UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
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As of May 23, 2022, there were
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND OTHER INFORMATION CONTAINED IN THIS REPORT
This report contains forward-looking 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” or other similar expressions in this report. In particular, these include statements relating to future actions; prospective products, applications, customers and technologies; future performance or results of anticipated products; and projected expenses and financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| ● | our ability to successfully integrate acquired businesses or new products, or to realize anticipated synergies in connection with mergers and acquisitions. |
| ● | the effect of COVID-19, closure of offices and site location(s); on our ability to service our customers resulting in less revenues; |
| ● | our cash position and our history of losses. |
| ● | our ability to achieve profitability. |
| ● | customer demand for the products and services we offer. |
| ● | the impact of competitive or alternative services, products, technologies, and pricing. |
| ● | increased delays in delivery of product due to worldwide strain on 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. |
| ● | 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. |
| ● | our ability to continue as a going concern. |
| ● | our ability to complete strategic transactions, which may include acquisitions, mergers, dispositions, joint ventures, or investments. |
| ● | lawsuits and other claims by third 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. |
| ● | authorized shares will be insufficient to convert debenture holders; and |
| ● | other factors discussed in this report. |
The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.
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, TTM Digital Assets & Technologies, Inc. (“TTM Digital”) and Sysorex Government Services, Inc. (“SGS”).
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying Condensed 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 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, 2022, 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, 2021, and 2020 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on 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.
1
Sysorex, Inc. and Subsidiaries
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 | $ | $ | ||||||
| Digital assets, net | ||||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Assets held for sale | ||||||||
| Total Current Assets | ||||||||
| Mining equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Pre-funded right- in Ostendo | ||||||||
| Operating lease right-of-use asset, net | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities | ||||||||
| Short-term debt | ||||||||
| Conversion feature derivative liability | ||||||||
| Operating lease obligation, current | ||||||||
| Common stock derivative liability | - | |||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease obligation - noncurrent | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Common stock, par value $ | ||||||||
| Treasury stock, at cost, | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated financial statements
2
Sysorex, Inc. and Subsidiaries
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, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Mining income | $ | $ | ||||||
| Product revenue | ||||||||
| Services revenue | ||||||||
| Total Revenues | ||||||||
| Operating costs and expenses | ||||||||
| Mining cost | ||||||||
| Product cost | ||||||||
| Services cost | ||||||||
| Sales and marketing | ||||||||
| General and administrative | ||||||||
| Management fee | ||||||||
| Depreciation | ||||||||
| Impairment of digital assets | ||||||||
| Amortization of intangibles | ||||||||
| Total Operating Costs and Expenses | ||||||||
| Loss from Continuing Operations | ( | ) | ( | ) | ||||
| Other Income (Expense) | ||||||||
| Interest expense | ( | ) | ||||||
| Gain on sale of digital assets | ||||||||
| Revaluation of conversion feature derivative liability | ( | ) | - | |||||
| Loss on extinguishment of debt | ( | ) | - | |||||
| Other income, net | ( | ) | ||||||
| Total Other Income (Expense) | ( | ) | ||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Gain from discontinued operations | ||||||||
| Net (Loss) Income | $ | ( | ) | $ | ||||
| Net Loss per share - basic and diluted - continuing operations | $ | ( | ) | $ | ( | ) | ||
| Net Income per share - basic and diluted - discontinued operations | $ | $ | ||||||
| Weighted Average Shares Outstanding - basic and diluted | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
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 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Convertible debt conversions | - | - | - | - | - | |||||||||||||||||||||||||||
| Reclassification of equity contracts to liabilities | - | - | - | - | ( | ) | - | - | ( | ) | ||||||||||||||||||||||
| Professional services | - | - | - | - | - | |||||||||||||||||||||||||||
| Exercise of Pre-funded warrants | - | - | - | - | - | - | -- | |||||||||||||||||||||||||
| Cashless exercise of warrants | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Vesting of restricted stock | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional
Paid-In | Subscription | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivables | Deficit | Total | |||||||||||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Distributions to shareholders | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Payments of subscription receivables | - | - | ||||||||||||||||||||||||||||||
| Exercise of Moon warrants | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||
| Balance – March 31, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
4
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation expense | ||||||||
| Amortization of right of use asset | ||||||||
| Realized gain on sale of digital assets | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt | ||||||||
| Change in fair value of debt conversion feature | ||||||||
| Gain on settlement of vendor liabilities | ( | ) | ||||||
| Impairment of digital assets | ||||||||
| Issuance of shares in exchange for services | ||||||||
| Changes in assets and liabilities: | ||||||||
| Digital assets – mining net of pool fees | ( | ) | ||||||
| Prepaid assets and other current assets | ||||||||
| Accounts receivable and other receivables | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities and other current liabilities | ( | ) | ||||||
| Net cash used in operating activities- continuing operations | ( | ) | ( | ) | ||||
| Net cash used in operating activities – discontinued operations | ( | ) | ( | ) | ||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | ||
| Cash Flows from Investing Activities | ||||||||
| Proceeds from sale of digital assets | $ | $ | ||||||
| Pre-funded right in Ostendo | ( | ) | ||||||
| Net cash provided by investing activities -continuing operations | ||||||||
| Net cash provided by investing activities – discontinued operations | ||||||||
| Net cash provided by investing activities | $ | $ | ||||||
| Cash Flows from Financing Activities | ||||||||
| Payment of subscription receivable | ||||||||
| Net cash provided by financing activities- continuing operations | ||||||||
| Net cash provided by financing activities – discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Conversion of debt to equity | $ | $ | ||||||
| Settlement of loan with mining equipment | ||||||||
| Digital assets received for members interest | ||||||||
| Distributions of digital assets to members | ||||||||
| Reclassification of equity contracts to liabilities | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
5
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature and description of Business
Description of Business
Sysorex, Inc. 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, SGS, a business that provides information technology products, solutions, and 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 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.
Heads 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
The Purchase Price shall be comprised of the issuance
to the Company of
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 $
Note 2 — Going Concern
As of March 31, 2022, the Company had an approximate cash balance of
$
6
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. In addition, the Ethereum network is in the process of implementing software upgrades and other changes to its protocol, which are intended to be a new iteration of the 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.
Note 3 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles that are generally accepted in the United States of 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 months ended March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, 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, 2021, and 2020 included in Amendment No. 1 to the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (the “SEC”) on May 23, 2022.
The Company’s significant accounting policies are discussed in Note 4 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
7
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 | $ | $ | ||||||
| Net Loss | ( | ) | ( | ) | ||||
| Net Loss per share – basic and diluted | ( | ) | ||||||
| Weighted Average Shares Outstanding – basic and diluted | ||||||||
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.
8
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 inter-company balances and transactions have been 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:
| ● | Revenue recognition | |
| ● | Fair value of digital assets | |
| ● | Fair value of the Company’s common stock | |
| ● | Expected useful lives and valuation of 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
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. |
9
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 recognizes revenue in accordance with ASC 606, the core 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 basic criteria must be met before revenue can be recognized:
| ● | Identification of the contract, or contracts, with a customer; |
| ● | Identification of the performance obligations in the contract; |
| ● | Determination of the transaction price; |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, the Company satisfies a performance 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.
10
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
SGS 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.
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 over time.
License and Maintenance Services Revenue Recognition
SGS 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.
11
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.
SGS’s professional services include fixed fee contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. 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. Anticipated losses are recognized as soon as they become known. For the three months ended March 31, 2022, 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 $
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 $
12
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 $
Digital 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 $
Investments
The Company accounts for its investments that represent
less than
13
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 — assets 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 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.
14
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.
15
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.
16
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 | ||||||||
| Weighted-average potential common shares considered outstanding | ||||||||
| Weighted-average common shares outstanding – basic | ||||||||
| Dilutive effect of options, warrants and restricted stock | ||||||||
| Weighted-average common shares outstanding – diluted | ||||||||
| 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 | ||||||||
17
Emerging Growth Company
Sysorex is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). As such, Sysorex is 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 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 | $ | $ | $ | |||||||||
| Services Revenue | ||||||||||||
| Mining Income | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Product Cost | $ | $ | $ | |||||||||
| Services Cost | ||||||||||||
| Mining Cost | ||||||||||||
| Other Operating Expenses | $ | $ | $ | |||||||||
| Operating Income (Loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| Total Segment Assets | $ | $ | $ | |||||||||
18
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
As a result of the decision 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.
19
The carrying value of the TTM Digital asset disposal group was $
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Current Assets | ||||||||
| Mining equipment and facilities, net | $ | $ | ||||||
| Investment in Style Hunter | ||||||||
| Total Current Assets | $ | $ | ||||||
| Total Assets associated with discontinued operations | $ | $ | ||||||
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 | $ | $ | ||||||
| Total revenues | ||||||||
| Operating costs and expenses | ||||||||
| Mining cost | ||||||||
| General and administrative | ||||||||
| Depreciation | ||||||||
| Total operating costs and expenses | ||||||||
| Gain from Operations | ||||||||
| Other Income (Expenses) | ||||||||
| Loss on sale of fixed assets | ( | ) | ||||||
| Income before taxes and equity method investee | ||||||||
| Provision for income taxes | ||||||||
| Income before equity method investee | ||||||||
| Share of net loss of equity method investee | ||||||||
| - | ||||||||
| Net income from discontinued operations | $ | $ | ||||||
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 | ( | ) | ( | ) | ||||
| Net cash provided by investing activities – discontinued operations | ||||||||
| Net cash provided by financing activities – discontinued operations | ||||||||
20
Note 7 — Mining Equipment, net
Mining equipment, net, was comprised of the following (in thousands of dollars):
| Balance as of | ||||||||
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Gross Mining Equipment: | ||||||||
| Mining Equipment (non-GPUs) | $ | $ | ||||||
| GPUs | ||||||||
| Accumulated Depreciation: | ||||||||
| Mining Equipment (non-GPUs) | ( |
) | ( |
) | ||||
| GPUs | ( |
) | ( |
) | ||||
| Mining Equipment, net | $ | $ | ||||||
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 $
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 | $ | $ | ( | ) | $ | |||||||
| Customer relationships | ( | ) | ||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||
Intangible assets as of December 31, 2021, consist of the following:
| Gross | Net | |||||||||||
| Carrying | Accumulated | Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Trade name | $ | $ | ( | ) | $ | |||||||
| Customer relationships | ( | ) | ||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||
The estimated future amortization expense associated with intangible assets is as follows:
| Calendar Years Ending December 31, | Amount | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
21
Note 9 — 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 sales derived by SGS from those customers that accounted for at least
| For the Three Months Ended | ||||||||
| March 31, 2022 | ||||||||
| $ | % | |||||||
| Customer A | $ | % | ||||||
| Customer B | $ | % | ||||||
As of March 31, 2022, Customer B represented approximately
For the three months ended March 31, 2022,
one vendor represented approximately
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, 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 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.
22
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 | $ | $ | ||||||
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 $
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)
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
Debenture Default
The Debentures provide that any monetary judgment
filed against the Company for more than $
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
Convertible Debenture Conversion
For the three months ended March 31, 2022, the convertible debenture
holders converted approximately $
23
Subsequent to March 31, 2022, convertible debenture holders have converted
approximately $
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 | $ | $ | $ | $ | ||||||||||||
| Common stock derivative liability | ||||||||||||||||
| Total derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total recurring fair value measurements | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2021 | ||||||||||||||||
| Recurring fair value measurements | ||||||||||||||||
| Derivative liability: | ||||||||||||||||
| Conversion feature derivative liability | $ | $ | $ | $ | ||||||||||||
| Common stock derivative liability | ||||||||||||||||
| Total derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total recurring fair value measurements | $ | $ | $ | $ | ||||||||||||
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 $
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 equity 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 | $ | $ | $ | |||||||||
| Transferred to equity on debt conversion | ( |
) | ( |
) | ||||||||
| Transferred from equity on recognition of derivative liability | ||||||||||||
| Increase in fair value included in earnings | ||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | |||||||||
24
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 | $ | $ | ||||||
| Revenue from mining | ||||||||
| Mining pool operating fees | ( | ) | ( | ) | ||||
| Management fees | - | ( | ) | |||||
| Impairment of digital assets | ( | ) | - | |||||
| Owners’ distributions | - | ( | ) | |||||
| Proceeds from sale of digital assets | ( | ) | ( | ) | ||||
| Transaction fees | ( | ) | - | |||||
| Realized gain on sale of digital assets | ||||||||
| Ending Balance | $ | $ | ||||||
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
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 | $ | |||||||
| Granted | $ | |||||||
| Exercised | ||||||||
| Forfeited or cancelled | ||||||||
| Outstanding, March 31, 2022 | $ | |||||||
| Exercisable, March 31, 2022 | $ | |||||||
The Company recognized approximately $
25
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, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Outstanding, March 31, 2022 | $ | |||||||
The weighted average contractual term as of March
31, 2022, is
| * | 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 directors during the three months ended March 31, 2022:
| Number of Restricted Stock Shares | Weighted Average Grant Price | |||||||
| Outstanding, January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ||||||||
| Unvested, March 31, 2022 | $ | |||||||
The
unrecognized stock compensation at March 31, 2022 is $
26
Share Derivative Liabilities
| March 31, 2022 | ||||
| Warrants | $ | |||
| Stock options | ||||
| RSUs vested but unissued | ||||
| Total share derivative liability | $ | |||
Note 14 — Commitments and Contingencies
Contractual Commitments
On September 5, 2017, prior to the merger and as
a result of a spinoff from Sysorex’s previous parent, a computer hardware supplier threatened legal action against the Company and
demanded approximately $
On January 22, 2018, a software vendor filed a
motion for entry of default judgment (the “Motion”) against SGS in the Circuit 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
$
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, to 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 $
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 $
Following a negotiation with Tech Data, the Company was able to reduce
the Award by in excess of $
27
Operating Leases/Right-of-Use Assets and Lease Liability
On
December 8, 2021, the Company’s principal executive offices moved to 13880 Dulles Corner Lane, Suite 120, Herndon, Virginia 20171.
We lease these premises, which consist of approximately
As of March 31, 2022, future minimum operating leases commitments are as follows:
| Calendar Years Ending December 31, | Amount | ||||
| 2022 | $ | | |||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Total future lease payments | |||||
| Less: interest expense at incremental borrowing rate | ( | ) | |||
| Net present value of lease liabilities | $ | ||||
Other assumptions and pertinent information related to the Company’s accounting for operating leases are:
| Weighted average remaining lease term: | ||||
| Weighted average discount rate used to determine present value of operating lease liability: | % |
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.
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Note 15 — Related Party Transactions
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 through June 30, 2022 and renews automatically for successive one
year renewal terms unless either party terminates within sixty (60) days of the expiration of the then current term.
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 mining costs for the three months ended March 31, 2022.
Master Services Agreement
Bespoke Growth Partners, Inc. (“Bespoke”)
Effective as of April 15, 2021, the Company entered
into a consulting agreement with Bespoke.
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 $
Ressense LLC
On August 4, 2021, the Company executed a six (6)
month business advisory services agreement with Ressense LLC. The services to be provided include potential business activities including
acquisition, merger and reverse merger opportunities. As compensation for the performance of services, the Company paid and recorded $
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 | $ | $ | ||||||
| Rent | ||||||||
| Vendor Payments | ||||||||
| Insurance | ||||||||
| License and Maintenance Contracts | ||||||||
| Other | ||||||||
| $ | $ | |||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction the unaudited financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the Company’s audited consolidated financial statements and 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 for the year ended December 31, 2021 filed with the SEC on May 23, 2022 (the “10-K Amendment”). In addition to historical information, the discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not limited to, risks described in the section entitled “Risk Factors” in the 10-K Amendment, as the same may be updated from time to time.
Overview of the Company’s Subsidiaries
TTM Digital
TTM Digital is a 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.
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.”
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 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 closing of the TTM Digital Asset sale will be subject to the satisfaction or waiver of customary closing conditions.
Sysorex Government Services
SGS is a 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, allow us to reach multiple customer public sector segments including federal, state and local governments, as well as educational institutions.
The 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 operations were under common control. All intercompany accounts and transactions have been eliminated between the combined entities.
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Basis of Presentation
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 Condensed Consolidated financial statements are presented fairly and in accordance with 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 4 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 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.
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.
31
Three months ended March 31, 2022, compared to three months March 31, 2021
Summary of TTM Digital Mining Result
The following table presents the roll forward of digital asset activity during the respective 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 three 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 fees, $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.
32
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 reported $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 included in the notes to the financial statements. Based on the two contracts, the Company acted as the agent and is required to record the costs against the related 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,
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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) | |||
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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
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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.
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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 in accordance with ASC 606, the core 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 basic criteria must be met before revenue can be recognized:
| ● | Identification of the contract, or contracts, with a customer |
| ● | Identification of the performance obligations in the contract |
| ● | Determination of the transaction price |
| ● | Allocation of the transaction price to the performance obligations in the contract; and |
| ● | Recognition of revenue when, or as, the Company satisfies a performance 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.
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Hardware and Software Revenue Recognition
SGS 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.
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.
License and Maintenance Services Revenue Recognition
SGS 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
SGS’s professional services include fixed fee contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. 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, 2022, 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.
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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.
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.
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-month ended March 31, 2022, was a loss of $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, 2022 (in thousands):
| 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 | ) | |
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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 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, 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. |
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.
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.
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rule€3a-1€) or 15€5(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive officer and principal financial officer, with assistance from other members of management. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of March 31, 2022, and based on this evaluation, our principal executive officer and principal financial officer concluded the disclosure controls and procedures were not effective as of that date due to the same material weaknesses in internal control over financial reporting that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 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”).
As previously described in Part II, Item 9A of the Original 10-K and of the Amendment, we began implementing a remediation plan to address 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 Company’s restated its audited consolidated financial statements and notes for the years ended December 31, 2021, and 2020 included in Amendment No. 1 to the 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 financial 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 the Exchange Act) during the three months ended March 31, 2022, have not been effective.
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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 prejudgment interest in 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 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 the filing date of this Quarterly Report on Form 10-Q, there 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 potential 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 convertible 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 the 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 amended, to increase the authorized shares of our common stock. We can give no assurance that we will obtain the requisite affirmative vote of our shareholders to so amend our Articles of Incorporation, as amended, which could materially adversely affect our financial condition and the market for our shares.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
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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, 2022 | SYSOREX, INC. | |
| By: | /s/ Vincent Loiacono | |
| Vincent Loiacono | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
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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. |
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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, 2022 | SYSOREX, INC. | |
| By: | /s/ Vincent Loiacono | |
| Vincent Loiacono | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
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