UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2022

 

OR

 

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

 

For the transition period from         to         

 

Commission file number: 000-55924

 

SYSOREX, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   68-0319458
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

13880 Dulles Corner Lane
Suite 175
Herndon, Virginia
  20171
(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

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

 

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

 

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

 

 

 

 

 

 

 

 

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022

 

TABLE OF CONTENTS

 

  Page
   
Special Note Regarding Forward-Looking Statements and Other Information Contained in this Report ii
   
PART I - FINANCIAL INFORMATION 1
     
Item 1. Financial Statements (Unaudited) 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2022, and December 31, 2021 2
     
  Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2022, and 2021 3 
     
  Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months ended March 31, 2022, and 2021 4 
     
  Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2022, and 2021
     
  Notes to Unaudited Condensed Consolidated Financial Statements
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
     
Item 4. Controls and Procedures 40
     
PART II - OTHER INFORMATION 41
     
Item 1. Legal Proceedings 41
     
Item 1A. Risk Factors 41
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
Item 3. Defaults Upon Senior Securities 42
     
Item 4. Mine Safety Disclosure 42
     
Item 5. Other Information 42
     
Item 6. Exhibits 42
     
Signatures 43

 

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

 

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   $ 765     $
-
 
Product revenue     4,529      
-
 
Services revenue     508      
-
 
Total Revenues     5,802      
-
 
                 
Operating costs and expenses                
Mining cost     144      
-
 
Product cost     2,015      
-
 
Services cost     262      
-
 
Sales and marketing     398      
-
 
General and administrative     3,568       58  
Management fee    
-
      321  
Depreciation     457      
-
 
Impairment of digital assets     1,236      
-
 
Amortization of intangibles     143      
-
 
Total Operating Costs and Expenses     8,223       379  
                 
Loss from Continuing Operations     (2,421 )     (379 )
                 
Other Income (Expense)                
Interest expense     (974 )    
-
 
Gain on sale of digital assets     1,107       87  
Revaluation of conversion feature derivative liability     (838 )     -  
Loss on extinguishment of debt     (549 )     -  
Other income, net     6       (2 )
Total Other Income (Expense)     (1,248 )     85  
                 
Loss from continuing operations before income taxes     (3,669 )     (294 )
                 
Income tax expense    
-
      178  
                 
Loss from continuing operations     (3,669 )     (472 )
Gain from discontinued operations     636       1,683  
Net (Loss) Income   $ (3,033 )   $ 1,211  
                 
Net Loss per share - basic and diluted - continuing operations   $ (0.021 )   $ (0.001 )
Net Income per share - basic and diluted - discontinued operations   $ 0.004     $ 0.020  
Weighted Average Shares Outstanding - basic and diluted     174,980,542       83,039,900  

 

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

 

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

 

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

 

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

 

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 75% of its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The Assets to be sold will not include the Company’s Ether funds generated prior to and held at Closing and any graphics processing units or associated assets maintained and operated by the Company at a co-located facility in North Carolina. The definitive terms of the sale of Assets will be set forth in definitive transaction agreements (the “Definitive Documentation”) to be executed by the parties.

 

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

 

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

 

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

 

Note 2 — Going Concern

 

As of March 31, 2022, the Company had an approximate cash balance of $0.9 million, a 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 unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued.

 

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

 

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

 

Discontinued Operations

 

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

 

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 3-years and remaining mining equipment (primarily chassis, power supply units, computer memory, motherboards, risers, and fans) is depreciated over the estimated useful life of 5-years.

 

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

 

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

 

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

 

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

 

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

 

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 $0.9 million as of March 31, 2022, and December 31, 2021.

 

Accounts Receivable, net

 

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

 

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 $1.2 million and $0, respectively.

 

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 $1.1 million for the three months ended March 31, 2022. The Company recognized realized gains through the sale and disbursement of digital assets during the three-month period ended March 31, 2021, of $0.08 million.

 

Investments

 

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

 

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

 

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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   $
-
    $ 4,529     $ 4,529  
Services Revenue    
-
      508       508  
Mining Income     765      
-
      765  
Total Revenues   $ 765     $ 5,037     $ 5,802  
                         
Product Cost   $
-
    $ 2,015     $ 2,015  
Services Cost    
-
      262       262  
Mining Cost     144      
-
      144  
Other Operating Expenses   $ 3,908     $ 1,894     $ 5,802  
                         
Operating Income (Loss)   $ (3,287 )   $ 866     $ (2,421 )
                         
Total Segment Assets   $ 5,741     $ 8,859     $ 14,600  

 

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Note 6 — Discontinued Operations

 

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

 

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 $6.1 million as of March 31, 2022, and December 31, 2021. No adjustments were recorded to the carrying value of the assets held for sale as the estimated fair value less selling costs exceeded the carrying value. The following table details the assets and liabilities of the Company’s TTM Assets that were classified as assets held for sale and discontinued operations for the periods presented (in thousands):

  

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

 

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

 

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

 

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

 

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

 

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)   $ 493     $ 493  
GPUs     6,033       6,033  
Accumulated Depreciation:                
Mining Equipment (non-GPUs)     (164 )     (123 )
 GPUs                (2,742 )     (2,326 )
Mining Equipment, net   $ 3,620     $ 4,077  

 

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

 

Note 8 — Intangible Assets

 

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

 

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

 

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

 

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

 

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

 

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

 

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 10% of sales during the three months ended March 31, 2022 (in thousands of dollars):

 

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

 

As of March 31, 2022, Customer B represented approximately 88% of total accounts receivable. One other customer represents approximately 11% of total accounts receivable.

 

For the three months ended March 31, 2022, one vendor represented approximately 82% of total purchases. Purchases from this vendor during the three months ended March 31, 2022, was approximately $3.2 million.

 

Geographic and Technology Concentration

 

The Company had geographic concentration risk with mining operations being exclusively carried out within New York in the first quarter of 2022 and throughout 2021, 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   $ 17,721     $ 19,439  

 

  

2021 Convertible Debentures & Warrants

 

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

 

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

 

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

 

Debenture Default

 

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

 

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

 

Convertible Debenture Conversion

 

For the three months ended March 31, 2022, the convertible debenture holders converted approximately $1.6 million of debt owed to them into approximately 72.7 million shares. As a result of the conversions, the Company recorded a loss on debt extinguishment of approximately $0.5 million and settled approximately $0.7 million of the derivative liability associated with the conversion option.

 

23

 

 

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

 

Note 11 — Fair Value Measurement

 

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

 

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

 

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

 

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

 

The Company recorded the common stock derivative liability at fair value as of March 31, 2022, through a transfer from 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   $ 8,355     $ -     $ 8,355  
                         
Transferred to equity on debt conversion     (769 )     -       (769 )
Transferred from equity on recognition of derivative liability     -       314       314  
Increase in fair value included in earnings     838       -       838  
                         
Balance as of March 31, 2022   $ 8,424     $ 314     $ 8,738  

 

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

 

Note 13 — Equity

 

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

 

Stock Options  

 

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

 

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

 

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

 

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     5,926,763     $        *  
Granted     -       -  
Exercised     418,931       -  
Outstanding, March 31, 2022     5,507,832     $ -  

 

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

 

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

 

Restricted Stock Units

 

The following table represents the activity related to the Company’s restricted stock awards granted to employees and directors during the three months ended March 31, 2022:

 

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

 

The unrecognized stock compensation at March 31, 2022 is $0.1 million.

 

26

 

 

Share Derivative Liabilities

 

As the amount of common stock on an as converted basis as of March 31, 2022, exceeded our authorized share amount, the Company’s outstanding warrants, stock options and vested but unissued restricted stock shares (“RSUs”) were reclassified to derivative liabilities in the consolidated financial statements. This results in non-cash gains or losses each period during the term of the warrants, stock options, RSU vesting period and convertible debt. The table below summarizes the reclassified share derivative liabilities as of March 31, 2022 (dollars in thousands):

 

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

 

Note 14 — Commitments and Contingencies

 

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 $1.8 million for payment of unpaid invoices. On or about January 29, 2018, the parties executed a settlement agreement resolving the matter. No court action was filed. The liability of approximately $0.6 million has been accrued and includes interest $0.1 million calculated based on a default rate, which is included as a component of accounts payable and accrued liabilities as of March 31, 2022, in the unaudited condensed consolidated balance sheets.

 

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 $336,000 plus $20,000 in legal fees. On August 10, 2018, the Company and vendor entered into a settlement agreement and the Company is repaying the debt in monthly installments. The liability of approximately $0.2 million has been accrued and includes interest $0.08 million calculated based on a default rate and is included as a component of accounts payable and accrued liabilities as of March 31, 2022, in the unaudited condensed consolidated balance sheets.

 

The Company entered into a Registration Rights Agreement (the “RRA”) dated April 13, 2021. The Company had ninety (90) calendar days following the closing date of its Merger with TTM Digital Assets & Technologies, Inc. on April 14, 2021, 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 $0.2 million recorded in the unaudited condensed consolidated balance sheets – Accrued Liabilities for the year ended March 31, 2022. The RRA terminated as of October 14, 2021, by its own terms.

 

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. (the “Settlement Amount”) on January 14, 2022. The Company recognized a gain on settlement of $1.5 million and has recorded in product costs in the condensed consolidated statement of operations. The Award was deemed satisfied in full. Among other things, Tech Data agreed to file an acknowledgment of full satisfaction of judgment attached as an exhibit to the Settlement Agreement, not take any further action against the Company in connection with or relating to the Judgment, and release the Company and its representatives from any and all 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.

 

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 5,800 square feet, pursuant to a lease that expires on May 31, 2025. The total amount of rent expense under the leases is recognized on a straight-line basis over the term of the leases. The Company has no other operating or financing leases with terms greater than 12 months.

 

As of March 31, 2022, future minimum operating leases commitments are as follows:

 

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

 

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

 

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

 

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.

 

28

 

 

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. At the signing of the Hosting Contract an estimated 382 data mining rigs were covered at an estimated monthly cost of approximately $21,556 ($260,000 per year). The Company recorded $64,667 in mining costs in the condensed statement of operations for the three months ended March 31, 2022.

 

Services Agreement

 

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

 

Master Services Agreement

 

On April 29, 2021, the Company entered into a Master Services Agreement with CoreWeave to provide support to management relating to cryptocurrency expertise, marketing, and other operational matters for a three-month term. The compensation for these services is a fixed fee of $35,000 per 30-day period, which includes 175 hours per period. The Company did not incur service costs for the three months ended March 31, 2022. Effective February 24, 2022, the master services agreement has been terminated.

 

Bespoke Growth Partners, Inc. (“Bespoke”)

 

Effective as of April 15, 2021, the Company entered into a consulting agreement with Bespoke. Under the terms of the consulting agreement, the Company agreed to total compensation for services of $975,000 which of which $775,000 was paid during the year ended December 31, 2021. The Company made an additional payment in accordance with the agreement of $200,000 in January 2022. The Company recognized an additional $167,000 amount of expense during the three months ended March 31, 2022, which is recorded as consultant fees in general and administrative in the condensed consolidated statement of operations. Lastly, the Company may request Bespoke to expand its services.

 

Effective as of January 13, 2022, the Company entered into a consulting agreement with Bespoke. Under the terms of the consulting agreement, the Company is to pay Bespoke a gross advisory fee of $975,000 for identifying the Ostendo acquisition and services related to the Company.. On March 23, 2022, the Company paid off the balance owed for this service. The Company expensed the advisory fee during the three months ended March 31, 2022, which is recorded as consultant fees in general and administrative in the condensed consolidated statement of operations.

 

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 $25,000 through January 31, 2022, as consultant fees in general and administrative in the condensed consolidated statement of operations.

 

The business advisory services agreement expired January 31, 2022.

 

Note 16 — Prepaid Expenses and Other Current Assets

 

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

 

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

 

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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.

 

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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.

 

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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.

 

38

 

 

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 )

 

39

 

 

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.

  

40

 

 

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.

 

41

 

 

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.

 

42

 

 

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)

 

43

 

 

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.

 

44

 

 

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)

 

 

 

45

 

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