UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A10-Q

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended March 31, 20212022

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: 000-55924

SYSOREX, INC.

(Exact name of registrant as specified in its charter)

Nevada68-0319458
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)

13880 Dulles Corner Lane

Suite 175


Herndon, Virginia
20171
(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code:  800-929-3871

Securities registered pursuant to Section 12(b) of the Act: None.

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 10, 2021,23, 2022, there was 150,537,427were 494,443,611 shares of the Registrant’s Common Stock, $0.00001 par value per share, issued and outstanding.

 

 

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 (the “Amendment”) of Sysorex, Inc. (the “Company”) amends the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 17, 2021 (the “Original Filing”). The Company is filing this Amendment to provide the Section 302 certification from its principal financial officer as Exhibit 31.2, which was inadvertently omitted from the Original Filing, and to update the exhibit index to include such exhibit.

No other changes have been made to the Original Filing. This Amendment does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way the disclosures made in the Original Filing. Other than as described above, the Original Filing has been restated in its entirety herein.

 

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 20212022

TABLE OF CONTENTS

Page
Special Note Regarding Forward-Looking Statements and Other Information Contained in this Reportii
PART I - FINANCIAL INFORMATION1
Item 1.Financial Statements (Unaudited)Financial Statements1
Condensed Consolidated Balance Sheets as of March 31, 20212022, and December 31, 202020212
Condensed Consolidated Statements of Operations for the three monthsThree Months ended March 31, 20212022, and 202020213
Condensed Consolidated Statement of Changes in Stockholders’ DeficitEquity for the three monthsThree Months ended March 31, 2022, and 20214
Condensed Consolidated Statement of Changes in Stockholders’ Deficit for the three months ended March 31, 20205
Condensed Consolidated Statements of Cash Flows for the three monthsThree Months ended March 31, 20212022, and 202020216
Notes to Unaudited Condensed Consolidated Financial Statements7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1730
Item 3.Quantitative and Qualitative Disclosures About Market Risk3540
Item 4.Controls and Procedures3540
PART II - OTHER INFORMATION3641
Item 1.Legal Proceedings3641
Item 1A.Risk Factors3641
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds3842
Item 3.Defaults Upon Senior Securities3842
Item 4.Mine Safety Disclosure3842
Item 5.Other Information3842
Item 6.Exhibits3842
Signatures3943

i

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

AND OTHER INFORMATION CONTAINED IN THIS REPORT

This Quarterly Report on Form 10-Q (this “Form 10-Q”)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”).statements. 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,”“may” or other similar expressions in this Form 10-Q.report. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; anticipated expenses; 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 ability to successfully integrate acquired businesses or new products, or to realize anticipated synergies in connection with acquisition of the new businesses line;mergers and acquisitions.

the effect of COVID-19, closure of offices and site location;location(s); on our ability to service our customers resulting in less revenues;

our limited cash position and our history of losses;losses.

our ability to achieve profitability;profitability.

customer demand for solutionsthe products and services we offer;offer.

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

our abilityincreased delays in delivery of product due to resell products without terms, without wholesale suppliers,worldwide strain on a prepay basis;supply chain primarily due to labor, raw material, and chip shortages.

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

ii

a security breach, through cyber-attack, cyber intrusion, insider threats or otherwise, or other significant disruption of our IT networks and related systems.

decrease in value of digital assets

general cryptocurrency risks.

technological changes and developments in the blockchain and cryptocurrencies.

risks related to changes of rules and regulations in connection with cryptocurrencies in general and Ethereum in particular.

risks related to Ethereum’s transition from “proof-of-work” to “proof-of-stake” model that may render mining activities within Ethereum blockchain obsolete.

risks related to the loss of assets of our cryptocurrency mining facility held with a third party.

competition for blockchain platforms and technologies, including but not limited to non-fungible tokens (“NFTs”);

our ability to obtain adequate financing in the future;future.

our ability to continue as a going concern;concern.

our ability to complete strategic transactions, which may include acquisitions, mergers, dispositions, joint ventures, or investments;investments.

 lawsuits and other claims by third parties;parties

 the restatement of our financial statements in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021, and the impact of such restatement on our future financial statements and other financial measures; and the material weaknesses we identified in our internal control over financial reporting, our efforts to remediate such material weaknesses and the timing of remediation

 our success at managing the risks involved in the foregoing items; anditems.

 authorized shares will be insufficient to convert debenture holders; and

other factors discussed in this Form 10-Q.report.

We may not actually achieve the plans, intentions or expectations disclosed in ourThe forward-looking statements are based upon management’s beliefs and youassumptions 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 ourthese forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.

You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Unless otherwise stated or the context otherwise requires, the terms “Sysorex,” “we,” “us,” “our,” and the “Company” refer collectively to Sysorex, Inc. and its subsidiaries, – Sysorex Government Services, Inc. (“SGS”) and TTM Digital Assets & Technologies, Inc. (“TTM”TTM Digital”) and Sysorex Government Services, Inc. (“SGS”).

iii

ii

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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

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

The results for the period ended March 31, 20212022, are not necessarily indicative of the results of operations for the full year. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the years ended December 31, 20202021, and 20192020 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2021.April 14, 2022, and Amendment No. 1 on Form 10-K filed on May 23, 2022, to restate the Company’s previously issued consolidated financial statements and financial information as of and for the fiscal year ended December 31, 2021, as well as to provide restated interim financial information as of September 30, 2021 and for the three and nine months then ended.


Sysorex, Inc. and SubsidiarySubsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

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

 

  March 31,
2022
  December 31,
2021
 
Assets      
Current Assets      
Cash and cash equivalents $938  $659 
Digital assets, net  1,237   5,202 
Accounts receivable, net  1,553   3,023 
Prepaid expenses and other current assets  1,024   1,402 
Assets held for sale  6,071   6,071 
Total Current Assets  10,823   16,357 
         
Mining equipment, net  3,620   4,077 
Intangible assets, net  2,409   2,553 
Goodwill  1,634   1,634 
Pre-funded right- in Ostendo  1,600   - 
Operating lease right-of-use asset, net  510   558 
Other assets  75   103 
Total Assets $20,671  $25,282 
         
Liabilities and Stockholders’ Deficit        
Current Liabilities        
Accounts payable  3,637   6,724 
Accrued liabilities  2,349   2,382 
Short-term debt  17,721   19,439 
Conversion feature derivative liability  8,424   8,355 
Operating lease obligation, current  158   49 
Common stock derivative liability  314   - 
Deferred revenue  866   932 
Total Current Liabilities  33,469   37,881 
         
Operating lease obligation - noncurrent  397   509 
         
Total Liabilities  33,866   38,390 
         
Commitments and Contingencies        
         
Stockholders’ Deficit        
Common stock, par value $0.00001 per share, 499,560,659 shares authorized; 237,513,850 shares issued as of March 31, 2022, and 145,713,591 shares issued as of December 31, 2021, 237,438,471 shares outstanding as of March 31, 2022, and 145,638,212 shares outstanding as of December 31, 2021  1   1 
Treasury stock, at cost, 75,379 shares as of March 31, 2022, and as of December 31, 2021  -   - 
Additional paid-in-capital  39,102   36,156 
Accumulated Deficit  (52,298)  (49,265)
Total Stockholders’ Deficit  (13,195)  (13,108)
Total Liabilities and Stockholders’ Deficit $20,671  $25,282 

 

  As of  As of 
  March 31,  December 31, 
  2021  2020 
  (Unaudited)  (Audited) 
Assets      
       
Current Assets      
Cash $35  $167 
Accounts receivable and other receivables, net  335   2,186 
Prepaid expenses and other current assets  2,353   382 
         
Total Current Assets  2,723   2,735 
         
Operating lease right-of-use asset, net  72   99 
Intangible assets, net  522   600 
Other assets  29   29 
         
Total Assets $3,346  $3,463 
         
Liabilities and Stockholders’ Deficit        
         
Current Liabilities        
Accounts payable $7,273  $8,541 
Accrued liabilities  1,347   1,297 
Operating lease obligation  74   101 
Related Party Note Payable  201   - 
Short Term debt, net of discounts  6,220   1,515 
Deferred revenue  381   402 
         
Total Current Liabilities  15,496   11,856 
         
Long Term Liabilities        
Related party payable  8,389   9,044 
Payable to related party  699   682 
Long term debt-promissory note  3,623   5,390 
Other liabilities  8   4 
         
Total Liabilities  28,215   26,976 
         
Commitments and Contingencies        
         
Stockholders’ Deficit        
Common stock, par value $0.00001 per share, 500,000,000 shares authorized; 569,690 and 485,423 shares issued as of March 31, 2021 and December 31, 2020; respectively and 494,311 and 410,044 shares outstanding as of March 31, 2021 and December 31, 2020, respectively  -   - 
Treasury stock, at cost, 75,379 shares as of March 31, 2021, and December 31, 2020, respectively  -   - 
Additional paid-in-capital  (11,492)  (11,511)
Accumulated deficit  (13,377)  (12,002)
         
Total Stockholders’ Deficit  (24,869)  (23,513)
Total Liabilities and Stockholders’ Deficit $3,346  $3,463 

The accompanying notes are an integral part of these condensed consolidatedunaudited Condensed Consolidated financial statements


Sysorex, Inc. and SubsidiarySubsidiaries

Condensed Consolidated Statements of Operations

(In thousands of dollars, except number of shares and per share data)

(Unaudited)

 

  For the Three Months Ended 
  March 31, 
  2021  2020 
       
Revenues      
Products $928  $1,152 
Services  479   1,114 
Total Revenues  1,407   2,266 
         
Cost of Revenues        
Products  829   1,127 
Services  329   868 
Total Cost of Revenues  1,158   1,995 
         
Gross Profit  249   271 
         
Operating Expenses        
Sales and marketing  249   270 
General and administrative  751   768 
Amortization of intangibles  78   78 
         
Total Operating Expenses  1,078   1,116 
         
Loss from Operations  (829)  (845)
         
Other (Expense) Income        
Interest expense  (546)  (327)
Other Income  1   11 
         
Total Other (Expense) Income  (545)  (316)
         
Net Loss $(1,374) $(1,161)
Net Loss per share - basic and diluted $(3.06) $(2.84)
Weighted Average Shares Outstanding - basic and diluted  448,439   408,505 
  For the Three Months
Ended
March 31,
 
  2022  2021 
Revenues      
Mining income $765  $- 
Product revenue  4,529   - 
Services revenue  508   - 
Total Revenues  5,802   - 
         
Operating costs and expenses        
Mining cost  144   - 
Product cost  2,015   - 
Services cost  262   - 
Sales and marketing  398   - 
General and administrative  3,568   58 
Management fee  -   321 
Depreciation  457   - 
Impairment of digital assets  1,236   - 
Amortization of intangibles  143   - 
Total Operating Costs and Expenses  8,223   379 
         
Loss from Continuing Operations  (2,421)  (379)
         
Other Income (Expense)        
Interest expense  (974)  - 
Gain on sale of digital assets  1,107   87 
Revaluation of conversion feature derivative liability  (838)  - 
Loss on extinguishment of debt  (549)  - 
Other income, net  6   (2)
Total Other Income (Expense)  (1,248)  85 
         
Loss from continuing operations before income taxes  (3,669)  (294)
         
Income tax expense  -   178 
         
Loss from continuing operations  (3,669)  (472)
Gain from discontinued operations  636   1,683 
Net (Loss) Income $(3,033) $1,211 
         
Net Loss per share - basic and diluted - continuing operations $(0.021) $(0.001)
Net Income per share - basic and diluted - discontinued operations $0.004  $0.020 
Weighted Average Shares Outstanding - basic and diluted  174,980,542   83,039,900 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements


Sysorex, Inc. and SubsidiarySubsidiaries

Condensed Consolidated StatementStatements of Changes in Stockholders’ DeficitEquity

For the Three Months Ended March 31, 2022, and 2021

(In thousands of dollars, except share data)

(Unaudited)

  Common Stock  Treasury Stock  Additional
Paid-In
  Subscription  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Receivables  Deficit  Total 
                         
Balance – December 31, 2021  145,638,212   1   75,379            -   36,156          -   (49,265)  (13,108)
Convertible debt conversions  72,717,883       -   -   -   2,909   -   -   2,909 
Reclassification of equity contracts to liabilities  -   -   -   -   (314)  -   -   (314)
Professional services  6,000,000   -   -   -   240   -   -   240 
Exercise of Pre-funded warrants  12,361,622   -   -   -   -   -   -   -- 
Cashless exercise of warrants  220,754   -   -   -   -   -   -   - 
Stock based compensation  -   -   -   -   111   -   -   111 
Vesting of restricted stock  500,000   -   -   -   -   -   -   - 
Net Loss  -   -   -   -   -   -   (3,033)  (3,033)
Balance – March 31, 2022  237,438,471  $1   75,379  $-  $39,102  $-  $(52,298) $(13,195)

  Common Stock  Treasury Stock  Additional
Paid-In
  Subscription  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Receivables  Deficit  Total 
Balance – December 31, 2020  66,431,920  $           -             -  $           -  $2,060  $      (100) $(135) $1,825 
Distributions to shareholders  -   -   -   -   (1,521)  -   -   (1,521)
Payments of subscription receivables  -   -   -   -   -   100   -   100 
Exercise of Moon warrants  14,607,980   -   -   -   -   -   -   - 
Net Income  -   -   -   -   -   -   1,211   1,211 
Balance – March 31, 2021  81,039,900  $-   -  $-  $539  $-  $1,076  $1,615 

 

        Additional       
  Common Stock  Treasury Stock  Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
Balance - January 1, 2021  485,423  $                -   75,379  $                -  $(11,511) $(12,003) $(23,514)
Shares issued for payment of short-term debt  84,267   -   -   -   19   -   19 
Net loss  -   -   -   -   -   (1,374)  (1,374)
                             
Balance - March 31, 2021  569,690  $-   75,379  $-  $(11,492) $(13,377) $(24,869)

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


Sysorex, Inc. and SubsidiarySubsidiaries

Condensed Consolidated StatementStatements of Changes in Stockholders’ DeficitCash Flows

For the Three Months Ended March 31, 2020

(In thousands of dollars, except share data)dollars)

(Unaudited)

  For the Three Months
Ended
 
  March 31, 
  2022  2021 
Cash Flows from Operating Activities      
Net loss from continuing operations $(3,669) $(234)
Adjustments to reconcile net loss to net cash used in operating activities        
Depreciation and amortization  601   - 
Stock-based compensation expense  166   - 
Amortization of right of use asset  62   - 
Realized gain on sale of digital assets  (1,107)  (87)
Loss on extinguishment of debt  549   - 
Change in fair value of debt conversion feature  838   - 
Gain on settlement of vendor liabilities  (1,533)  - 
Impairment of digital assets  1,236   - 
Issuance of shares in exchange for services  240   - 
Changes in assets and liabilities:        
Digital assets – mining net of pool fees  (611)  - 
Prepaid assets and other current assets  390   - 
Accounts receivable and other receivables  1,470   - 
Accounts payable  (1,554)  164 
Accrued liabilities and other current liabilities  (282)  - 
Net cash used in operating activities- continuing operations  (3,204)  (157)
Net cash used in operating activities – discontinued operations  (626)  (47)
Net cash used in operating activities $(3,830) $(204)
Cash Flows from Investing Activities        
Proceeds from sale of digital assets $5,709  $251 
Pre-funded right in Ostendo  (1,600)  - 
Net cash provided by investing activities -continuing operations  4,109   251 
Net cash provided by investing activities – discontinued operations  -   47 
Net cash provided by investing activities $4,109  $298 
         
Cash Flows from Financing Activities        
Payment of subscription receivable  -   100 
         
Net cash provided by financing activities- continuing operations  -   100 
Net cash provided by financing activities – discontinued operations  -   - 
Net cash provided by financing activities  -   100 
         
Net increase in cash and cash equivalents  279   194 
         
Cash and cash equivalents at beginning of period  659   67 
Cash and cash equivalents at end of period $938  $261 
         
Supplemental disclosure of cash flow information:        
Cash paid for:        
Interest $932  $- 
Income taxes  -   - 
         
Supplemental disclosure of noncash investing and financing activities:        
Conversion of debt to equity $2,909  $- 
Settlement of loan with mining equipment  -   75 
Digital assets received for members interest  -   46 
Distributions of digital assets to members  -   1,521 
Reclassification of equity contracts to liabilities  314   - 

 

        Additional       
  Common Stock  Treasury Stock  Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
Balance - January 1, 2020  482,923  $        -   75,379  $        -  $(11,511) $(8,538) $(20,049)
Shares issued for trademark  2,500   -   -   -   -   -   - 
Net loss  -   -   -   -   -   (1,161)  (1,161)
                             
Balance - March 31, 2020  485,423  $-   75,379  $-  $(11,511) $(9,699) $(21,210)

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


Sysorex, Inc. and Subsidiary

Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)

(Unaudited)

  For the Three Months Ended
March 31,
 
  2021  2020 
Cash Flows from Operating Activities      
Net loss $(1,374)  (1,161)
Adjustment to reconcile net loss to net cash provided by operating activities:        
Depreciation  -   3 
Amortization of intangibles  78   78 
Amortization of right-of-use assets  31   31 
Amortization of debt discount  -   74 
Gain on settlement of liabilities  33   - 
Accrued issuable equity  3   (8)
Changes in operating assets and liabilities:        
Accounts receivable and other receivables  1,850   1,426 
Prepaid assets and other current assets  (1,971)  3 
Accounts payable  (1,268)  (1,166)
Accrued liabilities  540   8 
Deferred revenue  (20)  136 
Payment on lease obligations  (27)  - 
Total Adjustments  (751)  585 
         
Net Cash Used In Operating Activities  (2,125)  (576)
         
Cash Flows From Financing Activities        
         
Related party advances  117   298 
Net payments to revolver line of credit  (324)  (138)
Proceeds from short-term debt note  2,200   319 
Repayments on short-term debt note  -   (207)
         
Net Cash Provided by Financing Activities  1,993   548 
         
Net Decrease in Cash  (132)  (28)
         
Cash – beginning of period  167   28 
         
Cash – end of period $35  $- 
         
Supplemental Disclosure of Cash Flow Information:        
Cash paid for:        
Interest $25  $- 
Income taxes $-  $- 
Supplemental Disclosure of non-cash investing and financing activities:        
Common shares issued for short-term debt payment $19  $- 

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


SYSOREX, INC. AND SUBSIDIARYSUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 1 — Nature and description of Business

Description of Business the Spin-Off and Going Concern and Management’s Plans

Description of Business

Sysorex, Inc., through is a technology company focused on Ethereum mining and the Ethereum blockchain and information technology solutions primarily in the public sector segments including federal, state and local governments. The Company has two wholly owned subsidiaries: TTM Digital Assets & Technologies, Inc. (“TTM Digital”) and Sysorex Government Services, Inc. (“SGS”). Following the Company’s Merger with TTM Digital in April 2021, the Company shifted its business focus to the mining of Ethereum and opportunities related to the Ethereum blockchain. In addition to the mining of Ethereum, the Company continues to operate its wholly owned subsidiary, Sysorex Government Services, Inc., formerly known as (f/k/a) Inpixon Federal, Inc. (“SGS”), (unless otherwise stated or the context otherwise requires, the terms “SGS” “we,” “us,” “our” and the “Company” refer collectively to Sysorex, Inc. and SGS),SGS, a business that provides information technology products, solutions, primarilyand services to federal, state, and local government, including system integrators. SGS provides these services to enable its customers to manage, protect, and monetize their enterprise assets whether on-premises, in the public sector. These solutions include cybersecurity, professional services, engineering support, IT consulting, enterprise level technology, networking, wireless, help desk, and custom IT solutions.cloud, or via mobile technology. The Company is headquartered in Virginia.

TTM Digital was originally formed as a Delaware limited liability company on June 28, 2017, under the name of TTM Ventures LLC. Thereafter, on March 30, 2021, it filed a certificate of conversion to a non-Delaware entity with the Secretary of State of the State of Delaware together with Articles of Conversion and Articles of Incorporation with the Nevada Secretary of State filed on the same date. As a result, of such conversion, TTM Digital has become a Nevada corporation under the name of “TTM Digital Assets & Technologies, Inc.

 

Going Concern and Management’s PlansHeads of Terms Agreement

 

On March 24, 2022, Sysorex, Inc. (“Company”) executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which includes certain binding and non-binding provisions. Pursuant to the Heads of Terms, the Company and Ostendo agreed to certain terms related to the Company’s sale of approximately 75% of its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The Assets to be sold will not include the Company’s Ether funds generated prior to and held at Closing and any graphics processing units or associated assets maintained and operated by the Company at a co-located facility in North Carolina. The definitive terms of the sale of Assets will be set forth in definitive transaction agreements (the “Definitive Documentation”) to be executed by the parties.

The Purchase Price shall be comprised of the issuance to the Company of 7,125,000 fully paid, non-assessable shares of Ostendo preferred stock (“Shares”). The Shares shall be of a newly created series of preferred stock. The Shares shall not be transferable by the Company and may not be distributed by dividend or otherwise by the Company until such time as the earlier of the following shall occur: (i) Ostendo completes an underwritten initial public offering of its common stock pursuant to a registration statement under the Securities Act of 1933, as amended, or similar law of a foreign jurisdiction, (ii) Ostendo’s outstanding shares of capital stock are exchanged for or otherwise converted into securities that are publicly listed, pursuant to a transaction governing such exchange or conversion, on a national securities exchange, including through a merger (including a reverse merger), acquisition, business combination or similar transaction, in one transaction or series of related transactions, and including a transaction or series of related transactions involving a vehicle commonly known as a special purpose acquisition company (SPAC) (“Public Listing”), (iii) a “change in control” event with at least 50% plus 1 share of Ostendo’s issued and outstanding capital stock being sold to an unaffiliated third-party, or (iv) Ostendo undergoing a liquidity or other event that necessitates the transfer of the Shares (each, a “Transfer Event”). Upon the occurrence of a Transfer Event, the Company shall have the right to transfer the Shares. Pursuant to the Heads of Term agreement, the Company agreed to transfer 312,500 shares to Bespoke Growth Partners, Inc. and 1,562,500 shares to Omniverse LLC, Accordingly, following the closing, the Company will hold 5,250,000 shares, Bespoke Growth Partners, Inc. will hold 312,500 shares and Omniverse LLC will hold 1,562,500 shares.

As of May 23, 2022, the parties will either (i) execute Definitive Documentation regarding the TTM Digital Asset sale and close the TTM Digital Asset sale or (ii) extend the closing date of the TTM Digital Asset sale. The closing of the TTM Digital Asset sale will be subject to the satisfaction or waiver of customary closing conditions.

Additionally, pursuant to the Heads of Terms, the Company has agreed to make a non-refundable deposit of $1,600,000 (“Deposit”) to be credited toward the purchase of an additional 166,667 shares of Ostendo’s preferred stock, which will be of the same series as the Shares and will have the same terms (“Purchased Shares”). The Purchased Shares will be issued to the Company at closing and at the same time the other Shares are issued in accordance with a standard securities purchase agreement. The Company paid the non-refundable deposit on March 25, 2022.

Note 2 — Going Concern

As of March 31, 2021,2022, the Company had an approximate cash balance of $0.9 million, a working capital deficit of approximately $12.8 million. In addition, the Company has a stockholders’$22.7 million, and an accumulated deficit of approximately $25.0$52.3 million. For the three months ended March 31, 2021 and 2020, the Company incurred net losses of approximately $1.4 million and $1.2 million, respectively. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern.concern for the next twelve months from the date of issuance of these unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued.


The Company does not believe that its capital resources as of March 31, 2021,2022, its ability to mine cryptocurrency, its expected sale of certain mining assets and data center, its ability to settle convertible debt obligations through issuance of the Company’s shares, availability on the SGS SouthStar credit facility to finance purchase orders and invoices, funds from financing from our related party note (as defined in Note 8 below) and other short-term borrowings, higher margin public sector contracts capture, reauthorization of key vendors and credit limitation improvements will be sufficient to fund planned operations during the year ending December 31, 2021.operations. As a result, the Company will need additional funds to support its obligations for the next twelve months from the date these financial statements are made available.months. The Company is exploringcontinues to explore a number of other possible solutions to its financing needs, including additional efforts to raise additional capital as needed, through the issuance of equity, equity-linked or debt securities, as well as possible transactions with other companies, strategic partnerships, and other mechanisms for addressing our financial condition. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern, is dependent upon the ability to attain funding to secure additional resources to generate sufficient revenues and increased margin, which without these represent the principal conditions that raise substantial doubt about our ability to continue as a going concern.

On April 14, 2021, Sysorex consummated a reverse triangular merger (“Merger”) with TTM Digital Assets & Technologies, Inc. (“TTM”), a data center owner and operator and now, the largest U.S. publicly traded Ethereum mining company based in the United States with operations in New York and North Carolina. In connection with the Merger, the shareholders of TTM exchanged 100% of TTM’s share capital for 124,218,268 shares of Sysorex common stock, which represented approximately 82% of the total share capital of Sysorex. As a closing condition to the Merger, a significant portion of the Company’s existing debtholders, creditors and service providers agreed to convert or exchange their outstanding indebtedness or accounts payable, as applicable, eliminating at least $13,500,000 of Sysorex debt, substantially improving Sysorex’s balance sheet and significantly increasing Sysorex shareholders’ equity. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of debt to equity.

The Company’s consolidated financial statements as of March 31, 2021 do not include any adjustments that might result from the outcome of this uncertainty.   

Impact of COVID 19

The outbreak of the novel coronavirus, SARS-CoV-2, which causes coronavirus disease 2019 (COVID-19), has evolved into a global pandemic. COVID -19 has spread to many regions of the world, including the United States. In response to the pandemic, the Company has implemented a work from home policy, with all employees continuing their work outside of the Company’s office. COVID-19 is causing disruption and curtailment of our product offering and services due to our customers, predominantly the Federal and local governments have closed offices and field locations.

The Company is maintaining its overall headcount but continues to identify potential reductions in cash flows for operating expenses and other purchases to the extent possible. On May 3, 2020, the Company received a loan of $349,693 under the Payroll Protection Program as part of the Coronavirus Aid, Relief and Economic Security Act. While the Company expects some degree of an adverse impact on revenues in the second quarter of 2021,addition, the Company will need to implementincrease its plan as discussed aboveauthorized common stock to potentially settle convertible debt conversions.

If the Company is unable to raise additional capital on terms acceptable to the Company and on a timely basis, the Company will be required to downsize or wind down its operations through liquidation, bankruptcy, or sale of its assets. In addition, the Ethereum network is in Going Concernthe process of implementing software upgrades and Management’s Plans. See Note 8 - Subsequent events-regarding forgivenessother changes to its protocol, which are intended to be a new iteration of the $349,693 loan.

Ethereum network that changes its consensus mechanism from “proof of work” to “proof of stake”, which may decrease the reliance on computing power as an advantage to validating blocks. The move to a proof of stake mechanism will shift the network from mining utilizing computing power to staking, in which Ethereum holders can deposit their Ethereum in exchange for rewards. The switch to a proof of stake model would adversely affect the Company’s operations and ability to sustain operations as it would make the Company’s mining equipment obsolete. In addition, as of March 31, 2022, the Company has been reliant on its ability to liquidate Ethereum to continue to fund operations when needed, and as such, the Company does not currently have enough Ethereum on hand to fund operations through a proof of stake model.


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 23 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) for interim financial information, which are the accounting principles that are generally accepted in the United States of America.America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the three-month periodthree months ended March 31, 2021 is2022, are not necessarily indicative of the results to be expected for the year ending December 31, 2021.2022. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes for the years ended December 31, 20202021, and 20192020 included in Amendment No. 1 to the Company’s Annual Report on Form 10-K10-K/A filed with SECthe Securities and Exchange Commission (the “SEC”) on March 29, 2021.May 23, 2022.

 

The Company’s significant accounting policies are discussed in Note 34 of the unaudited condensed consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

TTM Digital Reverse Merger and Sysorex Recapitalization

On April 8, 2021, the Company, TTM Digital, and TTM Acquisition Corp., a Nevada corporation, and, a wholly owned subsidiary of Sysorex (“MergerSub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, the parties agreed that Sysorex would acquire TTM Digital by way of a reverse triangular merger, subject to certain closing conditions (the “Merger”). On April 14, 2021 (the “Effective Time”), the closing conditions delineated in the Merger Agreement were satisfied and the Merger closed. At the Effective Time, the MergerSub was merged with and into TTM Digital with TTM Digital surviving the Merger.

Under the terms of the Merger Agreement, the shareholders of TTM Digital received a right to receive an aggregate of 124,218,268 shares of Sysorex common stock, $0.00001 par value per share (the “Merger Shares”) in exchange for their shares of TTM Digital. Simultaneously, upon the issuance of the Merger Shares to the TTM Digital shareholders, Sysorex was issued all of the authorized capital of TTM Digital and TTM Digital became a wholly owned subsidiary of Sysorex (together, the “Combined Company”). The Merger resulted in a change of control, with the shareholders of TTM Digital receiving that number of Merger Shares equal to approximately eighty percent (80%) of the outstanding shares of capital stock of Sysorex including the effect of the Sysorex Recapitalization as discussed in TTM Digital Reverse Merger and Sysorex Recapitalization. Due to the TTM Digital shareholders acquiring a controlling interest in Sysorex after the merger, the transaction was accounted for as a reverse acquisition for accounting purposes, with TTM Digital being the accounting acquirer and reporting entity. Therefore, the historical amounts presented prior to the Merger are those of TTM Digital. The Merger is accounted for under the acquisition method of accounting applied to Sysorex as the accounting acquiree under the guidance of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations (“ASC 805”). In accordance with acquisition method guidance under ASC 805, the purchase consideration was $0.3 million.


As discussed in Note 5 Segment Reporting after the completion of the Merger the Company reports two segments (“TTM Digital” and “Sysorex Government Services”) which are also defined as reporting units for impairment assessment purposes. As TTM Digital met the definition of discontinued operations, segment reporting disclosures have been omitted, as permitted by ASC 280 Segment Reporting. See Note 5, Segment Reporting and Note 6, Discontinued Operations for additional information.

Pro Forma Financial Information

The following proforma results of operations are presented for information purposes only and include the results of TTM Digital that are reported in discontinued operations in Note 6. The proforma results of operations are not intended to present actual results that would have been attained had the reverse merger and Sysorex Recapitalization been completed as of January 1, 2021, or to project potential operating results as of any future date or for any future periods.

  March 31, 
  2022  2021 
       
Total Revenues $7,077  $3,425 
         
Net Loss  (3,669)  (20)
         
Net Loss per share – basic and diluted  (0.021)  - 
         
Weighted Average Shares Outstanding – basic and diluted  174,980,542   83,039,900 

Discontinued Operations

As discussed in Note 6 – Discontinued Operation, the Company made the decision to divest certain mining equipment and the data center of the TTM Digital reporting unit (“TTM Assets”) and commenced discussions with a third party to execute an asset sale. As a result of the decision to divest certain operating assets of the TTM Digital reporting unit, the Company has determined that the subject assets met the definition of assets held for sale as defined by ASC 205-20 – Presentation of Financial Statements – Discontinued Operations. As of December 31, 2021, the Company determined the TTM Assets represented discontinued operations as it constituted a disposal of a significant component and a strategic shift that will have a material effect on the Company’s operations and financial results. As a result, the Company reclassified the balances and activities of the TTM Assets from their historical presentation to assets held for sale and assets and liabilities – discontinued operations on the Condensed Consolidated balance sheets and to loss from discontinued operations on the Condensed Consolidated statements of operations for the periods presented. As of the date of this report, no transaction has been consummated.


Note 4 — Summary of Significant Accounting Policies

Principles of Consolidation

The unaudited condensed consolidated financial statements have been prepared using the accounting records of Sysorex, TTM Digital and SGS. All material inter-company balances and transactions have been eliminated.eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with 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 allowance for doubtful accounts;Revenue recognition
Fair value of digital assets
   
 Fair value of the valuation allowance for the deferred tax asset; andCompany’s common stock
the impairmentExpected useful lives and valuation of long-lived assets.assets
Fair value of derivative liabilities

Mining Equipment

Mining equipment is stated at cost. Depreciation is computed using the straight-line method regardless of the category of asset. The Company has determined that the useful life of graphics processing units (“GPUs”) is 3-years and remaining mining equipment (primarily chassis, power supply units, computer memory, motherboards, risers, and fans) is depreciated over the estimated useful life of 5-years.

Expenditures for repairs and maintenance are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in the statement of operations.

The rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its transaction verification servers are influenced by several factors including the following:

-the complexity of the transaction verification process which is driven by the algorithms contained within the Ethereum open-source software;

-the general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured in Terahash units); and

-technological obsolescence reflecting rapid development in the transaction verification server industry such that more recently developed hardware is more economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs. i.e., the speed of hardware evolution in the industry is such that later hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.


The Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Management will review this estimate quarterly and will revise such estimates as and when data comes available.

To the extent that any of the assumptions underlying management’s estimate of useful life of its mining equipment are subject to revision in a future reporting period either because of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.

Impairment of Long-lived Assets

The Company reviews its long-lived assets, including mining equipment, for impairment whenever events or changes in circumstances indicate the carrying value of an asset or group of assets may not be recoverable. The carrying amount is considered not recoverable if the sum of the undiscounted cash flows to be generated from the use and eventual disposition of the asset group is less than the carrying amount of the asset group. If the carrying amount exceeds the undiscounted cash flows, then the carrying amount is compared to the fair value and an impairment loss is recorded for the difference between the fair value and the carrying amount. No impairment charges were identified for long-lived assets during the periods ended March 31, 2022, or March 31, 2021.

Revenue Recognition

The Company reports revenues under ASC 606, “Revenue from Contracts with Customers” and all the related amendments (Topic 606)

The Company recognizes revenue after applyingin accordance with ASC 606, the followingcore principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five steps:basic criteria must be met before revenue can be recognized:

1)identificationIdentification of the contract, or contracts, with a customer;

2)identificationIdentification of the performance obligations in the contract, including whether they are distinct within the context of the contract;

3)determinationDetermination of the transaction price, including the constraint on variable consideration;price;

4)allocationAllocation of the transaction price to the performance obligations in the contract; and

5)recognitionRecognition of revenue when, or as, the Company satisfies a performance obligations are satisfied.obligation.

Mining Revenue

TTM Digital has entered into mining pools with the operators to provide computing power to the mining pool. The Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less transaction fees to the mining pool operator) for successfully adding a block to the blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of such computing power is the only performance obligation in the Company’s contracts with mining pool operators The transaction consideration the Company receives, if any, is non-cash consideration. The transaction price of the Company’s share of the cryptocurrency award is measured at fair value on the date received, which is not materially different than the fair value at the time the Company has earned the award from the mining pool. The consideration is all variable under the definition within ASC 606. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the Company successfully places a block and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.


Fair value of the digital asset award received is determined using the quoted price of the related digital asset at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could impact the Company’s Condensed Consolidated financial position and results from operations.

Hardware and Software Revenue Recognition

The CompanySGS is a primary resale channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers and wholesale distributors.

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified product or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 3 — Summary of Significant Accounting Policies (cont.)

The Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically specify F.O.B. destination.

The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouse. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross basis.

The Company may provide integration of products from multiple vendors as a solution it sells to the customer. In this arrangement, the Company provides direct warranty to the customer with the Company’s own personnel as the customer requires warranty on the solution and not individual vendor products. This type of warranty is sold integral to the overall solution quoted to the customer. The Company considers these service-type warranties to be performance obligations of the principal from the underlying products that make up a solution and therefore is acting as a principal in the transaction and records revenue on a gross basis at the point of sale.over time.

 

License and Maintenance Services Revenue Recognition

The CompanySGS provides a customized design and configuration solution for its customers and in this capacity resells hardware, software and other IT equipment license and maintenance services in exchange for fixed fees. The Company selects the vendors and sells the products and services, including maintenance services, that best fit the customer’s needs. For sales of maintenance services and warranties, the customer obtains control at the point in time that the services to be provided by a third-party vendor are purchased by the customer and therefore the Company’s performance obligation to provide the overall systems solution is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer-approved invoice.


For resale of services, including maintenance services, warranties, and extended warranties, the Company is acting as an agent as the primary activity for those services are fulfilled by a third party. While the Company may facilitate and act as a first responder for these services, the third-party service providers perform the primary maintenance and warranty services for the customer. Therefore, the Company is not primarily responsible for performing these services and revenue is recorded on a net basis.

Professional Services Revenue Recognition

The Company’sSGS’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three months ended March 31, 2021 and 2020, the Company2022, SGS did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term contracts are derived principally with various United States government agencies.

Contract Balances

The timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had deferred revenue of $0.9 million as of March 31, 2022, and December 31, 2021.

Accounts Receivable, net

Account receivables are stated at the amount the Company expects to collect. The Company recognizes an allowance for doubtful accounts to ensure accounts receivables are not overstated due to un-collectability. Bad debt reserves are maintained for various customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings, or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. The Company’s allowance for doubtful accounts was $0.05 million as of March 31, 2022, and December 31, 2021.


Digital Assets

Digital assets (predominantly Ethereum) are included in current assets in the accompanying Condensed Consolidated balance sheets. The classification of digital assets as a current asset has been made after the Company’s consideration of the consistent daily trading volume on cryptocurrency exchange markets, there are no limitations or restrictions on Company’s ability to sell Ethereum, and the pattern of actual sales of Ethereum by the Company. Digital assets purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed above.

Digital assets held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital asset at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. During the three months ended March 31, 2022, and March 31, 2021, the Company recorded impairment of $1.2 million and $0, respectively.

 


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCHDigital assets awarded to the Company through its mining activities are included within operating activities on the accompanying Condensed Consolidated statements of cash flows. The sales of digital assets are included within investing activities in the accompanying Condensed Consolidated statements of cash flows. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting. The Company recognized realized gains of $1.1 million for the three months ended March 31, 2022. The Company recognized realized gains through the sale and disbursement of digital assets during the three-month period ended March 31, 2021, AND 2020of $0.08 million.

 

NoteInvestments

The Company accounts for its investments that represent less than 20% ownership, and for which the Company does not have the ability to exercise significant influence, using the FASB’s Accounting Standards Update (“ASU”) 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The Company measures investments in equity securities without a readily determinable fair value using a measurement alternative that measures these securities at the cost method minus impairment, if any, plus or minus changes resulting from observable price changes on a non-recurring basis. Gains and losses on these securities are recognized in other income and expenses. As of March 31, 2022, and December 31, 2021, the Company’s equity investment is classified as assets held for sale. In addition, the Company accounts for its prefunded right in Ostendo at cost, less impairment.


Fair Value

The Company follows the accounting guidance under FASB’s ASC 820, Fair Value Measurements for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 — quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and

Level 3 — Summaryassets and liabilities whose significant value drivers are unobservable.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of Significant Accounting Policies (cont.)the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment.

The carrying amounts of the Company’s financial assets and liabilities, such as cash and cash equivalents, accounts receivable, accrued liabilities, and accounts payable, approximate fair value due to the short-term nature of these instruments.


Derivative Liabilities

The Company evaluates its convertible instruments, options, warrants, or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, Derivatives and Hedging. The Company evaluates whether the amount of common stock on a as converted basis is in excess of its authorized share total which, if in excess, would result in derivative accounting treatment. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to a liability at the fair value of the instrument on the reclassification date.

Held for Sale and Discontinued Operations Classification

The Company classifies a business as held for sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is probable and the business is being marketed at a reasonable price in relation to its fair value.

Newly acquired businesses that meet the held-for-sale classification criteria upon acquisition are reported as discontinued operations. Upon a business’ classification as held for sale, net assets are measured for impairment. Goodwill impairment is measured in accordance with the method described in the accounting policy. An impairment loss is recorded for long-lived assets held for sale when the carrying amount of the asset exceeds its fair value less cost to sell. Other assets and liabilities are generally measured for impairment by comparing their carrying values to their respective fair values. A long-lived asset shall not be depreciated or amortized while it is classified as held for sale.


Convertible Debt

The Company’s debt instruments contain a host liability, freestanding warrants, and an embedded conversion feature. The Company uses the guidance under FASB ASC Topic 815 Derivatives and Hedging (“ASC 815”) to determine if the embedded conversion feature must be bifurcated and separately accounted for as a derivative under ASC 815. It also determines whether any embedded conversion features requiring bifurcation and/or freestanding warrants qualify for any scope exceptions contained within ASC 815. Generally, contracts issued or held by a reporting entity that are both (i) indexed to its own stock, and (ii) classified in shareholders equity, would not be considered a derivative for the purposes of applying ASC 815. Any embedded conversion features and/or freestanding warrants that do not meet the scope exception noted above are classified as derivative liabilities, initially measured at fair value, and remeasured at fair value each reporting period with change in fair value recognized in the Condensed Consolidated statements of operations. Any embedded conversion features and/or freestanding warrants that meet the scope exception under ASC 815 are initially recorded at their relative fair value in paid-in-capital and are not remeasured at fair value in future periods.

The host debt instrument is initially recorded at its relative fair value in long-term debt. The host debt instrument is accounted for in accordance with guidance applicable to non-convertible debt under FASB ASC Topic 470 Debt (“ASC 470”) and is accreted to its face value over the term of the debt with accretion expense and periodic interest expense recorded in the unaudited condensed consolidated statements of operations.

Issuance costs are allocated to each instrument in the same proportion as the proceeds that are allocated to each instrument. Issuance costs allocated to the debt hosted instrument are netted against the proceeds allocated to the debt host. Issuance costs allocated to freestanding warrants classified in equity are recorded in paid-in-capital.


Net Loss per Share

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus potentially dilutive common shares. Convertible debt, restricted stock, stock options and warrants are excluded from the diluted net loss per share calculation when their impact is antidilutive. The Company reported a net loss for the three months ended March 31, 2022, and as a result, all potentially dilutive common shares are considered antidilutive for this period.

The Company includes potentially issuable shares in the Weighted-average common shares – basic that include warrants and other agreements that are exercisable for little or no consideration without substantive contingencies and others once any contingencies relative to the issuance of the shares is resolved.

Computations of basic and diluted weighted average common shares outstanding were as follows for the periods reported:

  March 31, 
  2022  2021 
       
Weighted-average common shares outstanding  171,980,542   81,039,900 
         
Weighted-average potential common shares considered outstanding  3,000,000   2,000,000 
         
Weighted-average common shares outstanding – basic  174,980,542   83,039,900 
         
Dilutive effect of options, warrants and restricted stock  -   - 
         
Weighted-average common shares outstanding – diluted  174,980,542   83,039,900 
         
Options, restricted stock, and warrants and convertible debt excluded from the computation of diluted loss per share because the effect of inclusion would be anti-dilutive  138,922,213   - 


Emerging Growth Company

Sysorex is an “emerging growth company” as defined in the JOBS Act.Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). As such, Sysorex will beis eligible to take advantage of certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies, including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.Act of 2002, as amended. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, for complying with new or revised accounting standards, meaning that Sysorex, as an emerging growth company, can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Sysorex has elected to take advantage of this extended transition period, and therefore our financial statements may not be comparable to those of companies that comply with such new or revised accounting standards.

Note 5 — Segment Reporting

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (CODM) for purposes of allocating resources and evaluating financial performance. The Company’s CODM is the chief financial officer who reviews financial information presented at the subsidiary level for purposes of allocating resources and evaluating financial performance. As such, the Company’s operations constitute two (2) operating segments and two (2) reportable segments.

The following table reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is primarily based on revenue and gross profit. These results are used, in part, by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments. The CODM does not evaluate performance or allocate resources based on segment asset data, and therefore such information is not included.

The following tables provide a summary of the revenue, and cost of revenue from continuing operations for our subsidiary segments for the three months ended March 31, 2022 (in thousands):

For the Three Months Ended March 31, 2022
Revenues TTM
Digital
  Sysorex
Government
Services
  Condensed
Consolidated
 
Products Revenue $-  $4,529  $4,529 
Services Revenue  -   508   508 
Mining Income  765   -   765 
Total Revenues $765  $5,037  $5,802 
             
Product Cost $-  $2,015  $2,015 
Services Cost  -   262   262 
Mining Cost  144   -   144 
Other Operating Expenses $3,908  $1,894  $5,802 
             
Operating Income (Loss) $(3,287) $866  $(2,421)
             
Total Segment Assets $5,741  $8,859  $14,600 

 


Subsequent Events

Note 6 — Discontinued Operations

In December 2021, the Company made the decision to divest certain mining equipment, graphic processing units and data center and its assets of TTM Digital reporting unit (“TTM Assets”) and commenced discussions with a third party to execute an asset sale. On March 24, 2022, Company executed Heads of Terms agreement with a third party which includes certain binding and non-binding provisions. Pursuant to the Heads of Terms, the Company and the third party agreed to certain terms related to the Company’s sale of approximately 75% of its Ethereum mining assets and certain associated real property. The Assets to be sold are those assets located in the facility in New York. The Company evaluates events and/will continue to operate certain graphics processing units or transactions occurring after the balance sheet date and before the issue dateassociated assets at a co-located facility in North Carolina.

As a result of the condensed consolidateddecision to divest certain operating assets of the TTM Digital reporting unit, the Company has determined that subject assets met the definition of assets held for sale as defined by ASC 205-20 – Presentation of Financial Statements – Discontinued Operations. The Company determined the TTM Assets represented discontinued operations as it constituted a disposal of a significant component and a strategic shift that will have a material effect on the Company’s operations and financial results. As a result, the Company reclassified the balances and activities of the TTM Assets from their historical presentation to assets held for sale and assets and liabilities – discontinued operations on the Condensed Consolidated balance sheets and to loss from discontinued operations on the Condensed Consolidated statements of operations for the periods presented.


The carrying value of the TTM Digital asset disposal group was $6.1 million as of March 31, 2022, and December 31, 2021. No adjustments were recorded to determine if anythe carrying value of those events and/or transactions requires adjustment to or disclosure in the condensed consolidated financial statements.assets held for sale as the estimated fair value less selling costs exceeded the carrying value. The following table details the assets and liabilities of the Company’s TTM Assets that were classified as assets held for sale and discontinued operations for the periods presented (in thousands):

  March 31,  December 31, 
  2022  2021 
Current Assets      
       
Mining equipment and facilities, net  $5,571   $5,571 
Investment in Style Hunter  500   500 
Total Current Assets $6,071  $6,071 
         
Total Assets associated with discontinued operations $6,071  $6,071 

The following table presents the TTM Digital assets statement of operations line items classified as discontinued operations included within loss from discontinued operations for the three-months ended March 31, 2022, and 2021 (in thousands):

 

  2022  2021 
Revenues      
Mining income $1,275  $2,018 
Total revenues  1,275   2,018 
         
Operating costs and expenses        
Mining cost  383   131 
General and administrative  256   - 
Depreciation  -   199 
Total operating costs and expenses  639   330 
         
Gain from Operations  636   1,688 
         
Other Income (Expenses)        
Loss on sale of fixed assets  -   (8)
     
         
Income before taxes and equity method investee  636   1,680 
         
Provision for income taxes  -   - 
         
Income before equity method investee  636   1,680 
         
Share of net loss of equity method investee  -   3 
   -     
Net income from discontinued operations $636  $1,683 

The following table summarizes the net cash flows from discontinued operations of TTM Digital (in thousands):

  For the Three Months
Ended March 31,
 
  2022  2021 
Net cash used in operating activities -discontinued operations  (626)  (47)
Net cash provided by investing activities – discontinued operations  -   47 
Net cash provided by financing activities – discontinued operations  -   - 


SYSOREX, INC. AND SUBSIDIARY

Note 7 — Mining Equipment, net

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Mining equipment, net, was comprised of the following (in thousands of dollars):

FOR THE THREE MONTHS ENDED MARCH

  Balance as of 
  March 31,  December 31, 
  2022  2021 
Gross Mining Equipment:      
Mining Equipment (non-GPUs) $493  $493 
GPUs  6,033   6,033 
Accumulated Depreciation:        
Mining Equipment (non-GPUs)  (164)  (123)
 GPUs             (2,742)  (2,326)
Mining Equipment, net $3,620  $4,077 

An Ethereum mining server consists of multiple commodity Graphics Processing Units (GPUs) and ancillary components such as chassis, CPU, motherboard, and power supply. The GPUs are solely responsible for the compute power to generate the cryptographic hashes for mining, while the other components act to support the system. Depreciation expense was approximately $0.5 million for the three months ended March 31, 2022.

Note 8 — Intangible Assets

Intangible assets as of March 31, 2022, consist of the following:

  Gross     Net 
  Carrying  Accumulated  Carrying 
  Amount  Amortization  Amount 
Trade name $1,060  $(100) $960 
Customer relationships  1,900   (451)  1,449 
Total intangible assets $2,960  $(551) $2,409 

Intangible assets as of December 31, 2021, AND 2020consist of the following:

 

  Gross     Net 
  Carrying  Accumulated  Carrying 
  Amount  Amortization  Amount 
Trade name $1,060  $(74) $986 
Customer relationships  1,900   (333)  1,567 
Total intangible assets $2,960  $(407) $2,553 

The estimated future amortization expense associated with intangible assets is as follows:

Calendar Years Ending December 31, Amount 
2022  430 
2023  573 
2024  573 
2025  266 
Thereafter  567 
Total $2,409 


Note 49 — Credit Risk and Concentrations

Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash. The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently, believes that its accounts receivable credit risk exposure beyond such allowances is limited.

The Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash.

The following table sets forth the percentages of revenuesales derived by the CompanySGS from those customers that accounted for at least 10% of revenuessales during the three months ended March 31, 2021 and 20202022 (in thousands of dollars):

  For the Three Months
Ended
 
  March 31, 2022 
  $  % 
Customer A $3,583   72%
Customer B $1,170   24%

 

  For the Three Months Ended
March 31, 2021
  For the Three Months Ended
March 31, 2020
 
  $  %  $  % 
Customer A  509   41%  1,121   49%
Customer B  348   28%  576   25%
Customer C  169   14%  -   - 
Customer D  169   14%  -   - 

As of March 31, 2021,2022, Customer A rand customer B represented 73% and 27%approximately 88% of total accounts receivable, respectively.receivable. One other customer represents approximately 11% of total accounts receivable.

 

For the three months ended March 31, 2021, purchases from three vendors2022, one vendor represented approximately 41%, 28%, and 14%82% of total purchases. Purchases from these vendorsthis vendor during the three months ended March 31, 2022, was approximately $3.2 million.

Geographic and Technology Concentration

The Company had geographic concentration risk with mining operations being exclusively carried out within New York in the first quarter of 2022 and throughout 2021, were $472 thousand, $352 thousand,while the Company has added geographic diversity during April 2021 using a colocation datacenter in North Carolina. Any legislation that restricts or bans the mining of proof-of-work related digital asset mining in New York State would have a negative impact on the Company’s ability to operate and $158 thousand. generate revenues.

Further, the Company had concentrated exposure to the Ethereum blockchain infrastructure through its mining operations during the periods presented. There is a possibility of digital asset mining algorithms transitioning to proof-of-stake validation and other mining related risks, which could make us less competitive and ultimately adversely affect our business and our ability to generate revenues. When and if Ethereum switches to proof-of stake the Company’s GPUs will no longer be able to mine Ethereum. Additionally, on August 5, 2021, the London Hard Fork protocol went into effect which includes changes in Ethereum’s handling of transaction fees. These changes had an impact on the Company’s future potential Ethereum revenue stream due to less Ethereum being distributed per mined block, if not offset by an increase in the value of ETH and/or additional transaction tipping, the process by which a user can pay an additional amount to ensure a transaction is processed very quickly. The Company saw a financial impact during the quarter ended March 31, 2022. While the Company doubled mining capacity in the first half of 2021, the difficulty to mine increased. This resulted in a steady decrease of average mining rewards, along with the market price of Ethereum, particularly during the second half of 2021 and into the first quarter of 2022.


Note 10 — Convertible Debentures & Warrants

Convertible debt as of March 31, 2022, consisted of the following (in thousands):

  March 31,  December 31, 
   2022   2021 
         
Convertible Debentures & Warrants, including interest payable to the Convertible Debenture Holders $17,721  $19,439 

2021 Convertible Debentures & Warrants

On July 7, 2021, the Company consummated the initial closing of a private placement offering (the “Offering”) pursuant to the terms and conditions of a Securities Purchase Agreement for up to $15,187,500 in principal amount (“Original Principal Value”) Convertible Debentures. To manage the administration of the Offering the Company entered into a placement agency agreement with Joseph Gunner & Co. LLC, a U.S. registered broker-dealer (“Placement Agent”). At the initial closing, the Company sold the purchasers (i) 12.5% Original Issue Discount Convertible Debentures (“Debentures”) in an aggregate principal amount of $9,990,000 and (ii) warrants to purchase up to 3,534,751 shares of common stock of the Company. The Company received total gross proceeds of $8,880,000 taking into account the 12.5% discount before deducting placement agent fees and expenses of approximately $913,000. The Debentures mature on July 7, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder.

On August 13, 2021, the Company consummated the second closing of the offering pursuant to the same terms and conditions of the Securities Purchase Agreement dated July 7, 2021. At the second closing, the Company sold the purchasers (i) 12.5% Original Issue Discount Senior Secured Convertible Debentures in an aggregate principal amount of $3,976,875 and (ii) warrants to purchase up to 1,862,279 shares of common stock of the Company. The Company received a total of $3,535,000 in gross proceeds following the second closing taking into account the 12 % discount before deducting placement agent fees and expenses of approximately $354,000. The Debentures mature on August 13, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder.

Under the conversion terms of the Debentures, the Debenture is convertible, in whole or in part, into shares of Common Stock at the option of the Holder at any time until the Debenture is no longer outstanding. The Holder executes a conversion by delivering to the Company a Notice of Conversion specifying the principal amount to be converted and the date on which the conversion is to be executed. The Conversion Price is set at the lower of (i) $18.00 and (ii) 80% of the average of the VWAP during the 5 Trading Day period immediately prior to the applicable Conversion Date. The number of Conversion Shares to be issued is determined by dividing the outstanding principal amount of the debenture to be converted by the Conversion Price. The Debentures are subject to mandatory conversion (“Mandatory Conversion”) in the event the Company closes a registered public offering of its Common Stock and receives gross proceeds of not less than $40,000,000 and at the completion of which the Company’s securities are traded on a national exchange (“Qualified Offering”). The Company determined that the conversion feature associated with the convertible debentures should be bifurcated and treated as a separate derivative liability. The Company recorded a revaluation loss of approximately $0.8 million for the three months ended March 31, 2022, for the change in the fair value of the conversion option. As of March 31, 2022, the derivative liability associated with the conversion option was $8.4 million. In addition, during the quarter, the Company recognized an extinguishment loss of approximately $0.5 million as a result of the conversion of debt of $1,590,000 and the settlement of the derivative liability associated with the conversion option of $.8 million.

Debenture Default

The Debentures provide that any monetary judgment filed against the Company for more than $50,000, and if such judgment remains unvacated for a period of 45 calendar days shall constitute an event of default. On December 14, 2021, the Company became aware that a Confession of Judgment (the “Confession of Judgment”) had been entered against the Company in the Superior Court of the State of California, County of Santa Clara by Tech Data on September 24, 2021. The Confession of Judgement was entered for a total sum of $5,942,559.05, which is comprised of the principal sum of $3,341,801.80 and prejudgment interest in the sum of $2,600,757.25. As a result, the Confession of Judgment was deemed to be an event of default under the Debentures although the Company only became aware of the Confession of Judgment on December 14, 2021.

On January 7, 2022, the Company received a notice of default (the “Default Notice”) from the Placement Agent stating that the Company defaulted under the Purchase Agreement as a result of: (i) the Company failing to disclose certain material indebtedness of the Company outstanding as of the date of the Purchase Agreement; and (ii) the filing of a judgment relating to such material indebtedness. Due to such events of default, (i) the Debentures are now deemed to have begun bearing interest at the default interest rate of 18% per annum from the date of the issuance of the Debentures; and (ii) the holders of the Debentures are entitled to receive in satisfaction of the amounts owing under the Debentures an amount equal to 130% of the Original Principal Value of the Debentures (“Default Principal Increase”), in accordance with the terms of the Debentures. In addition, as a result of the events of default, the exercise price for the Warrant is the lower of: (A) $18.00 and (B) an amount equal to fifty percent (50%) of the average of volume-weighted average price for the common stock of the Company over the five (5) trading days preceding the date of the delivery of the applicable exercise notice or (C) the qualified offering price as defined in the Purchase Agreement.

Convertible Debenture Conversion

For the three months ended March 31, 2020, purchases2022, the convertible debenture holders converted approximately $1.6 million of debt owed to them into approximately 72.7 million shares. As a result of the conversions, the Company recorded a loss on debt extinguishment of approximately $0.5 million and settled approximately $0.7 million of the derivative liability associated with the conversion option.


Subsequent to March 31, 2022, convertible debenture holders have converted approximately $2.1 million of debt owed to them into approximately 257.0 million shares of the Company’s common stock.

Note 11 — Fair Value Measurement

Fair value measurements are determined based on assumptions that a market participant would use in pricing an asset or a liability. A three-tiered hierarchy distinguishes between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents the placement in the fair value hierarchy measured at fair value on a recurring basis as of March 31, 2022, and December 31, 2021 (in thousands):

     Fair value measurement at reporting date using 
     Quoted prices in  Significant    
     active markets  other  Significant 
     for identical  observable  unobservable 
  Balance  assets
(Level 1)
  inputs
(Level 2)
  inputs (Level 3) 
As of March 31, 2022:            
Recurring fair value measurements:            
Derivative Liabilities:            
Conversion feature derivative liability $8,424  $    —  $  $8,424 
Common stock derivative liability  314          —   314 
Total derivative liabilities $8,738  $  $  $8,738 
Total recurring fair value measurements $8,738  $  $  $8,738 
                 
As of December 31, 2021                
Recurring fair value measurements                
Derivative liability:                
Conversion feature derivative liability $8,355  $  $  $8,355 
Common stock derivative liability            
Total derivative liabilities $8,355  $  $  $8,355 
Total recurring fair value measurements $8,355  $  $  $8,355 

The conversion feature of the convertible Debentures was separately accounted for at fair value as a derivative liability under guidance in ASC 815 that is remeasured at fair value on a recurring basis using Level 3 inputs. The Company uses a probability weighted expected return model (“PWERM”) valuation technique to measure the fair value of the conversion feature with any changes in the fair value of the conversion feature liability recorded in earnings. Significant inputs to the model include estimated time to conversion events, estimated interest converted at the event, the implied yield, the discount rate for the conversion, and the probability of the conversion events. For the three months ended March 31, 2022, the Company recorded a loss of approximately $0.8 million for the change in fair value of debt conversion feature.

As discussed in Note 13 – Equity below, the Company exceeded its authorized share limit with respect to potentially issuable shares under the equity contracts described with the Share Derivative Liabilities section. The Company estimates the fair value of the Common stock derivative liability based on the fair value of the potentially issuable shares for the warrants, stock options and RSUs vested but unissued. This liability excludes the fair value of the potentially convertible shares for the convertible Debentures which are accounted for through the carrying value of the debt and the separate conversion feature derivative liability.

The Company recorded the common stock derivative liability at fair value as of March 31, 2022, through a transfer from two vendors representedequity to the common stock derivative liability. Changes in the fair value of the liability in future periods will be included in other income (expense) in the consolidated statements of operations.

The change in Level 3 fair value of the Company's derivative liabilities is as follows:

  Conversion
feature
derivative
liability
  Common
stock
derivative
liability
  Total level 3
derivative
liability
 
Balance as of December 31, 2021 $8,355  $-  $8,355 
             
Transferred to equity on debt conversion  (769)  -   (769)
Transferred from equity on recognition of derivative liability  -   314   314 
Increase in fair value included in earnings  838   -   838 
             
Balance as of March 31, 2022 $8,424  $314  $8,738 


Note 12 — Digital Assets

The following table presents the roll forward of digital asset activity from continuing and discontinued operations during the periods ended:

  Three Months Ended 
  March 31, 
  2022  2021 
Opening Balance $5,202  $24 
Revenue from mining  1,983   2,018 
Mining pool operating fees  (20)  (21)
Management fees  -   (322)
Impairment of digital assets  (1,236)  - 
Owners’ distributions  -   (1,521)
Proceeds from sale of digital assets  (5,709)  (251)
Transaction fees  (90)  - 
Realized gain on sale of digital assets  1,107   87 
Ending Balance $1,237  $14 

Note 13 — Equity

As discussed in Note 3 Basis of Presentation the Company completed a reverse merger of Sysorex and TTM Digital with TTM Digital being the accounting acquirer and reporting entity. In a reverse merger, the capital accounts of the reporting entity (TTM Digital) are restated to reflect the legal capital structure of the legal acquirer (Sysorex). As a result, the share data of the reporting entity has been retroactively restated for all periods presented to the equivalent share values of Sysorex for the capital transaction activity of TTM Digital, as if the reverse merger occurred on January 1, 2020. The share data of the reporting entity has been retroactively stated for all periods presented to the equivalent share values of Sysorex. The Company is authorized to issue 499,560,659 shares of common stock, $0.00001 par value, and 10,000,000 shares of preferred stock, $0.00001 par value. The holders of the Company’s common stock are entitled to one vote per share. As of March 31, 2022, 499,560,659 common stock shares were authorized; 237,513,850 shares were issued, and 237,438,471 shares were outstanding. No preferred stock has been designated or issued.

Stock Options

A summary of stock option activity for the three months ended March 31, 2022, is as follows:

  Number of
Options
(in Shares)
  Weighted
Average
Exercise
Price
 
Outstanding, January 1, 2022  1,656,000  $2.00 
Granted  -  $-
Exercised  -   - 
Forfeited or cancelled  -   - 
Outstanding, March 31, 2022  1,656,000  $2.00 
         
Exercisable, March 31, 2022  1,656,000  $2.00 

The Company recognized approximately 43%$0.03 million of stock-based compensation for the quarter ended March 31, 2022. The unrecognized stock-based compensation of $0.3 million will be recorded over the derived service period ending in the second quarter 2024.


Warrants

The following table represents the activity related to the Company’s warrants during the three-month ended March 31, 2022:

Number of
Warrants
(in Shares)
Weighted
Average
Exercise
Price
Outstanding, January 1, 20225,926,763$       *
Granted--
Exercised418,931-
Outstanding, March 31, 20225,507,832$-

The weighted average contractual term as of March 31, 2022, is 4.36 years.

*The exercise price will be determined by a 5-day VWAP price calculation on the exercise date.

Restricted Stock Units

The following table represents the activity related to the Company’s restricted stock awards granted to employees and 36% of total purchases. Purchases from these vendorsdirectors during the three months ended March 31, 2020 were $859 thousand and $724 thousand.2022:

  Number of
Restricted
Stock
Shares
  Weighted
Average
Grant
Price
 
Outstanding, January 1, 2022  1,000,000  $0.40 
Granted  -   - 
Vested  500,000   - 
Unvested, March 31, 2022  500,000  $0.40 

 

As ofThe unrecognized stock compensation at March 31, 2021, two vendors represented approximately 39% and 19%2022 is $0.1 million.


Share Derivative Liabilities

As the amount of total gross accounts payable.


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 5 — Debt

Debtcommon stock on an as converted basis as of March 31, 20212022, exceeded our authorized share amount, the Company’s outstanding warrants, stock options and December 31, 2020 consistedvested but unissued restricted stock shares (“RSUs”) were reclassified to derivative liabilities in the consolidated financial statements. This results in non-cash gains or losses each period during the term of the following (in thousands): 

  As of
March 31,
  As of
December 31,
 
  2021  2020 
Short-Term Debt      
Chicago Venture Convertible Note payable (A) $870  $842 
Wells Fargo N.A. SBA loan (B)  350   350 
Revolving Credit Facility (C)  -   323 
First Choice (F)  5,000   - 
Total Short-Term Debt $6,220  $1,515 
         
Related Party- Quantum Lexicon (E)  201   - 

Long-Term Debt

Systat Promissory Note Payable (D)$3,623$5,390

(A) Chicago Venture Convertible Note Payable

On December 31, 2018,warrants, stock options, RSU vesting period and convertible debt. The table below summarizes the Company issued a $625,000 principal face amount convertible promissory note (the “Convertible Note”) to an investor, which yielded net proceeds of $500,000 to the Company pursuant to a Securities Purchase Agreement, dated as of December 31, 2018, by and between the Company and the investor. The Convertible Note bears interest at the rate of 10% per year and is due and payable 10 months after the date of issuance. The Convertible Note carries an original issue discount of $105,000 and the Company agreed to pay $20,000 to the Lender to cover its transaction costs incurred with the purchase and sale of the Convertible Note.

The agreement states that the Lender has the right to convert all or part of the outstanding balance into fully paid and non-assessable shares of common stock. The conversion formula is as follows: The number of shares will equal the amount of the outstanding note balance being converted divided by $0.05 per share. Since the value of the underlying equity on the commitment date was $0.0229 perreclassified share which was less than the lender conversion price $0.05, the Company determined there was no beneficial conversion feature.

The lender conversion price is subject to certain adjustment such as down-round features whereby the agreement notes that if the Company were to sell, issue or grant any common stock, option to purchase common stock, right to reprice, preferred shares convertible into common stock, or debt, warrants, options or other securities which are convertible, exercisable, or exchangeable for shares of common stock at a price per share less than the lender conversion price, then the lender conversion price shall be reduced to equal the new lower price, subject to a floor of $0.01 per share. When and if there is an adjustment under the down-round provision, the Company will analyze the accounting treatment of the adjustment.

Redemptions may occur at any time after the 6-month anniversary of the date of issuance of the Convertible Note with a minimum redemption price equal to the Conversion Price. If the conversion rate is less than the market price, then the redemptions must be made in cash.

During the three months ended March 31, 2021 the Company issued 84,267 shares of common stock for the settlement of approximately $19,000 on its short-term debt.

Subsequent to March 31, 2021, the Company entered into discussions and a definite agreement to convert its outstanding debt and interest for the common stock of the Company. The balance outstandingderivative liabilities as of March 31, 2021 is $870,413.2022 (dollars in thousands):

  March 31,
2022
 
Warrants $236 
Stock options  66 
RSUs vested but unissued  12 
Total share derivative liability $314 

Note 14 — Commitments and Contingencies

See Note 8 – Subsequent Events, regarding

Contractual Commitments

On September 5, 2017, prior to the merger and discussionas a result of conversiona spinoff from Sysorex’s previous parent, a computer hardware supplier threatened legal action against the Company and demanded approximately $1.8 million for payment of its debt to equity.unpaid invoices. On or about January 29, 2018, the parties executed a settlement agreement resolving the matter. No court action was filed. The liability of approximately $0.6 million has been accrued and includes interest $0.1 million calculated based on a default rate, which is included as a component of accounts payable and accrued liabilities as of March 31, 2022, in the unaudited condensed consolidated balance sheets.

 


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 5 — Debt (cont.)

(B) Wells Fargo N.A. SBA -Payroll Protection program

On May 7, 2020, the Company was grantedJanuary 22, 2018, a loansoftware vendor filed a motion for entry of default judgment (the “Loan”“Motion”) from Wells Fargo, N.A.against SGS in the principalCircuit Court of Fairfax County, Virginia. The Motion alleges that SGS failed to respond to a complaint served on November 22, 2017. The Motion requests a default judgment in the amount of $349,693, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020.

The Loan, which was$336,000 plus $20,000 in the form of a Note dated May 3, 2020 issued by the Company (the “Note”), matures on May 3, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act.

See Note 8 Subsequent Events, regarding notice approval for forgiveness of the debt on April 2, 2021.

(C) Revolving Credit Facility

legal fees. On August 31,10, 2018, the Company entered in an agreement with Payplant Alternatives Funds LLC (“Payplant”), pursuant to which Payplant may purchase from the Borrowers, in Payplant’s sole and absolute discretion, Eligible Receivables, as that term is defined in the agreement, in exchange for cash advances, subject to the terms and conditions in the agreement.

As of May 22, 2020 the Company terminated its services with Payplant.

Non-Recourse Factoring and Security Agreement

Effective as June 19, 2020 (the “Effective Date”), the Company and SouthStar Financial, LLC (“SouthStar”)vendor entered into a Non-Recourse Factoringsettlement agreement and Security Agreement (the “Agreement”) pursuant to which SouthStar may purchase receivables from the Company (the “Purchased Receivables”) foris repaying the debt in monthly installments. The liability of approximately $0.2 million has been accrued and includes interest $0.08 million calculated based on a price not to exceed 85%default rate and is included as a component of the face value of the Purchased Receivables or a lesser percentage agreed upon between the Companyaccounts payable and SouthStar. In consideration of SouthStar’s purchase of the Purchased Receivables, the Company will pay to SouthStar an amount equal to 0.8% of the face amount of the Purchased Receivables for the first 10-day period after payment for the Purchased Receivables is transmitted to SouthStar plus 0.9% for each additional 10-day period or part thereof, calculated from the date of purchase until payments received by SouthStar in collected funds on the Purchased Receivables equals the purchase price of the Purchased Receivables plus all charges due SouthStar from the Company at the time. An additional 1.0% per 10-day period will be charged for invoices exceeding 60 days from invoice date.

Asaccrued liabilities as of March 31, 2022, in the unaudited condensed consolidated balance sheets.

The Company entered into a Registration Rights Agreement (the “RRA”) dated April 13, 2021. The Company had ninety (90) calendar days following the closing date of its Merger with TTM Digital Assets & Technologies, Inc. on April 14, 2021, there is no outstandingto file an initial registration statement covering the Shares. The ninety (90) calendar day filing date was July 13, 2021 (“Filing Deadline”). The Company did not fulfil its obligation to file a registration statement covering the Shares by July 13, 2021, nor any date and therefore has accounted for an accrued liability in the amount of $0.2 million recorded in the unaudited condensed consolidated balance due to SouthStar.sheets – Accrued Liabilities for the year ended March 31, 2022. The RRA terminated as of October 14, 2021, by its own terms.


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 5 — Debt (cont.)

(D) Systat Promissory Note Payable

On June 30, 2020, theThe Company, entered into a Promissory Judgment Note Assignment and Assumption Agreementdated as of August 15, 2018 (the “Assignment Agreement”“Note”), an Intercreditor Agreement (the “Intercreditor Agreement”with Tech Data Corporation (“Tech Data”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuantpursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., andwhich the Company acknowledged and consentedpromised to pay the assignmentprincipal sum of certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security$6,849,423.42 to Tech Data. The Note provides that interest inshall accrue on the assetsbalance of the Company.

Inpixon isNote at the holderrate of a secured promissory note, dated December 31, 2018, issued by18% per annum. Due to miscommunication with Tech Data, the Company inadvertently failed to Inpixon, as amended, (the “Original Note”)pay, when due, some of the installment payments in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. are entering into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. (the “License Agreement”). Inpixon has agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note (each a “Partitioned Note” and collectively, the “Partitioned Notes”), with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note to be in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement, the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date.

The Promissory Note balance outstanding as of March 31, 2021 is $3,623,250. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

(E) Related Party - Quantum Lexicon Promissory Note Payable

On March 11, 2021, the Company and Quantum Lexicon, LLC (the “Lender”) entered into a Commercial Loan Agreement and related transaction documents (“Term Loan”) dated as of March 11, 2021 providing for the issuance of a Secured Promissory Note in the principal amount of $125,000 (the “Note”). The Note is secured pursuant to a Pledge Agreement dated as of March 11, 2021 (the “Pledge Agreement”) by a pledge of the Company’s common stock equal to three hundred percent (300%) of the principal amount and accrued interest outstanding from time to time under the Note, which may be issued under certain conditions (“Events of Default”). The Company has set aside 625,000 shares (the “Set-aside Shares”) of Common Stock for issuance to the Lender upon uncured Events of Default. The Term Loan matures in ninety (90) days and bears interest at the rate of one percent (1%) per month. The Company may prepay principal and accrued interest at any time without penalty. The Lender funded the Term Loan on March 15, 2021. Additional costs in excess of the $125,000 were funded in March 2021 and recorded as payable to Quantum Lexicon. 

The balance outstanding as of March 31, 2021 is $200,645.

(F) First Choice Promissory Note Payable

On March 19, 2021, the Company, Systat and First Choice International Company, Inc. (“Lender”) entered into a Letter Agreement (“Letter Agreement”), providing for the advance payment by the Lender of $2,000,000 (“Advance”) to Systat on behalf of the Company. In consideration of the Advance, Systat agreed it would (a) enter into a Securities Settlement Agreement (“SSA”) with the Company for the cancellation of three promissory notes owed (or to be owed) by the Company in the aggregate principal amount of $3,300,000 (“Notes One - Three”) to Systat; and (b) assign a fourth note dated June 30, 2020, in the principal amount of $3,000,000 (“Fourth Note”) to Lender to be held as collateral pending repayment by the Company of the Advance as further set forth below. In further consideration of the Advance, under the terms of an SSA (a form SSA is attached to the Letter Agreement), Systat has agreed that upon the Company’s issuance of shares of the Company’s restricted common stock to Systat in full satisfaction of the $3,300,000 in promissory notes and accrued interest owed to Systat, all indebtedness owed to Systat pursuant to Notes One - Three (specifically excluding the debt arising from the Fourth Note) will be fully extinguished and cancelled. The number of shares to be issued will be determined at a later date. The Company and the Lender are continuing to negotiate the terms of a loan agreement providing for repayment by the Company of the Advance as well as the terms of a second SSA to be entered into between the Lender and the Company whereby the Lender will cancel the Fourth Note, which was assigned to the Lender as a condition of the Advance, on substantially similar terms as will be negotiated between the Company and Systat for Notes One-Three.

The Promissory Note balance outstanding as of March 31, 2021 is $5,000,000, which includes the $3,000,000 Fourth Note and the $2,000,000 loan from First Choice to the Company. 


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 6 — Related Party Transactions

On December 31, 2018, the Company entered into a note purchase agreement with Inpixon (the “Note Purchase Agreement”) pursuant to which Inpixon, the Company’s former parent, agreed to purchase from the Company at a purchase price equal to the Loan Amount (as defined below), a secured promissory note (the “Related Party Note”) for up to an aggregate principal amount of $3,000,000 (the “Principal Amount”), including any amounts advanced through the date of the Related Party Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with the Prior Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent (10%) per annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount. In addition, the Company agreed to pay $20,000 to Inpixon to cover Inpixon’ legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of the Related Party Note (the “Transaction Expense Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any amounts disbursed to the Company and the Transaction Expense Amount.

The Company may borrow under the Related Party Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest, not to exceed the Principal Amount at any one time.

All sums advanced by Inpixon to the maturity date pursuant to the terms of the Note Purchase Agreement will become part of the aggregate Loan Amount underlying the Related Party Note. All outstanding principal amounts and accrued unpaid interest owing under the Related Party Note shall become immediately due and payable on the earlier to occur of (i) December 31, 2020 (the “Maturity Date”), (ii) at such date when declared due and payable by Inpixon upon the occurrence of an Event of Default (as defined in the Related Party Note), or (iii) at any such earlier date$3,341,801.80, as set forth in the Related PartyNote and has defaulted under the Note. All accrued unpaid

On December 14, 2021, the Company became aware that a Confession of Judgment (the “Confession of Judgment”) had been entered against the Company in the Superior Court of the State of California, County of Santa Clara by Tech Data on September 24, 2021. The Confession of Judgement is entered for a total sum of $5,942,559.05, which is comprised of the principal sum of $3,341,801.80 and prejudgment interest shall be payable in cash.the sum of $2,600,757.25. 

Following a negotiation with Tech Data, the Company was able to reduce the Award by in excess of $4.2 million, and on January 13, 2022, the Company and Tech Data entered into a Settlement and Release Agreement (the “Settlement Agreement”). Pursuant to the terms of the Related Party Note,Settlement Agreement, the Company granted Inpixon, subjectpaid $1,375,000. (the “Settlement Amount”) on January 14, 2022. The Company recognized a gain on settlement of $1.5 million and has recorded in product costs in the condensed consolidated statement of operations. The Award was deemed satisfied in full. Among other things, Tech Data agreed to file an acknowledgment of full satisfaction of judgment attached as an exhibit to the Settlement Agreement, not take any further action against the Company in connection with or relating to the Judgment, and release the Company and its representatives from any and all Payplant Liens (as defined inclaims, including the Related Party Note) and Permitted Liens (as defined in the Related Party Note), a continuing first priority security interest in all assets ofJudgment, which Tech Data may have against the Company whether owned as ofbased upon any transaction that occurred at any time before the date of the Related Party Note or subsequently acquired, including all proceeds therefrom (collectively,Settlement Agreement.


Operating Leases/Right-of-Use Assets and Lease Liability

On December 8, 2021, the “Collateral”)Company’s principal executive offices moved to secure13880 Dulles Corner Lane, Suite 120, Herndon, Virginia 20171. We lease these premises, which consist of approximately 5,800 square feet, pursuant to a lease that expires on May 31, 2025. The total amount of rent expense under the paymentleases is recognized on a straight-line basis over the term of the Related Party Note and allleases. The Company has no other loans and advances (including all renewals, modifications and extensions thereof) and all obligations of any and every kind and nature of the Company to Inpixon, whether arising prior to, underoperating or after the Related Party Note, however incurred or evidenced, plus all interest, reasonable costs, reasonable expenses and reasonable attorneys’ fees, which may be made or incurred by Inpixon in the disbursement, administration, and collection of such amounts, and in the protection, maintenance, and liquidation of the Collateral.financing leases with terms greater than 12 months.

On March 1, 2020, the Related Party Note was amended to extend the maturity date from December 31, 2020 to December 31, 2022, to increase the default interest rate from 18% to 21% or the maximum rate allowable by law and to require a cash payment by the Company to Inpixon against the loan amount in an amount equal to no less than 6% of the aggregate gross proceeds raised following the completion of any financing, or series of related financings, in which the Company raises aggregate gross proceeds of at least $5,000,000.

On June 30, 2020, the “Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., and the Company acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security interest in the assets of the Company.

Inpixon was the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. entered into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. Inpixon agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note, with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement (the “Closing Date”), the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date. Nadir Ali, a member of the Company’s board of directors, is also Inpixon’s Chief Executive Officer and a member of its board of directors. The transactions disclosed herein were approved by all of the disinterested members of the Company’s board of directors.

The proceeds received and interest and legal costs accrued, in accordance with the Related Party Note asAs of March 31, 2021 is $9,088,176.2022, future minimum operating leases commitments are as follows:

Calendar Years Ending December 31,  Amount 
2022  $        120 
2023   214 
2024   219 
2025   92 
Total future lease payments   645 
Less: interest expense at incremental borrowing rate   (90)
Net present value of lease liabilities  $555 

Other assumptions and pertinent information related to the Company’s accounting for operating leases are:

Prior to March 31, 2021, the Company entered into discussions and a definite agreement to convert its outstanding debt and interest for the common stock of the Company. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

Weighted average remaining lease term:3.17 years
Weighted average discount rate used to determine present value of operating lease liability:8%

 


SYSOREX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020

Note 7 — Commitments and Contingencies

Litigation

Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements.

If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. There are no pending legal proceedings to which the Company is a party to.


Note 15 — Related Party Transactions

As of March 31,

Effective April 1, 2021, the Company entered a variety of contracts with CoreWeave, Inc. (“CoreWeave”).

Hosting Facilities Services Order

The Hosting Facility Services Order (the “Hosting Contract”) provided for the provision of hosting facility space and services by CoreWeave. The services are paid for in advance of the service month and the initial term of the hosting services is subject to a claimthrough June 30, 2022 and renews automatically for non-payment by a vendorsuccessive one year renewal terms unless either party terminates within sixty (60) days of the expiration of the then current term. At the signing of the Hosting Contract an estimated 382 data mining rigs were covered at an estimated monthly cost of approximately $21,556 ($260,000 per year). The Company recorded $64,667 in mining costs in the condensed statement of operations for approximately $735,000 including interest which has been accrued for as ofthe three months ended March 31, 2022.

Services Agreement

The initial term of the Services Agreement runs from April 1, 2021, through December 31, 2022, and automatically renews thereafter for successive one (1)-year terms unless either party provides written notice to the other of nonrenewal within sixty (60) days of the expiration of the then current Term. The initiation of the Services Agreement required a one-time payment of $100,000. The monthly base management fee was set to $20.00 per GPU-based Mining System (approximately $20,000 per month), and $6.50 per ASIC-based Mining System. Base management fees are paid in arrears and due within fifteen (15) days of invoice receipt. If, during any calendar month of the Term, CoreWeave operates on average, more than 1,500 Mining Systems on behalf of the Company, the Base Management Fee with respect to the excess Mining Systems above 1,500 is discounted by 40%. The Company recorded $71,820 in Accounts Payable and Accrued Liabilities. See Note 8 Subsequent Events, regarding resolution of this claim.mining costs for the three months ended March 31, 2022.

Master Services Agreement

Note 8 — Subsequent Events

On April 2, 2021, the U.S. Small Business Administration forgave the Company’s Wells Fargo, N.A. Paycheck Protection Program loan of $349,693.

On April 6,29, 2021, the Company entered into a settlement agreementMaster Services Agreement with VMS Software, Inc.CoreWeave to provide support to management relating to cryptocurrency expertise, marketing, and other operational matters for existing payable, inclusivea three-month term. The compensation for these services is a fixed fee of interest of $735,274.$35,000 per 30-day period, which includes 175 hours per period. The debt is recorded in Accounts Payable asCompany did not incur service costs for the 3 months ended March 31, 2021. A down-payment2022. Effective February 24, 2022, the master services agreement has been terminated.

Bespoke Growth Partners, Inc. (“Bespoke”)

Effective as of $75,000 was paid with four equal payments of $165,069 to be paid every 30 days from the effective date of the agreement. The agreement allows for early prepayments to be made in full satisfaction of the debt if made within 45 and 60 days of the effective date of the agreement. As of May 17, 2021, $384,932 was paid, in full satisfaction of the Company’s obligations of the Settlement.

On April 14,15, 2021, the Company completedentered into a reverse triangular mergerconsulting agreement with TTM Digital Assets & Technologies, Inc. (“Bespoke. Under the Merger”). By the Merger, the shareholders of TTM exchanged 100% of TTM’s share capital for the Company’s agreement to issue 124,218,268 sharesterms of the Company’s common stockconsulting agreement, the Company agreed to total compensation for services of $975,000 which of which $775,000 was paid during the year ended December 31, 2021. The Company made an additional payment in accordance with the agreement of $200,000 in January 2022. The Company recognized an additional $167,000 amount of expense during the three months ended March 31, 2022, which is recorded as consultant fees in general and administrative in the condensed consolidated statement of operations. Lastly, the Company may request Bespoke to expand its services.

Effective as of January 13, 2022, the Company entered into a consulting agreement with Bespoke. Under the terms of the consulting agreement, the Company is to pay Bespoke a gross advisory fee of $975,000 for identifying the Ostendo acquisition and services related to the TTM shareholders,Company.. On March 23, 2022, the Company paid off the balance owed for this service. The Company expensed the advisory fee during the three months ended March 31, 2022, which will represent approximately 82%is recorded as consultant fees in general and administrative in the condensed consolidated statement of the total share capital of the Company. As a closing condition to the merger, a significant portion of the Company’s existing debtholders, creditors and service providers agreed to convert or exchange their outstanding indebtedness or accounts payable, as applicable, eliminating at least $13,500,000 of Sysorex debt, substantially improving Sysorex’s balance sheet and significantly increasing Sysorex shareholders’ equity.operations.

Ressense LLC

On April 14, 2021, the Related Party Note of $9.1 million was settled in exchange for 12,972,189 shares of common stock.

On April 14, 2021, the Systat Note of $3.6 million was settled in exchange for 6,367,750 shares of common stock.

On April 14, 2021, the Fourth Note (described above in Note 5 - First Choice Promissory Note Payable) of $3,000,000 was settled in exchange for 5,272,407 rights to purchase shares of common stock.

On April 14, 2021, the Chicago Venture Note redemption of $870,000 was settled in exchange for 1,530,149 shares of common stock.

On April 14,August 4, 2021, the Company settledexecuted a six (6) month business advisory services agreement with vendors, pastRessense LLC. The services to be provided include potential business activities including acquisition, merger and post liabilitiesreverse merger opportunities. As compensation for the performance of services, the Company paid and recorded $25,000 through January 31, 2022, as consultant fees in exchange for 4,954,760 sharesgeneral and administrative in the condensed consolidated statement of common stock.operations.

 

The business advisory services agreement expired January 31, 2022.

Note 16 — Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following as of March 31, 2022, and December 31, 2021:

  March 31,
2022
  December 31,
2021
 
Consultants $146  $565 
Rent  -   17 
Vendor Payments  135   - 
Insurance  102   162 
License and Maintenance Contracts  613   658 
Other  28   - 
  $1,024  $1,402 


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read theThe following discussion and analysis of our financial condition and results of operations should be read in conjunction with the combinedunaudited financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, and with ourthe Company’s audited consolidated financial statements and related notes for the years ended December 31, 2021 and 2021 included in Amendment No. 1 to the Company’s Annual Report on Form 10-K asfor the year ended December 31, 2021 filed with the U.S. Securities and Exchange CommissionSEC on May 23, 2022 (the “SEC”“10-K Amendment”) on March 29, 2021.. In addition to our historical condensed consolidated financial information, the following discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that reflect our plans, estimates,involve risks, uncertainties and beliefs.assumptions. Our actual results couldmay differ materially from those discussedanticipated in these forward-looking statements due to a number of factors, including but not limited to, risks described in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A,section entitled “Risk Factors.”

The historical financial statements we have included in this Form 10-Q may not reflect what our business, financial position or results of operations would have been had we been a publicly traded company during the periods presented or what our results of operations, financial position and cash flows will beFactors” in the future when we are10-K Amendment, as the same may be updated from time to time.

Overview of the Company’s Subsidiaries

TTM Digital

TTM Digital is a stand-alone company.digital asset technology and mining company that owns and operates a large number of specialized cryptocurrency mining processors and is currently focused on the Ethereum blockchain ecosystem. Following the Merger, the business of TTM Digital has become a primary business segment of the Company.

Overview

SysorexTTM Digital was incorporated in Californiaoriginally formed as a Delaware limited liability company on January 3, 1994 as Lilien Systems and was acquired by InpixonJune 28, 2017, under the name of TTM Ventures LLC. Thereafter, on March 20, 2013. Effective January 1, 2016, Inpixon consummated30, 2021, it filed a reorganization transaction pursuantcertificate of conversion to which certain Inpixon subsidiaries were mergeda non-Delaware entity with the Secretary of State of the State of Delaware together with Articles of Conversion and into Lilien and Lilien changed its name to “Sysorex USA”. Sysorex USA changed its name to Inpixon USAArticles of Incorporation with the Nevada Secretary of State filed on March 1, 2017. On July 26, 2018, Inpixon USA merged into Sysorex, Inc., a wholly owned subsidiary of Inpixon, for the purpose of changing its name and moving its state of formation from California to Nevada. 


On August 31, 2018, Inpixon completed the spin-off (the “Spin-off”) of its value-added reseller business from its indoor positioning analytics business by way of a distribution of all the shares of common stock of Inpixon’s wholly-owned subsidiary, Sysorex, Inc., a Nevada corporation (“Sysorex,” “we,” “us,” “our” and similar terms), to holders of Inpixon’s common stock, preferred stock and certain Inpixon warrants as of August 21, 2018 (the “Record Date”).

same date. As a result, of the Spin-off, Sysorex is an independent public company and Sysorex’s common stock began regular-way trading on the OTC Marketssuch conversion, TTM Digital has become a Nevada corporation under the symbol “SYSX”name of “TTM Digital Assets & Technologies, Inc.”

The Company made the decision to divest certain mining equipment and the data center of the TTM Dig€tal reporting unit (“TTM Assets”) and commenced discussions with a third party to execute an asset sale. On March 24, 2022, Company executed with a third party an agreement which includes certain binding and non-binding provisions. Pursuant to the agreement, the Company and the third party agreed to certain terms related to the Company’s sale of approximately 75% of its Ethereum mining assets and certain associated real property. The Assets to be sold will not include the Company’s Ether funds generated prior to and held at Closing and any graphics processing units or associated assets maintained and operated by the Company at a co-located facility in North Carolina. The definitive terms of the sale of assets will be set forth in definitive transaction agreements (the “Definitive Documentation���) to be executed by the parties.

It is expected that on September 4, 2018.

May 23, 2022, the parties will (i) execute Definitive Documentation regarding the TTM Digital Asset sale and close the TTM Digital Asset sale or (ii) extend the closing date of the TTM Digital Asset sale. The financial statements presentclosing of the combined resultsTTM Digital Asset sale will be subject to the satisfaction or waiver of operations, financial condition, and cash flows of customary closing conditions. 

Sysorex and its subsidiary. These financial statements were prepared on a combined basis because the operations were under common control. All intercompany accounts and transactions have been eliminated between the combined entities.Government Services

SysorexSGS is a leading provider of information technology solutions from multiple vendors, including hardware products, software, services, including warranty and maintenance support, offered through our dedicated sales force, ecommerce channels, existing federal contracts and service team. Since our founding, we have served our customers by offering products and services from key industry vendors such as Aruba, Cisco, Dell, GETAC, Lenovo, Microsoft, Panasonic, Samsung, Symantec, VMware and others. We provide our customers with comprehensive solutions incorporating leading products and services across a variety of technology practices and platforms such as cyber, cloud, networking, security, and mobility. We utilize our professional services, consulting services and partners to develop and implement these solutions. Our sales and marketing efforts in collaboration with our vendor partners, allowsallow us to reach multiple customer public sector segments including federal, state and local governments, as well as educational institutions. 

Revenues from our business are typically driven by public sector delivery orders that are received on a monthly basis. During the three months ended March 31, 2021, approximately 100% of our revenues were from these delivery orders. These delivery orders include information technology hardware, software, professional services, warranty and maintenance support, and highly integrated solutions that include two or more of the aforementioned items.

We experience variability in our net sales and operating results on a quarterly basis as a result of many factors. We experience some seasonal trends in our sales of technology solutions to government and educational institutions. For example, the fiscal year-ends of U.S. Public Sector customers vary for those in the federal government space and those in the state and local government and educational institution (“SLED”) space. We generally see an increase in our second quarter sales related to customers in the U.S. SLED sector and in our third quarter sales related to customers in the federal government space as these customers close out their budgets for their fiscal year (June 30th and September 30th, respectively). We may also experience variability in our gross profit and gross profit margin as a result of changes in the various vendor programs we participate in and its effect on the amount of vendor consideration we receive from a particular vendor or their authorized distributor/wholesaler, which may be impacted by a number of events outside of our control. As such, the results of interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.

A substantial portion of our business is dependent on sales through existing federal contracts, known as Government Wide Acquisition Contracts (“GWAC”). We have three key GWAC contracts, known in the industry as GSA Federal Supply Schedule IT 70, NASA SEWP V, and NIH CIO-CS. Each contract can be utilized by any agency/departments of the Executive, Judiciary, and Legislative Branch, and government contractors in support of a contract. In addition to the federal government, the GSA FSS IT 70 is available to all 50-states, U.S. territories, and local government. Maintaining current vendor offerings and pricing is critical to attaining sales.


Our planned operating expenditures each quarter are based in large part on sales forecasts for the quarter. If our sales do not meet expectations in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow margins may magnify the impact of these factors on our operating results. Management regularly reviews our operating performance using a variety of financial and non-financial metrics including sales, shipments, margin, vendor consideration, advertising expense, personnel costs, account executive productivity, accounts receivable aging, supplier inventory turnover, and liquidity and cash resources. Our management monitors the various metrics against goals and budgets, and makes necessary adjustments intended to enhance our performance.

Our current debt repayment to key vendors due to prior non-payment of invoices has impacted our ability to receive the most favorable cost, terms, and delivery priority. General economic conditions also have an effect on our business and results of operations. For example, if the federal government fails to pass a budget or a continuing resolution before adopting an annual budget, our primary customers will not have the ability to make purchases off of our existing contracts until the budget issue is resolved, and some accounts receivables may be delayed. If current tariffs and stipulation by the government to require the purchase of goods that are substantially made or assembled in America are enacted, this could severely impact our ability to source from vendors who manufacture overseas. These factors affect sales of our products, sales cycles, adoption rates of new technologies and level of price competition. We continue to focus our efforts paying down our debt, cost controls, competitive pricing strategies, capturing new contracts, and driving higher margin service and solution sales. We also continue to make selective investments in our sales force personnel, service and solutions capabilities and internal information technology infrastructure and tools in an effort to meet vendor program requirements and to position us for enhanced productivity and future growth. 

COVID-19 Update

In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. While certain of these restrictions and guidelines have been lifted or relaxed, they may be reinstituted in response to continuing effects of the pandemic. The pandemic and the various governments’ response have caused, and continue to cause, significant and widespread uncertainty, volatility, and disruptions in the U.S. and global economies, including in the regions in which we operate.

On May 3, 2020, the Company received a loan of $349,693 under the Payroll Protection Program as part of the Coronavirus Aid, Relief and Economic Security Act which was subsequently forgiven by the Small Business Administration on April 2, 2021.

Through March 31, 2021, we have not experienced a material impact to our business, operations or financial results as a result of the pandemic. However, in the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material.

We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We have been able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. Among these steps, we have transitioned to primarily working remotely and ceasing travel, which has not resulted in a material disruption to the Company’s operations. We expect to maintain many of these steps for the near future.

Recent Events

On March 31, 2021, the Company and First Choice International Company, Inc. (the “Lender”) into a Commercial Loan Agreement (“Loan Agreement”) and Promissory Note (“Note”) (collectively, the “Loan Documents”). Under the terms of the Note, the Company must repay the principal amount of $2,000,000 plus any accrued and unpaid interest as a balloon payment no later than June 30, 2021. The Loan Agreement includes a pledge of 5,272,407 shares of Common Stock securing repayment of the Note.


On April 6, 2021, the Company entered a definitive settlement agreement (the “Settlement”) with VMS Software, Inc. (“VMS”), whereby (i) the Company paid to VMS, seventy-five thousand dollars ($75,000.00); (ii) the Company is required to make four (4) additional periodic payments to VMS, commencing thirty (30) days from the effective date of the Settlement (the “Effective Date”), each in the amount of one hundred sixty-five thousand sixty-eight dollars and fifty cents ($165,068.50); (iii) if VMS receives from the Company payments totaling six hundred twenty-five thousand dollars ($625,000.00) within forty-five (45) days from the Effective Date, VMS will accept such six hundred twenty-five thousand dollars ($625,000.00) as full satisfaction of the Company’s payment obligations under the Settlement; (iv) if VMS receives from the Company payments totaling six hundred fifty thousand dollars ($650,000.00) within sixty (60) days from the Effective Date, VMS will accept such six hundred fifty thousand dollars ($650,000.00) as full satisfaction of Company’s payment obligations under the Settlement; (v) if, within ninety-one (91) days of VMS’s receipt of any of the Company’s payments pursuant to its obligations in paragraph 1 of the Settlement, the Company commences, or a third party commences against the Company, any case, proceeding, or other action under the United States Bankruptcy Code, 11 U.S.C. § 101 et seq, which is not dismissed within thirty (30) days, then VMS’s release of the Company contained in paragraph 2 of the Settlement shall be null, void, and of no force or effect, and the Parties shall be returned to the position they were in prior to execution of this Agreement, except that VMS may retain any payment made to it by the Company, crediting same against those sums claimed by VMS. In connection with the Settlement, on April 14, 2021, the Company and the Lender entered into a commercial loan agreement, secured promissory note, and stock pledge agreement (“Loan Documents”) whereby the Lender has provided an immediate loan of $278,368.50 to the Company (the “Loan”) in consideration of a promissory note secured with a pledge of that number of shares of the Company’s common stock equal to three hundred percent (300%) of the Loan inclusive of the outstanding balance of the settlement entered into by and between the Company and VMS, for a reserved amount of 2,631,708 shares of Common Stock. As of May 17, 2021, $384,932 was paid, in full satisfaction of the Company’s obligations of the Settlement.

On April 8, 2021, the Company, TTM Digital Assets & Technologies, Inc. (“TTM Digital”), and TTM Acquisition Corp., a Nevada corporation, a wholly-owned subsidiary of the Company (“MergerSub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), which resulted in a change of control, with the shareholders of TTM Digital receiving the number of shares of the Company’s common stock equal to not less than eighty percent (80%) of the outstanding shares of capital stock of the Company in exchange for their shares of TTM Digital. As a result of the Merger, the Company now has two wholly owned subsidiaries: TTM Digital and Sysorex Government Services, Inc. The closing of the Merger Agreement occurred on April 14, 2021. Further, the Company entered a number of agreements as conditions of the Merger Agreement’s closing.

Basis of Presentation

Sysorex, Inc., through its wholly owned subsidiaries, Sysorex Government Services, Inc., formerly known as Inpixon Federal, Inc. (“SGS”), and TTM Digital (unless otherwise stated or the context otherwise requires, the terms “SGS” “we,” “us,” “our” and the “Company” refer collectively to Sysorex and its subsidiaries), is focused on two lines of business. The Company provides information technology which include cybersecurity, professional services, engineering support, IT consulting, enterprise level technology, networking, wireless, help desk, blockchain technology, and custom IT solutions. The Company is headquartered in Virginia.

The accompanying unaudited condensed consolidated financial statements present the combined results of operations, financial condition, and cash flows of Sysorex and its subsidiaries. These financial statements were prepared on a combined basis because the Companyoperations were under common control. All intercompany accounts and transactions have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, which areeliminated between the accounting principles that are generally accepted in the United Statescombined entities.


Basis of America. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the three-month period ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited condensed consolidated financial statements and notes for the years ended December 31, 2020 and 2019 included in the Form 10-K filed with SEC on March 29, 2021.Presentation

Critical Accounting Policies and Estimates

In connection with the preparation of our unaudited condensed 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 unaudited condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidatedCondensed Consolidated financial statements are presented fairly and in accordance with GAAP.accounting principles generally accepted in the United States (“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 34 of the unaudited condensed consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Known Trends or Uncertainties

TTM Digital has an evolving business model which is subject to various uncertainties. As digital assets and blockchain technology become more widely utilized on a mass scale, we anticipate that the services and products associated with the technologies will continue to evolve. To successfully continue in the industry, our business model may need to evolve to reflect the trends of the industry. Over time, we may modify aspects of our business model relating to our strategy. We cannot offer any assurance that we will be successful or that the future industry or business operation changes will not result in harm to our business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results. Management cannot provide any assurances that we will identify all emerging trends and growth opportunities in this business sector, and we may lose out on those opportunities to current or future competitors. As anticipated, any such circumstances could have a material adverse effect on our business, prospects, or operations. There is a possibility of digital asset mining algorithms transitioning to proof-of-stake validation and other mining-related risks, which could make us less competitive and ultimately adversely affect our business and our ability to generate revenues. When and if Ethereum switches to “proof-of-stake” our GPUs will no longer be able to mine Ethereum. TTM Digital will mine other coins with the GPUs. At that time, instead of mining with GPUs, the amount of Ethereum accumulated in our treasury will be used to stake to the network in the “proof-of-stake model” Proof-of-stake will earn the Company rewards based on the amount of Ethereum you have. Additionally, on August 5, 2021, the London Hard Fork protocol (EIP 1559) went into effect which includes changes in Ethereum’s handling of transaction fees. EIP 1559 improves the efficiency of commissions, mainly on the user side. At the block level, EIP 1’59’s scheme allows the base fee to vary by up to 12.5% from block to block, allowing users to predict and pay a relatively accurate fee based on the rules to improve the user experience. This comes at the expense of Ethereum miners by not providing the base fee as part of the block reward for mining a block. EIP 1559 is designed to make Ethereum less inflationary by taking or “burning” ETH out of circulation, which is the excess ETH leftover from the lower transaction fee. These changes could have been noan impact on the Company’s future potential Ethereum revenue stream due to less Ethereum being distributed per mined block, if not offset by an increase in the value of ETH and/or additional transaction tipping, the process by which a user can pay an additional amount to ensure a transaction is processed very quickly.

SGS experiences variability in our net sales and operating results on a quarterly basis as a result of many factors. SGS experiences some seasonal trends in our sales of technology solutions to government and educational institutions. For example, the fiscal year-ends of U.S. Public Sector customers vary for those in the federal government space and those in the state and local government and educational institution (“SLED”) space. SGS generally sees an increase in our second quarter sales related to customers in the U.S. SLED sector and in our third quarter sales related to customers in the federal government space as these customers close out their budgets for their fiscal year (June 30th and December 31st, respectively). SGS may experience variability in our gross profit and gross profit margin as a result of changes in the various vendor programs we participate in and its effect on the amount of vendor consideration we receive from a particular vendor or their authorized distributor/wholesaler, may be impacted by a number of events outside of our control.


Three months ended March 31, 2022, compared to estimatesthree months March 31, 2021

Summary of TTM Digital Mining Result

The following table presents the roll forward of digital asset activity during the periods presentedrespective periods:

  Three Months Ended 
  March 31, 
  2022  2021 
Opening Balance $5,202  $24 
Revenue from mining  1,983   2,018 
Mining pool operating fees  (20)  (21)
Management fees  -   (322)
Impairment of digital assets  (1,236)  - 
Owners’ distributions  -   (1,521)
Proceeds from sale of digital assets  (5,709)  (251)
Transaction fees  (90)  - 
Realized gain on sale of digital assets  1,107   87 
Ending Balance $1,237  $14 

Discussion of Results of Operations of TTM Digital for the three months ended March 31, 2022, and 2021

The activities for TTM revenues and costs for the three months ended March 31, 2022, represent continuing and discontinued operations. Discontinued operations are disclosed in Note 6 to the financial statements. Revenues for continuing operations are not comparable to the three months ended March 31, 2021. On April 1, 2021, additional digital mining assets were purchased from CoreWeave, which resulted in increased revenue for the remainder of 2021 into 2022. The increase in general and administrative costsfor the three months ended March 31, 2022, are due to post-merger related costs, advisory costs, accounting and tax costs, and consultant and advisory fees that did not exist for the three months ended March 31, 2021. In addition, the Company incurred non-cash costs that are included in Other income (expense) that are related to derivative accounting treatment that did not exist in the filing. Historically, changesthree months ended March 31, 2021.

For the three months ended March 31, 2022, TTM Digital reported $2.0 million in revenues, ($0.8 million in continuing operations and $1.2 million in discontinued operations). TTM Digital reported $0.5 million in mining costs ($0.1 million in continuing operations and $0.4 million in discontinued operations), $0.04 million in sales and marketing costs (continuing operations), $2.4 million in general and administrative costs (continuing operations), $0.5 million in depreciation costs in continuing operations, $1.2 million of digital asset impairment (continuing operations), $1.1 million in other net income-gain on disposal of digital assets (continuing operations) $0.8 million of revaluation of conversion feature derivative liability, loss on debt extinguishment of $0.5 million, resulting in a net loss from operations of $3.0 million ($3.6 million net loss from continuing operations and $0.6 million net income from discontinued operations).

For the three months ended March 31, 2021, TTM reported its continuing operations as follows; $0.3 million in management estimatesfees, $0.06 million in general and administrative fees, $0.08 million in gain on sale of digital assets and $0.2 million in an income tax benefit, resulting in a loss from continuing operations of $0.1 million.

For the three months ended March 31, 2021, TTM reported its discontinued operations results as follows; $2.0 million in revenues, $0.1 million in mining costs, $0.06 million in general and administrative costs, $0.2 million in depreciation costs, and $0.2 million in income taxes, resulting in a net income from discontinued operations of $1.7 million.

TTM Digital margins are affected by new and existing competitors in the digital asset mining industry. The price of Ethereum also has a direct impact to revenues, and the value of Ethereum that TTM holds on its balance sheet. The price of Ethereum hit its peak in the fourth quarter of 2021 at approximately $4,600 per 1 ETH and has steadily declined along with the overall markets. During Q1 2022 has a low of approximately $2,000 per 1 ETH 2. Margins are also affected by increases in natural gas prices. At times of peak usage on the power grid, and in times of inclement weather, natural gas prices tend to rise.

Discussion of Results of Operations of SGS for the Three Months Ended March 31, 2022

SGS operates on the resale of technology products and associated services related to those products. These products are resold through several contracts with the federal government in SGS’ portfolio of contracts. SGS suppliers include wholesale distributors of major technology products, small niche product suppliers, services from specialized partners, and services from SGS’ own resources.

The lifecycle of an order includes: solicitation of a requirement form the customer, quotation or proposal in response to the solicitation, evaluation of quote or proposal by the customer, awarding an order to SGS based on favorable evaluation, customer order is then entered in as a sales order, the SGS system then issues purchase orders to suppliers, suppliers delivers the goods to the customer and performs any services necessary to complete order obligations, customer provides acceptance, and SGS issues an invoice to the customer. Once a customer accepts the invoice the dollar amount is guaranteed and backed by the U.S. Treasury. Post invoice obligation may include warranty, maintenance, and telephonic support either directly by SGS or through the OEM directly. From acceptance until the period of performance is completed (warranty, maintenance, and/or telephonic support), SGS is responsible for the operability of the delivered goods. Once the period of performance is completed, the customer will contact SGS to complete a contract closeout.


For the three months ended March 31, 2022, SGS reported $5.0 million in revenues. This includes approximately 96% of revenues coming from the Company’s top two customers. SGS reported $2.3 million in product and services costs. Included in product and service costs is gain on vendor liability settlement of $1.5 million, without this gain, SGS would have not been material.

Revenue Recognition

The Company reports revenuesreported $3.8 million in product and service costs, SGS also reported $0.4 million in sales and marketing costs, $1.4 million in general and administrative costs, $0.1 million in amortization costs, resulting in a loss from operations of $0.7 million. See Note 4 — Summary of Significant Accounting Policies for discussion of the accounting treatment under ASC 606 “Revenue from Contracts with Customers”included in the notes to the financial statements. Based on the two contracts, the Company acted as the agent and allis required to record the costs against the related amendments (Topic 606)revenues, resulting in a reduced revenue line, offset by a reduced cost of goods sold line in the financial statements.

SGS margins are affected by the diversity of our supplier. Supplier diversity allows companies such as SGS to seek better cost through competition of multiple suppliers of the same product. Currently, SGS does not have the supplier diversity that is required to increase margin. SGS is on a prepay basis with many suppliers and this requires SGS to finance cash advances to suppliers from our finance source, South Star Capital. Our financial source charges high fees and interest, which also affects our net margin.

Liquidity and Capital Resources as of March 31, 2022

Going Concern

As of March 31, 2022, the Company had an approximate cash balance of $0.9 million, working capital deficit of approximately $22.7 million, and an accumulated deficit of approximately $52.3 million. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date of issuance of these unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Condensed Consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued.

 

The Company does not believe that its capital resources as of March 31, 2022, its ability to mine cryptocurrency, its expected sale of certain mining assets and data center, its ability to settle convertible debt obligations through issuance of the Company’s shares, availability on the SGS SouthStar credit facility to finance purchase orders and invoices, reauthorization of key vendors and credit limitation improvements will be sufficient to fund planned operations. As a result, the Company will need additional funds to support its obligations for the next twelve months. The Company continues to explore a number of other possible solutions to its financing needs, including additional efforts to raise additional capital as needed, through the issuance of equity, equity-linked or debt securities, as well as possible transactions with other companies, strategic partnerships, and other mechanisms for addressing our financial condition. In addition, the Company will need to increase its authorized common stock to potentially settle convertible debt conversions.

If the Company is unable to raise additional capital on terms acceptable to the Company and on a timely basis, the Company will be required to downsize or wind down its operations through liquidation, bankruptcy, or sale of its assets.

Our capital resources and operating results, continuing and discontinued operations, as of and through March 31, 2022 consist of:

1) An overall working capital deficit of $22.7 million,

2) Cash and cash equivalents of $0.9 million,

3) Net cash used in operating activities of $3.8 million, and

4) Net cash provided by investing activities of $4.1 million,


Operating Activities

Net cash used in operating activities was $3.8 million during the three-months ended March 31, 2022. Cash was consumed from operations by the net loss of $3.7 million, plus non-cash and one-time items of $0.3 million, $.2 million in stock-based compensation, non-employee compensation costs of $0.2 million, in shares issued in exchange for services, impairment of digital assets of $1.2 million, and depreciation and amortization of $0.6 million, $1.1 million in a realized gain on sale of digital assets, $0.5 million in a loss on extinguishment of debt, $0.8 million in a change in fair value of debt conversion feature,$1.5 million in a gain on settlement of vendor liabilities,, offset by changes in assets and liabilities of $(0.6) million. In addition, $0.6 million was consumed from its discontinued operations.

Investing Activities:

Net cash provided by investing activities for the three-months ended March 31, 2022, was approximately $4.1 million, primarily driven from proceeds from the sale of digital assets of $5.7 million, offset by a pre-funded right in Ostendo of $1.6 million.

Liquidity and Capital Resources as of March 31, 2022, Compared to March 31, 2021

The Company’s net cash flow used in operating, investing and financing activities, continuing and discontinued operations for the three-months ended March 31, 2022 and 2021, respectively, and certain balances as of the end of those periods are as follows (in thousands):

  March 31, 
(Thousands, except per share data) 2022  2021 
Net cash used in operating activities $(3,830) $(204)
Net cash provided by investing activities  4,109   298 
Net cash provided by financing activities  -   100 
Net increase in cash $279  $194 

  March 31,
2022
  December 31,
2021
 
       
Cash $938  $659 
Working capital (deficit) $(22,646) $(21, 034) 


Operating Activities:

Net cash used in operating activities during the three months ended March 31, 2022, was $ (3,830), consisted of the following (in thousands):

The non-cash income and expenses of $1,052 consisted of (in thousands):

$601  Depreciation expense
 166  Stock compensation
 62  Amortization of right of use asset
 549  Loss on extinguishment of debt
 (1,533) Gain on settlement of vendor liabilities
 838  Change in fair value of debt conversion feature
 1,236  Impairment of digital assets
 (1,107) Realized gain on sale of digital assets
 240  Issuance of shares in exchange for services
$1,052  Total non-cash income and expenses

The net proceeds of cash due to changes in operating assets and liabilities totaled $(1,213) and consisted of the following (in thousands):

$1,470  Increase in accounts receivable and other receivables
 390  Prepaid assets and other current assets
 (1,554) Increase in accounts payable
 (282)  Decrease in accrued liabilities and other payables
 (626) Operating cash flows – discontinued operations
 (611)  Decrease in digital assets
     
$(1,213)  Net use of cash in the changes in operating assets and liabilities

Net cash used in operating activities was $(3.8) million during the three-months ended March 31, 2022. Cash was consumed from operations by the net loss of $3.7 million, plus non-cash and one-time items of $0.3 million, $0.2 million in stock-based compensation, loss on debt extinguishment of $0.5 million, change in fair value of debt conversion feature of $0.8 million, non-employee compensation costs of $0.2 million, in shares issued in exchange for services, impairment of digital assets of $1.2 million, and depreciation and amortization of $0.6 million, $1.1 million in a realized gain on sale of digital assets, $1.5 million in a gain on settlement of vendor liabilities, offset by changes in assets and liabilities of $ (0.6) million. In addition, $0.6 million was consumed from its discontinued operations.

Net cash used in operating activities was $(0.2) million during the three-months ended March 31, 2021. Cash was consumed from operations by the net loss of $0.4 million, plus non-cash and one-time items of $0.2 million, $(0.09) million in a realized gain on sale of digital assets, and by changes in assets and liabilities of $ 0.16 million, offset by net cash used in operating activities discontinued operations $ (0.04) million


Investing Activities:

Net cash provided by investing activities for the three-months ended March 31, 2022, was approximately $4.1_million, primarily driven from proceeds from the sale of digital assets of $5.7 million, offset by a prefunded right in Ostendo of $1.6 million.

Net cash provided by investing activities for the three-months ended March 31, 2021, was approximately $0.3 million, primarily driven from proceeds from the sale of digital assets of $0.25 million and proceeds from sale of mining equipment of $0.5 million.

Critical Accounting Policies and Estimates

Digital Assets

Digital assets, (predominantly Ethereum) are included in current assets in the accompanying unaudited condensed consolidated balance sheets. The classification of digital assets as a current asset has been made after the Company’s consideration of the consistent daily trading volume on cryptocurrency exchange markets, there are no limitations or restrictions on Company’s ability to sell Ethereum, and the pattern of actual sales of Ethereum by the Company. Cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy.

Digital assets held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital asset at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. During the three months ended March 31, 2022, and March 31, 2021, the Company recorded impairment of $1.2 million and $0, respectively.


Impairment of Long-lived Assets

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairment charges were identified for long-lived assets during the three months ended March 31, 2022, or March 31, 2021.

Revenue Recognition

The Company recognizes revenue after applyingin accordance with ASC 606, the followingcore principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five steps:basic criteria must be met before revenue can be recognized:

1)identificationIdentification of the contract, or contracts, with a customer;customer

2)identificationIdentification of the performance obligations in the contract including whether they are distinct within the context of the contract;

3)determinationDetermination of the transaction price including the constraint on variable consideration;

4)allocationAllocation of the transaction price to the performance obligations in the contract; and

5)recognitionRecognition of revenue when, or as, the Company satisfies a performance obligations are satisfied.obligation.

Mining Revenue

TTM Digital has entered into mining pools with the operators to provide computing power to the mining pool. The Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less transaction fees to the mining pool operator) for successfully adding a block to the blockchain. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power in digital asset transaction verification services is an output of the Company’s ordinary activities. The provision of such computing power is the only performance obligation in the Company’s contracts with mining pool operators The transaction consideration the Company receives, if any, is non-cash consideration. The transaction price of the Company’s share of the cryptocurrency award is measured at fair value on the date received, which is not materially different than the fair value at the time the Company has earned the award from the mining pool. The consideration is all variable under the definition within ASC 606. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the Company successfully places a block and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.


Hardware and Software Revenue Recognition

The CompanySGS is a primary resale channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers and wholesale distributors.

The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified goodsproduct or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.

The Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically specify F.O.B. destination.

The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouses.warehouse. The Company is the principal in the transaction and recognizes revenue for drop-shipment arrangements on a gross basis.


The Company may provide integration of products from multiple vendors as a solution it sells to the customer. In this arrangement, the Company provides direct warranty to the customer with the Company’s own personnel as the customer requires warranty on the solution and not individual vendor products. This type of warranty is sold integral to the overall solution quoted to the customer. The Company considers these service-type warranties to be performance obligations of the principal from the underlying products that make up a solution and therefore is acting as a principal in the transaction and records revenue on a gross basis at the point of sale.

License and Maintenance Services Revenue Recognition

The CompanySGS provides a customized design and configuration solution for its customers and in this capacity resells hardware, software and other IT equipment license and maintenance services in exchange for fixed fees. The Company selects the vendors and sells the products and services, including maintenance services, that best fit the customer’s needs. For sales of maintenance services and warranties, the customer obtains control at the point in time that the services to be provided by a third-party vendor are purchased by the customer and therefore the Company’s performance obligation to provide the overall systems solution is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer-approved invoice.

 

For resale of services, including maintenance services, warranties, and extended warranties, the Company is acting as an agent as the primary activity for those services are fulfilled by a third party.

While the Company may facilitate and act as a first responder for these services, the third-party service providers perform the primary maintenance and warranty services for the customer. Therefore, the Company is not primarily responsible for performing these services and revenue is recorded on a net basis.

Professional Services Revenue Recognition

The Company’sSGS’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended. Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in Accounting Standards Codification (“ASC”)ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three monthsthree-months ended March 31, 2021 and 2020, the Company2022, SGS did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term contracts are derived principally with various United States government agencies and commercial customers.agencies.


Derivative Liabilities

 


Long-lived Assets

We accountThe Company evaluates its convertible instruments, options, warrants, or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for our long-lived assetsunder ASC Topic 815, Derivatives and Hedging. The Company evaluates whether the amount of common stock on a as converted basis is in accordance with ASC 360, “Accounting for the Impairment or Disposalexcess of Long-Lived Assets” (“ASC 360”),its authorized share total which, requires that long-lived assets be evaluated whenever events or changesif in circumstances indicateexcess, would result in derivative accounting treatment. The result of this accounting treatment is that the carrying amount may not be recoverable or the useful life has changed. Somefair value 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 recognitionderivative is marked-to-market each balance sheet date 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 ofrecorded as a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.

When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions.liability. In the event that our estimates or related assumptionsthe fair value is recorded as a liability, the change in fair value is recorded in the future, we maystatement of operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to a liability at the fair value of the instrument on the reclassification date.

Convertible Debt

The Company’s debt instruments contain a host liability, freestanding warrants, and an embedded conversion feature. The Company uses the guidance under FASB ASC Topic 815 Derivatives and Hedging (“ASC 815”) to determine if the embedded conversion feature must be requiredbifurcated and separately accounted for as a derivative under ASC 815. It also determines whether any embedded conversion features requiring bifurcation and/or freestanding warrants qualify for any scope exceptions contained within ASC 815. Generally, contracts issued or held by a reporting entity that are both (i) indexed to record an impairment charge. Based on our evaluation, we didits own stock, and (ii) classified in shareholders equity, would not recordbe considered a charge for impairmentderivative for the three months ended March 31, 2021.

The benefits to be derived from our acquired intangibles, will take additional financial resources to continue the developmentpurposes of our technology. Management believes our technology has significant long-term profit potential, and to date, management continues to allocate existing resources to the develop products and services to seek returns on its investment. We continue to seek additional resources, through both capital raising efforts and meeting with industry experts, as part of our continued efforts. Although there can be no assurance that these efforts will be successful, we intend to allocate financial and personnel resources when deemed possibleapplying ASC 815. Any embedded conversion features and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, the related development of our technology (resulting in our lack of ability to expand our business), may be subject to significant impairment.

As described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing our business plans. The Company will continue to monitor these uncertainties in future periods, to determine the impact.

We evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances during the three months ended March 31, 2021, 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.


Deferred Income Taxes

In accordance with ASC 740 “Income Taxes” (“ASC 740”), we routinely evaluate the likelihood of the realization of income tax benefits and the recognition of deferred tax assets. In evaluating the need for any valuation allowance, we 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 our analyses, we consider 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, we considered (i) that we have had historical losses in the prior years and cannot anticipate generating a sufficient level of future profits in order to realize the benefits of our deferred tax asset; (ii) tax planning strategies; and (iii) the adequacy of future income as of and for the three months ended March 31, 2021, based upon certain economic conditions and historical losses through March 31, 2021. After consideration of these factors, we deemed it appropriate to establish a full valuation allowance.

A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax filingsfreestanding warrants that do not meet these recognitionthe scope exception noted above are classified as derivative liabilities, initially measured at fair value, and measurement standards. As of March 31, 2021 and the year ended December 31, 2020, 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. Our policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. No interest or penalties were recorded during the three months ended March 31, 2021 and 2020.

Allowance for Doubtful Accounts

We maintain our reserves for credit lossesremeasured at a level we believe to be adequate to absorb potential losses inherentfair value each reporting period with change in fair value recognized in the respective balances. We assign an internal credit quality ratingCondensed Consolidated statements of operations. Any embedded conversion features and/or freestanding warrants that meet the scope exception under ASC 815 are initially recorded at their relative fair value in paid-in-capital and are not remeasured at fair value in future periods.

The host debt instrument is initially recorded at its relative fair value in long-term debt. The host debt instrument is accounted for in accordance with guidance applicable to all new customersnon-convertible debt under FASB ASC Topic 470 Debt (“ASC 470”) and update these ratings regularly, but no less than annually. Our determinationis accreted to its face value over the term of the adequacy ofdebt with accretion expense and periodic interest expense recorded in 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.

The Company’s allowance for doubtful accounts was $50,000 as of March 31, 2021 and December 31, 2020.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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

  For the Three Months Ended    
  March 31, 2021  March 31, 2020    
(in thousands, except percentages) Amount  % of
Revenues
  Amount  % of
Revenues
  
Change
 
                
Product revenues $928   66% $1,152   51%  (19)%
Services revenues $479   34% $1,114   49%  (57)%
Cost of net revenues - products $829   59% $1,127   50%  (26)%
Cost of net revenues - services $329   23% $868   38%  (62)%
Gross profit $249   18% $271   12%  (8)%
Operating expenses $1,078   77% $1,116   49%  (3)%
Loss from operations $(829)  (59)% $(845)  (37)%  (2)%
Net loss $(1,374)  (98)% $(1,161)  (51)%  (18)%

 


Revenues

Revenues for the three months ended March 31, 2021 were $1.4 million comparedIssuance costs are allocated to $2.3 million for the comparable periodeach instrument in the prior year. This decrease of $0.9 million is primarily associated with timing of orders which were based on shipment and acceptance dates andsame proportion as a result werethe proceeds that are allocated to each instrument. Issuance costs allocated to the debt hosted instrument are netted against the proceeds allocated to the debt host. Issuance costs allocated to freestanding warrants classified in equity are recorded in April 2021.paid-in-capital.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2021 was $1.2 million compared to $2 million for the prior year period. This decrease of $0.8 million was primarily associated with timing of orders which were based on shipment and acceptance dates and as a result were recorded in April 2021.

The gross profit margin for the three months ended March 31, 2021 was 18% compared to 12% during the three months ended March 31, 2020. This increase in gross margin is primarily due to gains on settlement of liabilities in the current year offset by certain federal and local government sales in the prior year that drove margins down

Operating Expenses

Operating expenses for the three months ended March 31, 2021 were $1.1 million compared to $1.1 million for the prior year period. This is a relatively stable cost structure and will increase as new contracts are added throughout the year. Compensation costs, occupancy costs and travel costs have remained relatively stable year over year.

Loss from Operations

Loss from operations for the three months ended March 31, 2021 was $829 thousand compared to $845 thousand for the prior year period. The efficiencies and cost reductions in prior periods have allowed us not to increase the Company’s costs and losses.

Provision for Income Taxes

There was no provision for income taxes for the three months ended March 31, 2021 and 2020. Deferred tax assets resulting from such losses would be fully reserved as of March 31, 2021 and 2020 since, at present, we have no history of taxable income and it is more likely than not those such assets will not be realized.

Net Loss

Net loss for the three months ended March 31, 2021 was $1.4 million compared to $1.2 million for the prior year period. This increase in loss of $0.2 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 three monthsthree-month ended March 31, 20212022, was a loss of $0.8 million compared to a loss of $0.6 million for the prior year period.

$0.2 million.


The following table presents a reconciliation of net income/loss attributable to stockholders of Sysorex, which is our GAAP operating performance measure, to Adjusted EBITDA for the three months ended March 31, 2021 and 20202022 (in thousands):

 

  Three Months Ended
March 31,
 
  2021  2020 
Net loss $(1,374) $(1,161)
Adjustments:        
Gain on settlement of obligations  (33)  - 
Interest expense  546   327 
Depreciation and amortization  109   186 
Adjusted EBITDA $(752) $(648)
  March 31, 
  2022 
Net (loss) $(3,033)
Interest expense  974 
Depreciation and amortization  601 
EBITDA  (1,458)
Adjustments:    
Non-cash items:    
Change in fair value of debt conversion feature  838 
Loss on extinguishment of debt  549 
Impairment of digital assets  1,236 
Gain on settlement of vendor liabilities  (1,533)
Stock compensation  166 
     
Adjusted EBITDA $(202)

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 ASC Topic 280, Segment Reporting;
to compare our current operating results with corresponding periods and with the operating results of other companies in our industry;
as a basis for allocating resources to various projects;
as a measure to evaluate potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and
to evaluate internally the performance of our personnel.

We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss).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, depreciation and amortization and other non-cash items including stock based compensation, amortization of intangibles, change in the fair value of shares to be issued, change in the fair value of derivative liability, impairment of goodwill and one time charges including gain/loss on the settlement of obligations, severance costs, provision for doubtful accounts, acquisition costs and the costs associated with public offerings; and

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 Adjusted EBITDA is helpful to compare our results to other companies.performance.

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 combined carve-out 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.

Indebtedness of the Company

Related Party Note

On December 31, 2018, the Company entered into a note purchase agreement with Inpixon (the “Note Purchase Agreement”) pursuant to which Inpixon, the Company’s former parent, agreed to purchase from the Company at a purchase price equal to the Loan Amount (as defined below), a secured promissory note (the “Related Party Note”) for up to an aggregate principal amount of 3,000,000 (the “Principal Amount”), including any amounts advanced through the date of the Related Party Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with the Prior Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent (10%) per annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount. In addition, the Company agreed to pay $20,000 to Inpixon to cover Inpixon’ legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of the Related Party Note (the “Transaction Expense Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any amounts disbursed to the Company and the Transaction Expense Amount.

The Company may borrow under the Related Party Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest, not to exceed the Principal Amount at any one time.

All sums advanced by Inpixon to the maturity date pursuant to the terms of the Note Purchase Agreement will become part of the aggregate Loan Amount underlying the Related Party Note. All outstanding principal amounts and accrued unpaid interest owing under the Related Party Note shall become immediately due and payable on the earlier to occur of (i) December 31, 2020 (the “Maturity Date”), (ii) at such date when declared due and payable by Inpixon upon the occurrence of an Event of Default (as defined in the Related Party Note), or (iii) at any such earlier date as set forth in the Related Party Note. All accrued unpaid interest shall be payable in cash.

Pursuant to the terms of the Related Party Note, the Company granted Inpixon, subject to any and all Payplant Liens (as defined in the Related Party Note) and Permitted Liens (as defined in the Related Party Note), a continuing first priority security interest in all assets of the Company whether owned as of the date of the Related Party Note or subsequently acquired, including all proceeds therefrom (collectively, the “Collateral”) to secure the payment of the Related Party Note and all other loans and advances (including all renewals, modifications and extensions thereof) and all obligations of any and every kind and nature of the Company to Inpixon, whether arising prior to, under or after the Related Party Note, however incurred or evidenced, plus all interest, reasonable costs, reasonable expenses and reasonable attorneys’ fees, which may be made or incurred by Inpixon in the disbursement, administration, and collection of such amounts, and in the protection, maintenance, and liquidation of the Collateral.


On March 1, 2020, the Related Party Note was amended to extend the maturity date from December 31, 2020 to December 31, 2022, to increase the default interest rate from 18% to 21% or the maximum rate allowable by law and to require a cash payment by the Company to Inpixon against the loan amount in an amount equal to no less than 6% of the aggregate gross proceeds raised following the completion of any financing, or series of related financings, in which the Company raises aggregate gross proceeds of at least $5 million.

On June 30, 2020, the “Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., and the Company has acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security interest in the assets of the Company.

Inpixon is the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. entered into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. Inpixon agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note, with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note to be in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement (the “Closing Date”), the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date. Nadir Ali, a member of the Company’s board of directors, is also Inpixon’s Chief Executive Officer and a member of its board of directors. The transactions disclosed herein were approved by all of the disinterested members of the Company’s board of directors.

The proceeds received and interest and legal costs accrued, in accordance with the Related Party Note as of March 31, 2021 was $9,088,176.

On April 14, 2021, to satisfy the Inpixon Debt (in the amount of $9,088,176 as of the date) in full, the Company entered into (i) a securities settlement agreement with Inpixon under which the Company agreed to issue Inpixon 12,972,189 shares of Common Stock, and (ii) a right to shares letter agreement through which the Company granted to Inpixon rights to the further issuance of 3,000,000 shares of Common Stock at no cost, in whole or in part, from time-to-time. The Right to Shares Letter Agreement includes a beneficial ownership limitation that states that in no event shall Inpixon be issued that number of shares which would result in Inpixon’s beneficial ownership exceeding 9.99%.

See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

Short Term Debt

Chicago Venture Convertible Note Payable

On December 31, 2018, the Company issued a $625,000 principal face amount convertible promissory note (the “Convertible Note”) to Chicago Venture Partners, L.P. (“CVP”), which yielded net proceeds of $500,000 to the Company pursuant to a Securities Purchase Agreement, dated as of December 31, 2018, by and between the Company and CVP. The Convertible Note bears interest at the rate of 10% per year and is due and payable 10 months after the date of issuance. The Convertible Note carries an original issue discount of $105,000 and the Company agrees to pay $20,000 to the CVP to cover its transaction costs incurred with the purchase and sale of the Convertible Note.


The agreement states that CVP has the right to convert all or part of the outstanding balance into fully paid and non-assessable common stock. The conversion formula is as follows: The number of shares will equal the amount of the outstanding note balance being converted divided by $5.00 per share. The Company determined since the value of the underlying equity on the commitment date was $2.29 per share, was less than conversion price $5.00, the Company determined there was no beneficial conversion feature.

The Lender Conversion Price is subject to certain adjustment such as down-round features whereby the agreement notes that if the Company were to sell, issue or grant any common stock, option to purchase common stock, right to reprice, preferred shares convertible into common stock, or debt, warrants, options or other securities which are convertible, exercisable, or exchangeable for shares of common stock at a price per share less than the conversion price, then the conversion price shall be reduced to equal the new lower price, subject to a floor of $1.00 per share. When and if there is an adjustment under the down-round provision, the Company will analyze the accounting treatment of the adjustment.

Redemptions may occur at any time after the 6-month anniversary of the date of issuance of the Convertible Note with a minimum redemption price equal to the Conversion Price. If the conversion rate is less than the market price, then the redemptions must be made in cash.

During the three months ended March 31, 2021 the Company issued 84,267 shares of common stock for the settlement of approximately $19,000 on its short-term debt.

Prior to March 31, 2021, the Company entered into discussions and a definite agreement to convert its outstanding debt and interest for the common stock of the Company. The balance outstanding as of March 31, 2021 is $870,413. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

Wells Fargo N.A. SBA -Payroll Protection program

On May 7, 2020, Sysorex, Inc. was granted a loan (the “Loan”) from Wells Fargo, N.A. in the principal amount of $349,693, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020.


The Loan, which was in the form of a Note dated May 3, 2020 issued by the Company (the “Note”), matures on May 3, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the Company at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. See Note 8 Subsequent Events, regarding notice approval for forgiveness of the debt on April 2, 2021.

Non-Recourse Factoring and Security Agreement

Effective as June 19, 2020 (the “Effective Date”), the Company and SouthStar Financial, LLC (“SouthStar”) entered into a Non-Recourse Factoring and Security Agreement (the “Agreement”) pursuant to which SouthStar may purchase receivables from the Company (the “Purchased Receivables”) for a price not to exceed 85% of the face value of the Purchased Receivables or a lesser percentage agreed upon between the Company and SouthStar. In consideration of SouthStar’s purchase of the Purchased Receivables, the Company will pay to SouthStar an amount equal to 0.8% of the face amount of the Purchased Receivables for the first 10-day period after payment for the Purchased Receivables is transmitted to SouthStar plus 0.9% for each additional 10-day period or part thereof, calculated from the date of purchase until payments received by SouthStar in collected funds on the Purchased Receivables equals the purchase price of the Purchased Receivables plus all charges due SouthStar from the Company at the time. An additional 1.0% per 10-day period will be charged for invoices exceeding 60 days from invoice date.

As of March 31, 2021, there is no outstanding balance due to SouthStar.

Systat Promissory Note Payable

On June 30, 2020, the Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agrees to assign to Systat Software, Inc., and the Company has acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. will be granted a security interest in the assets of the Company.

Inpixon is the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. are entering into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. (the “License Agreement”). Inpixon has agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note (each a “Partitioned Note” and collectively, the “Partitioned Notes”), with the first Partitioned Note to be in the original principal amount of $3,000,000, the second Partitioned Note to be in the original principal amount of $1,300,000, the third Partitioned Note to be in the original principal amount of $1,000,000 and the fourth Partitioned Note to be in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and to assign and deliver to Systat Software, Inc. the Closing Note on the closing date of the License Agreement, the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date.

The Promissory Note balance outstanding as of March 31, 2021 is $3,623,250. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.


Related Party - Quantum Lexicon Promissory Note Payable

On March 11, 2021, the Company and Quantum Lexicon, LLC (the “Lender”) entered into a Commercial Loan Agreement and related transaction documents (“Term Loan”) dated as of March 11, 2021 providing for the issuance of a Secured Promissory Note in the principal amount of $125,000 (the “Note”). The Note is secured pursuant to a Pledge Agreement dated as of March 11, 2021 (the “Pledge Agreement”) by a pledge of the Company’s common stock equal to three hundred percent (300%) of the principal amount and accrued interest outstanding from time to time under the Note, which may be issued under certain conditions (“Events of Default”). The Company has set aside 625,000 shares (the “Set-aside Shares”) of Common Stock for issuance to the Lender upon uncured Events of Default. The Term Loan matures in ninety (90) days and bears interest at the rate of one percent (1%) per month. The Company may prepay principal and accrued interest at any time without penalty. The Lender funded the Term Loan on March 15, 2021. Additional costs in excess of the $125,000 were funded in March 2021 and recorded as payable to Quantum Lexicon.

The balance outstanding as of March 31, 2021 is $200,645.

First Choice Promissory Note Payable

On March 19, 2021, the Company, Systat and First Choice International Company, Inc. (“Lender”) entered into a Letter Agreement (“Letter Agreement”), providing for the advance payment by the Lender of $2,000,000 (“Advance”) to Systat on behalf of the Company. In consideration of the Advance, Systat agreed it would (a) enter into a Securities Settlement Agreement (“SSA”) with the Company for the cancellation of three promissory notes owed (or to be owed) by the Company in the aggregate principal amount of $3,300,000 (“Notes One - Three”) to Systat; and (b) assign a fourth note dated June 30, 2020, in the principal amount of $3,000,000 (“Fourth Note”) to Lender to be held as collateral pending repayment by the Company of the Advance as further set forth below. In further consideration of the Advance, under the terms of an SSA (a form SSA is attached to the Letter Agreement), Systat has agreed that upon the Company’s issuance of shares of the Company’s restricted common stock to Systat in full satisfaction of the $3,300,000 in promissory notes and accrued interest owed to Systat, all indebtedness owed to Systat pursuant to Notes One - Three (specifically excluding the debt arising from the Fourth Note) will be fully extinguished and cancelled. The number of shares to be issued will be determined at a later date. The Company and the Lender are continuing to negotiate the terms of a loan agreement providing for repayment by the Company of the Advance as well as the terms of a SSA to be entered into between the Lender and the Company whereby the Lender will cancel the Fourth Note on substantially similar terms as will be negotiated between the Company and Systat for Notes One-Three.

The Promissory Note balance outstanding as of March 31, 2021 is $5,000,000, which includes the $3,000,000 Fourth Note and the $2,000,000 First Choice Note.

Liquidity and Capital Resources as of March 31, 2021

Our capital resources and operating results as of and through March 31, 2021, consist of:

1)an overall working capital deficit of $12.8 million;
2)certain large orders from customers paying earlier than 30-day terms
3)net cash used in operating activities for the year-to date of $2.1 million.
4)some vendors starting to provide net-30-day terms

The breakdown of our overall working capital deficit is as follows (in thousands):

Working Capital Assets  Liabilities  Net 
          
Accounts receivable and other receivables, net / accounts payable and accrued liabilities  335   8,620   (8,285)
Other  2,388   6,876   (4,488)
Total $2,723  $15,496  $(12,773)


Accounts payable and accrued liabilities exceed the accounts receivable by $8.3 million. These deficits are expected to be funded by our anticipated cash flow from operations and financing activities, as described below, over the next twelve months.

Net cash used in operating activities during the three months ended March 31, 2021 of $125 thousand consists of net loss of $1.4 million plus non-cash adjustments of $1.1 million thousand and net cash used in changes in operating assets and liabilities of $145 thousand. We expect net cash from operations to increase during the remainder of 2021, as a result of, the following:

1)We continue to keep our operational costs low in 2021.
2)We are working with our key distributors and financing partners to address our credit limitation issues. We believe revenues during the three months ended March 31, 2021 and the year ended December 31, 2020 could have been higher but were negatively impacted by our inability to timely process orders due to past due amounts and credit limitations with various vendors. See Note 8- Subsequent events for discussion on the merger as of April 14, 2021, which will eliminate significant amounts of our debt, reduce our stockholder’s deficit and ultimately allow us to obtain better pricing from our vendors. We also expect to relieve some of these issues by continuing to grow our services revenue.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. 

The Company’s continuation is dependent upon attaining and maintaining profitable operations and raising additional capital as needed, but there can be no assurance that we will be able to close on any financing. The Company’s ability to generate positive cash flow from operations is dependent upon sustaining certain cost reductions and generating sufficient revenues.

Based on future debt and /or equity offerings, projected revenues, the revolving credit facility that the Company entered into in order to continue to finance purchase orders and invoices following the Spin-off and the $10 million related party note from Inpixon, credit limitation improvements resulting or anticipated to result from negotiated vendor settlement arrangements have occurred. There are, however, no guarantees that these sources will be sufficient to provide the capital necessary to fund the Company’s operations during the next twelve months, therefore, the Company does intend to seek other sources of capital to supplement and strengthen its financial position under financing structures that are available to it. We expect as a result of the merger as note in Note 8- Subsequent events, we will have the ability to negotiate better terms and pricing with our vendors.

Our history of operating losses, the amount of our indebtedness and the potential for significant judgments to be rendered against us may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings or debt financings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern, and we may have to curtail, or even to cease, certain operations.  

Liquidity and Capital Resources – SouthStar

See the discussion above in the section titled “Indebtedness of the Company” for information concerning this loan. As of March 31, 2021, there was no principal amount outstanding under the Loan Agreement.


Liquidity and Capital Resources Inpixon Note

On April 14, 2021, to satisfy the Inpixon Debt in full, the Company entered into (i) a Securities Settlement Agreement with Inpixon under which the Company agreed to issue Inpixon 12,972,189 shares of Common Stock, and (ii) a Right to Shares Letter Agreement through which the Company granted to Inpixon rights to the further issuance of 3,000,000 shares of Common Stock at no cost, in whole or in part, from time-to-time. The Right to Shares Letter Agreement includes a beneficial ownership limitation that states that in no event shall Inpixon be issued that number of shares which would result in Inpixon’s beneficial ownership exceeding 9.99%.

Liquidity and Capital Resources – Systat Note

On April 14, 2021, the Company entered into a Securities Settlement Agreement with Systat under which the Company agreed to issue Systat 6,367,750 shares of Common Stock in full satisfaction of the Systat Debt in accordance with the terms and conditions of the Systat Securities Settlement Agreement.

Liquidity and Capital Resources – Chicago Venture

On April 14, 2021, the Company entered into an Exchange Agreement with CVP (the “CVP Exchange Agreement”) under which the Company agreed to issue CVP 1,530,149 shares of Common Stock in exchange for the cancellation of the CVP Debt in accordance with the terms and conditions of the CVP Exchange Agreement.

Liquidity and Capital Resources – Related Party - Quantum Lexicon Note

See the discussion above in the section titled “Indebtedness of the Company” for information concerning this loan. As of March 31, 2021, the principal amount outstanding was $200,645.

Liquidity and Capital Resources – First Choice Note

On April 14, 2021, the Company entered into a Securities Settlement Agreement and Right to Shares Letter Agreement with First Choice International Company, Inc. (“First Choice”), through which the Company granted to First Choice rights to the issuance of 5,272,407 shares of Common Stock at no cost, in whole or in part, from time-to-time. The Right to Shares Letter Agreement includes a beneficial ownership limitation that states that in no event shall First Choice’s beneficial ownership exceed 9.99%. The background regarding the Securities Settlement Agreement was previously disclosed in the Company’s Current Report on Form 8-K/A filed with the SEC on April 6, 2021.

Liquidity and Capital Resources as of March 31, 2021 Compared to March 31, 2020

The Company’s net cash flows used in operating, investing and financing activities for the three months ended March 31, 2021 and 2020 and certain balances as of the end of those periods are as follows (in thousands):

  For the Three Months Ended
March 31,
 
(thousands, except per share data) 2021  2020 
Net cash used in operating activities $(2,125) $(576)
         
Net cash (used) provided by financing activities  1,993   548 
         
Net decrease in cash $(132) $(28)

  March 31,
2021
  December 31,
2020
 
       
Cash $35  $167 
Working capital deficit $(12,773) $(9,121)


Operating Activities:

Net cash used in operating activities during the three months ended March 31, 2021 was 125 thousand. Net cash used in operating activities during the three months ended March 31, 2019 was $576 thousand. Net cash used in operating activities during the three months ended March 31, 2021 consisted of the following (in thousands):

Net loss $(1,374)
Non-cash income and expenses  145 
Net change in operating assets and liabilities  (896)
Net cash used in operating activities $(2,125)

The non-cash income and expenses of $145,000 consisted primarily of (in thousands):

$33  Gain on settlement of liabilities
 3  Accrued issuable equity
 109  Amortization of intangibles and right of use assets
     
$145  Total non-cash income and expenses

The net proceeds of cash due to changes in operating assets and liabilities total $399 thousand and consisted primarily of the following (in thousands):

$1,850  Decrease in accounts receivable and other receivables
 (1,971) Increase in prepaid assets
 (728) Decrease in accounts payable and accrued liabilities
 (27) Payments on lease liabilities
 (20) Increase in deferred revenue
$(896) Net change in operating assets and liabilities

Financing Activities:

Net cash provided by financing activities during the three months ended March 31, 2021 was approximately $2.0 million. Net cash provided by financing activities during the three months ended March 31, 2020 was approximately $548 thousand. The net cash provided by financing activities during the three months ended March 31, 2021 was primarily comprised of advances from Inpixon on a related party note from Inpixon, proceeds from Quantum Lexicon and First Choice financings, payments on a revolving line of credit with SouthStar.

Going Concern and Management Plans

Our condensed consolidated financial statements as of March 31, 2021 have been prepared under the assumption that we will continue as a going concern for the next twelve months from the date the financial statements are issued. Footnote 1 to the notes to our financial statements as of March 31, 2021 include language referring to our recurring and continuing losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern, is dependent upon the ability to obtain additional equity or debt financing, attain further operating efficiency, reduce expenditures, and, ultimately, to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements as of March 31, 2021 do not include any adjustments that might result from the outcome of this uncertainty.


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 Standards

None

 

For a discussion of recently issued accounting pronouncements, please see the Recent Accounting Standards section of Note 3 to our condensed consolidated financial statements, which is included in this Form 10-Q in Item 1.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

Disclosure

Our disclosure controls areand procedures that(as defined in Rule€3a-1€) or 15€5(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed with the objective of ensuringto ensure that information required to be disclosed in ourthe reports filedthat we file or submit under the Exchange Act such as this Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed withforms of the objective of ensuringSecurities and Exchange Commission (the “SEC”) and to ensure that such information required to be disclosed is accumulated and communicated to our management, including the Principal Executive Officerour principal executive officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designedprincipal financial officer, with the objectiveassistance from other members of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with GAAP.

In connection with the preparation of this Form 10-Q,management. Our management, with the participation of our Principal Executive Officerprincipal executive officer and Principal Financial Officer, hasprincipal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)as of March 31, 2022, and 15d-15(e)). Based upon thatbased on this evaluation, our Principal Executive Officerprincipal executive officer and Principal Financial Officerprincipal financial officer concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective.

Changesnot effective as of that date due to the same material weaknesses in Internal Controls

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Control

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


PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Other thanwere disclosed development of the legal proceedings herein, we are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect. From time to time, we may become involved legal proceedings, lawsuits, claims and regulations in the ordinary course of our business.

VMS Lawsuit

On October 20, 2020, VMS Software, Inc. (“VMS”) filed suit against us in the United States District Court for the District of Massachusetts Eastern Division, Case # # 1:20-CV-11895-WGY. In its complaint, VMS alleged that the Company has failed to make payments to VMS in the amount of $652,255 (plus interest of 8% from June 28, 2019) pursuant to a written settlement agreement. We filed an Answer to the Complaint and VMS filed a motion for judgment on the pleadings based on the admission that no payments have been made under the settlement agreement.

On April 6, 2021, the Company entered a definitive settlement agreement (the “Settlement”) with VMS, whereby (i) the Company paid to VMS, seventy-five thousand dollars ($75,000.00); (ii) the Company is required to make four (4) additional periodic payments to VMS, commencing thirty (30) days from the effective date of the Settlement (the “Effective Date”), each in the amount of one hundred sixty-five thousand sixty-eight dollars and fifty cents ($165,068.50); (iii) if VMS receives from the Company payments totaling six hundred twenty-five thousand dollars ($625,000.00) within forty-five (45) days from the Effective Date, VMS will accept such six hundred twenty-five thousand dollars ($625,000.00) as full satisfaction of the Company’s payment obligations under the Settlement; (iv) if VMS receives from the Company payments totaling six hundred fifty thousand dollars ($650,000.00) within sixty (60) days from the Effective Date, VMS will accept such six hundred fifty thousand dollars ($650,000.00) as full satisfaction of Company’s payment obligations under the Settlement; (v) if, within ninety-one (91) days of VMS’s receipt of any of the Company’s payments pursuant to its obligations in paragraph 1 of the Settlement, the Company commences, or a third party commences against the Company, any case, proceeding, or other action under the United States Bankruptcy Code, 11 U.S.C. § 101 et seq, which is not dismissed within thirty (30) days, then VMS’s release of the Company contained in paragraph 2 of the Settlement shall be null, void, and of no force or effect, and the Parties shall be returned to the position they were in prior to execution of this Agreement, except that VMS may retain any payment made to it by the Company, crediting same against those sums claimed by VMS. In connection with the Settlement, on April 14, 2021, the Company and the Lender entered into a commercial loan agreement, secured promissory note, and stock pledge agreement (“Loan Documents”) whereby the Lender has provided an immediate loan of $278,368.50 to the Company (the “Loan”) in consideration of a promissory note secured with a pledge of that number of shares of the Company’s common stock equal to three hundred percent (300%) of the Loan inclusive of the outstanding balance of the settlement entered into by and between the Company and VMS, for a reserved amount of 2,631,708 shares of Common Stock.

As of May 17, 2021, $384,932 was paid, in full satisfaction of the Company’s obligations of the Settlement.

Item 1A. Risk Factors

We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by these risks. Except as disclosed below, there have been no material changes to the risk factors listed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.2021 filed with the SEC on April 14, 2022 (the “Original 10-K”), as amended by Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on May 23, 2022 (the “Amendment”).

 


Risks RelatedAs previously described in Part II, Item 9A of the Original 10-K and of the Amendment, we began implementing a remediation plan to our Software Businessaddress the material weaknesses. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control over Financial Reporting

The ongoing coronavirus outbreak,Company’s restated its audited consolidated financial statements and measures takennotes for the years ended December 31, 2021, and 2020 included in response thereto, could continueAmendment No. 1 to have a material adverse effectthe Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 23, 2022. The restatement on our business, resultsfinancial statements, and the material weaknesses identified in our internal control over financial reporting identify that our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of operations and financial condition.

Our business is highly susceptible to changes in economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to financial markets. Efforts to control the spread of COVID-19 have led governments and other authorities to impose restrictions which have resulted in business closures and disrupted supply chains worldwide. As a result, transportation and supply chain companies such as ours have experienced slowdowns and reduced demand and could continue to further negatively impact our business.

Furthermore, quarantines, shelter in place orders, labor shortages due to illness and otherwise, business and facility closures or other disruptions to our operations, or our customers’ operations, have also adversely impacted demand for our services and our ability to provide services to our customers.

We have a history of operating losses and working capital deficiency and there is no assurance that we will be able to achieve profitability raise additional financing or continue as a going concern.

We have a history of operating losses and working capital deficiency. We have incurred recurring net losses of approximately $1.4 million and $1.2 million forExchange Act) during the three months ended March 31, 2022, have not been effective.


PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.

Sysorex, Inc., a Nevada corporation (the “Company”), entered into a Promissory Judgment Note dated as of August 15, 2018 (the “Note”), with Tech Data Corporation (“Tech Data”), pursuant to which the Company promised to pay the principal sum of $6,849,423.42 to Tech Data. The Note provides that interest shall accrue on the balance of the Note at the rate of 18% per annum. Due to miscommunication with Tech Data, the Company inadvertently failed to pay, when due, some of the installment payments in the aggregate principal amount of $3,341,801.80, as set forth in the Note and has defaulted under the Note.

On December 14, 2021, the Company became aware that a Confession of Judgment (the “Confession of Judgment”) had been entered against the Company in the Superior Court of the State of California, County of Santa Clara by Tech Data on September 24, 2021. The Confession of Judgement is entered for a total sum of $5,942,559.05, which is comprised of the principal sum of $3,341,801.80 and 2020, respectively. We hadprejudgment interest in the sum of $2,600,757.25.

Following a working capital deficiencynegotiation with Tech Data, the Company was able to reduce the Award by in excess of approximately $12.8$4.2 million, and $9.1 millionon January 13, 2022, the Company and Tech Data entered into a Settlement and Release Agreement (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company paid $1,375,000 on January 14, 2022. The Company recognized a gain on settlement of $1.5 million.

The Award was deemed satisfied in full. Among other things, Tech Data agreed to file an acknowledgment of full satisfaction of judgment attached as an exhibit to the Settlement Agreement, not take any further action against the Company in connection with or relating to the Judgment, and release the Company and its representatives from any and all claims, including the Judgment, which Tech Data may have against the Company based upon any transaction that occurred at any time before the date of the Settlement Agreement.

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 1A. Risk Factors

As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as amended (the “2021 10-K”), as updated from time to time. However, the Company is voluntarily providing the risk factor below. Other than as set forth below, as of March 31, 2021 and December 31, 2020, respectively. These circumstances raise substantial doubt about our ability to continue as a going concern within one year after the filing date that the financial statements included elsewhere inof this Quarterly Report on Form 10-Q, are issued. Implementationthere have been no material changes to the risk factors faced by the Company from those previously disclosed in the 2021 10-K, as updated from time to time.

We do not currently have enough authorized shares of common stock under our Articles of Incorporation, as amended, to meet all of our planspotential obligations to third parties.

Our Articles of Incorporation, as amended, provide for 499,560,659 authorized shares of our common stock. As of May 23, 2022, we have 494,443,611 shares of common stock issued and outstanding. As of May 23, 2022, holders of our abilityconvertible debentures have delivered notices of conversion covering an aggregate of 321,241,575 shares of common stock. If we issued the shares that are subject to continuethe notices of conversion that have been delivered, it would result in us issuing more shares than what we have authorized. Accordingly, in order to meet all of such obligations, we will need to amend our Articles of Incorporation, as a going concern will depend upon attaining and maintaining profitable operations and raising additional capital as needed, but thereamended, to increase the authorized shares of our common stock. We can begive no assurance that we will be able to raise any further financing.

Our ability to generate positive cash flow from operations is dependent upon sustaining certain cost reductions and generating sufficient revenues. We have funded our operations primarily with a revolving loan from Inpixon, our former parent. Our history of operating losses, the amount of our debt and the potential for significant judgments to be rendered against us may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings or debt financings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern, and we may have to curtail, or even to cease, certain operations. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.

Adverse judgments or settlements in legal proceedings could materially harm our business, financial condition, operating results and cash flows.

We are subject to pending claims for non-payment by certain vendors in an aggregate amount of approximately $5.8 million as of March 31, 2021, which is approximately 331%affirmative vote of our total assets. We may also be a partyshareholders to other claims that arise from time to time in the ordinary courseso amend our Articles of our business,Incorporation, as amended, which may include those related to, for example, contracts, sub-contracts, protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array of state and federal statutes, rules and regulations that pertain to different aspects of our business. We may also be required to initiate expensive litigation or other proceedings to protect our business interests. There is a risk that we will not be successful or otherwise be able to satisfactorily resolve any pending or future litigation. In addition, litigation and other legal claims are subject to inherent uncertainties and management’s view of currently pending legal matters may change in the future. Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable judicial or jury decisions and the differing laws and judicial proclivities regarding damage awards among the states in which we operate. Unexpected outcomes in such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings (possibly resulting in changes in established reserves), could have a material adverse effect on our business, financial condition, results of operations and cash flows. Due to recurring losses and net capital deficiency, our current financial status may increase our default and litigation risks and may make us more financially vulnerable in the face of pending or threatened litigation.  


We are a holding company whose subsidiaries are given certain degree of independence and our failure to integrate our subsidiaries maymaterially adversely affect our financial condition and the market for our shares.

.


 

We have given our subsidiary companies and their executives a certain degree of independence in decision-making. On the one hand, this independence may increase the sense of ownership at all levels, on the other hand it has also increased the difficulty of the integration of operation and management, which has resulted in increased difficulty of management integration. In the event we are not able to successfully manage our subsidiaries this will result in operating difficulties and have a negative impact on our business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

a) Sales of Unregistered Securities

None.

c) Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See the Exhibit Index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 23, 2022SYSOREX, INC.
By:/s/ Vincent Loiacono
Vincent Loiacono
Chief Financial Officer
(Principal Financial Officer)


EXHIBIT INDEX

Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Filed or Furnished Herewith
10.38 Settlement and Release Agreement, dated as of January 13, 2022, by and between Sysorex, Inc. and Tech Data Corporation 8-K 000-55924 10.1 January 13, 2022  
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         X
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002         X
32.1# Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         X
101.INS* Inline XBRL Instance Document         X
101.SCH* Inline XBRL Taxonomy Extension Schema Document         X
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document         X
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document         X
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document         X
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document         X
104* 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

         X

#This exhibit is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act.


SIGNATURES

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 18, 202123, 2022SYSOREX, INC.
  
 By:/s/ Vincent Loiacono
  

Vincent Loiacono

Chief Financial Officer

(Principal Financial Officer

Authorized Officer

and Principal Accounting Officer)


EXHIBIT INDEX

Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith
2.1 Agreement and Plan of Merger, dated as of April 8, 2021, by and among Sysorex, Inc., TTM Acquisition Corp., and TTM Digital Assets & Technologies, Inc. 8-K 000-55924 10.1 April 14,
 2021
  
             
3.1.1 Articles of Incorporation of Sysorex, Inc. 10-12G/A 000-55924 3.1 August 13,
2018
  
             
3.1.2 Certificate of Amendment to Articles of Incorporation, effective as of July 30, 2019. 8-K 000-55924 3.1 July 29,
2019
  
             
3.2.1 Articles of Merger pursuant to NRS Chapter 92A between Inpixon USA and Sysorex, Inc. 10-12G/A 000-55924 3.2.1 August 13,
2018
  
             
3.2.2 By-Laws of Sysorex, Inc. 10-12G/A 000-55924 3.2.2 August 13,
2018
  
             
4.1 Secured Promissory Note, dated as of December 31, 2018. 8-K 000-55924 4.1 December 31,
2018
  
             
4.2 PPP Loan Forgiveness Letter, dated as of April 2, 2021         X
             
10.1 Commercial Loan Agreement and Promissory Note, dated as of March 31, 2021 by and between Sysorex, Inc. and First Choice International Company, Inc. 8-K 000-55924 10.1 April 06, 2021  
             
10.2 Stock Pledge Agreement, dated as of March 31, 2021 by and between Sysorex, Inc. and First Choice International Company, Inc. 8-K   000-55924  10.2 April 06, 2021  
             
10.3 Settlement Agreement by and between Sysorex, Inc. and VMS Software, Inc. dated as of April 6, 2021. 8-K 000-55924 10.1 April 12, 2021  
             
10.4 Securities Settlement Agreement dated April 14, 2021, by and between Sysorex, Inc. and Inpixon. 8-K 000-55924 10.2    
             
10.5 Right to Shares Letter Agreement dated April 14, 2021, by and between Sysorex, Inc. and Inpixon. 8-K/A 000-55924 10.3    
             
10.6 Securities Settlement Agreement dated April 14, 2021, by and between Sysorex, Inc. and Systat Software, Inc. 8-K 000-55924 10.4    
             
10.7 Exchange Agreement dated April 14, 2021, by and between Sysorex, Inc. and Chicago Venture Partners, L.P. 8-K 000-55924 10.5    
             
10.8 Securities Settlement Agreement dated April 14, 2021, by and between Sysorex, Inc. and First Choice International Company, Inc. 8-K 000-55924 10.6    


10.9 Right to Shares Letter Agreement dated April 14, 2021, by and between Sysorex, Inc. and First Choice International Company, Inc. 8-K 000-55924 10.7    
             
10.10 Amendment No. 1 to Trademark License Agreement by and between Sysorex, Inc. Sysorex Government Services, Inc., and Sysorex Consulting, Inc., dated April 14, 2021. 8-K 000-55924 10.8    
             
10.11 Consulting Agreement dated April 14, 2021 by and between Sysorex, Inc. and Nadir Ali. 8-K 000-55924 10.9    
             
10.12 Form of Securities Subscription Agreement dated April 14, 2021. 8-K 000-55924 10.10    
             
10.13 Registration Rights Agreement dated April 14, 2021 by and among Sysorex, Inc. and the parties to the Securities Subscription Agreement and certain other parties. 8-K 000-55924 10.11    
             
10.14 Commercial Loan Agreement and related documents dated April 14, 2021 by and between Sysorex, Inc. and First Choice International Company, Inc. 8-K 000-55924 10.12    
             
31.1 Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 X
     
31.2 Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 X
     
32.1# Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X
     
32.2# Certification of the Company’s Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X
     
101.INS XBRL Instant Document X
     
101.SCH XBRL Taxonomy Extension Schema Document X
     
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X
     
101.DEF XBRL Taxonomy Extension Definition Linkbase Document X
     
101.LAB XBRL Taxonomy Extension Label Linkbase Document X
     
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X

45

#As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the SEC and are not incorporated by reference in any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in such filings.

41

 

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