As filed with the Securities and Exchange Commission on November 17, 2022

Registration No. 333-__________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

SYSOREX, INC.

(Exact name of registrant as specified in its charter)

13880 Dulles Corner Lane, Suite 120

Herndon, Virginia 20171

Telephone: (800) 929-3871

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Wayne Wasserberg

Chief Executive Officer

13880 Dulles Corner Lane, Suite 120

Herndon, Virginia 20171

Telephone: (800) 929-3871

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Laura Anthony, Esq.

Craig D. Linder, Esq.

Anthony L.G., PLLC

625 N. Flagler Drive, Suite 600

West Palm Beach, Florida 33401

Telephone: (561) 514-0936

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☒

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 7(a)(2)(B) of the Securities Act. ☐

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) may determine.

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.

SYSOREX, INC. 

 500,000,000 Shares of Common Stock for Resale by Selling Securityholders

500,000,000 Shares of Common Stock Underlying Warrants for Resale by Selling Securityholders

This prospectus relates to the resale of up to 500,000,000 shares of our common stock, par value $0.00001 per share (the “Common Stock”) held by the selling securityholders named in this prospectus or their permitted transferees (the “Selling Securityholders”).

In addition, this prospectus relates to the resale of up to 500,000,000 shares of Common Stock (the “Warrant Shares”) upon the exercise of 500,000,000 warrants (the “Warrants”) held by Selling Securityholders, which entitle them to purchase Common Stock at exercise price of $0.001 per share.

The Selling Securityholders will sell their shares registered for resale in this prospectus at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at negotiated prices. To the extent required by the Securities Act of 1933, as amended (the ”Securities Act”) and the rules and regulations thereunder, the Selling Securityholders will be deemed to be “underwriters” within the meaning of the Securities Act.

We will not receive any of the proceeds from the sale of the securities owned by the Selling Securityholders. We will receive the proceeds of any cash exercise of the Warrants. See “Use of Proceeds” beginning on page 28 of this prospectus. We will bear all costs, expenses and fees in connection with the registration of these securities, including with regard to compliance with state securities or “blue sky” laws. The Selling Securityholders will bear all commissions and discounts, if any, attributable to their sale of securities. See “Plan of Distribution” beginning on page 96 of this prospectus.

Our Common Stock is currently quoted on the OTC Market Group, Inc.’s OTCQB tier under the symbol “SYSX.” On November 16, 2022, the last reported sale price of our Common Stock was $0.0009.

Our principal executive offices are located at 13880 Dulles Corner Lane, Suite 120, Herndon, Virginia 20171.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is ___________, 2022.

TABLE OF CONTENTS

No dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those contained in this prospectus in connection with the offer made by this prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by us or the selling stockholder. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent to the date hereof.

For investors outside the United States: We have not, and the selling stockholder has not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside the United States.

Cautionary Note Regarding Forward-Looking Statements

This prospectus contains forward-looking statements. Specifically, forward-looking statements may include statements relating to:

These forward-looking statements are based on information available as of the date of this prospectus and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

INDUSTRY AND MARKET DATA

We are responsible for the disclosure in this prospectus. However, this prospectus includes industry data that we obtained from internal surveys, market research, publicly available information and industry publications. The market research, publicly available information and industry publications that we use generally state that the information contained therein has been obtained from sources believed to be reliable. The information therein represents the most recently available data from the relevant sources and publications and we believe remains reliable. We did not fund and are not otherwise affiliated with any of the sources cited in this prospectus. Forward-looking information obtained from these sources is subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.

TRADEMARKS AND COPYRIGHTS

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. This prospectus may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property of their respective owners.

RISK FACTORS

An investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well as the other information contained in this prospectus, including our historical financial statements and related notes included elsewhere in this prospectus, before you decide to purchase our securities. Any one of these risks and uncertainties has the potential to cause material adverse effects on our business, prospects, financial condition and operating results which could cause actual results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value of our common shares and warrants. Refer to “Cautionary Statement Regarding Forward-Looking Statements.”

We may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause. These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks and uncertainties.

Summary of Material Risks

Below is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:

Risks Related to Our Business

We have a history of operating losses and our auditors have indicated that there is a substantial doubt about our ability to continue as a going concern.

As of December 31, 2021, the Company had an approximate cash balance of $0.6 million, working capital deficit of approximately $21.5 million, and an accumulated deficit of approximately $49.3 million. As of September 30, 2022, the Company had an approximate cash balance of $0.1 million, a working capital deficit of approximately $21.6 million, and an accumulated deficit of approximately $60.4 million. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months following the issuance of our financial statements. The accompanying 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 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 consolidated financial statements are issued.

The Company does not believe that its capital resources as of September 30, 2022, its ability to settle convertible debt obligations through issuance of the Company’s shares, availability on the SouthStar facility to finance purchase orders and invoices, reauthorization of key vendors and credit limitation improvements will be sufficient to fund planned operations during the next twelve months. As a result, the Company will need additional funds to support its obligations.

The Company will still require additional funds to support its obligations for the next twelve months. The Company is exploring a number of 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.

Our capital resources and operating results, as of and through December 31, 2021, consist of the following (i) an overall working capital deficit of $21.5 million, (ii) Cash and cash equivalents of $0.6 million, of (iii) Net cash used in operating activities of $(8.5) million, (iv) Net cash provided by investing activities of $2.2 million, and (v) Net cash provided by financing activities of $6.9 million. Our capital resources and operating results, as of and through September 30, 2022, consist of the following (i) an overall working capital deficit of approximately $21.6 million, (ii) Cash and cash equivalents of $0.1 million, of (iii) Net cash used in operating activities of $(6.9) million, (iv) Net cash provided by investing activities of $6.4 million, and (v) Net cash provided in financing activities of $0 million.

We have material weaknesses in our internal control over financial reporting.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting. Our management assessed the effectiveness of our disclosure controls and procedures as of December 31, 2021 and concluded that we had material weaknesses in our internal control over financial reporting and therefore, our disclosure controls and procedures may not be effective in providing material information required to be included in any future periodic SEC filings on a timely basis and to ensure that information required to be disclosed in any future periodic SEC filings is accumulated and communicated to our management to allow timely decisions regarding required disclosure about our internal control over financial reporting. See “Item 9A: Controls and Procedures.” More specifically, our internal control over financial reporting was not effective due to the following material weaknesses:

Although management has implemented, and continues to implement, actions to remediate the underlying causes of the control deficiencies that gave rise the material weaknesses, we cannot provide any assurance that the remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.

On May 17, 2022, subsequent to the evaluation as of December 31, 2021, management, in agreement with the audit committee of the Company’s Board of Directors, determined that the previously issued financial statements for the Affected Periods (as hereinafter defined) should no longer be relied upon and required restatement. We then filed Amendment No. 1 to our Form 10-K for the year ended December 31, 2021 (the “Amendment No. 1”) 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 (collectively, the “Affected Periods”), contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with the Securities and Exchange Commission (the “SEC”) on April 14, 2022 (the “Original Form 10-K”) and in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (the “Form 10-Q”). On June 1, 2022 we filed Amendment No. 2 to our Form 10-K because Amendment No. 1 contained a typographical error on the date of the audit report of Friedman LLP (“Friedman”). Although Friedman’s audit report was dated April 14, 2022, except for the effects of the restatement discussed in Note 1A, Note 12, Note 13, and Note 19 to the consolidated financial statements, as to which the date is May 23, 2022, the copy of Friedman’s audit report that was included in Amendment No. 1 incorrectly included a date of April 13, 2022 (instead of April 14, 2022). Amendment No. 2 on Form 10-K (“Amendment No. 2”) was filed to correct the typographical error regarding the date on Friedman’s audit report, such that the date of Friedman’s audit report is April 14, 2022, except for the effects of the restatement discussed in Note 1A, Note 12, Note 13, and Note 19 to the consolidated financial statements, as to which the date is May 23, 2022.

As discussed in Note 1A, “Restatement of Consolidated Financial Statements,” of the notes to the accompanying consolidated financial statements as of and for the year ended December 31, 2021 included in Amendment No.1 and Amendment No. 2, the correction of certain errors, as discussed in Amendment No.1 and Amendment No. 2, from previously reported information for the year ended December 31, 2021, has resulted in an increase in net loss of $8.4 million, primarily as a result of a $6.3 million in expense related to the revaluation on the derivative conversion liability, an increase in interest expense of $0.9 million, and an increase in the loss contingency on debt default of $1.2 million.

If we fail to comply with the rules under the Sarbanes-Oxley Act related to disclosure controls and procedures in the future, or, if we continue to have material weaknesses or other deficiencies in our internal control and accounting procedures and disclosure controls and procedures, our stock price could decline significantly and raising capital could be more difficult. If additional material weaknesses or significant deficiencies are discovered or if we otherwise fail to address the adequacy of our internal control over financial reporting and disclosure controls and procedures, our business may be harmed. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our securities could drop significantly.

The ongoing coronavirus outbreak, and measures taken in response thereto, could continue to have a material adverse effect on our business, results of operations, and financial condition.

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

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

We are a holding company whose subsidiaries are given a certain degree of independence, and our failure to integrate our subsidiaries may adversely affect our financial condition.

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

We are a relatively small company with limited staff and a limited accounting department. Our limited staff and resources may affect our internal controls over financial reporting. Our failure to implement measures that will ensure adequate controls over our financial and other reporting processes could cause us to fail to meet our financial and other reporting obligations.

While we continue to evaluate and improve our internal controls, we are a relatively small company with limited staff, particularly with a limited accounting department. The Company currently relies on the part-time services of third-party consultants to help us with our financial accounting, our reporting obligations, and our controls over financial processes and reporting.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process.

Due to our current staffing limitations, we cannot be certain that the measures we implement in the future will ensure that we design, undertake, and maintain adequate controls over our financial processes and reporting. Any failure by us to hire and retain experienced accounting and financial reporting personnel, implement required new or improved controls, or any difficulties we encounter in their implementation, could cause us to fail to meet our reporting obligations.

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

We are subject to pending claims for non-payment by certain vendors in an aggregate amount of approximately $0.7 million including interest as of December 31, 2021, which is approximately 2.7% of our total assets. We may also be a party to other claims that arise from time to time in the ordinary course of our business, which may include those related to, for example, contracts, sub-contracts, protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array of state and federal statutes, rules and regulations that pertain to different aspects of our business. We may also be required to initiate expensive litigation or other proceedings to protect our business interests. There is a risk that we will not be successful or otherwise be able to satisfactorily resolve any pending or future litigation. In addition, litigation and other legal claims are subject to inherent uncertainties and management’s view of currently pending legal matters may change in the future. Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable judicial or jury decisions and the differing laws and judicial proclivities regarding damage awards among the states in which we operate. Unexpected outcomes in such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings (possibly resulting in changes in established reserves), could have a material adverse effect on our business, financial condition, results of operations and cash flows. Due to recurring losses and net capital deficiency, our current financial status may increase our default and litigation risks and may make us more financially vulnerable in the face of pending or threatened litigation.

Future issuances of our common stock pursuant to various existing instruments including, but not limited to the existing convertible debentures and right to shares letter agreements could result in additional significant dilution of the percentage ownership of our shareholders and could cause the price of our common stock to decline.

In the future, the Company will have an obligation to issue its common stock pursuant to various securities instruments entitling their holders to receive shares of the Company’s common stock, including but not limited to rights to shares letter agreements and convertible debentures. Although such instruments typically provide for the limitation of the percentage of the common stock of the respective beneficial owners, the holders of such instruments are expected to obtain shares of common stock from time-to-time or, in some instances, to direct the Company to issue the shares of common stock to designated third parties. As a result, our shareholders may be materially diluted, and the price of our common stock may decline.

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 of 2022, subject to certain extensions, if not previously converted. In the event of 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 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. If full repayment, conversion, sale, extension, or refinancing is not obtained or consummated, we could default in our obligations.

Even if we are not in default of the debentures, the existence of these secured obligations and the terms of securities purchase agreement may impair our ability to obtain capital from external sources in a certain manner.

Our existing and future debt obligations could impair our liquidity and financial condition, and 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. Our debt and financial obligations:

Should we fail to make pay our obligations or fail to comply with any covenants contained in any related agreements, we could be in default regarding that indebtedness. Since we have pledged substantially all of our assets to secure our obligations under the secured convertible debentures, a 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.

As further described in the financial statements included herein, we believe we are currently in default under the terms of our secured convertible notes.

The Company has a number of convertible notes issued at this time that are currently in default. 

As of September 30, 2022, $15,985,489 worth of the Company’s convertible promissory notes, including interest accrued thereon, are past due and in default. As of September 30, 2022, $13,650,573 of the principal amount of the notes in default encumber all our assets which secure the payment of this indebtedness. In the event of default in repayment of the secured notes, our secured creditor could exercise its remedies, including the execution on all our assets, which would result in the termination of our activities. These notes being in default, and our inability to pay these obligations will result in a loss of investor confidence, and more generally impact our business, operating results, and financial condition. We do not plan to use any of the proceeds of this offering that we may receive from the non-cash exercise of the warrants held by the selling security holders to repay these loans and to date the loan holders have not exercised their default rights under these convertible promissory notes.

We are dependent upon our executive officers and directors and their departure could adversely affect our ability to operate.

Our operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors. We believe that our success depends on the continued service of our executive officers and directors. We do not have key-man insurance on the life of any of our directors or executive officers. The unexpected loss of the services of one or more of our directors or executive officers could have a detrimental effect on us.

We are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.

We are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our Common Stock held by non-affiliates exceeds $700 million. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Compliance obligations under the Sarbanes-Oxley Act may require substantial financial and management resources.

Section 404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls. As long as we remain an emerging growth company, we will not be required to comply with the independent registered public accounting firm attestation requirement on our internal control over financial reporting. 

We rely on a few major customers, the loss of which could adversely affect our results of operations.

For the year ended December 31, 2021, our sales to federal, state and local governments accounted for approximately 100% of our SGS net sales. Our past customers have included, among others, federal and international government agencies and state and local governments. Although SGS has had many customers, two customers, generated approximately 71% of SGS’s gross revenue during the year ended December 31, 2021. One customer accounted for 44% of SGS’s gross revenue in 2021; however, this customer may or may not continue to be a significant contributor to revenue in the future. We plan to continue to focus our efforts on existing and potential government customers. SGS revenues for the three months ended September 30, 2022, and 2021, was approximately $3.5 million and $1.9 million, respectively. This includes approximately 71% of sales coming from the Company’s top two customers. The loss of a significant amount of business from one of our major customers would materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost business. Significant clients or projects in any one period may not continue to be significant clients or projects in other periods. To the extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the extent that such risks impede the customer’s ability to stay in business and make timely payments to us.

We rely on a few major vendors the loss of which could adversely affect our results of operations.

SGS product and service costs for the year ended December 31, 2021 and three months ended September 30, 2022, and 2021, was approximately $6.9 million, $3.0 million and $1.5 million, respectively. This includes approximately 72% of product costs for the three months ended September 30, 2022, from the Company’s top two vendors. The loss of any of these vendors could materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost vendors. Significant vendors in any one period may not continue to be significant vendors in other periods. To the extent that we are dependent on any single vendor, we are subject to the risks faced by that vendor to the extent that such risks impede the vendor’s ability to stay in business and make timely payments to us.

Risks Related to Acquired Cryptocurrency Mining Business

The recent transition of Ethereum to proof-of-stake validation caused us to cease mining Ethereum.

Proof-of-stake is an alternative method in validating cryptocurrency transactions. Now that Ethereum has transitioned to proof-of-stake, our data mining assets can no longer mine Ethereum as of September 15, 2022, and as such, all revenues from mining operations have ceased.

We may be classified as an inadvertent investment company.

We are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. Under the Investment Company Act of 1940, as amended (the “Investment Company Act”), however, a company may be deemed an investment company under section 3(a)(1)(C) of the Investment Company Act if the value of its investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on a consolidated basis.

We commenced operations of digital asset mining, the output of which is cryptocurrencies. We cannot guarantee that such cryptocurrencies or digital assets we will mine are deemed as commodities and not as securities. If the digital assets held by us exceed 40% of our total assets, exclusive of cash, we inadvertently become an investment company. An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace period of one year from the earlier of: (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis, and (b) the date on which an issuer owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. We expect to establish policies that we would work to keep the investment securities held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our investment securities, or seeking a no-action letter from the Commission if we are unable to acquire sufficient assets or liquidate sufficient investment securities in a timely manner.

As Rule 3a-2 is available to a company no more than once every three years, and assuming no other exclusion were available to us, we would have to keep within the 40% limit for at least three years after we cease being an inadvertent investment company. This may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading securities.

Classification as an investment company under the Investment Company Act requires registration with the Commission. If an investment company fails to register, it would have to stop doing almost all business, and its contracts would become voidable. Registration is time-consuming and restrictive and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons, and portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result in our incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact on our operations.

Changes in laws, regulations, or requirements applicable to our software and services could impose increased costs on us, delay or prevent our introduction of new products and services or impair the function or value of our existing products and services.

Our digital assets mining operations may become subject to increasing regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our operations to comply with them.

For example, the adoption of new money transmitter (“MT”) or money services business (“MSB”) statutes in jurisdictions or changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, could subject us to registration or licensing, or limit business activities, cause us to enter relationships with one or more third parties for payment services until we are appropriately licensed. The activities of TTM Digital may cause it to be deemed a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, TTM Digital may be required to comply with FinCEN regulations, including those that would mandate TTM Digital to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.

Compliance and classifications are dependent on federal and state regulatory actions and our business activities. We do not believe that we are a money transmitter, because our activities do not cause us to hold, possess or control payment funds on behalf of a consumer or merchant. If we were deemed to be a money transmitter, we would be subject to significant additional regulation. This could increase our costs in operating our business. In addition, a regulator could act against us if it views our payment solution platform as a violation of existing law. Any of these outcomes would negatively affect the market price for our shares and could cause us to cease operations in the certain U.S. States. 

Subsequently, on March 9, 2022, the President of the United States issues an executive order outlining a government-wide approach to reviewing six key policy priorities. This includes: protecting US consumers, investors and businesses; protecting US and global financial stability and mitigating economywide financial risks; mitigating money laundering, other illicit finance activity and national security risks; reinforcing US leadership in the global financial system, and technological and economic competitiveness; promoting equitable access to safe and affordable financial services; and Supporting technological advances that promote responsible development and use of digital assets. Unlike China, which has banned all cryptocurrency activities that ultimately pushed more mining investments to the United States, eventual regulation of the cryptocurrency industry may potentially disrupt or temporarily stop mining activities until we conform with new regulatory requirements.

Additionally, we are not licensed to conduct a virtual currency business in New York and do not intend to become licensed in any other state that may require licensing in the future. We have taken the position that the New York State Department of Financial Services (“NYSDFS”) BitLicense Regulatory Framework (23 NYCRR 200.2(q)) does not apply to our business. It is possible, however, that the NYSDFS could disagree with our position. If we were deemed to be conducting an unlicensed virtual currency business in New York, we could be subject to significant additional regulation and/or regulatory consequences. There are a number of states that review the adaptation that the Conference of State Bank Supervisors has proposed a model form of state-level “virtual currency” regulation. There are at least thirty-one states that have pending legislation in the 2021 legislative session regarding blockchain and cryptocurrency.

The recent New York Senate Bill 6486C seeks to establish a moratorium on consolidated operations that use proof-of-work authentication methods to validate blockchain transactions; provides that such operations will be subject to a full generic environmental impact statement review. Although the majority of our mining activity is operating using hydroelectric power, New York Senate Bill 6486C may require TTM Digital to halt mining until an environmental impact assessment is completed.

It may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries, and ownership of, holding, or trading in our securities may also be considered illegal and subject to sanction.

Although currently digital assets are not regulated or are lightly regulated in most countries, including the United States, one or more countries such as China, India, and Russia may take regulatory actions in the future that severely restricts the right to acquire, own, hold, sell, or use digital assets or to exchange digital assets for fiat currency. Such an action may also result in the restriction of ownership, holding, or trading in our securities. Such restrictions may adversely affect an investment in us. For example, the Bank of England, in June of 2021, issued a paper for comments in which it explains that stablecoins should have the same regulations as fiat currencies.

The price of our existing mining assets are dictated by the volatile market for such assets to determine a fair market price of such assets.

Our current mining assets can no longer mine Ethereum as of September 15, 2022. Pricing related to mining assets are determined by the cryptocurrency they are able to mine. As a result, the price of our assets may have decreased. The Company may have a lower value on our mining assets based on market volatility if the Company’s attempts to sell its mining assets.

However, the Company is exploring other utilizations for its mining assets, not limited to, such as using them for cloud computing, datacenter hosting, simulation & modeling, virtual reality, artificial intelligence, and gaming. There is no expectation that using the mining assets for such applications will be profitable, which may have a negative impact on the trading price of our securities, which may have a materially adverse impact on investors’ investment in our Company.

Our mining operations, including the facilities in which our miners are operated, may experience damages, including damages that are not covered by insurance.

Our current mining operation is, and any future mines we establish will be, subject to a variety of risks relating to physical condition and operation, including, but not limited to:

For example, our mine could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist or other attack on the mine. The security and other measures we take to protect against these risks may not be sufficient. Additionally, our mine could be materially adversely affected by a power outage or loss of access to the electrical grid or loss by the grid of cost-effective sources of electrical power generating capacity. Given the power requirement, it would not be feasible to run miners on backup power generators in the event of a power outage. Our insurance covers the replacement cost of any lost or damaged miners but does not cover any interruption of our mining activities; therefore, our insurance, therefore, may not be adequate to cover the losses we suffer as a result of any of these events. In the event of an uninsured loss, including a loss in excess of insured limits, at any of the mines in our network, such mines may not be adequately repaired in a timely manner or at all and we may lose some or all of the future revenues anticipated to be derived from such mines. The potential impact on our business is currently magnified because we are only operating a single mine.

Risks Relating to Restatement of Our Consolidated Financial Statements

We have had to restate our previously issued consolidated financial statements. As previously disclosed, and as disclosed in the Amendments to our Form 10-K for the year ended December 31, 2021, we have identified a material weakness in our internal control over financial reporting. If we are unable to develop and maintain effective internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in us and may adversely affect our business, financial condition and results of operations.

On May 17, 2022, subsequent to the evaluation as of December 31, 2021, management, in agreement with the audit committee of the Company’s Board of Directors, determined that the previously issued financial statements for the Affected Periods (as hereinafter defined) should no longer be relied upon and required restatement. We then filed Amendment No. 1 to our Form 10-K for the year ended December 31, 2021 (the “Amendment No. 1”) 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 (collectively, the “Affected Periods”), contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with the Securities and Exchange Commission (the “SEC”) on April 14, 2022 (the “Original Form 10-K”) and in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (the “Form 10-Q”). On June 1, 2022 we filed Amendment No. 2 to our Form 10-K because Amendment No. 1 contained a typographical error on the date of the audit report of Friedman LLP (“Friedman”). Although Friedman’s audit report was dated April 14, 2022, except for the effects of the restatement discussed in Note 1A, Note 12, Note 13, and Note 19 to the consolidated financial statements, as to which the date is May 23, 2022, the copy of Friedman’s audit report that was included in Amendment No. 1 incorrectly included a date of April 13, 2022 (instead of April 14, 2022). Amendment No. 2 on Form 10-K (“Amendment No. 2”) was filed to correct the typographical error regarding the date on Friedman’s audit report, such that the date of Friedman’s audit report is April 14, 2022, except for the effects of the restatement discussed in Note 1A, Note 12, Note 13, and Note 19 to the consolidated financial statements, as to which the date is May 23, 2022.

As discussed in Note 1A, “Restatement of Consolidated Financial Statements,” of the notes to the accompanying consolidated financial statements as of and for the year ended December 31, 2021 included in Amendment No.1 and Amendment No. 2, the correction of certain errors, as discussed in Amendment No.1 and Amendment No. 2, from previously reported information for the year ended December 31, 2021, has resulted in an increase in net loss of $8.4 million, primarily as a result of a $6.3 million in expense related to the revaluation on the derivative conversion liability, an increase in interest expense of $0.9 million, and an increase in the loss contingency on debt default of $1.2 million. 

As previously disclosed in the Company’s Current Report on Form 8-K filed on May 17, 2022 with the SEC, on May 17, 2022, the Company’s management determined that its prior conclusion that the “conversion feature” of the Company’s 12.5% senior secured convertible debentures (the “Debentures”) qualified for equity classification and, therefore, qualified for the application of the guidance in the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Update (ASU) 2020-06 was incorrect. Management has determined that the conversion feature was a liability classified derivative under the FASB’s Accounting Standards Codification (ASC) 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity from the inception requiring recognition at fair value for each reporting period.

The Company’s management, in agreement with the audit committee of the Company’s Board of Directors, have determined that the previously issued financial statements for the Affected Periods should no longer be relied upon due to this error and require restatement. Amendment No. 1 and Amendment No. 2 (i) reflect the changes discussed above for the Affected Periods, (ii) restates the Company’s consolidated financial statements as and for the year ended December 31, 2021, and (iii) provides restated unaudited financial information as of September 30, 2021, and for the three and nine months then ended. The error does not impact the Company’s consolidated financial statements for the quarters ended March 31, 2021, or June 30, 2021.

As a result of the factors described above, the Company has included in Amendment No.1 and Amendment No. 2 the restated consolidated financial statements as of and for the year ended December 31, 2021, and restated financial information as of September 30, 2021, and for the three and nine months then ended, to restate the following items:

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reporting and prevent fraud. We continue to evaluate steps to remediate the material weaknesses. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects.

Any failure to maintain effective internal control over financial reporting could adversely impact our ability to report our financial position and results from operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the SEC or other regulatory authorities. In either case, there could be a material adverse affect on our business, financial condition and results of operations. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information which could have a negative effect on the trading price of our stock.

We can give no assurance that the measures we are taking and plan to take in the future will remediate the material weaknesses identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls, and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

We may face litigation and other risks as a result of the Restatement and material weakness in our internal control over financial reporting.

As a result of the Restatement and the identified material weaknesses, and other matters that may in the future be raised by the SEC, we face the potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the Restatement and/or the material weaknesses in our internal control over financial reporting and the preparation of our financial statements. As of the date of this Registration Statement, we have no knowledge of any such litigation or dispute. However, we can provide no assurance that such litigation or dispute will not arise in the future. Any such litigation or dispute, whether successful or not, could adversely affect our business, financial condition and results of operations.

Risk Factors Relating to Our Common Stock

Trading on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for you to resell your common stock.

Our common stock is quoted on the OTCQB tier of the OTC Markets Group, Inc. (“OTC Markets”). Trading in securities quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like Nasdaq Capital Market or a stock exchange like the NYSE American. These factors may result in your having difficulty reselling any shares of our common stock.

The market price of our common stock is likely to be highly volatile because of several factors, including a limited public float.

The market price of our common stock has been volatile in the past and the market price of our common stock is likely to be highly volatile in the future. You may not be able to resell shares of our common stock following periods of volatility because of the market’s adverse reaction to volatility.

Other factors that could cause such volatility may include, among other things:

Any of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance.

Our common stock is currently a “penny stock” under SEC rules. It may be more difficult to resell securities classified as “penny stock.”

Our common stock is currently a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share price below $5.00). If our common stock becomes listed on the Nasdaq Capital Market, it will not be considered “penny stock,” however, if we are unable to maintain that listing and our common stock is no longer listed on the Nasdaq Capital Market, unless we maintain a per-share price above $5.00, our common stock will become “penny stock.” These rules impose additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction.

Legal remedies available to an investor in “penny stocks” may include the following:

These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.

Many brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the increased financial risk generally associated with these investments.

For these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if ever, our common stock will not be classified as a “penny stock” in the future.

If the benefits of any proposed acquisition do not meet the expectations of investors, stockholders or financial analysts, the market price of our common stock may decline.

If the benefits of any proposed acquisition do not meet the expectations of investors or securities analysts, the market price of our common stock prior to the closing of the proposed acquisition may decline. The market values of our common stock at the time of the proposed acquisition may vary significantly from their prices on the date the acquisition target was identified.

In addition, broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to our previously filed financial statements, which could cause our stock price to decline.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results and retroactively affect previously reported results.

Being a public company results in additional expenses, diverts management’s attention and could also adversely affect our ability to attract and retain qualified directors.

As a public reporting company, we are subject to the reporting requirements of the Exchange Act. These requirements generate significant accounting, legal and financial compliance costs and make some activities more difficult, time consuming or costly and may place significant strain on our personnel and resources. The Exchange Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to establish the requisite disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required.

As a result, management’s attention may be diverted from other business concerns, which could have an adverse and even material effect on our business, financial condition and results of operations. These rules and regulations may also make it more difficult and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent, could be adversely impacted.

We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of some other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive to investors.

As a public reporting company with less than $1,235,000,000 in revenue during our last fiscal year, we qualify as an “emerging growth company” under the JOBS Act. An emerging growth company may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company we:

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or Chief Executive Officer pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act or such earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1,235,000,000 in annual revenues, have more than $700 million in market value of our Common Stock held by non-affiliates, or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. Further, under current SEC rules we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates) of less than $250 million as of the last business day of our most recently completed second fiscal quarter.

We cannot predict if investors will find our securities less attractive due to our reliance on these exemptions.

If we fail to maintain effective internal control over financial reporting, the price of our securities may be adversely affected.

Our internal control over financial reporting has weaknesses and conditions that require correction or remediation. For the year ended December 31, 2021 and the quarter ended September 30, 2022, we identified a material weakness in our assessment of the effectiveness of disclosure controls and procedures. Our internal control over financial reporting was not effective due to the following material weaknesses:

Although management has implemented, and continues to implement, actions to remediate the underlying causes of the control deficiencies that gave rise the material weaknesses, we cannot provide any assurance that the remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. See “Risk Factors—Risks Related to Restatement of Our Consolidated Financial Statements.”

If we fail to comply with the rules under the Sarbanes-Oxley Act related to disclosure controls and procedures in the future, or, if we continue to have material weaknesses or other deficiencies in our internal control and accounting procedures and disclosure controls and procedures, our stock price could decline significantly and raising capital could be more difficult. If additional material weaknesses or significant deficiencies are discovered or if we otherwise fail to address the adequacy of our internal control over financial reporting and disclosure controls and procedures, our business may be harmed. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our securities could drop significantly.

We are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act and if we fail to continue to comply, our business could be harmed, and the price of our securities could decline.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an annual assessment of internal control over financial reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm. The standards that must be met for management to assess the internal control over financial reporting as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In the event that our Chief Executive Officer or Chief Financial Officer determines that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our securities will be affected; however, we believe that there is a risk that investor confidence and the market value of our securities may be negatively affected.

Shares eligible for future sale may adversely affect the market.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months, subject only to the current public information requirement. Affiliates may sell after six months, subject to the Rule 144 volume, manner of sale (for equity securities), current public information, and notice requirements. Of the approximately 2,484,426,501 shares of our common stock outstanding as of November 16, 2022, approximately 1,933,270,220 shares are tradable without restriction. Given the limited trading of our common stock, resale of even a small number of shares of our common stock pursuant to Rule 144 or an effective registration statement may adversely affect the market price of our common stock.

We have never paid dividends on our common stock and have no plans to do so in the future.

Holders of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our common stock may have will be in the form of appreciation, if any, in the market value of their shares of common stock. See “Dividend Policy.”

We will indemnify and hold harmless our officers and directors to the maximum extent permitted by Nevada law.

Our bylaws provide that we will indemnify and hold harmless our officers and directors against claims arising from our activities, to the maximum extent permitted by Nevada law. If we were called upon to perform under our indemnification agreement, then the portion of our assets expended for such purpose would reduce the amount otherwise available for our business.

The planned Reverse Stock Split may decrease the liquidity of the shares of our common stock.

On June 15, 2022, the Company’s Board of Directors approved to effect a reverse stock split of the Company’s outstanding shares of common stock, par value $0.00001 per share, at a ratio of no less than 1-for-500 and no more than 1-for-1,000, with such ratio to be determined at the sole discretion of the Board of Directors. On September 22, 2022, the Company held its 2022 virtual annual meeting of stockholders, at which the Company’s stockholders voted in favor of, among other matters, to effect a reverse stock split of the Company’s outstanding shares of common stock, par value $0.00001 per share, at a ratio of no less than 1-for-500 and no more than 1-for-1,000, with such ratio to be determined at the sole discretion of the Board of Directors. On November 1, 2022, the Company’ Board of Directors approved an Articles of Amendment to the Company’s Articles of Incorporation to effect a 1 for 1,000 reverse stock split (“Reverse Stock Split”) of the Company’s common stock. The current status of the Reverse Stock Split is that the Company has notified the Financial Industry Regulatory Authority (FINRA) of the Reverse Stock Split, which will not be effective until FINRA processes it, and at such time we’ll file the Articles of Amendment with the State of Nevada to effectuate the Reverse Stock Split. The liquidity of the shares of our common stock may be affected adversely by the planned Reverse Stock Split given the reduced number of shares outstanding following the Reverse Stock Split. In addition, the planned Reverse Stock Split may have increased the number of shareholders who own odd lots (less than 100 shares) of our common stock, creating the potential for such shareholders to experience an increase in the cost of selling their shares and greater difficulty affecting such sales.

We have been notified of Non-Compliance with OTCQB Bid Price Standards, and our common stock may not be able to continue to trade on the OTCQB.

In order to be in compliance with OTCQB Standards, among other things, the Company must maintain a minimum closing bid price of $0.01 per share on at least one of the prior 30 consecutive calendar days. On October 13, 2022, the Company was contacted by OTC Markets Group, Inc. (“OTC Markets”), as the bid price of the Company’s common stock, quoted on the OTCQB under the symbol “SYSX,” closed below $0.001 on October 12, 2022. OTC Markets notified the Company that in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be removed from OTCQB as per Section 4.1(b) of the OTCQB Standards. On October 28, 2022, the Company was notified by OTC Markets that that the Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days and no longer meets the Standards for Continued Eligibility for OTCQB (the “OTCQB Standards”). Pursuant to Section 4.1 of the OTCQB Standards, the Company was granted a cure period of 90 calendar days, during which the minimum closing bid price for the Company’s common stock must be $0.01 or greater for 10 consecutive trading days in order to continue trading on the OTCQB marketplace. If this requirement is not met by January 26, 2023, the Company will be removed from the OTCQB marketplace. In addition, pursuant to the OTCQB Standards, in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be immediately removed from OTCQB. On October 31, 2022, OTC Markets notified the Company that the bid price for the Company’s common stock closed below $0.001 on October 28, 2022. The bid price for the Company’s common stock closed below $0.001 on October 31, 2022, as well as November 10, 2022, November 11, 2022, November 15, 2022and November 16, 2022. Again, in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be immediately removed from OTCQB.

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 November 16, 2022, we have 2,484,426,501 shares of common stock issued and outstanding. As of November 11, 2022, holders of our convertible debentures have delivered notices of conversion covering an aggregate of 617,635,347 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.

USE OF PROCEEDS

All of the shares of Common Stock offered by the Selling Securityholders pursuant to this prospectus will be sold by the Selling Security holders for their respective accounts. We will not receive any of the proceeds from these sales. We will receive up to an aggregate of approximately $500,000.00 from the exercise of Warrants, assuming the exercise in full of all of the Warrants for cash. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2022 on an actual basis. The numbers presented in this table are in thousands of dollars, except number of shares and par value data.

This table should be read in conjunction with the information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto appearing elsewhere in this prospectus.

DETERMINATION OF OFFERING PRICE

Resale of Common Stock by Selling Securityholders

Our Common Stock is quoted on the OTCQB under the symbol “SYSX.” The shares registered for resale in this prospectus being offered by the Selling Securityholders will be sold at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at negotiated prices.

Issuance of Shares of Common Stock Underlying Warrants

The price of the shares of Common Stock underlying the Warrants is determined by reference to the exercise price of the Warrants, such that each Warrant entitles the holder to purchase one share of our Common Stock at an exercise price of $0.001 per share.

DIVIDEND POLICY

We have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable future. The agreements into which we may enter in the future, including indebtedness, may impose limitations on our ability to pay dividends or make other distributions on our capital stock. Payment of future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.

MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock is currently quoted on the OTCQB tier of the OTC Market Group, Inc. under the symbol “SYSX.” The Company began trading on the OTC Markets under the symbol “SYSX” on September 4, 2018. The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information on current “bids” and “asks,” as well as volume information.

The following table sets forth the high and low closing prices for our common stock for each quarterly period during the years ended December 31, 2020, and 2021 and to date, as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

The closing price of our common stock on the OTCQB on November 16, 2022, was $0.0009.

Non-Compliance with OTCQB Bid Price Standards

In order to be in compliance with OTCQB Standards, among other things, the Company must maintain a minimum closing bid price of $0.01 per share on at least one of the prior 30 consecutive calendar days. On October 13, 2022, the Company was contacted by OTC Markets Group, Inc. (“OTC Markets”), as the bid price of the Company’s common stock, quoted on the OTCQB under the symbol “SYSX,” closed below $0.001 on October 12, 2022. OTC Markets notified the Company that in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be removed from OTCQB as per Section 4.1(b) of the OTCQB Standards. On October 28, 2022, the Company was notified by OTC Markets that that the Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days and no longer meets the Standards for Continued Eligibility for OTCQB (the “OTCQB Standards”). Pursuant to Section 4.1 of the OTCQB Standards, the Company was granted a cure period of 90 calendar days, during which the minimum closing bid price for the Company’s common stock must be $0.01 or greater for 10 consecutive trading days in order to continue trading on the OTCQB marketplace. If this requirement is not met by January 26, 2023, the Company will be removed from the OTCQB marketplace. In addition, pursuant to the OTCQB Standards, in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be immediately removed from OTCQB. On October 31, 2022, OTC Markets notified the Company that the bid price for the Company’s common stock closed below $0.001 on October 28, 2022. The bid price for the Company’s common stock closed below $0.001 on October 31, 2022, as well as November 10, 2022, November 11, 2022, November 15, 2022 and November 16, 2022. Again, in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be immediately removed from OTCQB.

Holders of Common Stock

As of November 16, 2022, there were approximately 218 record holders of our common stock. The number of record holders does not include beneficial owners of common stock held in the names of banks, brokers, nominees or other fiduciaries.

Dividends

We have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.

Historical Common Equity Transactions

The following is a summary of transactions by us since November 17, 2019 involving registered and unregistered issuances and redemption of our common equity securities.

On January 22, 2021, the Company issued 40,616 shares of its common stock to Chicago Venture Partners, L.P. pursuant to a waiver agreement as a redemption amount under a convertible promissory note which was issued on December 31, 2018.

On March 9, 2021, the Company issued 43,651shares of its common stock to Chicago Venture Partners, L.P. pursuant to a waiver agreement as a redemption amount under a convertible promissory note which was issued on December 31, 2018.

On March 19, 2021, the Company issued 5,272,408 shares of its common stock to First Choice International Company, Inc. pursuant to a letter agreement dated March 19, 2021.

On April 14, 2021, pursuant to the terms of the Merger Agreement, the Company agreed to issue an aggregate of 150,043,116, less certain pre-funded warrants and rights to receive shares of common stock as follows:

On May 4, 2021, the Company issued the aggregate of 60,000 shares of Common Stock to consultants in consideration of corporate communications/media relations and investor relations services pursuant to a consulting agreement.

On May 19, 2021, the Company issued 5,000 shares of Common Stock to an attorney in consideration of legal services provided.

The above shares have been sold and issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder.

On May 25, 2021, the Company entered into exchange agreements (each, an “Exchange Agreement”), with three of the Company’s shareholders – First Choice International Company, Inc., a Delaware corporation, Bespoke Growth Partners, Inc., a Delaware corporation, and One Percent Investments, Inc., a Delaware corporation (collectively, the “Shareholders”). Under the terms of the Exchange Agreements, the Shareholders agreed to convey, transfer, and assign their shares of common stock of the Company, $0.00001 par value per share (the “Common Stock”), in exchange for prefunded warrants (the “Prefunded Warrants”) based on a one-for-one exchange ratio. The number of shares of Common Stock exchanged and the corresponding number of Prefunded Warrants received, are as follows:

The issuances of Prefunded Warrants under the Exchange Agreements were made in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”), as no commission or other remuneration was or will be paid or given directly or indirectly for such transactions.

On July 7, 2021, the Company consummated the initial closing (the “Initial Closing”) of a private placement offering (the “Offering”) pursuant to the terms and conditions of that certain Securities Purchase Agreement, dated as of July 7, 2021 (the “Purchase Agreement”), between the Company and forty (40) accredited investors (the “Purchasers”). At the Initial Closing, the Company sold the Purchasers (i) 12.5% Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in an aggregate principal amount of $9,990,000.00 and (ii) warrants (the “Warrants” and together with the Debentures, the “Underlying Securities”) to purchase up to 3,534,751 shares of common stock of the Company (the “Common Stock”), subject to adjustments provided by the Warrants, or units of Common Stock and Common Stock purchase warrants, which represents 100% warrant coverage. The maximum number of shares of Common Stock that may be issued through the conversion of the Debentures and the exercise of the Warrants as of July 7, 2021 (the “Original Issue Date”) is 7,069,502.

On July 20, 2021, the Company issued 75,000 shares of Common Stock to a law firm in consideration of legal services provided.

On August 5, 2021, the Company issued 50,000 shares of Common Stock to an attorney in consideration of legal services provided.

On August 13, 2021, the Company consummated the second closing (the “Second Closing”) of a private placement offering (the “Offering”) pursuant to the terms and conditions of that certain Securities Purchase Agreement, dated as of July 7, 2021 (the “Purchase Agreement”), between the Company and thirty-nine (39) accredited investors (the “Purchasers”). At the Second Closing, the Company sold the Purchasers (i) twelve-and-one-half-percent (12.5%) Original Issue Discount Senior Secured Convertible Debentures (the “Debentures”) in an aggregate principal amount of $3,976,875 and (ii) warrants (the “Warrants” and together with the Debentures, the “Underlying Securities”) to purchase up to 1,862,279 shares of common stock of the Company (the “Common Stock”), subject to adjustments provided by the Warrants, or units of Common Stock and Common Stock purchase warrants, which represents one hundred percent (100%) warrant coverage. The maximum number of shares of Common Stock that may be issued through the conversion of the Debentures and the exercise of the Warrants sold at the Second Closing is 3,724,558 as of August 13, 2021 (the “Original Issue Date”).

On September 2, 2021, the Company issued the aggregate of 150,000 shares of Common Stock to an individual in consideration of corporate advisory services pursuant to an advisory agreement.

On September 3, 2021, the Company issued the aggregate of 50,000 shares of Common Stock to an individual elected to serve as a Board of Director.

On September 7, 2021, the Company issued the aggregate of 200,000 shares of Common Stock to an individual in consideration of corporate advisory services pursuant to an advisory agreement.

On November 2, 2021, the Company issued the aggregate of 1,000,000 shares of Common Stock in consideration for the purchase of the remaining 50% membership interest in Up North.

In January and February 2022, the Company issued an aggregate of 13,415,427 shares of restricted common stock. Of these shares:

From September 27, 2022 to September 28, 2022, the Company issued an aggregate of 56,044,018 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.0037 to $0.00453.

On September 29, 2022, the Company issued an aggregate of 79,647,000 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.0037 to $0.004.

On September 30, 2022, the Company issued an aggregate of 106,299,847 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.003 to $0.004.

From October 3, 2022 to October 4, 2022, the Company issued an aggregate of 62,131,250 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.004 to $0.0093.

On October 5, 2022, the Company issued an aggregate of 56,750,000 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.015 to $0.0034.

On October 6, 2022, the Company issued an aggregate of 59,000,000 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, of $0.015.

From October 7, 2022 to October 10, 2022, the Company issued an aggregate of 65,000,000 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.0009 to $0.001.

On October 11, 2022, the Company issued an aggregate of 82,267,826 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, of $0.00115.

On October 12, 2022, the Company issued an aggregate of 674,732,307 shares of the Company’s common stock in connection with conversions of outstanding debentures at 50% of the five-day VWAPs, pursuant to the terms of the debentures, ranging from $0.00085 to $0.0015.

As of October 14, 2022, there are 1,786,001,741 shares of common stock outstanding. In addition, there are several pending debenture conversions as of October 14, 2022.

On October 18, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”), dated as of October 18, 2022, by and among the Company and each of the each of the investors signatories thereto (each an “Investor” and collectively, the “Investors”) the SPA closed on October 18, 2022 and accordingly, on October 18, 2022, the Company sold to the Investors an aggregate of 500,000,000 Units, consisting of 500,000,000 shares of common stock, Warrant 1s to acquire 500,000,000 shares of common stock, and Warrant 2s to acquire 500,000,000 shares of common stock, for total consideration paid to the Company of $500,000.

The above shares have been sold and issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder.

DESCRIPTION OF BUSINESS

Overview

Sysorex, Inc. through its wholly owned subsidiary, Sysorex Government Services, Inc. (“SGS”), provides information technology solutions primarily to the public sector. These solutions include cybersecurity, professional services, engineering support, IT consulting, enterprise level technology, networking, wireless, help desk and custom IT solutions. In addition to SGS, the Company has another wholly owned subsidiary, TTM Digital Assets &Technologies, Inc. (“TTM Digital”). TTM Digital is a digital asset technology and mining company that owns and operates 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 a Proof of Stake model and as a result, the Company is no longer mining Ethereum. TTM is currently exploring alternative uses and sales opportunities for its Graphics Processing Units (“GPU”) assets and datacenter located in Lockport, NY. The Company had previously been in discussions with a third party to sell its mining assets and certain associated real property.

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. 

For the year ended December 31, 2021, our sales to federal, state and local governments accounted for approximately 100% of our SGS net sales. Our past customers have included, among others, federal and international government agencies and state and local governments. Although SGS has had many customers, two customers generated approximately 71% of SGS’s gross revenue during the year ended December 31, 2021. One customer accounted for 44% of SGS’s gross revenue in 2021; however, this customer may or may not continue to be a significant contributor to revenue in the future. We plan to continue to focus our efforts on existing and potential government customers. SGS revenues for the three months ended September 30, 2022, and 2021, was approximately $3.5 million and $1.9 million, respectively. This includes approximately 71% of sales coming from the Company’s top two customers.

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 September 30^th, respectively). SGS may also experience variability in our gross profit and gross profit margin as a result of changes in the various vendor programs we participate in and its effect on the amount of vendor consideration we receive from a particular vendor or their authorized distributor/wholesaler, may be impacted by a number of events outside of our control.

TTM Digital

TTM Digital is a digital asset technology and mining company that owns and operates specialized cryptocurrency mining processors and was previously focused on the Ethereum blockchain ecosystem. Following the reverse merger on April 14, 2021, the business of TTM Digital became a 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.”

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.

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 spring of 2022. On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which included 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 its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The parties agreed that the Assets to be sold would not include the Company’s Ether funds generated prior to and held at closing. The definitive terms of the sale of Assets were to be set forth in definitive transaction agreements to be executed by the parties. Additionally, pursuant to the Heads of Terms, 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 requested that Ostendo issue, pursuant to the Heads of Terms, shares equal to the initial deposit made by the Company of $1,600,000. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, but the Company has not received confirmation that the Certificate of Designations for the preferred stock has been filed and accepted by the California Secretary of State. If the Company receives this document and it is dated on or before November 14, 2022, then the preferred stock will have been validly issued as of that date. If it is dated after November 14, 2022, the certificate for the shares is invalid since it purports to issue something that did not exist at the time. Accordingly, the Company is unable to determine definitively whether it currently holds these shares or not.

As of September 15, 2022, Ethereum switched from a Proof of Work model to Proof of Stake model and as a result, the Company no longer mines Ethereum. TTM Digital is currently exploring alternative uses and sales opportunities for its Graphics Processing Unit (GPU) assets and datacenter located in Lockport, NY.

TTM is exploring the future possibility of hosting client computing and evaluating the sale of its assets. 

Recent Developments

Amendments to Heads of Terms and Current Status

On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which included 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 its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The parties agreed that the Assets to be sold would not include the Company’s Ether funds generated prior to and held at closing (the “Closing”). The definitive terms of the sale of Assets were to be set forth in definitive transaction agreements to be executed by the parties. Additionally, pursuant to the Heads of Terms, 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.

On June 22, 2022, the Company executed an Amendment No. 1 to Heads of Terms (“Amendment 1”) with Ostendo and its wholly owned subsidiary TTM Digital Assets & Technologies, Inc. Pursuant to the Amendment 1, the parties agreed to amend certain terms contained in the Heads of Terms, including:

On June 30, 2022, the Company executed an Amendment No. 2 to Heads of Terms (“Amendment 2”) with Ostendo and the Company’s wholly owned subsidiary TTM Digital Assets & Technologies, Inc. (“Seller”, and together with the Company, the “Seller Parties”). Pursuant to Amendment 2, the parties agreed to amend certain terms contained in the Heads of Terms and Amendment 1, including:

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 requested that Ostendo issue, pursuant to the Heads of Terms, shares equal to the initial deposit made by the Company of $1,600,000. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, but the Company has not received confirmation that the Certificate of Designations for the preferred stock has been filed and accepted by the California Secretary of State. If the Company receives this document and it is dated on or before November 14, 2022, then the preferred stock will have been validly issued as of that date. If it is dated after November 14, 2022, the certificate for the shares is invalid since it purports to issue something that did not exist at the time. Accordingly, the Company is unable to determine definitively whether it currently holds these shares or not.

Amendments to Employment Agreements

On August 10, 2022, the Company entered into Amendment No. 2 (“Amendment No. 2”) to Employment Agreement, by and between the Company and Vincent Loiacono, the Company’s Chief Financial Officer. Pursuant to the terms of Amendment No. 2, the parties amended the termination provisions of the original employment agreement, as amended. Amendment No. 2 provides that the Company, in its sole discretion, may terminate Mr. Loiacono’s employment for any reason without Just Cause (as defined in the employment agreement, as amended) at any time. If (a) the Company terminates Mr. Loiacono’s employment without Just Cause, or (b) within 24 months following a change of control, Mr. Loiacono resigns as a result of and upon a material diminution of his duties, responsibilities, authority, and position, or a material reduction of his compensation and benefits, or if he ceases to hold the position of Chief Financial Officer after a change of control, the Company will, among other things: (l) continue to pay Mr. Loiacono’s base salary for one month for every two months of employment after the effective date up to a maximum of 12 months (as opposed to six months under the original agreement, as amended); and (2) within 45 days of termination or resignation, pay to Mr. Loiacono 100% of the value of any accrued but unpaid bonus. Except as set forth in Amendment No. 2, the original employment agreement, as amended, remains in full force and effect.

On September 9, 2022, the Company entered into Second Amendment to the Employment Agreement for Wayne Wasserberg, the Company’s Chief Executive Officer. The Second Amendment provides a minimum bonus of $100,000 for achievement of the bonus milestone. The bonus milestone is based upon the following:

Voting Rights Plan

On September 6, 2022, the Board of Directors (the “Board”) of the Company adopted a Voting Rights Plan (the “Plan”) pursuant to which the Board authorized and granted super voting rights (the “Voting Rights”) to certain shares of the Company’s common stock, $0.00001 par value (“Common Stock”), held by stockholders holding a minimum of 12,900,000 shares of Common Stock (each, a “Rights Stockholder”) as of the close of business on May 27, 2022, the record date for the Annual Meeting (the “Eligibility Record Date”). The Voting Rights allowed Rights Stockholders the ability to exercise additional voting rights with respect to their shares of Common Stock to which the Voting Rights are applied (the “Eligible Shares”).

The Plan was adopted by the Board pursuant to the authority in Nevada Revised Statutes (“NRS”) 78.195(5) and NRS 78.350(8), based upon the determination by the Board that the Plan was necessary to protect the interests of the Company and its stockholders. The Plan was of limited scope and purpose and was designed to facilitate the approval of the Corporate Actions at the Annual Meeting.

Under the Plan, each Rights Stockholder had the right to vote on the Corporate Actions at the Annual Meeting, with all other stockholders as a single class, the number of votes per share of Common Stock owned multiplied by 15. The Voting Rights and the Plan automatically terminated upon the occurrence of the completion of the vote of the Company’s stockholders at the Annual Meeting as to the approval of the Corporate Actions.

Actions Approved at Annual Shareholder Meeting

On September 22, 2022, the Company held its 2022 virtual annual meeting of stockholders, originally scheduled for July 25, 2022 and adjourned to September 22, 2022 (the “Annual Meeting”). At the Annual Meeting, the Company’s stockholders voted in favor for the following:

Increase in Authorized Shares

On September 22, 2022, the Company filed a Certificate of Amendment with the Nevada Secretary of State to increase the authorized shares of the Company’s capital stock from 510,000,000 shares, par value $0.00001 per share, to 3,010,000,000 shares, of which 3,000,000,000 shares are designated as common stock and 10,000,000 are designated as preferred stock (the “Increase in Authorized”). The Increase in Authorized was approved by the Company’s Board of Directors on June 15, 2022, and by the Company’s shareholders on September 22, 2022.

Change in the Company’s Auditors

The Company was notified that the audit practice of Friedman LLP, the Company’s independent registered public accounting firm (“Friedman”), was combined with Marcum LLP (“Marcum”) effective September 1, 2022. On October 3, 2022, the Board of Directors of the Company approved the dismissal of Friedman LLP and the engagement of Marcum LLP to serve as the independent registered public accounting firm of the Company. The services previously provided by Friedman LLP will now be provided by Marcum LLP.

Friedman LLP’s reports on the Company’s financial statements for the fiscal years ended December 31, 2021 and 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that such reports expressed substantial doubt regarding the Company’s ability to continue as a going concern and the emphasis of matter paragraph with respect to the Company’s involvement in digital asset activities. Furthermore, during the Company’s two most recent fiscal years and through October 3, 2022, there have been no disagreements with Friedman LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Friedman LLP’s satisfaction, would have caused Friedman LLP to make reference to the subject matter of the disagreement in connection with its reports on the Company’s financial statements for such periods. For the fiscal years ended December 31, 2021 and 2020 and through October 3, 2022, there were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-K.

Marcum previously acted as the Company’s independent registered public accounting firm. As previously disclosed, Marcum ceased to be the Company’s independent registered public accounting firm on June 3, 2021, when the Company appointed Friedman as the Company’s independent registered public accounting firm. Except in connection with Marcum’s prior service as the Company’s independent registered public accounting firm, during the Company’s two most recent fiscal years and through October 3, 2022, neither the Company nor anyone acting on the Company’s behalf consulted Marcum LLP with respect to any of the matters or reportable events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

Non-Compliance with OTCQB Bid Price Standards

In order to be in compliance with OTCQB Standards, among other things, the Company must maintain a minimum closing bid price of $0.01 per share on at least one of the prior 30 consecutive calendar days. On October 13, 2022, the Company was contacted by OTC Markets Group, Inc. (“OTC Markets”), as the bid price of the Company’s common stock, quoted on the OTCQB under the symbol “SYSX,” closed below $0.001 on October 12, 2022. OTC Markets notified the Company that in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be removed from OTCQB as per Section 4.1(b) of the OTCQB Standards.

On October 28, 2022, the Company was notified by OTC Markets that that the Company’s bid price had closed below $0.01 for more than 30 consecutive calendar days and no longer meets the Standards for Continued Eligibility for OTCQB (the “OTCQB Standards”). Pursuant to Section 4.1 of the OTCQB Standards, the Company was granted a cure period of 90 calendar days, during which the minimum closing bid price for the Company’s common stock must be $0.01 or greater for 10 consecutive trading days in order to continue trading on the OTCQB marketplace. If this requirement is not met by January 26, 2023, the Company will be removed from the OTCQB marketplace.

In addition, pursuant to the OTCQB Standards, in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be immediately removed from OTCQB. On October 31, 2022, OTC Markets notified the Company that the bid price for the Company’s common stock closed below $0.001 on October 28, 2022. The bid price for the Company’s common stock closed below $0.001 on October 31, 2022, as well as November 10, 2022, November 11, 2022, November 15, 2022 and November 16, 2022. Again, in the event that the Company’s closing bid price falls below $0.001 at any time for five consecutive trading days, the Company will be immediately removed from OTCQB.

Placement Agent Agreement and Recent Private Placement

On October 17, 2022, the “Company entered into a Placement Agency Agreement (the “Placement Agency Agreement”), dated October 17, 2022, by and between the Company and Joseph Gunnar & Co., LLC (the “Placement Agent”). Pursuant to the terms of the Placement Agency Agreement, the Company engaged the Placement Agent to act as the Company’s exclusive placement agent with respect to effectuating a private placement (the “Offering”) to accredited investors, pursuant to which the Company offered up to $500,000 of its common stock and a warrant to purchase common stock (collectively, the “Securities”). Placement of the Securities was made on a “commercially reasonable efforts” basis.

Pursuant to the terms of the Placement Agency Agreement, the Company agreed to pay to the Placement Agent a cash fee (the “Cash Fee”) equal to 12.5% of the aggregate gross proceeds of the Offering. In addition, the Company agreed to reimburse the Placement Agent for all reasonable, documented marketing, travel and other out-of-pocket expenses incurred in connection with the Offering and to pay the Placement Agent’s counsel fees in the amount of $40,000 (“Legal Fees”); provided, however, that any fees or expenses incurred in connection with the Offering for which the Company will be responsible for reimbursement, including Legal Fees, will not exceed $50,000 collectively. The Company also agreed to pay to the Placement Agent the Cash Fee to the extent any party first introduced to the Company by the Placement Agent at any time prior to the date that is 12 months after the applicable termination date of the Offering or the final closing, whichever is applicable, makes any investment into the Company through the acquisition of Company securities from the Company.

For a period of 12 months following October 18, 2022 and subject to a closing of the Offering having been effected, in the event that the Company desires to raise additional capital in the form of debt, equity or otherwise (a “Prospective Financing”), the Placement Agent will have the right of first refusal to act as Placement Agent with respect to any such Prospective Financing

On October 18, 2022, the Company entered into a Securities Purchase Agreement (the “SPA”), dated as of October 18, 2022, by and among the Company and the following selling securityholders Brian M. Herman, James and Lidia Resnick, Andrew Resnick, Kantor Family Investments, Inc., B.K. Consulting Group LLC, Bigger Capital Fund, LP and District 2 Capital Fund LP (each an “Investor” and collectively, the “Investors”). Pursuant to the terms of the SPA, the Company agreed to sell to each Investor a number of Units of securities of the Company (each, a “Unit”), at a purchase price of $0.001 per Unit, with each Unit being comprised of: (i) one share of common stock (each, a “Purchased Share” and collectively, the “Purchased Shares”); (ii) a warrant to acquire one share of common stock at an exercise price of $0.001 per share, which exercise price will not be subject to adjustment as a result of any forward or reverse split of the common stock (each, a “Warrant 1”); and (iii) a warrant to acquire one share of common stock at an exercise price of $0.001 per share, which exercise price will not be subject to adjustment as a result of any forward or reverse split of the common stock (each, a “Warrant 2”). The Investors, collectively, subscribed for a total of 500,000,000 Units, consisting of 500,000,000 shares of common stock, Warrant 1s to acquire 500,000,000 shares of common stock, and Warrant 2s to acquire 500,000,000 shares of common stock, for total consideration payable to the Company of $500,000. The SPA contains customary representations, warranties and closing conditions.

The transactions contemplated by the SPA closed on October 18, 2022. Accordingly, on October 18, 2022, the Company sold to the Investors an aggregate of 500,000,000 Units, consisting of 500,000,000 shares of common stock, Warrant 1s to acquire 500,000,000 shares of common stock, and Warrant 2s to acquire 500,000,000 shares of common stock, for total consideration paid to the Company of $500,000.

On October 18, 2022, pursuant to the terms of the SPA, the Company and the Investors entered into the Initial Registration Rights Agreement (the “Initial Registration Rights Agreement”), which provides for the registration of all of the Purchased Shares and all of the shares of common stock that may be acquired by the Investors pursuant to the Warrant 1s (the “Registrable Securities”). Pursuant to the terms of the Initial Registration Rights Agreement, the Company agreed to, within 30 calendar days of October 18, 2022, use its commercially reasonable efforts to file with the Securities and Exchange Commission (the “SEC”) a registration statement or registration statements (as is necessary) on Form S-1 (or, if such form is unavailable for such a registration, on such other form as is available for such registration) covering the resale of all of the Registrable Securities, or amend its current registration statement to cover the Registrable Securities. Pursuant to the terms of the SPA, the Company agreed to use all commercially reasonable efforts to have the registration statement declared effective by the SEC within 90 days of October 18, 2022 (the “Registration Deadline”). If such registration statement has not become effective by the Registration Deadline, and provided that the Registrable Securities cannot otherwise be sold pursuant to Rule 144 pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the Registration Deadline, then, subject to the provisions of the SPA and the Initial Registration Rights Agreement, the Company agreed to issue to each Investor:

The Additional Shares and the Warrant 3 will, if applicable, be issuable to the Investors for each 30-day period, or portion thereof, that the registration statement registering the Registrable Securities has not become effective by the Registration Deadline. The Company’s obligation to issue the Additional Shares and the Warrant 3, if applicable, will not arise until the Company has amended its articles of incorporation, via a reverse split of the common stock, an increase of the number of authorized shares of common stock, or some combination thereof, such that the Company has a number of authorized but unissued shares of equal to (1) the number of Additional Shares that are otherwise to be issued plus (2) the number of shares of common stock that may be issuable pursuant to the Warrant 3.

Pursuant to the terms of the SPA, the Company also entered into a Piggyback Registration Rights Agreement (the “Piggyback Registration Rights Agreement”), dated as of October 18, 2022, by and among the Company and the Investors. The Piggyback Registration Rights Agreement provides piggyback registration rights for the shares of common stock that may be acquired by the Investors pursuant to the Warrant 2s. In the event that the Warrant 3s are issued pursuant to the provisions of the SPA, then at the time of such issuances, the Company and the Investors agreed to amend the Piggyback Registration Rights Agreement such that the Piggyback Registration Rights Agreement will also apply with respect to the shares of common stock that may be acquired by the Investors pursuant to the Warrant 3s.

Planned Reverse Stock Split

On June 15, 2022, the Company’s Board of Directors approved to effect a reverse stock split of the Company’s outstanding shares of common stock, par value $0.00001 per share, at a ratio of no less than 1-for-500 and no more than 1-for-1,000, with such ratio to be determined at the sole discretion of the Board of Directors. On September 22, 2022, the Company held its 2022 virtual annual meeting of stockholders, at which the Company’s stockholders voted in favor of, among other matters, to effect a reverse stock split of the Company’s outstanding shares of common stock, par value $0.00001 per share, at a ratio of no less than 1-for-500 and no more than 1-for-1,000, with such ratio to be determined at the sole discretion of the Board of Directors. On November 1, 2022, the Company’ Board of Directors approved an Articles of Amendment to the Company’s Articles of Incorporation to effect a 1 for 1,000 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock. The current status of the Reverse Stock Split is that the Company has notified the Financial Industry Regulatory Authority (FINRA) of the Reverse Stock Split, which will not be effective until FINRA processes it, and at such time we’ll file the Articles of Amendment with the State of Nevada to effectuate the Reverse Stock Split.

Resignation of William Stilley

On October 31, 2022, William Stilley, a member of the Board of Directors of the Company and Chairman of the Audit Committee, submitted his resignation as a director. Mr. Stilley’s resignation was not because of a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

Principal Products and Services

Operations by Sysorex Government Services, Inc. (“SGS”)

Through SGS, we provide enterprise infrastructure solutions for business operations, continuity, data protection, software development, collaboration, IT security, and physical security needs, that seek to help organizations tackle challenges and aim to accelerate business goals. Our products include third party hardware, software and related maintenance and warranty products and services that we resell from some of the world most trusted brands such as Dell, Canon, Panasonic, Cisco, Hewlett Packard, and Microsoft. By partnering with our technology vendors, we aim to offer our customers best-of-breed products and a team of technology certified subject matter experts and account representatives who serve commercial and federal clients and are ready to deploy and manage industry-leading solutions.

Working with our network of distribution partners, we believe that we have built a solid reputation of trust and knowledge with our customers, who look to end-to-end hardware and software solutions to optimize their performance. Solutions sets include:

We aim to provide a full range of information technology development and implementation professional services, from enterprise architecture design to custom application development. Our experienced IT professionals help meet evolving business needs by optimizing IT resources, application performance, and business processes. Our services span many emerging and hybrid enterprise technologies, and we offer a comprehensive suite of network performance, secure wireless access and cybersecurity products and services from leading manufacturers that aim to improve overall network performance and business operations. Our professional services are focused in the following areas:

These products and services allow Sysorex to offer turnkey solutions, including delivery of insights from the data, when requested by customers.

Operations by TTM Digital Assets & Technologies, Inc. (“TTM Digital” or “TTM”)

TTM Digital is a digital asset technology and mining company that owns and operates specialized cryptocurrency mining processors and was previously focused on the Ethereum blockchain ecosystem. Following the reverse merger on April 14, 2021, the business of TTM Digital became a business segment of the Company.

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.

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 spring of 2022. On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which included 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 its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The parties agreed that the Assets to be sold would not include the Company’s Ether funds generated prior to and held at closing. The definitive terms of the sale of Assets were to be set forth in definitive transaction agreements to be executed by the parties. Additionally, pursuant to the Heads of Terms, 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 requested that Ostendo issue, pursuant to the Heads of Terms, shares equal to the initial deposit made by the Company of $1,600,000. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, but the Company has not received confirmation that the Certificate of Designations for the preferred stock has been filed and accepted by the California Secretary of State. If the Company receives this document and it is dated on or before November 14, 2022, then the preferred stock will have been validly issued as of that date. If it is dated after November 14, 2022, the certificate for the shares is invalid since it purports to issue something that did not exist at the time. Accordingly, the Company is unable to determine definitively whether it currently holds these shares or not.

As of September 15, 2022, Ethereum switched from a Proof of Work model to Proof of Stake model and as a result, the Company no longer mines Ethereum. TTM Digital is currently exploring alternative uses and sales opportunities for its Graphics Processing Unit (GPU) assets and datacenter located in Lockport, NY.

TTM is exploring the future possibility of hosting client computing and evaluating the sale of its assets.

The Markets for Our Products and Services

Our markets are dynamic and highly competitive. The following is information about the various markets in which we operate.

General Market Information

In October 19, 2022, Gartner Forecasts Worldwide IT Spending to Grow 5.1% in 2023. Worldwide IT spending is projected to total $4.6 trillion in 2023, an increase of 5.1% from 2022, according to the latest forecast by Gartner, Inc.

According to Forrester, the global tech market will see robust 6% growth in 2022 and 2023, significantly faster than pre-pandemic levels.

According to the Computing Technology Industry Association, in the US market there are five key areas on IT component that will be focused on. These are divided as: IT Services 30%; Telecom Services 23%; Software 18%; Device + Infrastructure 17%; and Other Emerging Tech (e.g. IoT offerings).

Information about the Government IT Services and Solutions Market

For 2023 fiscal year, the U.S. government is estimating a 11% increase for the civilian information technology budget over the 2022 fiscal year. The total spending collectively by civilian agencies is $65.8B.

For 2023 fiscal year, the U.S. government is estimating a 2.3% increase for the defense information technology budget over the 2022 fiscal year. The total spending collectively by defense is 57.8B.

Sysorex intends to increase its role in this sector. Sysorex, through its wholly owned subsidiary Sysorex Government Services (“SGS”) services U.S. government customers in both civilian and defense agencies. SGS provides a variety of IT solutions and services (custom application development, project management, systems integration, etc.) through its various government contract vehicles including our GSA Schedule, TEIS-IV NASA SEWP V, NIH CIO-CS, and others. SGS may serve as the prime contractor or as the subcontractor, depending on the contract.

Key highlights in information technology spending according to Bloomberg Government are:

Cloud Computing: Spending projected to reach $11.5 billion by Q4 FY22, $12.5 billion by FY 202. DOD market share rose from 26% to 33% FY 2017–FY 2021, could hit 41% by FY 2023. Top contract vehicles include Virtual Data Center Prime (CMS), SEWP V (NASA), IT Schedule 70 (GSA).

Artificial Intelligence: Spending projected to total $1.4 billion by Q4 FY22, $1.5 billion by FY 2023. DOD market share rose from 48% to 64% FY 2017–FY 2021, could fall to 53% by FY 2023.

Operations and Logistics: Spending projected to total $17.6 billion by Q4 FY22 and rise incrementally in FY 2023. DOD market share averaged 95% from FY 2017–FY 2021, could fall to 91% by FY 2023.

Sysorex believes it has an advantage in the government marketplace by holding three government prime contracts. We believe that the key to our federal business is our ability to leverage existing contracts. We believe that three key contracts in our portfolio are unique in that each contract is a Government Wide Acquisition Contract (GWAC). These types of contracts can sell into all government agencies and directly to contractors (typically large integrators) who have existing services contracts that require IT products or additional professional services.

Our GWAC contracts include:

Through SGS, Sysorex enters into various types of contracts with our government customers, such as Indefinite Delivery Indefinite Quantity (IDIQ), Cost-Plus-Fixed-Fee (CPFF) Level of Effort (LOE), Cost-Plus-Fixed-Fee (CPFF) Completion, Cost-Reimbursement (CR), Firm-Fixed-Price (FFP), Fixed-Price Incentive (FPI) and Time-and-materials (T&M).

IDIQ contracts provide for an indefinite quantity of services or stated limits of supplies for a fixed period. They are used when the customer cannot determine, above a specified minimum, the precise quantities of supplies or services that the government will require during the contract period. IDIQs help streamline the contract process and speed service delivery. IDIQ contracts are most often used for service contracts and architect-engineering services. Awards are usually for base years and option years. The customer places delivery orders (for supplies) or task orders (for services) against a basic contract for individual requirements. Minimum and maximum quantity limits are specified in the basic contract as either a number of units (for supplies) or as dollar values (for services).

CPFF LOE contracts will be issued when the scope of work is defined in general terms requiring only that the contractor devote a specified level of effort, or LOE, for a stated time period. A CPFF completion contract will be issued when the scope of work defines a definite goal or target which leads to an end product deliverable (e.g., a final report of research accomplishing the goal or target).

CR contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed (except at its own risk) without the approval of the contracting officer and are suitable for use only when uncertainties involved in contract performance do not permit costs to be estimated with sufficient accuracy to use any type of fixed-price contract.

FFP contracts are issued when acquiring supplies or services on the basis of definite or detailed specifications and fair and reasonable prices can be established at the outset.

FPI target delivery contracts will be issued when acquiring supplies or services on the basis of reasonably definite or detailed specifications and cost can be reasonably predicted at the outset wherein the cost risk will be shared. A firm target cost, target profit, and profit adjustment formula will be negotiated to provide a fair and reasonable incentive and a ceiling that provides for the contractor to assume an appropriate share of the risk.

T&M contracts provide for acquiring supplies or services on the basis of (1) direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, and profit; and (2) actual cost for materials. A customer may use this contract when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.

Distribution Methods for our Products and Services

OEM and Vendor Arrangements

We work with a number of manufacturers (“OEMs”) and vendors in our industry with a focus on commercial and federal enterprise markets, including, Carahsoft, Synnex, ScanSource, Dell, Panasonic, Cisco, Samsung, and other. We anticipate that certain of the other suppliers are most likely to be more significant partners in the future.

Our vendor agreements vary, but typically they permit us to purchase products for combining with integration and professional services for transactions with our customers. Very few of our agreements require us to purchase any specified quantity of product. We usually require our partners to provide us with supply and price protection for the duration of specifically signed contracts. Other than supply agreements under certain government contracts, our vendor agreements are typically terminable by Sysorex or the vendor on short notice, at will or immediately upon default by either party, and may contain limitations on vendor liability. These vendor agreements also generally permit us to return previous product purchases at no charge within certain time limits for a restocking fee or in exchange for the vendor’s other products. Certain of our partners may provide us with various forms of marketing and sales financial assistance, including sales incentives, market development funds, cooperative advertising and sales events. Partners may also provide sell-through and other sales incentives in connection with certain product promotions.

We depend on our vendors to provide us with financing on our purchases of inventory and services. Some of our suppliers have offered us net-30 or net-45 payment, however, other vendors require that we prepay for our products and services. We have financing arrangements with SouthStar Capital to accommodate prepays. Our vendors could seek to limit the availability of vendor credit to us or modify the other terms under which they sell to us, or both, at any time which could negatively impact our liquidity. We have ongoing discussions concerning our liquidity and financial position with the vendor community and third parties that offer various credit protection services to our vendors. The topics discussed have included such areas as pricing, payment terms and ongoing business arrangements. We also used a revolving credit facility to finance invoices in an amount equal to 80% of the face value of customer invoices, with the remaining 20%, net of fees paid upon collection of the customer receivable. We also used our revolving credit facility to finance 50% of the face value of purchase orders received to pre-pay vendors/suppliers to ensure shipment on our behalf to the end customer. Upon collection of the associated receivable from the customer we then pay the remaining balance to our vendor/supplier and retain our profit.

Sales and Marketing

We utilize direct marketing through outside and inside sales representatives, who are compensated with a base salary and, in certain instances, with incentive plans such as commissions or bonuses. We utilize tradeshows, government events and websites, vendor provided market development funds and other direct and indirect marketing activities to generate demand for our products and services. We also have extensive relationships with vendor/supplier partners to directly engage with customers.

We believe that we have built a core competency in bidding on government requests for proposals in the infrastructure segment. We utilize our internal bid and proposal team as well as consultants to prepare the proposal responses for government clients. We also use business development, sales and account management employees or consultants.

As part of our end-to-end IT solutions, we are authorized resellers of the products and services of leading IT manufacturers and distributors. In many cases, we have achieved the highest level of relationship the manufacturer or distributor offers. In addition, our employees hold certifications issued by these manufacturers and by industry associations relating to the configuration, installation and servicing of these products. We aim to differentiate ourselves from our competitors by the range of manufacturers and distributors we represent, the relationship level we have achieved with these manufacturers and distributors and the scope of the manufacturer and industry certifications our employees hold.

We have a variety of contracts that vary from cost plus to time and material in our storage and computing and professional services segments. These apply to both commercial and government customers.

Customers

We have worked with over 500 customers company-wide since inception. These customers include federal and international government agencies as well as enterprise customers in retail, manufacturing, life sciences, biotechnology, high-tech, agriculture, financial services, state and local government, utilities, media and entertainment, telecom and many other verticals.

Dependence on Certain Customers

For the year ended December 31, 2021, our sales to federal, state and local governments accounted for approximately 100% of our SGS net sales. Our past customers have included, among others, federal and international government agencies and state and local governments. Although SGS has had many customers, two customers, generated approximately 71% of SGS’s gross revenue during the year ended December 31, 2021. One customer accounted for 44% of SGS’s gross revenue in 2021; however, this customer may or may not continue to be a significant contributor to revenue in the future. We plan to continue to focus our efforts on existing and potential government customers. SGS revenues for the three months ended September 30, 2022, and 2021, was approximately $3.5 million and $1.9 million, respectively. This includes approximately 71% of sales coming from the Company’s top two customers. The loss of a significant amount of business from one of our major customers would materially and adversely affect our results of operations until such time, if ever, as we are able to replace the lost business. Significant clients or projects in any one period may not continue to be significant clients or projects in other periods. To the extent that we are dependent on any single customer, we are subject to the risks faced by that customer to the extent that such risks impede the customer’s ability to stay in business and make timely payments to us.

Competition

We face substantial competition from other national, multi-regional, regional, and local value-added resellers and IT service providers, some of which may have greater financial and other resources than we do or that may have more fully developed business relationships with clients or prospective clients than we do. Many of our competitors compete principally on the basis of price and may have lower costs or accept lower selling prices than we do and, therefore, we may need to reduce our prices. In addition, manufacturers may choose to market their products directly to end-users, rather than through IT solutions providers such as us, and this could adversely affect our business, financial condition and results of operations.

The U.S. government systems integration business is intensely competitive and subject to rapid change. We compete with a large number of systems integrators, hardware and software manufacturers, and other large and diverse companies attempting to enter or expand their presence in the U.S. government market. Many of the existing and potential competitors have greater financial, operating and technological resources than we have. The competitive environment may require us to make changes in our pricing, services or marketing. The competitive bidding process involves substantial costs and a number of risks, including significant cost and managerial time to prepare bids and proposals for contracts that may not be awarded to us, or that may be awarded, but for which we do not receive meaningful revenues. Accordingly, our success depends on our ability to develop services and products that address changing needs and to provide people and technology needed to deliver these services and products. In the government services sector, our competition includes large systems integrators and defense contractors as well as small businesses such as 8a, women-owned, veteran disabled, Alaskan native, an others. Some of these competitors include global defense and IT service companies including IBM Global Services, LogicaCMG, CSC, ATOS Origins, Northrop Grumman, Raytheon IT Services and SAIC.

This complex landscape of domestic and multi-national services companies creates a challenging environment. To remain competitive, we must consistently provide superior service, technology and performance on a cost-effective basis to our customers. While we believe that, due to the functionality of our products, we can successfully compete in all of these markets, at this time we do not represent a significant presence in any of these markets.

Intellectual Property

The Company currently does not have any intellectual property or intellectual property rights.

Government Regulation

In general, we are subject to numerous federal, state and foreign legal requirements on matters as diverse as data privacy and protection, employment and labor relations, immigration, taxation, anticorruption, import/export controls, trade restrictions, internal and disclosure control obligations, securities regulation and anti-competition. Our business is subject to extensive laws, rules, regulations, policies, orders, determinations, directives, treaties, and legal and regulatory interpretations and guidance in the markets in which we operate, including those typically applied to securities, commodities, the exchange, and transfer of digital assets, cross-border and domestic money and digital asset transmission businesses, as well as those governing data privacy, data governance, data protection, cybersecurity, fraud detection, payment services (including payment processing and settlement services), consumer protection, antitrust and competition, bankruptcy, tax, anti-bribery, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. Many of these legal and regulatory regimes were adopted prior to the advent of the internet, mobile technologies, digital assets, and related technologies. As a result, they often do not contemplate or address unique issues associated with digital assets, are subject to significant uncertainty, and vary widely across U.S. federal, state, and local jurisdictions. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the relative novelty and evolving nature of our business and the significant uncertainty surrounding the regulation of digital assets requires us to exercise our judgement as to whether certain laws, rules, and regulations apply to us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have not complied with such laws, rules, and regulations, we could be subject to significant fines, limitations on our business, reputational harm, and other regulatory consequences, as well as criminal penalties, each of which may be significant and could adversely affect our business, operating results and financial condition. Regulatory enforcement actions have been taken against businesses in the industries in which we intend to operate, across many jurisdictions, in response to hacks, consumer harm, and criminal activity.

The SEC has been active in asserting its jurisdiction over Initial Coin Offerings (“ICO”) and digital assets and in bringing enforcement cases. The SEC has directed enforcement activity toward digital assets, and more specifically, ICOs. The SEC has issued guidance and made numerous statements regarding the application of securities laws to digital assets. For example, on July 25, 2017, the SEC issued a Report of Investigation (the “Report”) which concluded that “DAO Tokens” offered and sold by the Decentralized Autonomous Organization (“DAO”), a digital decentralized autonomous organization and investor-directed venture capital fund for digital assets, were issued for the purpose of raising funds. The Report concluded that these tokens were “investment contracts” within the meaning of Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, and therefore securities subject to the federal securities laws. In December 2017, the SEC issued a cease-and-desist letter ordering a company to stop its initial coin offering of tokens on the grounds that it failed to file a registration statement or qualify for an exemption from registration. Similar to the tokens issued by the DAO, the SEC found that these tokens satisfied the definition of an “investment contract,” and were therefore subject to the federal securities laws.

In September 2017, the SEC created a new division known as the “Cyber Unit” to address, among other things, violations involving distributed ledger technology and ICOs, and filed a civil complaint in the Eastern District of New York charging a businessman and two companies with defrauding investors in a pair of so-called ICOs purportedly backed by investments in real estate and diamonds. Subsequently, the SEC has filed several orders instituting cease-and-desist proceedings against certain entities in connection with their unregistered offerings of tokens for failing to register a hedge fund formed for the purpose of investing in digital assets as an investment company for failing to register as a broker-dealer, even though it did not meet the definition of an exchange for failing either to register as a national securities exchange or to operate pursuant to an exemption from registration as an exchange after creating a platform that clearly fell within the definition of an exchange.

On March 9, 2022, President Biden signed an executive order on cryptocurrencies. While the executive order did not mandate any specific regulations, it instructs various federal agencies to consider potential regulatory measures, including the evaluation of the creation of a U.S. Central Bank digital currency. We cannot be certain as to how future regulatory developments will impact the treatment of digital assets under the law, including, but not limited to, whether digital assets will be classified as a security, commodity, currency and/or new or other existing classification. Such additional regulations may result in extraordinary, non-recurring expenses, thereby materially and adversely affecting an investment in us. If we determine not to comply with such additional regulatory and registration requirements, we may seek to cease certain or all of our operations. Any such action could have a material adverse effect on our business, financial condition and results of operations. Further, we may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties as a result of any regulatory enforcement actions, all of which could harm our reputation and affect the value of our common stock. On April 4, 2022, shortly after President Biden’s executive order, SEC Chairman Gary Gensler announced that he has instructed the SEC staff to work (i) to register and regulate digital asset platforms like securities exchanges; (ii) with the CFTC on how to jointly address digital asset platforms that trade both securities and non-securities; (iii) on segregating out digital asset platforms’ custody of customer assets, if appropriate; and (iv) on segregating out the market making functions of digital asset platforms, if appropriate. These efforts have a high likelihood or resulting in new interpretations or regulations that would have material effects on our business that are impossible to predict.

Additionally, the adoption of new money transmitter (“MT”) or money services business (“MSB”) statutes in jurisdictions or changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, could subject us to registration or licensing, or limit business activities, cause us to enter relationships with one or more third parties for payment services until we are appropriately licensed. The activities of TTM Digital may cause it to be deemed a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, TTM Digital may be required to comply with FinCEN regulations, including those that would mandate TTM Digital to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.

Compliance and classifications are dependent on federal and state regulatory actions and our business activities. We do not believe that we are a money transmitter, because our activities do not cause us to hold, possess or control payment funds on behalf of a consumer or merchant. If we were deemed to be a money transmitter, we would be subject to significant additional regulation. This could increase our costs in operating our business. In addition, a regulator could act against us if it views our payment solution platform as a violation of existing law. Any of these outcomes would negatively affect the market price for our shares and could cause us to cease operations in the certain U.S. States.

Additionally, we are not licensed to conduct a virtual currency business in New York and do not intend to become licensed in any other state that may require licensing in the future. We have taken the position that the New York State Department of Financial Services (“NYSDFS”) BitLicense Regulatory Framework (23 NYCRR 200.2(q)) does not apply to our business. It is possible, however, that the NYSDFS could disagree with our position. If we were deemed to be conducting an unlicensed virtual currency business in New York, we could be subject to significant additional regulation and/or regulatory consequences. There are a number of states that review the adaptation that the Conference of State Bank Supervisors has proposed a model form of state-level “virtual currency” regulation. There are at least thirty-one states that have pending legislation in the 2021 legislative session regarding blockchain and cryptocurrency. The recent New York Senate Bill 6486C seeks to establish a moratorium on consolidated operations that use proof-of-work authentication methods to validate blockchain transactions; provides that such operations will be subject to a full generic environmental impact statement review. Although the majority of our mining activity is operating using hydroelectric power, New York Senate Bill 6486C may require TTM Digital to halt mining until an environmental impact assessment is completed.

Employees

As of November 17, 2022, we had 17 full-time employees. We believe our employee relations to be good.

Legal Proceedings

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.

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 $168,593 is recorded in the unaudited condensed consolidated balance sheets – accrued liabilities for the period ended September 30, 2022. The notice of conversion to convert its convertible debt to shares of the Company’s stock will be honored upon issuance of the Company’s increase in authorized shares.

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. 

Organizational Chart

The following is a current organization chart of our Company:

Properties

Our principal executive offices are located at 13880 Dulles Corner Lane, Suite 120, Herndon, Virginia 20171. We lease this premise, which consists of approximately 5,758 square feet pursuant to a lease that expires on May 31, 2025, with the following gross monthly rent payments:

In addition, the Company owns and operates its data center in New York. The data center facility is located in an industrial redevelopment area which has a property tax abatement and pays certain fees in lieu of property taxes under an agreement with the Industrial Development Agency. We believe that our facilities are adequate for our current needs.

Smaller Reporting Company Status

We qualify as a “smaller reporting company” under Rule 12b-2 of the Exchange Act, which is defined as an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that (i) has a public float of less than $250 million, or (ii) has annual revenues of less than $100 million and either (a) no public float, or (b) a public float of less than $700 million. Whether an issuer is a smaller reporting company is determined on an annual basis. As a smaller reporting company, we are not required to, and may not, include a Compensation Discussion and Analysis section in our proxy statements; we will provide only two years of financial statements; we need not provide the table of selected financial data; and we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended. We also will have other “scaled” disclosure requirements that are less comprehensive than issuers that are not smaller reporting companies which could make our common stock less attractive to potential investors, which could make it more difficult for our stockholders to sell their shares.

Corporate Information

Our office is located at 13880 Dulles Corner Lane, STE 120, Herndon, Va. 20171 which is where our records are kept. Our website addresses are www.sysorexinc.com and www.ttmdigitalassets.com. The inclusion of our website addresses in this prospectus does not include or incorporate by reference the information on our websites into this prospectus. Our telephone number is (703) 961-1125.

Corporate History

We were originally incorporated in California on January 3, 1994 under the name Lilien Systems. In connection with a reorganization of Inpixon (“Inpixon”) effective as of January 1, 2016, Lilien Systems acquired 100% of the issued and outstanding capital stock of Sysorex Government Services, Inc. (“SGS”) and changed its name to Sysorex USA. On February 27, 2017, our name was changed to Inpixon USA. On July 26, 2018, solely for the purpose of reincorporating the Company into the State of Nevada, Inpixon formed a wholly owned subsidiary in the State of Nevada named “Sysorex, Inc.” which was merged with the Company and resulted in the Company being reincorporated in the state of Nevada under the name “Sysorex, Inc.” On August 31, 2018, Sysorex and Inpixon engaged in a spin-off transaction (the “Spin-off”), whereby Sysorex Inc., and its wholly owned subsidiary SGS, was separated from Inpixon and became a separate entity. The Company began trading on the OTC Markets under the symbol “SYSX” on September 4, 2018.

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 its focus on 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. 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.”

On September 5, 2017, as a result of the Spin-Off, 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. Subsequently thereafter, the Company defaulted under the terms of the agreement. The liability of approximately $0.6 million has been accrued and includes interest $0.007 million calculated based on a default rate of 8%, which is included as a component of accounts payable and accrued liabilities as of December 31, 2021, in the 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. Subsequently thereafter, the Company defaulted under the terms of the agreement. The liability of approximately $0.1 million has been accrued and includes interest $0.001 million calculated based on a default rate of 6% and is included as a component of accounts payable and accrued liabilities as of December 31, 2021, in the 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 fulfill its obligation to file a registration statement covering the Shares by July 13, 2021, nor any date thereafter up to and including the filing of this Registration Statement and therefore has accounted for an accrued liability in the amount of $0.2 million recorded in the Consolidated Balance Sheets – Accrued Liabilities for the year ended December 31, 2021. 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 was paid $1,375,000.00 (the “Settlement Amount”) on January 14, 2022. 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. The vendor liability of $2,908,133 is recorded in the Consolidated Balance Sheets – Accounts Payable as of December 31, 2021.

On April 8, 2021, the Company, TTM Digital, “MergerSub”, entered into a merger agreement (the “Merger Agreement”). Under the terms of the Merger Agreement, the parties agreed that the Company 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 Merger Shares in exchange for their shares of TTM Digital. Simultaneously, upon the issuance of the Merger Shares to the TTM Digital shareholders, the Company was issued all of the authorized capital of TTM Digital and TTM Digital became a wholly owned subsidiary of the 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 the Company including the effect of the Company Recapitalization as discussed in TTM Digital Reverse Merger and the Company Recapitalization.

Effective on April 1, 2021, TTM Digital entered into an Asset Contribution and Exchange Agreement to acquire 3,130 GPUs, and thereafter a Purchase Order on April 1, 2021, for a lease-to-buy financing arrangement to acquire 1,344 GPUs with CoreWeave, with both CoreWeave agreements closing on or after April 1, 2021. In connection with the Contribution and Exchange Agreement, TTM Digital issued equity to the sellers representing 28.65% of the pre-merger equity outstanding for TTM Digital and agreed to installment payments of $2.2 million over 180 days subject to acceleration based on the completion of certain corporate events. Additionally, the parties entered a service agreement on the same date providing for installation and configuration, operation, and management of the mining systems of TTM Digital by CoreWeave. It includes the use of the management software to monitor, maintain, troubleshoot, and communicate with the hosting service providers as well as certain physical repairs. As part of the arrangement, the Company made an initial down payment of $100,000 which was applied to future invoices. The ongoing fee is determined based on the number of specific mining systems under the Service Agreement. Based on the number and type of units at the arrangement’s inception, monthly costs are expected to be $32,400. All third-party software costs associated with the Services and operation of the equipment will be passed through to the Company. The agreement expired on June 30, 2022.

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. At the initial closing the Company sold the purchasers (i) 12.5% Original Issue Discount Convertible 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 matured on July 7, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder. We believe we are currently in default under the terms of our secured convertible notes.

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 matured on August 13, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder. We believe we are currently in default under the terms of our secured convertible notes.

On September 26, 2021, the Company acquired a 5% minority interest in Style Hunter, Inc. (“Hunt”).  The investment in Hunt is part the assets that TTM is exploring the possibility of selling. Hunt issued 613,723 shares of its common stock: par value $0.0001 per share for $0.81470 per share for a total price of $500,000. The Company shall have a one-time option to purchase an additional $500,000 of the Common Stock (“Option”) on or before the 360-day anniversary of Closing Date as follows: (i) if the Buyer exercises its Option prior to the 90-day anniversary of Closing Date the per-share purchase price of the additional shares of Common Stock (the “Option Price”) shall be $0.81470 (a $10,000,000 Company valuation), (ii) if the Buyer exercises its Option after the 90-day anniversary of Closing Date, but prior to the 180-day anniversary of Closing Date, the Option Price will be $1.22200 (a $15,000,000 Company valuation), or (iii) if the Buyer exercises its option after the 180-day anniversary of Closing the Option Price will be $2.03670.

On November 2, 2021, the Company through a wholly owned subsidiary of TTM Digital executed a Membership Interest Purchase Agreement (“Up North Agreement”) with BWP Holdings, LLC (“BWP”) whereby the Company acquired the remaining 50.0% membership interest (“Transferred Membership Interest”) in Up North Hosting LLC (“Up North”) that it did not already own to bring its ownership in Up North to 100.0% (“UNH Acquisition”). In addition to the Transferred membership Interest the Company acquired certain data mining equipment of BWP (“Bitworks Equipment” and collectively the “Acquisition”) that was resident in the Up North data center facility. Total transaction consideration paid for the acquired interests of Up North and the Bitworks Equipment were $1.0 million and the issuance of 1.0 million shares of restricted common stock, $0.00001 par value of the Company.

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 spring of 2022. On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which included 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 its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The parties agreed that the Assets to be sold would not include the Company’s Ether funds generated prior to and held at closing (the “Closing”). The definitive terms of the sale of Assets were to be set forth in definitive transaction agreements to be executed by the parties. Additionally, pursuant to the Heads of Terms, 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 requested that Ostendo issue, pursuant to the Heads of Terms, shares equal to the initial deposit made by the Company of $1,600,000. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, but the Company has not received confirmation that the Certificate of Designations for the preferred stock has been filed and accepted by the California Secretary of State. If the Company receives this document and it is dated on or before November 14, 2022, then the preferred stock will have been validly issued as of that date. If it is dated after November 14, 2022, the certificate for the shares is invalid since it purports to issue something that did not exist at the time. Accordingly, the Company is unable to determine definitively whether it currently holds these shares or not.

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 $168,593 is recorded in the unaudited condensed consolidated balance sheets – accrued liabilities for the period ended September 30, 2022. The notice of conversion to convert its convertible debt to shares of the Company’s stock will be honored upon issuance of the Company’s increase in authorized shares.

On June 15, 2022, the Company’s Board of Directors approved to effect a reverse stock split of the Company’s outstanding shares of common stock, par value $0.00001 per share, at a ratio of no less than 1-for-500 and no more than 1-for-1,000, with such ratio to be determined at the sole discretion of the Board of Directors. On September 22, 2022, the Company held its 2022 virtual annual meeting of stockholders, at which the Company’s stockholders voted in favor of, among other matters, to effect a reverse stock split of the Company’s outstanding shares of common stock, par value $0.00001 per share, at a ratio of no less than 1-for-500 and no more than 1-for-1,000, with such ratio to be determined at the sole discretion of the Board of Directors. On November 1 2022, the Company’ Board of Directors approved an Articles of Amendment to the Company’s Articles of Incorporation to effect a 1 for 1,000 reverse stock split (the “Reverse Stock Split”) of the Company’s common stock. The current status of the Reverse Stock Split is that the Company has notified the Financial Industry Regulatory Authority (FINRA) of the Reverse Stock Split, which will not be effective until FINRA processes it, and at such time we’ll file the Articles of Amendment with the State of Nevada to effectuate the Reverse Stock Split.

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 audited financial statements and related notes included elsewhere in this registration statement. In addition to historical information, this discussion and analysis here and throughout this registration statement 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”.

Overview

Sysorex, Inc. through its wholly owned subsidiary, Sysorex Government Services, Inc. (“SGS”), provides information technology solutions primarily to the public sector. These solutions include cybersecurity, professional services, engineering support, IT consulting, enterprise level technology, networking, wireless, help desk and custom IT solutions. In addition to SGS, the Company has another wholly owned subsidiary, TTM Digital Assets &Technologies, Inc. (“TTM Digital”). TTM Digital is a digital asset technology and mining company that owns and operates 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 a Proof of Stake model and as a result, the Company is no longer mining Ethereum. TTM is currently exploring alternative uses and sales opportunities for its Graphics Processing Units (“GPU”) assets and datacenter located in Lockport, NY. The Company had previously been in discussions with a third party to sell its mining assets and certain associated real property.

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. 

For the year ended December 31, 2021, our sales to federal, state and local governments accounted for approximately 100% of our SGS net sales. Our past customers have included, among others, federal and international government agencies and state and local governments. Although SGS has had many customers, two customers generated approximately 71% of SGS’s gross revenue during the year ended December 31, 2021. One customer accounted for 44% of SGS’s gross revenue in 2021; however, this customer may or may not continue to be a significant contributor to revenue in the future. We plan to continue to focus our efforts on existing and potential government customers. SGS revenues for the three months ended September 30, 2022, and 2021, was approximately $3.5 million and $1.9 million, respectively. This includes approximately 71% of sales coming from the Company’s top two customers.

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 September 30^th, respectively). SGS may also experience variability in our gross profit and gross profit margin as a result of changes in the various vendor programs we participate in and its effect on the amount of vendor consideration we receive from a particular vendor or their authorized distributor/wholesaler, may be impacted by a number of events outside of our control.

TTM Digital

TTM Digital is a digital asset technology and mining company that owns and operates specialized cryptocurrency mining processors and was previously focused on the Ethereum blockchain ecosystem. Following the reverse merger on April 14, 2021, the business of TTM Digital became a 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.”

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.

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 spring of 2022. On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which included 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 its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The parties agreed that the Assets to be sold would not include the Company’s Ether funds generated prior to and held at closing. The definitive terms of the sale of Assets were to be set forth in definitive transaction agreements to be executed by the parties. Additionally, pursuant to the Heads of Terms, 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 requested that Ostendo issue, pursuant to the Heads of Terms, shares equal to the initial deposit made by the Company of $1,600,000. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, but the Company has not received confirmation that the Certificate of Designations for the preferred stock has been filed and accepted by the California Secretary of State. If the Company receives this document and it is dated on or before November 14, 2022, then the preferred stock will have been validly issued as of that date. If it is dated after November 14, 2022, the certificate for the shares is invalid since it purports to issue something that did not exist at the time. Accordingly, the Company is unable to determine definitively whether it currently holds these shares or not.

As of September 15, 2022, Ethereum switched from a Proof of Work model to Proof of Stake model and as a result, the Company no longer mines Ethereum. TTM Digital is currently exploring alternative uses and sales opportunities for its Graphics Processing Unit (GPU) assets and datacenter located in Lockport, NY.

TTM is exploring the future possibility of hosting client computing and evaluating the sale of its assets.

Basis of Presentation

In connection with the preparation of our 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 consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our 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 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

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.

TTM Digital, as noted above, has an evolving business model which is subject to various uncertainties and which may need to evolve to reflect the trends of the industry. Over time, we may be required to 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  

Material Changes

On April 8, 2021, the Company, TTM Digital, “MergerSub”, entered into 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. On 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 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. 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.

Effective on April 1, 2021, TTM Digital entered into an Asset Contribution and Exchange Agreement to acquire 3,130 GPUs, and thereafter a Purchase Order on April 1, 2021, for a lease-to-buy financing arrangement to acquire 1,344 GPUs with CoreWeave, with both CoreWeave agreements closing on or after April 1, 2021. In connection with the Contribution and Exchange Agreement, TTM Digital issued equity to the sellers representing 28.65% of the pre-merger equity outstanding for TTM Digital and agreed to installment payments of $2.2 million over 180 days subject to acceleration based on the completion of certain corporate events. Additionally, the parties entered a service agreement on the same date providing for installation and configuration, operation, and management of the mining systems of TTM Digital by CoreWeave. It includes the use of the management software to monitor, maintain, troubleshoot, and communicate with the hosting service providers as well as certain physical repairs. As part of the arrangement, the Company made an initial down payment of $100,000 which was applied to future invoices. The ongoing fee is determined based on the number of specific mining systems under the Service Agreement. Based on the number and type of units at the arrangement’s inception, monthly costs are expected to be $32,400. All third-party software costs associated with the Services and operation of the equipment will be passed through to the Company. The agreement expired on June 30, 2022.

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. At the initial closing the Company sold the purchasers (i) 12.5% Original Issue Discount Convertible 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 matured on July 7, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder. We believe we are currently in default under the terms of our secured convertible notes.

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 matured on August 13, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder. We believe we are currently in default under the terms of our secured convertible notes.

On September 26, 2021, the Company acquired a 5% minority interest in Style Hunter, Inc. (“Hunt”).  The investment in Hunt is part the assets that TTM is exploring the possibility of selling. Hunt issued 613,723 shares of its common stock: par value $0.0001 per share for $0.81470 per share for a total price of $500,000. The Company shall have a one-time option to purchase an additional $500,000 of the Common Stock (“Option”) on or before the 360-day anniversary of Closing Date as follows: (i) if the Buyer exercises its Option prior to the 90-day anniversary of Closing Date the per-share purchase price of the additional shares of Common Stock (the “Option Price”) shall be $0.81470 (a $10,000,000 Company valuation), (ii) if the Buyer exercises its Option after the 90-day anniversary of Closing Date, but prior to the 180-day anniversary of Closing Date, the Option Price will be $1.22200 (a $15,000,000 Company valuation), or (iii) if the Buyer exercises its option after the 180-day anniversary of Closing the Option Price will be $2.03670 (a $25,000,000 Company valuation).

On November 2, 2021, the Company through a wholly owned subsidiary of TTM Digital executed a Membership Interest Purchase Agreement (“Up North Agreement”) with BWP Holdings, LLC (“BWP”) whereby the Company acquired the remaining 50.0% membership interest (“Transferred Membership Interest”) in Up North Hosting LLC (“Up North”) that it did not already own to bring its ownership in Up North to 100.0% (“UNH Acquisition”). In addition to the Transferred membership Interest the Company acquired certain data mining equipment of BWP (“Bitworks Equipment” and collectively the “Acquisition”) that was resident in the Up North data center facility. Total transaction consideration paid for the acquired interests of Up North and the Bitworks Equipment were $1.0 million and the issuance of 1.0 million shares of restricted common stock, $0.00001 par value of the Company.

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 spring of 2022. On March 24, 2022, the Company executed Heads of Terms (“Heads of Terms”) with Ostendo Technologies, Inc. (“Ostendo”) which included 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 its Ethereum mining assets and certain associated real property (“Assets”) to Ostendo for Ostendo preferred stock. The parties agreed that the Assets to be sold would not include the Company’s Ether funds generated prior to and held at closing (the “Closing”). The definitive terms of the sale of Assets were to be set forth in definitive transaction agreements to be executed by the parties. Additionally, pursuant to the Heads of Terms, 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 requested that Ostendo issue, pursuant to the Heads of Terms, shares equal to the initial deposit made by the Company of $1,600,000. In November 2022, the Company received a certificate, dated November 14, 2022, for the shares, but the Company has not received confirmation that the Certificate of Designations for the preferred stock has been filed and accepted by the California Secretary of State. If the Company receives this document and it is dated on or before November 14, 2022, then the preferred stock will have been validly issued as of that date. If it is dated after November 14, 2022, the certificate for the shares is invalid since it purports to issue something that did not exist at the time. Accordingly, the Company is unable to determine definitively whether it currently holds these shares or not.

Summary of TTM Digital Mining Result for the year ended December 31, 2021 and 2020

The following is a discussion on continuing and discontinued operations is discussed further in the following sections, Liquidity and Capital Resources as of December 31, 2021, and 2020.

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

Discussion of Results of Operations of TTM Digital for the year ended December 31, 2021, and 2020

For the year ending 2021, TTM Digital reported $12.5 million in revenues, ($4.4 million in continuing operations and $8.1 million in discontinued operations). TTM Digital reported $1.3 million in mining costs ($0.5 in continuing operations and $0.8 million in discontinued operations), $0.2 million in sales and marketing costs (continuing operations), $6.3 million in general and administrative costs, ($6.0 million in continuing operations and $0.3 million in discontinued operations), $0.3 million in management fees (continuing operations), $4.1 million in amortization and depreciation costs ($2.5 million in continuing operations and $1.6 million in discontinued operations), $3.2 million of fixed asset impairment ( continuing operations), $0.7 million of digital asset impairment (continuing operations), $7.8 million in loss contingency on debt default (continuing operations), $6.3 million in change in fair value of debt conversion feature, $22.0 million in merger charges (continuing operations), $2.0 million in restructuring fees (continuing operations), $0.8 in other net income and expenses ($0.012 million in other income from continuing operations and $0.1 million in other expenses in discontinued operations), resulting in a net loss from operations of $21.6 million ($26.8 million net loss from continuing operations and $5.2 million net income from discontinued operations).

For the year ending 2020, TTM reported its results as discontinued operations. TTM Digital reported $1.8 million in revenues. TTM Digital reported $0.4 million in mining costs, $0.1 million in management fees, $0.8 million in depreciation costs, resulting in a net income from operations of $0.5 million.

TTM Digital margins are affected by new and existing competitors in the digital asset mining industry. As an increasing number of new miners enter the Ethereum network, and as existing miners acquire additional mining equipment, the total rewards per miner decrease and the difficulty to obtain mining equipment increases. 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. Additionally, for the year ended December 31, 2021, there were significant merger and acquisition related costs due to the triangular reverse merger with Sysorex Inc.

Discussion of Results of Operations of SGS for the year ended December 31, 2021

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

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

For the year ending 2021, the SGS reported $8.3 million in revenues. This includes approximately 70% of revenues coming from the Company’s top two customers. SGS reported $6.9 million in product and services costs, $0.8 million in sales and marketing costs, $3.4 million in general and administrative costs, $0.4 million in amortization costs, resulting in a loss from operations of $3.2 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 credit facility. Our financial source charges high fees and interest, which also affects our net margin.

Three Months Ended September 30, 2022, Compared to Three Months Ended September 30, 2021

Discussion of Results of Operations of SGS for the Three Months Ended September 30, 2022, and 2021

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 September 30, 2022, and 2021, was approximately $3.5 million and $1.9 million, respectively. This revenue increase is representative of increased product sales to the federal agencies. This includes approximately 71% of sales coming from the Company’s top two customers. SGS product and service costs for the three months ended September 30, 2022, and 2021, was approximately $3.0 million and $1.5 million, respectively. This includes approximately 72% 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 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.

SGS also reported for the three months ended September 30, 2022, and 2021, $0.2 million and in sales and marketing costs, $1.0 million in general and administrative costs, $0.1 million in amortization costs, resulting in a loss from operations of approximately $0.9 million. The Company continues to search for paths to drive costs down and increase its cash position. The overall decrease in general and administrative costs are directly related to a decrease in professional and consulting fees.

Summary of TTM Mining Result

The numbers presented in this table are in thousands of dollars. The following table present the roll forward of digital asset activity from continuing and discontinued operations during the respective periods:

Discussion of Results of Operations of TTM Digital for the Three Months Ended September 30, 2022, and 2021

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

Revenues from mining are impacted significantly by volatility in cryptocurrency prices and network difficulty. The average price of Ethereum mined during the three months ended September 30, 2022, was approximately $1,521 compared to approximately $2,771 during the three months ended September 30, 2021. Network difficulty was also significantly higher in 2022, resulting in lower total rewards from mining. Total Ethereum mined during the three months ended September 30, 2022, was approximately 512 ETH vs approximately 1,069 ETH during the three months ended September 30, 2021.

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.

For the three months ended September 30, 2022, the Company recorded approximately $1.3 million of impairment of fixed assets in its discontinued operations.

Nine Months Ended September 30, 2022, Compared to Nine Months Ended September 30, 2021

Discussion of Results of Operations of SGS for the Nine Months Ended September 30, 2022, and 2021

SGS revenues for the nine months ended September 30, 2022, and 2021, was approximately $12.0 million and $3.9 million respectively. This revenue increase is representative of increased product sales to the federal agencies, however, the periods for the nine months ended September 30, 2022, and September 30, 2021 are not comparable, as the prior year period includes a short period of April 15, 2021 through September 30, 2021. SGS revenues resulted from product sales to U.S. governmental agencies and local county governments. This includes approximately 83% of sales coming from the Company’s top two customers in 2022. As disclosed in the notes to the financial statements, Note 3 - Basis of Presentation, the acquisition/merger was effective April, 2021 which resulted in SGS’s reporting period of April 15, 2021 through September 30, 2021. As a result, the nine months ended September 30, 2021, is not comparable in total months of operation to the nine months ended September 30, 2022.

Product, and service costs for the nine months ended September 30, 2022, of approximately $8.4 million included a gain on a vendor liability settlement of $1.5 million. Without this gain, product and service costs would approximate $9.9 million. The margin effect on the revenue and costs as presented is approximately 30%, however without the one-time settlement gain of $1.5 million, the margin is approximately 17%.

Selling, general, and administrative expenses (“SG&A”) for the nine months ended September 30, 2022, was $4.4 million, which were associated with compensation and payroll tax costs, and professional fees related to the Heads of Terms investment and sale of TTM assets and ongoing operational advisory and accounting services.

Other income and expense, including interest expense for the nine months ended September 30, 2022, was approximately $3.2 million of which interest incurred on the Company’s convertible debt of approximately of $2.4 million, a loss on extinguishment of debt of $1.0 million, a realized gain on sale of digital assets of $1.5 million and a conversion feature derivative liability valuation of $1.6 million. Other income and expenses for the nine months ended September 30,2021 was approximately $25.0 million. SGS recorded approximately $22.0 million in merger charges, $2.0 million in debt restructuring fees and $0.9 million in interest expense for the period nine months ended September 30, 2021, related to the acquisition.

Summary of TTM Mining Result

The numbers presented in this table are in thousands of dollars. The following tables present the roll forward of digital asset activity from continuing and discontinuing operations during the periods ended:

Discussion of Results of Operations of TTM Digital for the Nine Months Ended September 30, 2022, and 2021

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

As disclosed in the notes to the financial statements, revenues from mining are impacted significantly by volatility in cryptocurrency prices and network difficulty. The average price of Ethereum mined during the nine months ended September 30, 2022, was approximately $2,213 compared to approximately $2,276 during the nine months ended September 30, 2021. While the average price of Ethereum during the nine months ended September 30, 2022, was lower than the nine months ended September 30, 2021. Additionally, network difficulty was also significantly higher in 2022, resulting in lower total rewards from mining. Total Ethereum mined during the nine months ended September 30, 2022, was approximately 1,747 ETH compared to approximately 3,987 ETH during the nine months ended September 30, 2021.

Ethereum’s transition to proof of stake (“POS”) occurred on September 15, 2022, and has had a direct negative impact on the company’s ability to generate revenue.

For the nine months ended September 30, 2022, the Company recorded approximately $2.3 million of impairment of fixed assets in its discontinued operations.

Liquidity and Capital Resources

Going Concern

As of December 31, 2021, the Company had an approximate cash balance of $0.6 million, working capital deficit of approximately $21.5 million, and an accumulated deficit of approximately $49.3 million. As of September 30, 2022, the Company had an approximate cash balance of $0.1 million, working capital deficit of approximately $21.6 million, and an accumulated deficit of approximately $60.4 million. On October 18, 2022, the Company completed a $500,000 private placement. Despite the Company’s recent private placement, the aforementioned factors continue to raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months following the issuance of these financial statements. The accompanying 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 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 consolidated financial statements are issued.

The Company does not believe that its capital resources as of December 31, 2021 and as of September 30, 2022, its ability to pursue its Ethereum related business, 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 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. These contracts can provide the Company 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 has utilized SouthStar to finance purchase orders and it also has the ability to factor its receivables if needed to fund operations. In addition, the Company will need to increase its authorized common stock to settle convertible debt conversions.  

If the Company is unable to raise additional capital on terms acceptable to the Company and on a timely basis, or is unable to attain new vendors, the Company will be required to downsize or wind down its operations through liquidation, bankruptcy, or sale of its assets. In addition, as of September 30, 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 the next twelve months.

Our capital resources and operating results, continuing and discontinued operations, as of and through December 31, 2021, consisted of the:

1) An overall working capital deficit of $21.5 million,

2) Cash and cash equivalents of $0.6 million,

3) Net cash used in operating activities of $(8.5) million,

4) Net cash provided by investing activities of $2.2 million, and

5)

Net cash provided by financing activities of $6.9 million.

Our capital resources and operating results as of and through September 30, 2022, consisted of the:

1) An overall working capital deficit of $21.6 million,

2) Cash and cash equivalents of $0.1 million,

3) Net cash used in operating activities of $(6.9) million,

4) Net cash provided by investing activities of $6.4 million.

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

The Company’s net cash flow used in operating, investing and financing activities, continuing and discontinued operations for the year ended December 31, 2021, 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 year ended December 31, 2021, was $(8,473). Net cash used in operating activities during the year ended December 31, 2021, consisted of the following (in thousands):

The non-cash income and expenses of $49,612 consisted of (in thousands):

The net use of cash due to changes in operating assets and liabilities totaled $(3,719) and consisted of the following (in thousands):

Operating cash flows – discontinued operations of approximately $1.4 million for the year ended December 31, 2021, is primarily driven by net income of $5.2 million, depreciation and amortization of $1.6 million and a gain on sale of mining equipment of $0.2 million, equity in earnings of equity method investments of $0.1 million, offset by decreases in digital assets of $6.1 million and a decrease in accounts payable and accrued liabilities of $11.8 million.

Net cash used in operating activities for the year ended December 31, 2020, of $(0.5) million were primary driven by a net loss from continuing operations of $0.1 million, decreases in digital assets of $1.0 million offset by operating cash flows – discontinued operations of $0.6 million.

Operating cash flows – discontinued operations for the year ended December 31, 2020, is primarily driven by net income of $0.6 million, depreciation and amortization of $0.8 million, offset by decreases in digital assets of $0.7 million and a decrease in accrued liabilities of $0.1 million.

Operating Activities:

Net cash used in operating activities was $(8.5) million during the year ended December 31, 2021. Cash was consumed from operations by the net loss of $(54.4) million, plus non-cash and one-time items of $49.6 million, consisting primarily of merger charges of $22.0 million, non-employee compensation costs of $2.6 million, in shares issued in exchange for services, restructuring fees of $2.0 million, loss contingency for debt default of $7.8 million, change in fair value of debt conversion feature of $6.3 million, impairment of mining assets of $3.2 million, impairment of digital assets of $0.7 million, and depreciation and amortization of $2.9 million and cash flows provided by discontinued operations of $1.3 million, offset by changes in assets and liabilities of $(5.1) million.

Investing Activities:

Net cash provided by investing activities for the year ended December 31, 2021, was approximately $2.2 million, primarily driven from proceeds from the sale of digital assets of $3.6 million, offset by investing cash flows – discontinued operations of $1.4 million.

Investing cash flows - discontinued operations for the year ended December 31, 2021, is primarily driven by purchase of mining equipment of $0.5 million, UpNorth business combination of $0.3 million, investments in UpNorth of $0.1 million and an investment in Style Hunter of $0.5 million.

Net cash provided by investing activities for the year ended December 31, 2020, was approximately $0.03 million, primarily driven from proceeds from the sale of digital assets of $0.55 million and investing cash flow – discontinued operations of $0.6 million.

Investing cash flows - discontinued operations for the year ended December 31, 2020, is primarily driven by purchase of mining equipment of $0.9 million offset by proceeds from the sale of mining equipment of $0.3 million.

Financing Activities:

Net cash provided by financing activities during the year ended December 31, 2021, of $6.9 million was from the proceeds received for convertible debt of $12.4 million and offset by the payments for convertible debt transaction costs of $1.2 million and the repayment of loans of $4.3 million.

Net cash provided by financing activities during the year ended December 31, 2020, was approximately $0.6 million, primarily driven by proceeds received from the issuance of members’ interest.

Liquidity and Capital Resources as of September 30, 2022, Compared to September 30, 2021 

The Company’s net cash flow used in operating, investing and financing activities for the nine months ended September 30, 2022, and 2021 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 nine months ended September 30, 2022, and 2021, was $(6.9) million and $(5.8) million, respectively. Net cash used in operating activities during the nine months ended September 30, 2022, consisted of the following (in thousands):

The non-cash income and expenses of $2,667, consisted of (in thousands):

The net proceeds of cash due to changes in operating assets and liabilities totaled $426 and consisted of the following (in thousands):

Investing Activities:

Net cash provided by investing activities during the nine months ended September 30, 2022, was approximately $6.4 million, primarily driven from proceeds from the sale of digital assets of $8 million, offset by Pre–funded right in Ostendo of $1.6 million. Net cash provided by financing activities for the nine months ended September 30, 2021, was approximately $3.1 million, also driven from the proceeds from the sale of digital assets of approximately $3.7 million, offset by investing activities for discontinued operations of approximately $0.6 million.

Financing Activities:

The company did not incur financing activities for the nine months ended September 30, 2022. Net cash used in financing activities during the nine months ended September 30, 2021, was approximately $7.9 million, primarily from the proceeds received for convertible debt of approximately $12.4 million, offset by the repayment of loans of approximately $3.3 million and convertible debt transaction fees paid of approximately $1.2 million.

Critical Accounting Policies and Estimates

We believe the following accounting estimates to be the most critical estimates we used in preparing our consolidated financial statements for the year ended December 31, 2021 and our financial statements for the nine months ended September 30, 2022.

Digital Assets

Digital assets, (predominantly Ethereum) are included in current assets in the accompanying 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. The Company recorded a $2.5 million and $0.7 million impairment charge for the nine months ended September 30, 2022, and the year ended December 31, 2021. No impairment was taken during the year ended December 31, 2020.

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 (losses) through the sale and disbursement of digital assets during the year ended December 31, 2021, and 2020 of $0.1 million and $0.04 million, respectively.

Impairment of Long-lived Assets

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. An impairment loss of $2.3 million and $3.3 million was recorded for long-lived assets during the nine months ended September 30, 2022, and the year ended December 31, 2021.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in December, or more frequently if a triggering event occurs between impairment testing dates.

The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. Qualitative factors may include, macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. If, based on the qualitative test, the Company determines that it is “more likely than not” that the fair value of a reporting unit is less than its carrying value, then the Company evaluates goodwill for impairment by reviewing the fair value of the reporting unit versus its respective carrying value, including its goodwill. If it is determined that it is “not likely” that the fair value of the reporting unit is less than its carrying value, then no further testing is required.

The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. Fair values may be determined using a combination of both income and market-based approaches.

The Company did not record any impairment of goodwill as of September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, the total goodwill of approximately $1.6 million relates to the Sysorex Reporting unit.

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:

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 arrangement with mining pool operators. The transaction consideration the Company receives, if any, is non-cash consideration. The transaction price of the Company’s share of the cryptocurrency award is measured at fair value on the date received, which is not materially different than the fair value at the time the Company has earned the award from the mining pool. The consideration is all variable under the definition within ASC 606. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the Company successfully places a block and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. 

Hardware and Software Revenue Recognition

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 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. 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 year ended December 31, 2021, 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.

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 year ended December 31, 2021, was a gain of $4.2 million compared to a gain of $1.3 million for the prior year period.

The following table presents a reconciliation of continuing and discontinued operations net income/loss attributable to stockholders of Sysorex, which is our GAAP operating performance measure, to Adjusted EBITDA for the years ended December 31, 2021, and 2020 (in thousands):

We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). 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:

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.

MANAGEMENT

The following table sets forth the names and ages of all of our current directors and executive officers. Our officers are appointed by, and serve at the pleasure of, the Company’s Board of Directors (the “Board”) and/or our Chief Executive Officer. On, September 22, 2022, at the Company’s Annual Meeting of its stockholders, Wayne Wasserberg, Zaman Kahn and William Stilley were elected to the Company’s Board of Directors, to serve for a term of one year, until the next annual meeting of stockholders and until their successors have been duly elected. Mr. Stilley resigned from his position as a member of the Company’s board of directors on October 31, 2022.

Wayne Wasserberg

Mr. Wasserberg has served as the Chief Executive Officer of Sysorex, Inc. and the President of TTM Digital Assets & Technologies, Inc., and a member of Sysorex’s Board of Directors since April 14, 2021. Mr. Wasserberg is an executive with more than 15 years of experience working with clients internationally across industries including structured finance, currency trading and arbitrage, alternative assets investments, and infrastructure and real estate development. Prior to joining the Company on April 14, 2021, Mr. Wasserberg was the President of Quantum Lexicon, a company focused on advisory services to technology innovation companies where he served from April 2020 until April 2021. Mr. Wasserberg founded and served as CEO of an international real estate brokerage and property management company, where he was directly involved in more than $200 million in closed transactions and where he served from October 2013 to December 2021. In this role, he also provided consulting to large multinational companies regarding their geographic expansions. Mr. Wasserberg began his career at International Sales Group and was responsible for more than $500 million in international sales within a flagship Trump property. Mr. Wasserberg holds a Bachelor of Science from State University of New York, Oneonta.

Zaman Khan

Mr. Khan has served as our President since August 2018. Mr. Khan has served as a member of our Board since July 2018. Mr. Khan has also served as the President of SGS since January 2017. From 1997 until January 2017, Mr. Khan served as the Executive Vice President at Intelligent Decisions, Inc., an information technology firm specialized in government contracting with an emphasis in intelligence space. From 1991 to 1996, Mr. Khan served as the Director of Business Development of WIN Laboratories, LTD, a manufacturer of WIN Labs computers and reseller specialized in government and commercial contracting. Mr. Khan’s strong background in technology startups, international business development, strategic operations, contract administration, and organizational leadership led us to the conclusion that he should serve as a member of our Board.

Vincent Loiacono

Mr. Loiacono has served as our Chief Financial Officer since August 2018. He has also served as the Chief Financial Officer of SGS since March 2018. From October 2015 through February 2018, Mr. Loiacono provided consulting and performed tax service projects, primarily in residential real estate, commercial banking and SEC reporting. From October 2014 to September 2015, Mr. Loiacono served as VP Finance, Operations and Analytic at Intelligent Decisions, Inc. From 2008 to 2012, Mr. Loiacono served as Chief Financial Officer of TerreStar Networks where he was responsible for scaling its business, providing strategic oversight of the development of its satellite phone and the launch of its commercial satellite. From 2005 through 2008, Mr. Loiacono served as the Senior Vice President and Principal Financial Officer at WorldSpace Radio Satellite Radio where he led the effort to raise $220 million in its initial public offering and the buildout of its international markets. Mr. Loiacono received a Bachelor of Business Administration degree in Accounting from CUNY-Bernard M. Baruch College in 1983. Mr. Loiacono is a member of the American Institute of Certified Public Accountants and is licensed as a Certified Public Accountant in New York.

Involvement in Certain Legal Proceedings

To the best of our knowledge, there is no involvement in legal proceedings during the past ten years that is required to be disclosed pursuant to Regulation S-K 401(f).

Board of Directors

Our Board may establish the authorized number of directors from time to time by resolution. The current authorized number of directors is three. Our current directors, if elected, will continue to serve as directors until the next annual meeting of stockholders and until his or her successor has been elected and qualified, or until his or her earlier death, resignation, or removal.

We continue to review our corporate governance policies and practices by comparing our policies and practices with those suggested by various groups or authorities active in evaluating or setting best practices for corporate governance of public companies. Based on this review, we have adopted, and will continue to adopt, changes that the Board believes are the appropriate corporate governance policies and practices for our Company.

Our Board held thirteen meetings during 2021. No officer or member of our board of directors was delinquent in filing any Section 16 reports during 2021. No member of our Board attended fewer than 75% of the aggregate of (i) the total number of meetings of the Board (held during the period for which he or she was a director) and (ii) the total number of meetings held by all committees of the Board on which such director served (held during the period that such director served), if any. 

Independence of Directors

In determining the independence of our directors, we apply the definition of “independent director” provided under the listing rules of The NASDAQ Stock Market LLC. Pursuant to these rules, none of our directors are independent within the meaning of Nasdaq Listing Rule 5605.

There are no family relationships between any of the individuals who serve as members of our Board and as our executive officers.

Board Committees

Audit committee

We do have a separately designated standing audit committee (“AC”). The AC approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the AC reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.

Compensation Committee, Corporate Governance and Nominating Committees

We currently are not required to have, and do not have, a compensation committee, a corporate governance and nominating committee, or any other Board committee performing equivalent functions. Currently, the members of our full Board participate in discussions concerning executive officer compensation and Board matters.

Stockholder Communications

Stockholders can communicate with the Company through the Company’s investor relations firm, Crescendo Communications LLC, (“firm”) which is noted on each press release issued by the Company. The firm then communicates with the Board of Directors on any inquiries.

Stockholder Proposals and Director Nominations

Stockholder proposals are reviewed by the Secretary for compliance with the requirements for such proposals set forth in Rule 14a-8 promulgated under the Exchange Act. Stockholder proposals that meet these requirements will be summarized by the Secretary. Summaries and copies of the stockholder proposals are circulated to the Chairman of the Board.

Stockholder nominations for directors are reviewed by the Secretary for compliance with the requirements for director nominations that are set forth in our Articles of Incorporation and Bylaws. Stockholder nominations for directors that meet these requirements are summarized by the Secretary. Summaries and copies of the nominations are then circulated to the Chairman of the Board.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to members of our Board, our executive officers, and our employees. The Code of Conduct is available on our website at https://sysorexinc.com/?page_id=2. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Ethics by posting such information on our website at the address specified above.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table summarizes the total compensation earned by each of the following executive officers (each an “NEO” and collectively, our “NEOs”) for the fiscal years ended December 31, 2021, and 2020.