year in the past few years according to their records. We expect this acquisition will enable us to increase and help smooth our revenue and cash flows going forward. I think it is important to frame our developments in the context of our overall strategic vision to derive real-time value for our customers with the combination of physical and digital data which is not changed. The Integrio purchase is demonstrative of our approach to solving a problem in the VAR industry trend by showing up our storage and computing business with new support. This pending acquisition addresses a challenge in this business segment allows us to grow the top line and contributes to our EBITDA, providing us additional runway as we see AirPatrol and LightMiner take hold. I would now like to shift our focus to developments in our AirPatrol and LightMiner business. I think it is fair to say that there our announcement in the third quarter was strong AirPatrol contract with a top mall operator was received but not necessarily fully understood. So I want to spend a few minutes clarifying the implications of this superb win for Sysorex and frame it in context. On September 8, we announced that we have secured an AirPatrol for retail properties managed services contract with a top mall operator. As a reminder, Sysorex AirPatrol for retail properties products will soon be live in a marque shopping center providing detailed visitor analytics, including foot counts, visitor journey, length of stay and other location based information with a marque shopping center. Do you think a global real estate of Icon is going to put our sensors inside myriad walls all over the world without first realizing that what we have is unique and it works? The diligence that Sysorex went through in this client evaluation lasted for over a year and a half. We competed with startups to multi-billion dollar organizations to win this business. We are truly delivering something that has never been down before. The confidential nature of this announcement was strategic and intentional from a competitive positioning perspective, so I want our investors to understand that we -- our client and Sysorex intentionally have not named the client nor to divulge detail of this engagement that would compromise our future potential deployments together. While somewhat frustrating, and yes, I share this frustration as my desire is to profusely transparent, in this case our relationship with the client demands confidentiality for the benefit of their retaining competitive advantage and for the sake of our future potential solution deployments. That confidentiality and of itself speaks bonds about the nature of our ongoing opportunity and I hope that by clarifying this point that you are able to discern some further context about this relationship and what it potentially represents for Sysorex and our AirPatrol LightMiner retail offering. I'd also like to give you a quick reminder of what we are doing for these mall operators in case some of you are wondering. If you are a large retailer today, you have no idea about the flow of people throughout your stores; what people do before they come to you stores etcetera. Today there is video, beacons but they still don't solve the problem. Think about it, retailers know infinitely more about their online customers and they are trying to replicate that into physical record [ph]. They need to understand real-time information and trends that can help them optimize staffing and improve security, provide way finding, offer customized service and improve margin campaigns. To do this they need indoor location and the data that goes with it. Why? Because we spend most of our time indoors working, shopping, eating, etcetera. GPS and maps don't work indoors they need line of sight to the sky. Wifi and Bluetooth solutions help solve part of the problem but they don't have people that capture all of their devices and Wifi location is not very precise. No one else that we've seen does what Sysorex can do with its AirPatrol product, and that's because we have cellular Wifi and Bluetooth, all in one. That's what gets precision versus proximity and we capture practically 100% of the devices unless they are turned off. Indoor location is becoming a currency and we are in the best position to provide that best locationing and increase the value of that currency. Like most technology solutions today, AirPatrol has typically purchased on a SaaS basis, mostly by non-government customers and therefore, you don't see the top line impact immediately. However, similar to other SaaS companies this will lead to reoccurring revenue streams with a more direct impact on our bottom line. For example, a monthly fee for a mall can range from $30,000 per month to $100,000 per month depending on the size of the mall. These customers will be typically signing and two to three-year renewable contract. Other customers in government or international space, we've seen purchasing upfront silencing with annual maintenance fees. Now I'd like to just say a few things of a more personal nature before I turn the call over to Kevin. Unlike a lot of micro caps you may invest in, insiders and affiliates own approximately 30% of this company, so there is no one more unhappy with the stock performance than us. I take responsibly for perhaps not communicating the vision and model as I could at times but let me say we are confident in the vision but we also know the finical results needs to improve. And given the margins in AirPatrol LightMiner, we can get there; we shouldn't discount the importance of that business segment because despite the comparatively small revenue numbers, this high margin business is very additive to a business that is approaching EBITDA breakeven. We also believe that as they improve, the buy side and the sell side will more than recognize the value of Sysorex. So I want to say thank you to all of you for your patience and for your shared confidence. While we do not control our stock price, we have taken substantive measures to strengthen our foundation and we are confident that our evaluation will become better aligned with our evolving reality. We fully intend to remain as a NASDAQ listed company, as well and we will take the appropriate measures at the appropriate time in order to accomplish this important requisite. Our vision for the evolution Sysorex remains steadfast and we are resolute in our determination to achieve the promise we know we can achieve. We remain opportunistic about our prospects for sale growth in our higher margin segments and in our lower margin segments to be sure. With that I will now turn the call over to Kevin to discuss our financial results for the quarter ended September 30, 2016.

Thanks, Nadir. Total revenues for the three months ended September 30, 2016 were $11.2 million compared to $14.9 million for the comparable period in the prior year. The decrease in revenue is of $3.7 million is primarily attributable to the storage and computing segment as explained by Nadir early on this call. For the 3 months ended September 30, 2016 mobile IoT and Big Data product revenue was $542,000 compared to $487,000 for the prior year period. Storage and computing revenue was 7.9 million for the three months ended September 30 2016 and $10.3 million for the prior year period. Tax revenue worth $826,000 during the three months ended September 30, 2016 and $871,000 during the prior year period. Professional services revenue was $2 million during the three months ended September 30, 2016 and $3.2 million during the prior year period. Total gross profit for the quarter ended September 30, 2016 was $3.1 million compared to $4.4 million for the comparable period in the prior year. Gross profit margin for the three months ended September 30, 2016 was 28% compared to 30% during the three months ended September 30, 2015. The decrease in gross margin was primarily trial to lower gross margin for the storage and computing segment during the quarter ended September 30 2016. Net loss attributed to common stock holders for the three months ended September 30, 2016 was $4.7 million compared $3.2 million for the prior year period. This increase of net loss of $1.5 million was attributable to lower revue during the quarter and therefore lower gross profit offset the operating expenses. For the quarter ended September 30, 2016 pro forma non-GAAP net loss was $3.3 million compared to a non-GAAP net loss of $1.8 million for the prior year period. The quarter ended September 30 2016 non-GAAP net loss per share was $0.13 compared to a non-GAAP net loss per share of $0.09 for the prior year period. Non GAAP net loss per share is defined as net loss for basic and diluted share adjusted for non-cash items including stock-based comp, amortization of tangibles, change in the fair value of shares to be issued, change of the fair value of derivative liability and one-time charges including acquisition cost. Total adjusted EBITDA for the quarter ended September 30, 2016 was a loss $2.4 million compared to a loss of $1.5 million for the prior year period. Non-GAAP adjusted EBITDA defined as net income or loss before interest provision for benefit from income taxes and depreciation and amortization plus adjustments for other income, 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 $505,000 and total current assets of $20.2 million. Our net cash used in operations was approximately $1.1 million for the nine months ended September 30, 2016. This concludes my comments, and I'd like to turn the call back over to Nadir. Nadir?

Thanks, Kevin. Sysorex is strongly positioned to deliver on its promise of innovation and value creation with market aiding technology driving diversified growth across our products and services. We are excited about our pending acquisition of Integrio and look forward to our future with enthusiasm and confidence in our expectations for growth and our past profitability. With that Gary, we are ready to open up the call to any questions.

Thank you. [Operator Instructions] The first question comes from Josh Nickels with B. Riley. Please go ahead.

Looking at the acquisition looks like it should be additive to EBITDA, just real quick I dint think you mentioned it could you talk about the funding mechanics briefly.

Sure. So the acquisition is accommodation of Cash and closing and installment payments, there is an earnout component, assumptions and liabilities, and of course a stock component.

Okay. Then you talked a bit about the AirPatrol opportunities with the recent deployment of the mall. When did you think that's going to be up and running and any high level detail you can provide about the opportunity to expand within that one-mark key mall and then what it might mean if you were to expand to other malls under the same umbrella as well.

Without going into specifics about that particular deal what I can tell you is yes its well underway and the goal is not just to one location for them it's definitely a roll up plan that we will work with them on and as you can imagine as you think about the business model I discussed earlier on the call. Scrambling from every mall starts becoming additive to the cash flow and recurrent revenues we see. These mall operators have millions of square feet, some of these operators have hundreds of malls others have 20, 30, 40, 50 malls. This is a vertical very excited about I think we have a unique solution for them and except that we can scale this across multiple mall operators and within multiple malls and within each mall operator itself.

Lastly, follow-up on point then I'll hop back into the queue is do you have anything that you can provide as far as -- is there a roll out time line or maybe how long the operator might want to test an installment before moving on to expand on the two additional areas?

We've actually gone through a testing period already with them during the year half of diligence and so we don't expect any delays unnecessarily it's just a matter of their timing in terms of being able to execute in the installations of the sensors right they have to open up ceilings and put these ensures up and things like that. They have timetables and process used to figure that out. We are hopping that's it -- it doesn't happen all over night but we are hoping to roll out sooner rather than later one mall at a time for that.

Thank you.

Thanks, Josh.

The next question comes from David Riedel from Riedel Research. Please go ahead.

Hi guys, this is David Riedel, a couple of questions about the Integrio acquisition. Are you planning to keep that brand and also you list a number of contracts and relationships that they have. Is there one there that stands out to you as a being especially valuable to Sysorex and AirPatrol?

Hi David, we -- this is an asset purchase -- well, we are capturing the brand use for some time it's really going to get rolled into our Sysorex government series division so we'll be transferring that under the Sysorex name at some point. There is definably some history there with the company and relationships and we are capturing and maintain those. They have actually several excellent contracts. We are pretty excited about the department of justice the FBI contract. We also have a few US army contracts - I don't know that its contract that we've - think we can leverage with some of the relationships we have and the products sources that we have. Variety of contracts that I think we can take advantage of and grow and that will integrate well and compliment a couple of contracts that we have. They also have a [indiscernible] but carry different product sets than we do so we'll be able to expand our offering under those contracts.

Great, Okay, thank you.

The next question comes from Mike Crawford with B. Riley & Company. Please go ahead.

Thank you. Nadir did you -- is the cash balance up in Q4 so far from the Q3 in because it seems otherwise it's a little tight on the outside cash portion of the acquisition.

The cash balance I mean as you can imagine we pay down our AR line AR collections come in and so the cash balance maybe on a date where we significantly at that point and time and significant pay it down and then we can borrow against our line as the receivables come back up. We manage to Cash from that perspective so you know it's - the balance has gone up and down throughout Q4 as well but it's really driven by our AR and Q4 is pretty good quarter for us typical on these [indiscernible] computing side because it's the end of the year so we are expediting that business4 to grow this quarter and drive the AR and we'll be able to use our line at that point.

Great. As far the mall operator ripping off these ceilings etcetera, did you say when you thought that you might be able to start recognizing these monthly service revenues?

We happened but its eminent is what I can say is - the contract has been signed the sensors have been deployed and its potentially going live here shortly so its eminent.

In time for the holidays?

Yes.

Okay, good and then as far as the two developments with Rune 1 where you the prime overseeing everything and the other one where it's just the [indiscernible] what the timing of the cash flow related to those?

We are looking at Q1 -- well there is still chance of part of the larger camp there 20-acre camp for little bit in Q4 then the balance in Q1. The bigger contract a $91 million contract that we talked about earlier because of construction delays I don't expect that revenue start kicking until possibly late Q1.

Okay. But the larger camp that's just a sale where you deliver AirPatrol and you get cash pretty quickie I believe right.

Yes, that's right and so we are expecting that to be part in Q4 and part in Q1.

Okay. Just back to the mall, I think you said - did you say one of their standard malls could represent close to $100,000 a month and recurring big data service revenue?

Yes, I was saying the range is $30,000 to $100,000 it's a pretty small mall it maybe can be 20 25,000 buts that's the range and what that means is that it could be going beyond just the common area potential to get the $100,000 per month fee or a combination of other thing that there are other services that they are buying from us on top of the AirPatrol solution. We atypically see I think the average probably in the 40 to 50 range but if you extend that's for the commentary if you extend beyond that then these malls could easily 100,000 per month.

Half million to a million of revenue per year ore mall and this is what like 60 to 70% type of gross margin business?

That's right.

Okay, thank you.

Thanks, Mike.

[Operator Instructions] I'm showing no questions at this time. This concludes our question and answer session. I'd like to turn the conference back over to Nadir Ali for any closing remarks.

Thank you, Gary. I wish to thank everyone again for your time today I want you reiterate the enthusiasm and confidence that brings to this call regarding our future. Sysorex tries to be a leader provider of real time data analytics Iota 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 are highly encouraged by the marketing responses we are experiencing from our clients and prospective customers alike. We seek to drive ever more or alike from their data thanks very much.

The conference is now concluded thank you for attending today's presentation you may now disconnect.