SYSX Sysorex Inc (CE)

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 June 30, 2023

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)

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.

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 August 14, 2023, there were 2,484,427 shares of the Registrant’s Common Stock, $0.00001 par value per share outstanding.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

TABLE OF CONTENTS

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:

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”).

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited 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 unaudited 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 three and six months ended June 30, 2023, 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, 2022, and 2021 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on June 13, 2023. 

Sysorex, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

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

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

Sysorex, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

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

(Unaudited)

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

Sysorex, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

For the Six Months Ended June 30, 2023, and 2022

(In thousands of dollars, except share data)

(Unaudited)

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

Sysorex, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands of dollars)

(Unaudited)

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

SYSOREX, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2022 and 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on June 13, 2023 (the “10-K ”). 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, as the same may be updated from time to time.

Overview of the Company’s Subsidiaries

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.

TTM Digital

TTM Digital is a digital asset technology company that previously operated specialized cryptocurrency mining processors and was previously focused on the Ethereum blockchain ecosystem. As of September 15, 2022, Ethereum switched from a Proof of Work model to Proof of Stake model and as a result, the Company is no longer mining Ethereum or any other cryptocurrency.

The Company made the decision to divest certain mining equipment and the data center of the TTM Digital reporting unit and commenced discussions with a third party to execute an asset sale in the fall of 2021.  On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”). Pursuant to the Heads of Terms, the Company and Ostendo agreed to certain terms related to the Company’s sale of its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The Company 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. The Company has in good faith worked with Ostendo to ensure all closing terms and closing conditions were mutually agreed upon, however, the parties have not entered into definitive transaction agreements and accordingly, it was determined in November 2022 that the transaction will not proceed. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, and thereafter, the Company received confirmation that the Certificate of Designations for the preferred stock had been filed and accepted by the California Secretary of State on November 14, 2022. The Company retained 30,000 shares of the investment in Ostendo. As of June 30, 2023, the Company has recorded $0.2 million in the condensed consolidated balance sheets as equity investment in Ostendo.

Subsequent to the Ostendo transaction not proceeding, TTM Digital explored alternate long-term uses for its assets and concluded that mining other coins was not a feasible path forward due to the volatility in crypto prices, and repurposing its assets was not a viable path forward as it would require significant upfront investments to its datacenter infrastructure. TTM Digital is currently exploring sales opportunities for its GPU assets and datacenter located in Lockport, NY. 

Discussion of Results of Operations of SGS for the Three Months Ended June 30, 2023, and 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.

SGS revenues for the three months ended June 30, 2023, and 2022, were approximately $1.6 million and $3.5 million, respectively. This includes approximately 89% of sales coming from the Company’s top two customers. SGS product and service costs for the three months ended June 30, 2023, and 2022, were approximately $1.4 million and $3.2 million. This includes approximately 65% of product costs from the Company’s top two vendors.

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 prepaid 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.

SGS also reported for the three months ended June 30, 2023, and 2022, $0.2 million and $0.3 million, respectively, in sales and marketing costs, $2.4 million and $1.6 million, respectively, in general and administrative costs, an impairment of its digital assets in 2022 of $1.2 million, and $0.1 million in amortization costs, resulting in a loss from operations of approximately $2.5 million and $2.9 million, respectively. The Company continues to search for paths to drive costs down and increase its cash position.

Discussion of Results of Operations of TTM Digital for the Three Months Ended June 30, 2023, and 2022

The activities for TTM revenues and costs for the three months ended June 30, 2022, represent discontinued operations.

Ethereum’s transition to proof of stake (“POS”) took place on September 15, 2022, and has had a direct negative impact on the company’s ability to generate revenue. TTM Digital no longer holds any Ethereum or other crypto tokens or crypto assets currently, does not conduct any mining activities, and does not have any plans to mine crypto tokens in the future.

The Company no longer mines Ethereum and as a result did not incur revenue for the three months ended June 30, 2023.

For the three months ended June 30, 2023, TTM Digital reported in continuing operations, general and administrative costs of approximately $0.3 million. TTM incurred $0.1 million of partially liquidated damages included in general and administrative costs related to the Company’s inability to timely file certain public information. The balance included in general and administrative costs is largely made up of salaries and wages.

For the three months ended June 30, 2022, TTM Digital reported in Note 5 – discontinued operations, $1.3 million in revenues. In addition, TTM Digital reported $0.4 million in mining costs, $0.2 million in general and administrative costs, $1.0 million of impairment of fixed assets, and $0.5 million in depreciation costs, resulting in a net loss from operations of $0.7 million.

For the three months ended June 30, 2022, TTM Digital reported in continuing operations, $0.7 million in general and administrative costs.

Discussion of Results of Operations of SGS for the Six Months Ended June 30, 2023, and 2022

SGS revenues for the six months ended June 30, 2023, and 2022, were approximately $5.8 million and $8.6 million. SGS revenues resulted from product sales to U.S. governmental agencies and local county governments. This includes approximately 86% of sales coming from the Company’s top two customers in 2023.

Product, and service costs for the six months ended June 30, 2023, and 2022, of approximately $5.0 million and $5.5 million. This includes approximately 63% of product costs from the Company’s top two vendors. A gain on a vendor liability settlement of $1.5 million was recorded in 2022. Without this gain, product and service costs would approximate $7.1 million. The margin effect on the revenue and costs as presented is approximately 32% in 2022, however without the one-time settlement gain of $1.5 million, the margin is approximately 14% in 2022. The margin effect in 2023 is approximately 13%.

Selling, general, and administrative expenses (“SG&A”) for the six months ended June 30, 2023, and 2022, was $4.2 million and $3.1 million, which were associated with compensation and payroll tax costs, and professional fees related the Heads of Terms investment and sale of TTM assets and ongoing advisory services.

Other income and expense for the six months ended June 30, 2023, was interest expense of approximately $0.7 million. Other income and expense for the six months ended June 30, 2022, was approximately $4.6 million which included interest incurred on the Company’s convertible debt of approximately of $1.7 million, a loss on extinguishment of debt of $1.4 million, a realized gain on sale of digital assets $1.2 million and a conversion feature derivative liability valuation of $2.7 million.

Discussion of Results of Operations of TTM Digital for the Six Months Ended June 30, 2023, and 2022

The activities for TTM revenues and costs for the six months ended June 30, 2022, represent discontinued operations.

Ethereum’s transition to proof of stake (“POS”) took place on September 15, 2022, and has had a direct negative impact on the company’s ability to generate revenue. TTM Digital no longer holds any Ethereum or other crypto tokens or crypto assets currently, does not conduct any mining activities, and does not have any plans to mine crypto tokens in the future.

The Company no longer mines Ethereum and as a result did not incur revenue for the six months ended June 30, 2023.

For the six months ended June 30, 2023, TTM Digital reported in continuing operations, general and administrative costs of approximately $1.1 million. TTM incurred $0.73 million of partially liquidated damages included in general and administrative costs related to the Company’s inability to timely file certain public information. The balance included in general and administrative costs is largely made up of salaries and wages. The costs associated with discontinued operations of $0.04 million were attributable to salaries and wages.

For the six months ended June 30, 2022, TTM Digital reported in Note 5 – discontinued operations, $3.3 million in revenues. In addition, TTM Digital reported $0.9 million in mining costs, $0.5 million in general and administrative costs, $1.0 million of impairment of fixed assets, and $0.9 million in depreciation costs, resulting in a net gain from operations of $0.06 million.

Liquidity and Capital Resources as of June 30, 2023

Going Concern

As of June 30, 2023, the Company had an approximate cash balance of $0.3 million, a working capital deficit of approximately $23.6 million, and an accumulated deficit of approximately $67.2 million. In an effort to raise capital, on October 18, 2022, the Company completed a $0.5 million private placement, and on April 3, 2023, the Company sold investments in certain preferred shares held for approximately $0.18 million to a related party. Despite these efforts to raise capital, the aforementioned factors continue to 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.

The Company does not believe that its capital resources as of June 30, 2023, its ability to settle a portion of existing convertible debt obligations through issuance of the Company’s shares, availability on the SouthStar facility to finance cash advances to suppliers, purchase orders and invoices, reauthorization of key vendors and credit limitation improvements will be sufficient to fund planned operations during the next twelve months. Additionally, the Company is in default on the aforementioned convertible debt, which was due to be repaid in July 2022, and is accruing related interest, late fees and other penalties. As a result of the above factors, the Company will need additional funds to fulfil its obligations. On September 22, 2022, the shareholders of the Company approved an increase in the Company’s authorized shares of common stock to 3 billion shares; however, all of the Company’s authorized shares have been issued or reserved since October 21, 2022, resulting in unfilled conversion notices and an inability to fill potential future conversion notices from convertible debt holders. In order for the Company to fulfil any further conversion obligations, on August 7, 2023, the Company effectuated a 1:1000 reverse stock-split. Prior to the reverse stock split, existing unfilled conversion notices received in excess of available and authorized shares as of June 30, 2023, totaled 1,159,495,000 pre-split, and 1,159,495 on a post-split basis. In order to satisfy all possible conversion obligations from existing debtholders as of the date of this report, the Company estimates it would need 47.3 million shares based on an assumed conversion price of $0.34 per share, using an August 7, 2023, 5-day VWAP with a 50% discount out of the 3 billion currently authorized. Given these circumstances and the potential for future market price declines, there can be no assurance that the Company will be able to satisfactorily fulfil such obligations.

The Company continues to explore a number of other possible solutions to its financing needs, including 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. The Company will utilize its current contracts that are not limited to a single branch of government or a specific agency as these contracts can provide the Company with an opportunity to attain new solutions and service type orders. The Company will also utilize SGS’s small business status to partner with prime contractors on larger orders. The Company currently utilizes SouthStar to finance purchase orders and it also can factor its receivables if needed to fund operations. After considering the plans to alleviate substantial doubt, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Our capital resources and operating results as of and through June 30, 2023, consist of the:

Liquidity and Capital Resources as of June 30, 2023, Compared to June 30, 2022

The Company’s net cash flow used in operating, investing and financing activities for the six months ended June 30, 2023, and 2022 and certain balances as of the end of those periods are as follows (in thousands):

Operating Activities:

Net cash used in operating activities during the six months ended June 30, 2023, and 2022, was $(0.2) million and $(5.6) million, respectively. Net cash used in operating activities during the six months ended June 30, 2023, consisted of the following (in thousands):

The non-cash income and  expenses of $(174), consisted of (in thousands):

The net proceeds of cash due to changes in operating assets and liabilities totaled ($5,140) and consisted of the following (in thousands):

Investing Activities:

Net cash provided by investing activities during the six months ended June 30, 2023, was approximately $0.2 million , primarily driven from proceeds from the sale of its equity investment in Ostendo. Net cash provided by investing activities during the six months ended June 30, 2022, was approximately $5.4 million, primarily driven from proceeds from the sale of digital assets of $7 million, offset by its equity investment in Ostendo of $1.6 million.

Financing Activities:

The company did not incur financing activities for the six months ended June 30, 2023, and 2022.

Critical Accounting Policies and Estimates

We consider certain accounting policies related to Revenue Recognition, Impairment of Long-Lived Assets and Derivative Liabilities, to be critical accounting policies that require the use of significant judgements and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions.

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:

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 a direct warranty to the customer with the Company’s own personnel as the customer requires a 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 of 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. 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 and six months ended June 30, 2023, 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.

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. The 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. An impairment loss of $0.1 million and $0.9 million was recorded for long-lived assets in discontinued operations during the three and six months ended June 30, respectively, and is disclosed in Note 5 – Discontinued Operations.

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. Under the provisions of ASC 815-40, convertible instruments and warrants, which contain terms that protect holders from declines in the stock price (“reset provisions”), are also required to be accounted for in accordance with derivative accounting treatment under ASC 815-10. Additionally, the Company evaluates whether the amount of common stock on a 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.

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

For a discussion of recently issued accounting pronouncements, please see the Recent Accounting Standards section of Note 4 to our condensed consolidated financial statements, which is included in this Form 10-Q in Item 1.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures 

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(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 June 30, 2023, 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, 2022 filed with the SEC on June 13, 2023.

As previously described in Part II, Item 9A of Form 10-K, 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

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended June 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There is 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 $6.8 million 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 $3.3 million, 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 $5.9 million, which is comprised of the principal sum of $3.3 million and prejudgment interest in the sum of $2.6 million. Following a negotiation with Tech Data, the Company was able to reduce the Award by more than $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 $1.4 million 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.

On June 3, 2022, the Company became aware that a Complaint had been entered against the Company in the United States District Court Southern District of New York by ProActive Capital Partners, L.P, a convertible debenture holder. The Complaint is entered for injunctive relief to honor is stock conversion, recover damages, and receive payments due under the Debenture agreement. The convertible debenture principal and interest of $0.2 million is recorded in the consolidated balance sheets – accrued liabilities for the six months ended June 30, 2023. 

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, 2022, However, the Company is voluntarily providing the risk factors 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 2022 10-K, as updated from time to time.

We are currently in default under our convertible debentures. All our assets are encumbered to secure the payment of secured convertible debentures that will require payments if not previously converted to Common Stock.

We encumbered all our assets to secure the payment of indebtedness and accrued interest due on secured convertible debentures required to be repaid by approximately July 2022, subject to certain extensions, if not previously converted.

The Company’s outstanding obligations which encumber the Company’s assets to secure payment of certain secured convertible debt are as follows:

Because we are in default in repayment, our secured creditor could exercise its remedies, including the execution on all our assets, which would result in the termination of our activities. Unless we generate enough cash, we may not have sufficient funds to pay our debentures and other indebtedness when due. In such an event, we might be required to sell our assets and properties to meet our obligations, or to seek an extension to our debentures, or alternative debt or equity financing. This would also cause our stock price to decline and could make an investment in us worthless and would have a material adverse effect on our investors and the Company.

Even if we are able to cure our default on the debentures, the existence of these secured obligations and the terms of the securities purchase agreement may impair our ability to obtain capital from external sources in certain manners.

Our existing and future debt obligations could impair our liquidity and financial condition. We are currently in default under our convertible debentures. If we are unable to meet our debt obligations, the lenders could foreclose on our assets.

All of our assets are encumbered to secure the payment of secured convertible debentures that will require payments if not previously converted to common stock. We are currently in default on these debt obligations. Our debt and financial obligations:

We are in default under the secured convertible debentures. Since we have pledged substantially all of our assets to secure our obligations under the secured convertible debentures, the debt default could enable the lenders to foreclose on the assets securing such debt and could significantly diminish the market value and marketability of our common stock and could result in the acceleration of other payment obligations or default under other contracts.

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 3,000,000,000 authorized shares of our common stock. As of June 30, 2023, we have 2,484,427 shares of common stock issued and outstanding. As of June 30, 2023, holders of our convertible debentures have delivered notices of conversion covering an aggregate of 1,159,495 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 we have authorized. Accordingly, in order to meet all of these 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. 

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

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