EDGAR 10-K Filing

Company CIK: 1737372
Filing Year: 2021
Filename: 1737372_10-K_2021_0001213900-21-018255.json

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ITEM 1. BUSINESS
ITEM
1: BUSINESS
Overview
We
provide information technology (“IT”) and telecommunications solutions and services to enable our customers to manage,
protect, and monetize their enterprise assets whether on-premises, in the cloud, or via mobile technology.
Our
priority is to help our customers meet their strategic missions by providing secure, optimized IT solutions that we believe will
allow these customers to perform more efficiently and effectively.
Products
and Services
Our
products and services are grouped into the following categories: Professional Services and IT Solutions. These enterprise infrastructure
solutions are for business operations, continuity, data protection, software development, collaboration, IT security, and physical
security. Our products include third party hardware, software and related maintenance and warranty products and services that
we resell from brands such as Cisco, Hewlett Packard Enterprises, Aruba Networks, Microsoft, Canon, Dell, Samsung, Tek84, Panasonic
and Lexmark.
Professional
Services
We
offer a full range of information technology development and implementation professional services, from enterprise architecture
design to custom application development. Our 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 improve
overall network performance and business operations. Our professional services are focused in the following areas:
● Network Performance
Management
● Cyber Security
● Secure Wireless
● IP Video
IT
Solutions
We
work with our network of distribution partners to offer end-to-end hardware and software solutions to optimize customer infrastructure
and security. These solutions sets include:
● Data center
● Cloud computing
● Enterprise servers,
storage, networking
● Virtualization/consolidation
● Client/Mobile computing
● Secure networking
● Cyber security
● Collaboration tools
● Security and data protection
● IT service management
tools
● Big data analytics
Our
Customers
We provide our products and services primarily to governmental agencies. For the years ended December 31, 2020 and 2019, our sales to federal, state and local governments accounted for approximately 100% of our net sales, respectively. We have worked with over 500 customers company-wide since inception. These customers include, among others, federal and international government agencies and state and local governments. Although we have had many customers, two customers generated approximately 69.0% and three customers generated approximately 74.0% of our gross revenue during the years ended December 31, 2020 and 2019, respectively. One customer accounted for 39% and 18% of our gross revenue in 2020 and 2019, respectively; however, these customer’s may or may not continue to be a significant contributor to revenue in 2021. We plan to continue to focus our efforts on existing and potential government customers.
Our
Market
Information
about the Government IT Services and Solutions Market
In 2021, the U.S. government is projected to spend approximately $53.36 billion on information technology, which is slightly higher than the 2020 spending of approximately $51 billion for civilian agencies. According to the U.S. Office of Management and Budget, this spending is expected to continue at a 4.4% growth rate as compared to 6% historically because of the government’s budget challenges. In addition, with respect to defense-related spending, the U.S. Department of Defense (“DoD”) is expected to spend $38.815 billion on its information technology programs, an increase of over $2 billion. Sysorex, through its wholly owned subsidiary, SGS, services U.S. government customers in both civilian and defense agencies with 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, SPAWAR, TEIS-IV, SEWP, CIO-CS, and others. SGS may serve as the prime contractor or as the subcontractor, depending on the contract.
Sysorex
believes it has an advantage in the government marketplace by holding three Government-wide Acquisition Contracts (“GWACs”).
A GWAC is a pre-competed, multiple-award, indefinite delivery, indefinite quantity contract that agencies can use to buy total
IT solutions, including both products and services. 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
GWACs include:
● NASA SEWP V
● NIH CIO-CS
● GSA IT 70 Schedule
The
NASA SEWP V is a GWAC for commercial IT products and services, including, desktops and servers, IT peripherals, network equipment,
storage systems, security tools, software products, cloud based services, telecommunication, Health IT, video conferencing systems
and other IT and Audio-Visual products along with product based services such as installation, maintenance and other services
related to in-scope products to all Federal agencies (including DOD) and their approved support service contractors. During the
government fiscal year end 2020, NASA SEWP V spent $9.12 billion on IT with the following agencies making up the majority of spending:
● Department of Defense
($1.8 billion)
● Department of Veterans
Affairs ($1.7 billion)
● Department of Air Force
($793 million)
● Department of Justice
($753 million)
● Department of Navy ($689
million)
● Department of the Treasury
($471 million)
● Department of State
($455 million)
The
NIH-CIO-CS is a GWAC for IT commodities/solutions that can be used by any federal civilian or DoD agency focused on IT products
and services, both on-site and in the cloud.
The
GSA IT 70 Schedule is a GWAC that offers federal, state and local governments solutions to their IT needs. These solutions include
cloud IT services, cyber security, data centers and storage, satellite services, telecommunications, wireless and mobility, and
telepresence. Our GSA IT 70 Schedule is critical to the broadly used Blanket Purchase Agreement (“BPA”) and is available
to all branches of government, including State, Local, and Education (“SLED”) customers. Here are some factors that
we believe make a BPA attractive:
● when there is a wide
variety of items in a broad class of supplies or services that are generally purchased;
● when there is a need
to provide commercial sources of supply for one or two more offices or projects that do not have or need authority to purchase
otherwise;
● use would avoid writing
multiple purchase orders;
● both agencies and vendors
like BPAs because they help cut the red tape associated with repetitive purchasing; and
● once set up, repeat
purchases are easy for both sides.
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.
Our
OEM and Vendor Arrangements
We work with a number of original equipment manufacturers (“OEMs”) and vendors in our industry with a focus on commercial and federal enterprise markets, including, but not limited to Avnet (now combined with TechData), Synnex, Arrow, Carasoft, Cisco, Hewlett Packard Enterprises, Aruba Networks, Microsoft, Canon, Dell, Samsung, Tek84, Panasonic and Lexmark. Avnet has historically been our most significant supplier by revenue; however, we intend to seek out additional quotes from other suppliers to obtain more competitive pricing.
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 typically permit us or the vendor to terminate the agreement on short notice, at will or immediately upon default by either party, may contain limitations on vendor liability. These vendor agreements also generally permit us to return previous product purchases within certain time limits for a restocking fee or in exchange for the vendor’s other products. Certain of our partners may also 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. However, most of our vendors require that we prepay for our products and services. In 2021 and 2020, our credit continued to be limited with vendors, however we have improved our credit standing and we have entered into partnerships with new vendors that have provided terms that have allowed us to process orders without the need for immediate cash to facilitate prepayment of purchase orders. 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 continue to avail ourselves of the revolving credit facility with SouthStar Financial to finance invoices in an amount equal to 80% of the face value of the customer’s invoice, continued financing through our Related Party Note (as defined below) and other Short Term borrowings (as defined below).
Our
Sales
In
2020, approximately 69% or $7.9 million of our total revenues were derived from product solutions sales and 31% or $3.6 million
of our total revenues were derived from professional services sales. In 2019, approximately 66% or $3.5 million of our total revenues
were derived from product solutions sales and 34% or $1.7 million of our total revenues were derived from professional services
sales. Now with all industry trends showing an increase in spending and our supplier credit issues improving, we believe we will
be able to regain previous clients and obtain new clients as spending increases and companies want to work closely with trusted
providers.
Our
Sales and Marketing Strategy
We
currently market our products and services through direct marketing via sales representatives, 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.
In addition, we believe we have built a core competency in bidding on government requests for proposals in our infrastructure segment, comprised of the integration of hardware/software and professional services, by utilizing our internal bid and proposal team as well as consultants to prepare the proposal responses for government clients.
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 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.
Competition
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, etc. 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.
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.
Furthermore, U.S. government contracts generally are subject to the Federal Acquisition Regulation (“FAR”), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government, department-specific regulations that implement or supplement DFAR, (the Department of Defense’s Defense Federal Acquisition Regulation Supplement (“DFARS”)) and other applicable laws and regulations. We are also subject to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations; the Procurement Integrity Act, which regulates access to competitor bid and proposal information and government source selection information, and our ability to provide compensation to certain former government officials; the Civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. government for payment or approval; and the U.S. Government Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts.
Violations
of one or more of these diverse legal requirements in the conduct of our business could result in significant fines and other
damages, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations
of these regulations or contractual obligations related to regulatory compliance in connection with the performance of customer
contracts could also result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity
and other reputational damage, restrictions on our ability to compete for certain work and allegations by our customers that we
have not performed our contractual obligations. To date, compliance with these regulations has not been financially burdensome.
Intellectual
Property
We
currently do not have any registered patents, copyrights or trademarks. On August 31, 2018, we entered into a Trademark License
Agreement (the “License Agreement”) with Sysorex Consulting, Inc. for use of the mark “Sysorex.” A. Salam
Qureishi, Mr. Nadir Ali’s father-in-law and a member of his household, is the majority owner and the chief executive officer
of Sysorex Consulting, Inc. The term of the License Agreement is perpetual. As consideration for the license, we issued 10,000
shares of our common stock to Sysorex Consulting, Inc. and have agreed to issue to Sysorex Consulting, Inc. 2,500 shares of our
common stock on each anniversary of the agreement date until the License Agreement is terminated. The number of shares of common
stock that will be issued in the future is subject to adjustment for changes in the outstanding shares of our common stock as
a result of stock dividends, stock splits, reverse stock splits, recapitalizations, mergers, consolidations, combinations or exchanges
of shares, separations, reorganizations or liquidations. The License Agreement may be terminated as a result of a breach of the
License Agreement by us that remains uncured; our bankruptcy; the discontinuance of our business or a change in our name so that
the word “Sysorex” is no longer used in the name or on our products or services; the license is attached, assigned
or transferred; or we experience a Change of Control, as defined in the License Agreement.
Employees
As of December 31, 2020, we had 18 employees, including one part-time employee. This includes two officers, five sales staff, six technical and engineering staff and five finance and administration staff. Our employees are not subject to collective bargaining agreements.
Corporate
Information
We
were originally incorporated in California on January 3, 1994 under the name Lilien Systems. In connection with a reorganization
of Inpixon effective as of January 1, 2016, Lilien Systems acquired 100% of the issued and outstanding capital stock of 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, and its wholly owned subsidiary SGS, was separated from Inpixon and became a separate
entity with a separate management team and separate boards of directors, except that Nadir Ali, Chief Executive Officer and director
of Inpixon also serves as a director of Sysorex. The address of our principal executive offices is 13880 Dulles Corner Lane, Suite
175, Herndon, Virginia 20171 and our telephone number at that location is (800) 929-3871.
Our
Internet website is www.sysorexinc.com. The information contained on, or that may be obtained from, our website is not a part
of this report. We have included our website address in this report solely as an inactive textual reference.

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ITEM 1A. RISK FACTORS
ITEM
1A: RISK FACTORS
Although smaller reporting companies like the Company are not required to respond to this item, we have elected to do so in the interest of full disclosure.
We
are subject to various risks that may materially harm our business, prospects, financial condition and results of operations.
An investment in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of
our common stock, you should carefully consider the risks described below, together with the other information included in this
report.
If
any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize,
that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and
financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline,
and investors in our common stock may lose all or part of their investment in our shares. The risks discussed below include forward-looking
statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Risks
Related to our Business
We
have a history of operating losses and working capital deficiency and there is no assurance that we will be able to achieve profitability
raise additional financing or continue as a going concern.
We have a history of operating losses and working capital deficiency. We have incurred recurring net losses of approximately $3.5 million and $5.4 million for the years ended December 31, 2020 and 2019, respectively. We had a working capital deficiency of approximately $9.1 million and $9.4 million as of December 31, 2020 and December 31, 2019, respectively. These circumstances raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements included elsewhere in this Annual Report on Form 10-K are issued. Implementation of our plans and our ability to continue as a going concern will depend upon attaining and maintaining profitable operations and raising additional capital as needed, but there can be no assurance that we will be able to raise any further financing.
Our ability to generate positive cash flow from operations is dependent upon sustaining certain cost reductions and generating sufficient revenues. In that regard, we have been able to increase our revenues by approximately 119% for the year ended December 31, 2020 as compared to the same period for the prior fiscal year. We have funded our operations primarily with a revolving loan from Inpixon, our former parent. However, such funding is no longer available. Our history of operating losses, the amount of our debt and the potential for significant judgments to be rendered against us may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings or debt financings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern, and we may have to curtail, or even to cease, certain operations. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.
Our
level of indebtedness could materially and adversely affect our financial position, including reducing funds available for other
business purposes and reducing our operational flexibility and we may have future capital needs and may not be able to obtain
additional financing on acceptable terms.
In
June of 2020, we entered into a new revolving credit facility with SouthStar Capital on similar terms to the facility we accessed
when we were a subsidiary of Inpixon, through PayPlant Alternative Payments. Although our credit facility restricts the amount
of our indebtedness, with proper consent, we may incur additional indebtedness in the future to refinance our existing indebtedness,
to finance newly acquired assets or for other purposes. Our governing documents do not contain any limitations on the amount
of debt we may incur and we do not have a formal policy limiting the amount of debt we may incur in the future. Subject to the
restrictions set forth in our debt agreements, our board of directors may establish and change our leverage policy at any time
without stockholder approval. Any significant additional indebtedness could require a substantial portion of our cash flow to
make interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available
to us to make capital expenditures and acquisitions, pay dividends, if declared, or carry out other aspects of our business strategy.
Increased indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to
general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with
relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability
to acquire assets, finance or refinance our assets, contribute assets to joint ventures or sell assets as needed.
Moreover,
our ability to obtain additional financing and satisfy our financial obligations under our indebtedness outstanding from time
to time will depend upon our future operating performance, which is subject to then prevailing general economic and credit market
conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors,
many of which are beyond our control. A worsening of credit market conditions could materially and adversely affect our ability
to obtain financing on favorable terms, if at all.
We
may be unable to obtain additional financing or financing on favorable terms or our operating cash flow may be insufficient to
satisfy our financial obligations under our indebtedness outstanding from time to time, if any. Among other things, the absence
of an investment grade credit rating or any credit rating downgrade could increase our financing costs and could limit our access
to financing sources. If financing is not available when needed, or is available on unfavorable terms, we may be unable to complete
acquisitions or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could materially
and adversely affect our business, financial condition and results of operations.
The
lender of our revolving credit facility is not and will not be obligated to make a loan under the credit facility and we may not
be able to draw funds on the credit facility at the sole discretion of the lender, which could have material adverse effect on
our liquidity and financial condition.
We depend on our vendors to provide us with financing on our purchases of inventory and services. In 2019 and 2020, we did experience credit limitations imposed by vendors, which resulted in a significant disruption to our operation and access to merchandise. In 2021, our credit continues to be limited with vendors, however we have improved our credit standing and we have entered into partnerships with new vendors that have provided terms, which has allowed us to process orders without the need for immediate cash to facilitate prepayment of purchase orders. We use our revolving credit facility to finance invoices and purchase orders received to pre-pay vendors/suppliers to ensure shipment on our behalf to the end customer and will be dependent on our revolving credit facility in order to improve our credit limitations with our vendors. However, our lender is not and will not be obligated to make a loan under the credit facility and we may not be able to draw funds on the credit facility at the sole discretion of the lender which could have a material adverse effect on our liquidity and financial condition.
Covenants
in our credit facility limit our operational flexibility, and a covenant breach or default could materially and adversely affect
our business, financial position or results of operations.
The
credit agreement for our credit facility contains customary covenants, which limit our operational flexibility. The notes have
terms customary for revolving credit facilities of this type, including covenants relating to debt incurrence, liens, restricted
payments, asset sales, transactions with affiliates, and mergers or sales of all or substantially all of our assets, and customary
provisions regarding optional events of default. The credit agreement contains customary covenants that, among other things, restrict,
subject to certain exceptions, our ability to grant liens on assets, incur indebtedness, sell assets, make investments, engage
in acquisitions, mergers or consolidations and pay certain dividends and other restricted payments. The credit agreement also
contains customary events of default that may require us to comply with specified financial maintenance covenants. Breaches of
certain covenants may result in defaults and cross-defaults under certain of our other indebtedness, even if we satisfy our payment
obligations to the respective obligee. We may not be able to comply with these covenants in the future, which could result in
the declaration of an event of default and cause us to be unable to borrow under our credit facilities or result in the acceleration
of the maturity of indebtedness outstanding under such credit facilities, which would require us to pay all amounts outstanding.
In addition, if the maturity of any indebtedness we incur is accelerated, we may not have sufficient funds available for repayment
or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable
to us or at all. Our failure to repay such indebtedness could result in the foreclosing on all or a portion of our assets and
force us to curtail, or even to cease, our operations.
We
may not be able to successfully finance, integrate the business and operations post Spin-off, which may result in our inability
to fully realize the intended benefits of the Spin-off, or may disrupt our current operations, which could have a material adverse
effect on our business, financial position and/or results of operations.
On
August 31, 2018, the Company became an independent company through the pro rata distribution by Inpixon of 100% of the outstanding
common stock of Sysorex to Inpixon equity holders. Immediately prior to the Spin-off, Inpixon transferred substantially all of
the assets and liabilities and operations of Inpixon’s value added reseller business to the Company. In connection with
such transfer, we assumed the trade debts to numerous vendors in excess of $15 million. We are subject to the risks inherent in
the financing, expenditures, complications and delays characteristic of a newly combined business. In addition, while the Company
has indemnified Inpixon from any undisclosed liabilities, there may not be adequate resources to cover such indemnity. Furthermore,
there are risks that the vendors, suppliers and customers of the Company may not renew their relationships for which there is
no indemnification. Accordingly, our business and success face risks from uncertainties inherent to developing companies in a
competitive environment. There can be no assurance that our efforts will be successful or that we will ultimately be able to attain
profitability.
Although we have a strong contract portfolio, the challenges of securing financing, raising capital and having sufficient operational resources may adversely affect our ability to maintain operations.
We
continue to leverage our existing contracts with the federal government to secure orders. The process involves timely fulfillment
of orders and making purchases from our vendors or their suppliers. Without clearing our trade debts, we cannot accept orders
for certain products, we may have a pricing disadvantage, and/or we require access to cash to prepay most vendors and their suppliers.
There are a number of risks to continued operations under these circumstances, including, but not limited to:
● complications of not
fulfilling a government order;
● inability to quote on
government request for quotes;
● the diversion of management’s attention from our ongoing core business operations;
● loss of key personnel;
● increased exposure to certain federal acquisition regulations;
● loss of the Company’s top-secret facility clearance;
● cancellation of key government contracts;
● termination for cause or termination for default issued by the government;
● Inability to raise capital or consolidate trade debt repayment;
● unanticipated costs and other assumed contingent liabilities; and
● unknown vendor accounts payable liabilities.
These factors could cause us to not fully realize the anticipated financial and/or strategic benefits of the acquisitions and the recent reorganization, which could have a material adverse effect on our business, financial condition and/or results of operations.
Even if we are able to successfully operate the businesses of SGS, the costs of achieving these benefits may be higher than what we currently expect, because of a number of risks, including, but not limited to:
● the possibility of unknown trade debts from former acquisitions by our former parent, Inpixon, which have been integrated into Sysorex and SGS may arise that have not been considered in our financial model;
● the possibility that we may not be able to expand the reach and customer base due to unsuccessful reinstatements with vendors after trade debt repayments; and
● the possibility that contracts may not be renewed due to lack of activity and fulfillment issues.
As a result of these risks, the integration may not contribute to our earnings as expected, we may not achieve expected revenue synergies or our return on invested capital targets when expected, or at all, and we may not achieve the other anticipated strategic and financial benefits of the integration and the reorganization.
Adverse judgments or settlements in legal proceedings could materially harm our business, financial condition, operating results and cash flows.
We are subject to pending claims for non-payment by certain vendors in an aggregate amount of approximately $5.8 million as of December 31, 2020, which is approximately 168% 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. We are currently being sued by our vendor VMS Software, Inc. as further discussed in Item 3 Legal Proceedings.
Our
business depends on experienced and skilled personnel, and if we are unable to attract and integrate skilled personnel, it will
be more difficult for us to manage our business and complete contracts.
The
success of our business depends on the skill of our personnel. Accordingly, it is critical that we maintain, and continue to build,
a highly experienced management team and specialized workforce, including those who create software programs, and sales professionals.
Competition for personnel, particularly those with expertise in government consulting and a security clearance, is high, and identifying
candidates with the appropriate qualifications can be costly and difficult. We may not be able to hire the necessary personnel
to implement our business strategy given our anticipated hiring needs, or we may need to provide higher compensation or more training
to our personnel than we currently anticipate. In addition, our ability to recruit, hire and indirectly deploy former employees
of the U.S. government is subject to complex laws and regulations, which may serve as an impediment to our ability to attract
such former employees.
Our
business is labor intensive, and our success depends on our ability to attract, retain, train and motivate highly skilled employees.
The increase in demand for consulting, technology integration and managed services has further increased the need for employees
with specialized skills or significant experience in these areas. Our ability to expand our operations will be highly dependent
on our ability to attract a sufficient number of highly skilled employees and to retain our employees. We may not be successful
in attracting and retaining enough employees to achieve our desired expansion or staffing plans. Furthermore, the industry turnover
rates for these types of employees are high and we may not be successful in retaining, training or motivating our employees. Any
inability to attract, retain, train and motivate employees could impair our ability to adequately manage and complete existing
projects and to accept new client engagements. Such inability may also force us to increase our hiring of independent contractors,
which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and
financial resources to monitoring and managing our workforce. Our future success will depend on our ability to manage the levels
and related costs of our workforce.
In
the event we are unable to attract, hire and retain the requisite personnel and subcontractors, we may experience delays in completing
contracts in accordance with project schedules and budgets, which may have an adverse effect on our financial results, harm our
reputation and cause us to curtail our pursuit of new contracts. Further, any increase in demand for personnel may result in higher
costs, causing us to exceed the budget on a contract, which in turn may have an adverse effect on our business, financial condition
and operating results and harm our relationships with our customers.
Insurance
and contractual protections may not always cover lost revenue, increased expenses or liquidated damages payments, which could
adversely affect our financial results.
Although
we maintain insurance and intend to obtain warranties from suppliers, obligate subcontractors to meet certain performance levels
and attempt, where feasible, to pass risks we cannot control to our customers, the proceeds of such insurance or the warranties,
performance guarantees or risk sharing arrangements may not be adequate to cover lost revenue, increased expenses or liquidated
damages payments that may be required in the future.
The
loss of our Chief Executive Officer or other key personnel may adversely affect our operations.
Our
success depends to a significant extent upon the operation, experience, and continued services of certain of our officers, including
our Chief Executive Officer, as well as other key personnel. While our Chief Executive Officer is employed under an employment
contract, there is no assurance we will be able to retain his services. The loss of our Chief Executive Officer or other key personnel
could have an adverse effect on us. If our Chief Executive Officer or other executive officers were to leave we would face substantial
difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary
training and experience. Furthermore, we do not maintain “key person” life insurance on the lives of any executive
officer and their death or incapacity would have a material adverse effect on us. The competition for qualified personnel is intense,
and the loss of services of certain key personnel could adversely affect our business.
Internal
system or service failures could disrupt our business and impair our ability to effectively provide our services and products
to our customers, which could damage our reputation and adversely affect our revenues and profitability.
Any system or service disruptions on our hosted Cloud infrastructure or disruptions caused by ongoing projects to improve our information technology systems and the delivery of services, if not anticipated and appropriately mitigated, could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our customers for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner. We are also subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, cyber security threats, ransom attacks, data privacy breaches, natural disasters, power shortages, terrorist attacks or other events, which could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our future results could be adversely affected.
Customer
systems failures could damage our reputation and adversely affect our revenues and profitability.
Many of the systems and networks that we develop, install and maintain for our customers on their premises or host on our infrastructure involve managing and protecting personal information and information relating to national security and other sensitive government functions. While we have programs designed to comply with relevant privacy and security laws and restrictions, if a system or network that we develop, install or maintain were to fail or experience a security breach or service interruption, whether caused by us, third-party service providers, cyber security threats or other events, we may experience loss of revenue, remediation costs or face claims for damages or contract termination. Any such event could cause serious harm to our reputation and prevent us from having access to or being eligible for further work on such systems and networks. Our errors and omissions liability insurance may be inadequate to compensate us for all of the damages that we may incur and, as a result, our future results could be adversely affected.
Our
financial performance could be adversely affected by decreases in spending on technology products and services by our government
customers.
Our
sales to our government customers are impacted by government spending policies, budget priorities and revenue levels. Although
our sales to federal, state and local government are diversified across multiple agencies and departments, they collectively accounted
for approximately 100% of 2020 and 2019 net sales. An adverse change in government spending policies (including budget cuts at
the federal level), budget priorities or revenue levels could cause our public sector customers to reduce their purchases or to
terminate or not renew their contracts with us, which could adversely affect our business, results of operations or cash flows.
In addition, U.S. government contracts are conditioned upon the continuing availability of Congressional appropriations and the failure of Congress to appropriate funds for programs in which we participate could negatively affect our results of operations. The government fiscal year ends on September 30. For the Company’s Q4 2020, the government provided a stopgap measure from October 1, 2020 through December 11, 2020. This adversely affected some of our accounts receivable, as certain customers did not have enough funding in place for their 2021 fiscal year to pay the Company in full. A final budget resolution for the federal government’s 2021 combines omnibus appropriations bill and COVID-19 relief package was finally in place on December 28, 2020. The Company continues to be impacted by the delay, even though the 2021 budget has passed, not all agencies have completed their budget appropriations which has significantly delayed payment of invoices. The same scenario starting in Q4 of the 2021 calendar year may have a similar impact to the Company. Any new shutdown could have similar or worse effects. The failure by Congress to approve future budgets on a timely basis could delay procurement of our products and services and cause us to lose future revenues. Any renewed emphasis on federal deficit and debt reduction could lead to a further decrease in overall defense spending. Budgetary concerns could result in future contracts being awarded more on price than on other competitive factors, and smaller defense budgets could result in government in-sourcing of programs and more intense competition on programs that are not in-sourced, which could result in lower revenues and profits.
Our
business could be adversely affected by the loss of certain vendor partner relationships and the availability of their products.
Currently,
we purchase substantially all of our products for resale from vendor partners, which include OEMs, software publishers, and wholesale
distributors. We are authorized by vendor partners to sell all or some of their products via direct marketing activities. Our
authorization with each vendor partner is subject to specific terms and conditions regarding such things as sales channel restrictions,
product return privileges, price protection policies and purchase discounts. In the event we were to lose one of our significant
vendor partners, our business could be adversely affected.
We
have entered into, and expect to continue to enter into, joint venture, teaming and other arrangements, and these activities involve
risks and uncertainties. A failure of any such relationship could have a material adverse effect on our business and results of
operations.
We
have entered into, and expect to continue to enter into, joint venture, teaming and other arrangements. These activities involve
risks and uncertainties, including the risk of the joint venture or applicable entity failing to satisfy its obligations, which
may result in certain liabilities to us for guarantees and other commitments, the uncertainty created by challenges in achieving
strategic objectives and expected benefits of the business arrangement, the risk of conflicts arising between us and our partners
and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business
arrangements. A failure of our business relationships could have a material adverse effect on our business and results of operations.
Our
business and operations expose us to numerous legal and regulatory requirements and any violation of these requirements could
harm our business.
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 control and disclosure
control obligations, securities regulation and anti-competition. Compliance with diverse and changing legal requirements is costly,
time-consuming and requires significant resources. We are also focused on expanding our business in certain identified growth
areas, such as health information technology, energy and environment, which are highly regulated and may expose us to increased
compliance risk. Violations of one or more of these diverse legal requirements in the conduct of our business could result in
significant fines and other damages, criminal sanctions against us or our officers, prohibitions on doing business and damage
to our reputation. Violations of these regulations or contractual obligations related to regulatory compliance in connection with
the performance of customer contracts could also result in liability for significant monetary damages, fines and/or criminal prosecution,
unfavorable publicity and other reputational damage, restrictions on our ability to compete for certain work and allegations by
our customers that we have not performed our contractual obligations.
We
rely on being able to license technology from third parties; however, we cannot assure you that these licenses will always be
available to us. An inability to license technology could materially and adversely affect our business.
We
rely on a variety of technology that we license from third parties. There can be no assurance that these third-party technology
licenses will continue to be available to us on commercially reasonable terms, if at all. The loss of or inability to maintain
or obtain upgrades to any of these technology licenses could result in delays in completing software enhancements and new development
until equivalent technology could be identified, licensed or developed and integrated. Any such delays could materially and adversely
affect our business.
The
growth of our business is dependent on increasing sales to our existing clients and obtaining new clients, which, if unsuccessful,
could limit our financial performance.
Our
ability to increase revenues from existing clients by identifying additional opportunities to sell more of our products and services
and our ability to obtain new clients depends on a number of factors, including our ability to offer high quality products and
services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing departments. If
we are not able to continue to increase sales of our products and services to existing clients or to obtain new clients in the
future, we may not be able to increase our revenues and could suffer a decrease in revenues as well.
Our
business depends on the continued growth of the market for IT products and services, which is uncertain.
The
storage and computing and professional services segments of our business include IT products and services solutions that are designed
to address the growing markets for on and off-premises services (including migrations, consolidations, Cloud computing and disaster
recovery), technology integration services (including storage and data protection services and the implementation of virtualization
solutions) and managed services (including operational support and client support). These markets are continuously changing. Competing
technologies and services, reductions in technology refreshes or reductions in corporate spending may reduce the demand for our
products and services.
Our
competitiveness depends significantly on our ability to keep pace with the rapid changes in IT. Failure by us to anticipate and
meet our clients’ technological needs could adversely affect our competitiveness and growth prospects.
We
operate and compete in an industry characterized by rapid technological innovation, changing client needs, evolving industry standards
and frequent introductions of new products, product enhancements, services and distribution methods. Our success depends on our
ability to develop expertise with these new products, product enhancements, services and distribution methods and to implement
IT solutions that anticipate and respond to rapid changes in technology, the IT industry, and client needs. The introduction of
new products, product enhancements and distribution methods could decrease demand for our current products or render them obsolete.
Sales of products and services can be dependent on demand for specific product categories, and any change in demand for, or supply
of such products, could have a material adverse effect on our net sales if we fail to adapt to such changes in a timely manner.
We
operate in a highly competitive market and we may be required to reduce the prices for some of our products and services to remain
competitive, which could adversely affect our results of operations.
Our
industry is developing rapidly and related technology trends are constantly evolving. In this environment, we face significant
price competition from our competitors. We may be unable to offset the effect of declining average sales prices through increased
sales volumes and/or reductions in our costs. Furthermore, we may be forced to reduce the prices of the products and services
we sell in response to offerings made by our competitors. Finally, we may not be able to maintain the level of bargaining power
that we have enjoyed in the past when negotiating the prices of our services.
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.
Our
profitability is dependent on the rates we are able to charge for our products and services. The rates we are able to charge for
our products and services are affected by a number of factors, including:
● our clients’ perceptions
of our ability to add value through our services;
● introduction of new
services or products by us or our competitors;
● our competitors’
pricing policies;
● our ability to charge
higher prices where market demand or the value of our services justifies it;
● procurement practices
of our clients; and
● general economic and
political conditions.
If
we are not able to maintain favorable pricing for our products and services, our results of operations could be adversely affected.
Sales
of our IT products and services are subject to quarterly and seasonal variations that may cause significant fluctuations in our
operating results, therefore period-to-period comparisons of our operating results may not be reliable predictors of future performance.
The
timing of our revenues can be difficult to predict. Our sales efforts involve educating our clients about the use and benefit
of the products we sell and our services and solutions, including their technical capabilities and potential cost savings to an
organization. Clients typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle,
which typically lasts several months, and may last a year or longer. We spend substantial time, effort and money on our sales
efforts without any assurance that our efforts will produce any sales during a given period.
In
addition, many of our clients spend a substantial portion of their IT budgets in the second half of the year. Other factors that
may cause our quarterly operating results to fluctuate include changes in general economic conditions and the impact of unforeseen
events. We believe that our revenues will continue to be affected in the future by cyclical trends. As a result, you may not be
able to rely on period-to-period comparisons of our operating results as an indication of our future performance.
A
delay in the completion of our clients’ budget processes could delay purchases of our products and services and have an
adverse effect on our business, operating results and financial condition.
We
rely on our clients to purchase products and services from us to maintain and increase our earnings, however, client purchases
are frequently subject to budget constraints, multiple approvals and unplanned administrative processing and other delays. If
sales expected from a specific client are not realized when anticipated or at all, our results could fall short of public expectations
and our business, operating results and financial condition could be materially adversely affected.
The
profit margins from our IT products and services depend, in part, on the volume of products and services sold. A failure to achieve
increases in our profit margins in the future could have a material adverse effect on our financial condition and results of operations.
Given
the significant levels of competition that characterize the IT reseller market, it is unlikely that we will be able to increase
gross profit margins through increases in sales of IT products alone. Any increase in gross profit margins from this operating
sector in the future will depend, in part, on the growth of our higher margin businesses such as IT consulting and professional
services. In addition, low margins increase the sensitivity of our results of operations to increases in costs of financing. Any
failure by us to maintain or increase our gross profit margins could have a material adverse effect on our financial condition
and results of operations.
Any
failures or interruptions in our services or systems could damage our reputation and substantially harm our business and results
of operations.
Our
success depends in part on our ability to provide reliable remote services, technology integration and managed services to our
clients. The operations of our IT products and services are susceptible to damage or interruption from human error, fire, flood,
power loss, telecommunications failure, terrorist attacks and similar events. We could also experience failures or interruptions
of our systems and services, or other problems in connection with our operations, as a result of:
● damage to or failure
of our computer software or hardware or our connections;
● errors in the processing
of data by our systems;
● computer viruses or
software defects;
● physical or electronic
break-ins, sabotage, intentional acts of vandalism and similar events;
● increased capacity demands
or changes in systems requirements of our clients; and
● errors by our employees
or third-party service providers.
Any
interruptions in our systems or services could damage our reputation and substantially harm our business and results of operations.
While we maintain disaster recovery plans and insurance with coverage we believe to be adequate, claims may exceed insurance coverage
limits, may not be covered by insurance or insurance may not continue to be available on commercially reasonable terms.
Some
of our services and solutions involve storing and replicating mission-critical data for our clients and are highly technical in
nature. If client data is lost or corrupted, our reputation and business could be harmed.
Our
IT data center and technology integration services solutions include storing and replicating mission-critical data for our clients.
The process of storing and replicating that data within their data centers or at our facilities is highly technical and complex.
If any data is lost or corrupted in connection with the use of our products and services, our reputation could be seriously harmed
and market acceptance of our IT solutions could suffer. In addition, our solutions have contained, and may in the future contain,
undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has
been in use by clients. Any errors, defects or security vulnerabilities discovered in our solutions after use by clients could
result in loss of revenues, loss of clients, increased service and warranty cost and diversion of attention of our management
and technical personnel, any of which could significantly harm our business. In addition, we could face claims for product liability,
tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention
and adversely affect the market’s perception of us and our service offerings and solutions.
We
do not have long-term recurring revenue generating contracts with our clients that utilize our IT products and services, and such
clients may cease providing new purchase orders at any time or reduce the amount of purchases they make. Any such action may result
in a decline of revenues we receive from our IT products and services and harm our results of operations.
Our
operations depend upon our relationships with our clients. Revenues from our IT products and services are typically driven by
purchase orders received every month. The majority of revenues from our IT products and services come from one-time purchase orders
that do not guarantee any future recurring revenues. During the year ended December 31, 2020, approximately 47% of such revenues
are recurring and based on contracts that range from 1-5 years for warranty and maintenance support. The Company’s performance
obligation is to work with customers to identify the computer maintenance and warranty services that best suit customers’
needs and sell them those products and services; however, the maintenance is provided to customers by the manufacturer. For these
contracts, customers are invoiced one time and pay up front for the full term of the warranty and maintenance contract. Prior
to January 1, 2018 when the new Accounting Standards Codification (“ASC”) 606 revenue recognition standards were applied,
revenue from these contracts was determined ratably over the contract period with the unearned revenue recorded as deferred revenue
and amortized over the contract period. Clients with these types of contracts may cease providing new purchase orders at any time,
and may elect not to renew such contracts. If clients cease providing us with new purchase orders, diminish the services purchased
from us, cancel executed purchase orders or delay future purchase orders, revenues received from the sale of our IT products and
services would be negatively impacted, which could have a material adverse effect on our business and results of operations. There
is no guarantee that we will be able to retain or generate future revenue from our existing clients or develop relationships with
new clients.
We
rely on a limited number of key customers, the importance of which may vary dramatically from year to year, and a loss of one
or more of these key customers may adversely affect our operating results.
Our top two customers accounted for approximately 69.0% and our top three customers accounted for approximately 74.% of our gross revenue during the years ended December 31, 2020 and 2019, respectively. One customer accounted for 39% of our gross revenue in 2020; however, this customer may or may not continue to be a significant contributor to revenue in 2021. 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.
Consolidation
in the industries that we serve or from which we purchase could adversely affect our business.
Some
of the clients we serve may seek to achieve economies of scale by combining with or acquiring other companies. If two or more
of our current clients combine their operations, it may decrease the amount of work that we perform for these clients. If one
of our current clients merges or consolidates with a company that relies on another provider for its consulting, systems integration
and technology, or outsourcing services, we may lose work from that client or lose the opportunity to gain additional work. If
two or more of our suppliers merge or consolidate operations, the increased market power of the larger company could also increase
our product costs and place competitive pressures on us. Any of these possible results of industry consolidation could adversely
affect our business.
The
loss of any key manufacturer or distributor relationships, or related industry certifications, could have an adverse effect on
our business.
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 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. There can be no assurance that we will be able to retain these relationships with
our manufacturers and distributors, that we will be able to retain the employees holding these manufacturer and industry certifications,
or that our employees will maintain their manufacturer or industry certifications. The loss of any of these relationships or certifications
could have a material adverse effect on our business.
We
may experience a reduction in the incentive programs offered to us by our vendors. Any such reduction could have a material adverse
effect on our business, results of operations and financial condition.
We
receive payments and credits from vendors, including consideration pursuant to volume sales incentive programs and marketing development-funding
programs. These programs are usually of finite terms and may not be renewed or may be changed in a way that has an adverse effect
on us. Vendor funding is used to offset, among other things, inventory costs, cost of goods sold, marketing costs and other operating
expenses. Certain of these funds are based on our volume of net sales or purchases, growth rate of net sales or purchases and
marketing programs. If we do not grow our net sales or if we do not comply with the terms of these programs, there could be a
material negative effect on the amount of incentives offered or paid to us by vendors. No assurance can be given that we will
continue to receive such incentives or that we will be able to collect outstanding amounts relating to these incentives in a timely
manner, or at all. Any sizeable reduction in, the discontinuance of, or a significant delay in receiving or the inability to collect
such incentives, particularly related to incentive programs with one of our largest partners, Hewlett-Packard Company, could have
a material adverse effect on our business, results of operations and financial condition. If we are unable to react timely to
any fundamental changes in the programs of vendors, including the elimination of funding for some of the activities for which
we have been compensated in the past, such changes would have a material adverse effect on our business, results of operations
and financial condition.
We need additional cash financing and any failure to obtain cash financing could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.
We expect that we will need to raise funds in order to continue our operations and implement our plans to grow our business. However, if we decide to seek additional capital, we may be unable to obtain financing on terms that are acceptable to us or at all. If we are unable to raise the required cash, our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges could be limited and we could go out of business.
If
we cannot collect our receivables or if payment is delayed, our business may be adversely affected by our inability to generate
cash flow, provide working capital or continue our business operations.
Our
business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for products received
from us and any work performed by us. The timely collection of our receivables allows us to generate cash flow, provide working
capital and continue our business operations. Our clients may fail to pay or delay the payment of invoices for a number of reasons,
including financial difficulties resulting from macroeconomic conditions or lack of an approved budget. An extended delay or default
in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of
our accounts receivable. If we are unable to timely collect our receivables from our clients for any reason, our business and
financial condition could be adversely affected.
We
depend on the U.S. government for a substantial portion of our business and government budget impasses together with changes in
government defense spending could have adverse consequences on our financial position, results of operations and business.
A substantial portion of our revenues from our operations have been from and will continue to be from sales and services rendered directly or indirectly to the U.S. government. Consequently, our revenues are highly dependent on the government’s demand for computer systems and related services. Our revenues from the U.S. government largely result from contracts awarded to us under various U.S. government programs, primarily defense-related programs with the DoD, as well as a broad range of programs with Bureau of Prisons, National Institutes of Health (“NIH”), National Aeronautics and Space Administration (“NASA”), the intelligence community and other departments and agencies. Cost cutting, including through consolidation and elimination of duplicative organizations and insurance, has become a major initiative for the government. The funding of our programs is subject to the overall U.S. government budget and appropriation decisions and processes, which are driven by numerous factors, including geo-political events and macroeconomic conditions.
The
Budget Control Act of 2011 enacted 10-year discretionary spending caps which are expected to generate over $1 trillion in savings
for the U.S. government, a substantial portion of which comes from DoD baseline spending reductions. In addition, the Budget Control
Act of 2011 provides for additional automatic spending cuts (referred to as “sequestration”) totaling $1.2 trillion
over nine years which were implemented beginning in the U.S. government fiscal year ending September 30, 2013 (GFY13). These reduction
targets will further reduce DoD and other federal agency budgets. Although the Office of Management and Budget has provided guidance
to agencies on implementing sequestration cuts, there remains much uncertainty about how exactly sequestration cuts will be implemented
and the impact those cuts will have on contractors supporting the government. We are not able to predict the impact of future
budget cuts if any, including sequestration, on our Company or our financial results. However, we expect that concerns related
to the national debt may impact DoD spending levels and that implementation of the automatic spending cuts without change will
reduce, delay or cancel funding for certain of our contracts - particularly those with unobligated balances - and programs and
could adversely impact our operations, financial results and growth prospects.
A
significant reduction in defense spending could have long-term consequences for our size and structure. In addition, reduction
in government priorities and requirements could affect the funding, or the timing of funding, of our programs, which could negatively
affect our results of operations and financial condition. In addition, we are involved in U.S. government programs, which are
classified by the U.S. government, and our ability to discuss these programs, including any risks and disputes and claims associated
with and our performance under such programs, could be limited due to applicable security restrictions.
The
U.S. government systems integration business is intensely competitive and we may not be able to win government bids when competing
against much larger companies, which could reduce our revenues.
Large
computer systems integration contracts awarded by the U.S. government are few in number and are awarded through a formal competitive
bidding process, including indefinite delivery/indefinite quantity (“IDIQ”), GSA Schedule and other multi-award contracts.
Bids are awarded on the basis of price, compliance with technical bidding specifications, technical expertise and, in some cases,
demonstrated management ability to perform the contract. There can be no assurance that we will win and/or fulfill additional
contracts. Moreover, the award of these contracts is subject to protest procedures and there can be no assurance that we will
prevail in any ensuing legal protest. The failure to secure a significant dollar volume of U.S. government contracts in the future
would adversely affect SGS, our subsidiary.
The
U.S. government systems integration business is intensely competitive and subject to rapid change. Sysorex competes 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. To remain competitive,
we must consistently provide superior service, technology and performance on a cost-effective basis to our customers. Our response
to competition could cause us to expend significant financial and other resources, disrupt our operations and strain relationships
with partners, any of which could harm our business and/or financial condition.
Our
financial performance is dependent on our ability to perform on our U.S. government contracts, which are subject to termination
for convenience, which could harm our results of operations and financial condition.
Our
financial performance is dependent on our performance under our U.S. government contracts. Government customers have the right
to cancel any contract at their convenience. An unanticipated termination of, or reduced purchases under, one of our major contracts
whether due to lack of funding, for convenience or otherwise, or the occurrence of delays, cost overruns and product failures
could adversely affect our results of operations and financial condition. If one of our contracts were terminated for convenience,
we would generally be entitled to payments for our allowable costs and would receive some allowance for profit on the work performed.
If one of our contracts were terminated for default, we would generally be entitled to payments for our work that has been accepted
by the government. A termination arising out of our default could expose us to liability and have a negative impact on our ability
to obtain future contracts and orders. Furthermore, on contracts for which we are a subcontractor and not the prime contractor,
the U.S. government could terminate the prime contract for convenience or otherwise, irrespective of our performance as a subcontractor.
The termination or cancellation of U.S. government contracts, no matter what the reason, could harm our results of operations
and financial condition.
Our
failure to comply with a variety of complex procurement rules and regulations could result in our being liable for penalties,
including termination of our U.S. government contracts, disqualification from bidding on future U.S. government contracts and
suspension or debarment from U.S. government contracting that could adversely affect our financial condition.
We must comply with laws and regulations relating to the formation, administration and performance of U.S. government contracts, which affect how we do business with our customers and may impose added costs on our business. U.S. government contracts generally are subject to: (i) the Federal Acquisition Regulation (“FAR”), which sets forth policies, procedures and requirements for the acquisition of goods and services by the U.S. government; (ii) department-specific regulations that implement or supplement FAR, such as the DFARS; and (iii) other applicable laws and regulations. We are also subject to the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations; the Procurement Integrity Act, which regulates access to competitor bid and proposal information and government source selection information, and our ability to provide compensation to certain former government officials; the Civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. government for payment or approval; and the U.S. Government Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. government contracts. These regulations impose a broad range of requirements, many of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost, contract termination and adjustment, and audit requirements. A contractor’s failure to comply with these regulations and requirements could result in reductions to the value of contracts, contract modifications or termination, and the assessment of penalties and fines and lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. In addition, government contractors are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Audit Agency (“DCAA”) and Defense Contract Management Agency. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of and a contractor’s compliance with its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. During the term of any suspension or debarment by any U.S. government agency, contractors can be prohibited from competing for or being awarded contracts by U.S. government agencies. The termination of any of our significant government contracts or the imposition of fines, damages, suspensions or debarment would adversely affect the Company’s business and financial condition.
We may be subject to regulatory and other government or regulatory investigations or inquiries and may be required to comply with data requests, or requests for information by government authorities and regulators in the United States or other jurisdictions in which we operate and any resulting enforcement action could have a materially adverse effect on us.
As a publicly traded reporting company with operations in the United States, we interact with regulatory and self-regulatory agencies in the United States, including the SEC and the Nasdaq Stock Market. We may be the subject of SEC and other regulatory investigations and are currently and may in the future be required to comply with formal orders or requests for information or documentation by the SEC or other government authorities and regulators regarding certain transactions that we have been involved in or our compliance with laws and regulations, including the rules and regulations under the Securities Act and the Exchange Act. Responding to requests for information from regulators in connection with any such investigations or inquiries could have a materially adverse effect on our business and results of operations through, among other things, significantly increased legal fees and the time and attention required of the Company’s management and employees to be diverted from our normal business operations and growth plans. Moreover, if a regulator were to initiate an enforcement action against us, such an action could further consume our resources, require us to change our business practices and have a material adverse effect on our business, financial condition, results of operations and cash flows.
The
U.S. government may adopt new contract rules and regulations or revise its procurement practices in a manner adverse to us at
any time.
Our
industry has experienced, and we expect it will continue to experience, significant changes to business practices as a result
of an increased focus on affordability, efficiencies, and recovery of costs, among other items. U.S. government agencies may face
restrictions or pressure regarding the type and amount of services that they may obtain from private contractors. Legislation,
regulations and initiatives dealing with procurement reform, mitigation of potential conflicts of interest and environmental responsibility
or sustainability, as well as any resulting shifts in the buying practices of U.S. government agencies, such as increased usage
of fixed price contracts, multiple award contracts and small business set-aside contracts, could have adverse effects on government
contractors, including us. Any of these changes could impair our ability to obtain new contracts or renew our existing contracts
when those contracts expire and are subject to a renewed bidding process. Any new contracting requirements or procurement methods
could be costly or administratively difficult for us to implement and could adversely affect our future revenues, profitability
and prospects.
We
may incur cost overruns as a result of fixed priced government contracts, which would have a negative impact on our operations.
Most
of our U.S. government contracts are multi-award, multi-year IDIQ task order-based contracts, which generally provide for fixed
price schedules for products and services, have no pre-set delivery schedules, have very low minimum purchase requirements, are
typically competed over among multiple awardees and force us to carry the burden of any cost overruns. Due to their nature, fixed-priced
contracts inherently have more risk than cost reimbursable contracts. If we are unable to control costs or if our initial cost
estimates are incorrect, we can lose money on these contracts. In addition, some of our contracts have provisions relating to
cost controls and audit rights, and if we fail to meet the terms specified in those contracts, we may not realize their full benefits.
Lower earnings caused by cost overruns and cost controls would have a negative impact on our results of operations. The U.S. government
has the right to enter into contracts with other suppliers, which may be competitive with our IDIQ contracts. We also perform
fixed priced contracts under which we agree to provide specific quantities of products and services over time for a fixed price.
Since the price competition to win both IDIQ and fixed price contracts is intense and the costs of future contract performance
cannot be predicted with certainty, there can be no assurance as to the profits, if any, that we will realize over the term of
such contracts.
Misconduct
of employees, subcontractors, agents and business partners could cause us to lose existing contracts or customers and adversely
affect our ability to obtain new contracts and customers and could have a significant adverse impact on our business and reputation.
Misconduct
could include fraud or other improper activities such as falsifying time or other records and violations of laws, including the
Anti-Kickback Act of 1986, as amended. Other examples could include the failure to comply with our policies and procedures or
with federal, state or local government procurement regulations, regulations regarding the use and safeguarding of classified
or other protected information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations
relating to environmental, health or safety matters, bribery of foreign government officials, import-export control, lobbying
or similar activities, and any other applicable laws or regulations. Any data loss or information security lapses resulting in
the compromise of personal information or the improper use or disclosure of sensitive or classified information could result in
claims, remediation costs, regulatory sanctions against us, loss of current and future contracts and serious harm to our reputation.
Although we have implemented policies, procedures and controls to prevent and detect these activities, these precautions may not
prevent all misconduct, and as a result, we could face unknown risks or losses. Our failure to comply with applicable laws or
regulations or misconduct by any of our employees, subcontractors, agents or business partners could damage our reputation and
subject us to fines and penalties, restitution or other damages, loss of security clearance, loss of current and future customer
contracts and suspension or debarment from contracting with federal, state or local government agencies, any of which would adversely
affect our business, reputation and our future results.
We
may fail to obtain and maintain necessary security clearances, which may adversely affect our ability to perform on certain U.S.
government contracts and depress our potential revenues.
Many
U.S. government programs require contractors to have security clearances. Depending on the level of required clearance, security
clearances can be difficult and time-consuming to obtain. If our employees or we are unable to obtain or retain necessary security
clearances, we may not be able to win new business, and our existing clients could terminate their contracts with us or decide
not to renew them. To the extent we are not able to obtain and maintain facility security clearances or engage employees with
the required security clearances for a particular contract, we may not be able to bid on or win new contracts, or effectively
rebid on expiring contracts, or we could lose existing contracts, any of which may adversely affect our operating results and
inhibit the execution of our growth strategy.
Our
future revenues and growth prospects could be adversely affected by our dependence on other contractors.
If
other contractors with whom we have contractual relationships either as a prime contractor or subcontractor eliminate or reduce
their work with us, or if the U.S. government terminates or reduces these other contractors’ programs, does not award them
new contracts or refuses to pay under a contract our financial and business condition may be adversely affected. Companies that
do not have access to U.S. government contracts may perform services as our subcontractor and that exposure could enhance such
companies’ prospect of securing a future position as a prime U.S. government contractor, which could increase competition
for future contracts and impair our ability to perform on contracts.
We
may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the
subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders
under a subcontract, our hiring of a subcontractor’s personnel or the subcontractor’s failure to comply with applicable
law. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance, financial or
other problems, our ability to fulfill our obligations as a prime contractor or higher tier subcontractor may be jeopardized.
Significant losses could arise in future periods and subcontractor performance deficiencies could result in our termination for
default. A termination for default could eliminate a revenue source, expose us to liability and have an adverse effect on our
ability to compete for future contracts and task orders, especially if the customer is an agency of the U.S. government.
As
a U.S. defense contractor, we are vulnerable to security threats and other disruptions that could negatively affect our business.
As
a U.S. defense contractor, we face certain security threats, including threats to our information technology infrastructure, attempts
to gain access to our proprietary or classified information, and threats to physical security. These types of events could disrupt
our operations, require significant management attention and resources, and could negatively affect our reputation among our customers
and the public, which could have a negative impact on our financial condition, results of operations and liquidity. We are continuously
exposed to cyber-attacks and other security threats, including physical break-ins. Any electronic or physical break-in or other
security breach or compromise may jeopardize security of information stored or transmitted through our information technology
systems and networks. This could lead to disruptions in mission-critical systems, unauthorized release of confidential or otherwise
protected information and corruption of data. Although we have implemented policies, procedures and controls to protect against,
detect and mitigate these threats, we face advanced and persistent attacks on our information systems and attempts by others to
gain unauthorized access to our information technology systems are becoming more sophisticated. These attempts include covertly
introducing malware to our computers and networks and impersonating authorized users, among others, and may be perpetrated by
well-funded organized crime or state sponsored efforts. We seek to detect and investigate all security incidents and to prevent
their occurrence or recurrence. We continue to invest in and improve our threat protection, detection and mitigation policies,
procedures and controls. In addition, we work with other companies in the industry and government participants on increased awareness
and enhanced protections against cyber security threats. However, because of the evolving nature and sophistication of these security
threats, which can be difficult to detect, there can be no assurance that our policies, procedures and controls have or will detect
or prevent any of these threats and we cannot predict the full impact of any such past or future incident. We may experience similar
security threats to the information and technology systems that we develop, install or maintain under customer contracts. Although
we work cooperatively with our customers and other business partners to seek to minimize the impacts of cyber and other security
threats, we must rely on the safeguards put in place by those entities. Any remedial costs or other liabilities related to cyber
or other security threats may not be fully insured or indemnified by other means. Occurrence of any of these security threats
could expose us to claims, contract terminations and damages and could adversely affect our reputation, ability to work on sensitive
U.S. government contracts, business operations and financial results.
Difficult
conditions in the global capital markets and the economy generally may materially adversely affect our business and results of
operations, and we do not expect these conditions to improve in the near future.
Our
results of operations are materially affected by conditions in the global capital markets and the economy generally, in both the
U.S. and elsewhere around the world. Sustained uncertainty about global economic conditions, concerns about future U.S. government
budget impasses or a prolonged tightening of credit markets could cause our customers and potential customers to postpone or reduce
spending on technology products or services or put downward pressure on prices, which could have an adverse effect on our business,
results of operations or cash flows. Concerns over inflation, energy costs, geopolitical issues and the availability of credit
in the U.S. have contributed to increased volatility and diminished expectations for the economy and the markets going forward.
These events and market upheavals may have an adverse effect on our business. In the event of extreme prolonged market events,
such as global economic recession, could result in significant losses for us.
Risks
Related to our Common Stock
We
are eligible to be treated as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of
2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common
stock less attractive to investors.
We are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements and two years of selected financial data in this 10-K. We could be an emerging growth company for up to five years, until 2022, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.07 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to provide selected financial data in the registration statements and periodic reports that we file with the SEC, and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Our
independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control
over financial reporting until the later of our second annual report or the first annual report required to be filed with the
SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure
you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected to take advantage of this extended transition period, and therefore, our
financial statements may not be comparable to those of companies that comply with such new or revised accounting standards.
We
do not intend to pay cash dividends to our stockholders.
We
do not intend to pay cash dividends to our common stockholders as a public company. We currently intend to retain any future earnings
for funding growth and, therefore, do not expect to pay any cash dividends in the foreseeable future.
Indemnification
of our officers and directors may cause us to use corporate resources to the detriment of our stockholders.
Our
articles of incorporation eliminate the personal liability of our directors for monetary damages arising from a breach of their
fiduciary duty as directors to the fullest extent permitted by Nevada law. This limitation does not affect the availability of
equitable remedies, such as injunctive relief or rescission. Our articles of incorporation require us to indemnify our directors
and officers to the fullest extent permitted by Nevada law, including in circumstances in which indemnification is otherwise discretionary
under Nevada law.
Under
Nevada law, we may indemnify our directors or officers or other persons who were, are or are threatened to be made a named defendant
or respondent in a proceeding because the person is or was our director, officer, employee or agent, if we determine that the
person:
● conducted himself or
herself in good faith, reasonably believed, in the case of conduct in his or her official capacity as our director or officer,
that his or her conduct was in our best interests, and, in all other cases, that his or her conduct was at least not opposed
to our best interests; and
● in the case of any criminal
proceeding, had no reasonable cause to believe that his or her conduct was unlawful.
These
persons may be indemnified against expenses, including attorneys’ fees, judgments, fines, excise taxes and amounts paid
in settlement, actually and reasonably incurred by the person in connection with the proceeding. If the person is found liable
to the corporation, no indemnification will be made unless the court in which the action was brought determines that the person
is fairly and reasonably entitled to indemnity in an amount that the court will establish.
The
obligations associated with being a public company require significant resources and management attention, which may divert resources
and attention from our business operations.
We
are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires us to file
annual, quarterly and current reports, proxy statements, and other information. The Sarbanes-Oxley Act requires, among other things,
that we establish and maintain effective internal controls and procedures for financial reporting. Our Chief Executive Officer
and Chief Financial Officer are required to certify that our disclosure controls and procedures are effective in ensuring that
material information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms. We need to hire or retain the services
of financial reporting, internal controls experts and other financial personnel or consultants in order to establish and maintain
appropriate internal controls and reporting procedures. As a result, we have incurred and expect to continue to incur significant
legal, accounting and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company
may divert management’s attention from improving our business, results of operations and financial condition.
Section
404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial
reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial
reporting, we may identify deficiencies. This may preclude us from keeping our filings with the SEC current and interfere with
the ability of investors to trade our securities.
If
we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results
accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation
and adversely affect the trading price of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable
financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control
environment existed, and our business and reputation with investors may be harmed. Notwithstanding our diligence, certain internal
controls deficiencies may not be detected. As a result, any internal control deficiencies may adversely affect our financial condition,
results of operations and access to capital.
Public
company compliance may make it more difficult to attract and retain officers and directors.
The
Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies.
As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming
and costly. As a public company, these rules and regulations may make it more difficult and expensive for us to maintain our director
and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons
to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
Our
stock price may be volatile.
The
market price of our common stock is highly volatile and fluctuates widely in price in response to various factors, many of which
are beyond our control, including the following:
● our ability to execute
our business plan;
● changes in our industry;
● sales of our common
stock;
● operating results that
fall below expectations;
● regulatory developments;
● economic and other external
factors;
● period-to-period fluctuations
in our financial results;
● our inability to develop
or acquire new or needed technologies;
● the public’s response
to press releases or other public announcements by us or third parties, including filings with the SEC;
● changes in financial
estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates or failure
of those analysts to initiate or maintain coverage of our common stock;
● the development and
sustainability of an active trading market for our common stock; and
● any future sales of
our common stock by our officers, directors and significant stockholders.
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of the companies. These market fluctuations may also materially and adversely affect the market price
of our common stock.
Our shares of common stock are thinly traded, and the price may not reflect our value. There can be no assurance that there will be an active market for shares of our common stock in the future.
Our shares of common stock are thinly traded and the price per share may not reflect our actual or perceived value. There can be no assurance that there will be an active market for our shares of common stock in the future. The market liquidity is dependent on the perception of our operating business, among other things. We plan to take certain steps including utilizing investor awareness campaigns, investor relations firms, press releases, road shows and conferences to increase awareness of our business. Any steps that we might take to bring us to the awareness of investors may require that we compensate consultants with cash and/or equity securities. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or to liquidate it at a price that reflects the value of the business. If an active market should develop, the price may be highly volatile. If there is a relatively low per-share price for our common stock, many brokerage firms or clearing firms may not be willing to effect transactions in our common stock or accept our shares for deposit in an account. Many lending institutions will not permit the use of low-priced shares of common stock as collateral for any loans.
There
may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We
are generally not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable
for, or that represent the right to receive, common stock. The market price of our common stock could decline as a result of sales
of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, common stock
or the perception that such sales could occur.
We
cannot assure you that the common stock will become liquid or that it will be listed on a securities exchange.
We
cannot assure you that we will ever be able to meet the initial listing standards of any stock exchange, or that we will be able
to maintain any such listing. Until the common stock is listed on an exchange, we expect that it would be eligible to be quoted
on the OTC Markets (including the OTCQB), another over-the-counter quotation system, or in the “pink sheets.” In those
venues, however, an investor may find it difficult to obtain accurate quotations as to the market value of the common stock. In
addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers
who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may
deter broker-dealers from recommending or selling the common stock, which may further affect its liquidity. This would also make
it more difficult for us to raise additional capital.
Our
common stock is considered a “penny stock” so long as it trades below $5.00 per share. This can adversely affect its
liquidity.
Our
common stock is considered a “penny stock” and will continue to be considered a penny stock so long as it trades below
$5.00 per share and as such, trading in our common stock will be subject to the requirements of Rule 15g-9 under the Exchange
Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited
investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability
determination for the purchaser and receive the purchaser’s written consent prior to the transaction.
SEC
regulations also require additional disclosure in connection with any trades involving a “penny stock,” including
the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated
risks. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements
may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our
securities and consequently adversely affect the market price for our securities. In addition, few broker or dealers are likely
to undertake these compliance activities. Other risks associated with trading in penny stocks could also be price fluctuations
and the lack of a liquid market.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM
1B: UNRESOLVED STAFF COMMENTS
As
a smaller reporting company, we are not required to provide this information.

---

ITEM 2. PROPERTIES
ITEM
2: PROPERTIES
Our
principal executive offices are located at 13880 Dulles Corner Lane, Suite 175, Herndon, Virginia 20171. We lease this premise,
which consists of approximately 5,800 square feet pursuant to a lease that expires on November 30, 2021 with the following gross
monthly rent payments:
Month
Gross
Monthly
Rent
Payment
Month 1
- Month 12
$ 9,653.33
Month 13 - Month
$ 10,039.46
Month 25 - Month
36*
$ 10,441.04
Month 37 - Expiration
Date
$ 10,858.68
We
believe that our facilities are adequate for our current needs.

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ITEM 3. LEGAL PROCEEDINGS
ITEM
3: LEGAL PROCEEDINGS
From time to time, we may become involved legal proceedings, lawsuits, claims and regulations in the ordinary course of our business. Below we’ve described any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. We’ve also described any action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
VMS Software Inc.
On October 20, 2020, VMS Software, Inc. (“VMS”) filed suit against us in the United States District Court for the District of Massachusetts Eastern Division, Case # # 1:20-CV-11895-WGY. In its complaint, VMS alleges that the Company has failed to make payments to VMS in the amount of $652,255 (plus interest of 8% from June 28, 2019) pursuant to a written settlement agreement. We filed an Answer to the Complaint and VMS filed a motion for judgment on the pleadings based on the admission that no payments have been made under the settlement agreement.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM
4: MINE SAFETY DISCLOSURES
Not
applicable.
PART
II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Shares of our common stock were approved for trading and began trading on September 4, 2018 on the OTC Markets under the symbol “SYSX.” The following table sets forth the high and low closing bid information for our common stock for each quarterly period during the years ended December 31, 2019 and 2020, 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.
Common
Stock
High
Low
Year Ended December 31,
2019:
January
1, 2019 through March 31, 2019
$ 2.75
$ 1.45
April
1, 2019 through June 30, 2019
$ 2.74
$ 1.36
July
1, 2019 through September 30, 2019
$ 1.45
$ 0.25
October
1, 2019 through December 31, 2019
$ 0.65
$ 0.17
Year Ended December 31,
2020:
January
1, 2020 through March 31, 2020
$ 0.15
$ 0.15
April
1, 2020 through June 30, 2020
$ 0.42
$ 0.25
July
1, 2020 through September 30, 2020
$ 0.38
$ 0.38
October
1, 2020 through December 31, 2020
$ 0.43
$ 0.43
Stockholders of
Record
As of March 25, 2021, there were 211 stockholders of record of our common stock. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of record are held through banks, brokers, other financial institutions and registered clearing agencies.
Dividend Policy
We
have never declared nor paid any cash dividends to stockholders. We do not currently expect to pay dividends on our capital
stock. The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of our board of
directors. The board’s decisions regarding the payment of dividends will depend on many factors, such as our financial condition,
earnings, capital requirements, debt service obligations, restrictive covenants in any debt instrument, industry practice, legal
requirements, regulatory constraints and other factors that the board deems relevant. Our ability to pay dividends will depend
on our ongoing ability to generate cash from operations. We cannot guarantee that we will pay a dividend in the future or continue
to pay any dividends if we began paying dividends.
Securities
Authorized for Issuance under Equity Compensation Plans
Information
about our equity compensation plans is incorporated herein by reference to Part III, Item 11 of this report.
Performance
Graph
Pursuant
to the accompanying instructions, the information called for by Item 201(e) of Regulation S-K is not required.
Unregistered
Sales of Securities and Use of Proceeds
None.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM
6: SELECTED FINANCIAL DATA
As
a smaller reporting company, we are not required to provide this information.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM
7: 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 Annual Report on Form 10-K. In addition to historical information,
this discussion and analysis here and throughout the Form 10-K 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
We
were incorporated in California on January 3, 1994 as Lilien Systems and were acquired by Inpixon on March 20, 2013. Effective
January 1, 2016, Inpixon consummated a reorganization transaction pursuant to which certain Inpixon subsidiaries, including, AirPatrol
Corporation and Shoom were merged with and into Lilien and Lilien changed its name to “Sysorex USA”; and all outstanding
shares of capital stock of SGS were assigned to Lilien, pursuant to which SGS became a direct subsidiary of Lilien. Sysorex USA
changed its name to Inpixon USA on March 1, 2017. On July 26, 2018, Inpixon USA merged into Sysorex, Inc., a wholly-owned subsidiary
of Inpixon, for the purpose of changing its name and moving its state of formation from California to Nevada. Lilien significantly
expanded Inpixon’s operations providing it with a big data analytics platform and enterprise infrastructure capabilities.
On
August 31, 2018, Inpixon completed the spin-off (the “Spin-off”) of its value-added reseller business from its indoor
positioning analytics business by way of a distribution of all the shares of common stock of Inpixon’s wholly-owned subsidiary,
Sysorex, Inc., a Nevada corporation (“Sysorex,” “we,” “us,” “our” and similar
terms), to holders of Inpixon’s common stock, preferred stock and certain Inpixon warrants as of August 21, 2018 (the “Record
Date”). The distribution occurred by way of a pro rata stock distribution to such holders of common stock, preferred stock
and warrants, each of whom received one share of Sysorex common stock for every three shares of Inpixon common stock held (or
into which such preferred stock was convertible or warrants were exercisable) on the Record Date.
As
a result of the Spin-off, Sysorex is an independent public company and Sysorex’s common stock began regular-way trading
on the OTC Markets under the symbol “SYSX” on September 4, 2018.
The financial statements present the combined results of operations, financial condition, and cash flows of Sysorex and its subsidiary. These financial statements were prepared on a combined basis because the operations were under common control. All intercompany accounts and transactions have been eliminated between the combined entities.
We are a provider of information technology solutions from multiple vendors, including hardware products, software, IT services, 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 Cisco, Hewlett Packard Enterprises, Aruba Networks, Microsoft, Canon, Dell, Samsung, Tek84, Panasonic, Lexmark 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, allows us to reach multiple customer public sector segments including federal, state and local governments, as well as educational institutions.
Revenues from our business are typically driven by public sector delivery orders that are received on a monthly basis. During the years ended December 31, 2020 and 2019, approximately 100% of our revenues were from these delivery orders. These delivery orders include information technology hardware, software, professional services, warranty and maintenance support, and highly integrated solutions that include two or more of the aforementioned items. The Company’s performance obligation is to work with customers to identify the computer maintenance and warranty services that best suit the customer’s needs and sell them those products and services however, the maintenance is provided to the customer by the manufacturer. For these contracts, the customer is invoiced one time and pays us upfront for the full term of the warranty and maintenance contract.
We
experience variability in our net sales and operating results on a quarterly basis as a result of many factors. We experience
some seasonal trends in our sales of technology solutions to government and educational institutions. For example, the fiscal
year-ends of U.S. public sector customers vary for those in the federal government space and those in the state and local government
and educational institution (“SLED”) space. We generally see an increase in our second quarter sales related to customers
in the U.S. SLED sector and in our third quarter sales related to customers in the federal government space as these customers
close out their budgets for their fiscal year (June 30 and September 30, respectively). We may also experience variability in
our gross profit and gross profit margin as a result of changes in the various vendor programs we participate in and its effect
on the amount of vendor consideration we receive from a particular vendor or their authorized distributor/wholesaler, which may
be impacted by a number of events outside of our control. As such, the results of interim periods are not necessarily indicative
of the results that may be expected for any other interim period or for the full year.
A
substantial portion of our business is dependent on sales through existing federal contracts, known as Government-wide Acquisition
Contracts (“GWAC”). We have three key GWAC contracts, known in the industry as GSA Federal Supply Schedule IT 70,
NASA SEWP V, and NIH CIO-CS. Maintaining current vendor offerings and pricing is critical to attaining sales.
Our
planned operating expenditures each quarter are based in large part on sales forecasts for the quarter. If our sales do not meet
expectations in any given quarter, our operating results for the quarter may be materially adversely affected. Our narrow margins
may magnify the impact of these factors on our operating results. Management regularly reviews our operating performance using
a variety of financial and non-financial metrics including sales, shipments, margin, vendor consideration, advertising expense,
personnel costs, account executive productivity, accounts receivable aging, supplier inventory turnover, liquidity and cash resources.
Our management monitors the various metrics against goals and budgets, and makes necessary adjustments intended to enhance our
performance.
Our current debt repayment to key vendors due to prior non-payment of invoices has affected our ability to receive the most favorable cost, terms, and delivery priority. General economic conditions also have an effect on our business and results of operations. For example, if the federal government fails to pass a budget or a continuing resolution before adopting an annual budget, our primary customers will not have the ability to make purchases off our existing contracts until such budget issue is resolved. If current tariffs and stipulation by the government to require the purchase of goods that are substantially made or assembled in America are enacted, this could severely affect our ability to source from vendors that manufacture overseas. These factors affect sales of our products, sales cycles, adoption rates of new technologies and level of price competition. We continue to focus our efforts paying down our debt, cost controls, competitive pricing strategies, capturing new contracts, and driving higher margin service and solution sales. We also continue to make selective investments in our sales force personnel, service and solutions capabilities and internal information technology infrastructure and tools in an effort to meet vendor program requirements and to position us for enhanced productivity and future growth.
For the years ended December 31, 2020 and 2019, the Company incurred net losses of approximately $3.5 million and $5.4 million, respectively. We cannot assure that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. In order to continue our operations, we continue to avail ourselves to the SouthStar facility to finance purchase orders and invoices in an amount equal to 80% of the face value of purchase orders received, continued financing through our Related Party Note (as further defined in this section) and other Short-Term Debt (as further defined in this section), higher margin public sector contracts capture, reauthorization of key vendors and credit limitation improvements. The Company will need 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.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles
(“GAAP”). In connection with the preparation of our consolidated financial statements and related disclosures in conformity
with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are
reasonable under the circumstances. We periodically review our accounting policies, estimates and assumptions and make adjustments
when facts and circumstances dictate. In addition to the accounting policies that are more fully described in the Notes to the
Consolidated Financial Statements included elsewhere in this Form 10-K, we consider the critical accounting policies described
below to be affected by accounting estimates. Our critical accounting policies that are affected by accounting estimates require
us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain,
and actual results could differ materially from these estimates. Historically changes in management estimates have not been material.
Revenue
Recognition
In
March 2016, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016,
the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations
and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic
606)”, or ASU 2016-12. This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue
from Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for
revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date
of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It has replaced most existing revenue
recognition guidance under GAAP. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect
adjustment as of the date of adoption. The Company has adopted Topic 606 using a modified retrospective approach and will be applied
prospectively in the financial statements from January 1, 2018 forward. Revenues under Topic 606 are required to be recognized
either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement,
and will be evaluated using a five-step model. The adoption of Topic 606 did have a material impact on our financial statements.
Hardware
and Software Revenue Recognition
The Company is a primary resale channel for a large group of vendors and suppliers, including 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
goods or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer
or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified
good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the
Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
The
Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when
control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal
title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer
has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s
products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s
warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The
Company’s shipping terms typically specify F.O.B. destination.
The
Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without
having to physically hold the inventory at its warehouses. The Company is the principal in the transaction and recognizes revenue
for drop-shipment arrangements on a gross basis.
The
Company may provide integration of products from multiple vendors as a solution it sells to the customer. In this arrangement,
the Company provides direct warranty to the customer with the Company’s own personnel as the customer requires warranty
on the solution and not individual vendor products. This type of warranty is sold integral to the overall solution quoted to the
customer. The Company considers these service-type warranties to be performance obligations of the principal from the underlying
products that make up a solution and therefore is acting as a principal in the transaction and records revenue on a gross basis
at the point of sale.
License
and Maintenance Services Revenue Recognition
The
Company provides a customized design and configuration solution for its customers and in this capacity resells hardware, software
and other IT equipment license and maintenance services in exchange for fixed fees. The Company selects the vendors and sells
the products and services, including maintenance services, that best fit the customer’s needs. For sales of maintenance
services and warranties, the customer obtains control at the point in time that the services to be provided by a third-party vendor
are purchased by the customer and therefore the Company’s performance obligation to provide the overall systems solution
is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer-approved
invoice.
For
resale of services, including maintenance services, warranties, and extended warranties, the Company is acting as an agent as
the primary activity for those services are fulfilled by a third party. While the Company may facilitate and act as a first responder
for these services, the third-party service providers perform the primary maintenance and warranty services for the customer.
Therefore, the Company is not primarily responsible for performing these services and revenue is recorded on a net basis.
Professional
Services Revenue Recognition
The
Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases,
or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours
worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended.
Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the
practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds
directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes
revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because
the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in
ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized
as soon as they become known. For the years ended December 31, 2020 and 2019, the Company did not incur any such losses. These
amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term
contracts are derived principally with various United States government agencies and commercial customers.
Impairment
of Long-Lived Assets
The
Company amortizes intangible assets with finite lives over their estimated useful lives and review them for impairment whenever
an impairment indicator exists. The Company continually monitors events and changes in circumstances that could indicate carrying
amounts of our long-lived assets, including our intangible assets, may not be recoverable. When such events or changes in circumstances
occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted
expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize
an impairment loss based on the excess of the carrying amount over the fair value of the assets. The Company did not recognize
any intangible asset impairment charges for the years ended December 31, 2020 and 2019.
Recent
Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires
an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also
require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the
amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December
15, 2018. As an emerging growth company, the Company delayed adoption of ASU 2016-02 until January 1, 2020.
As
a result of the new standard, all of the Company’s leases greater than one year in duration are recognized in its balance
sheets as both operating lease liabilities and right-of-use assets upon adoption of the standard. The Company adopted the standard
using the modified-retrospective method effective January 1, 2020. This adoption primarily affected the Company’s consolidated
balance sheet based on the recording of right-of-use assets and the lease liability, current and noncurrent, for its operating
leases. The adoption of ASU 2016-02 did not change the Company’s historical classification of these leases or the straight-line
recognition of related expenses. Upon adoption, the Company recorded approximately $217,000 in right-of-use assets and operating
lease liabilities on the Company’s balance sheet.
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (‘ASU”)
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which
simplifies income tax accounting in various areas including, but not limited to, the accounting for hybrid tax regimes, tax implications
related to business combinations, and interim period accounting for enacted changes in tax law, along with some codification improvements.
ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with
early adoption permitted. Certain changes in the standard require retrospective or modified retrospective adoption, while other
changes must be adopted prospectively. The Company is currently evaluating ASU 2019-12 and its impact on our consolidated financial
statements.
Long-lived
Assets
We
account for our long-lived assets in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“ASC 360”), which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable or the useful life has changed. Some of the events or changes in circumstances
that would trigger an impairment test include, but are not limited to:
● significant
under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows
for two consecutive years);
● significant
negative industry or economic trends;
● knowledge
of transactions involving the sale of similar property at amounts below our carrying value; or
● our
expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not
meet the criteria to be classified as “held for sale.”
Long-lived
assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability
of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly
associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived
assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge
equal to the excess, if any, of net carrying value over fair value.
When
assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets,
we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of
judgment and bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted
future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property
and equipment and residual value of asset groups. We formulate estimates from historical experience and assumptions of future
performance, based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event
that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Based on our
evaluation, we did not record a charge for impairment for the years ended December 31, 2020 and 2019.
The
benefits to be derived from our acquired intangibles, will take additional financial resources to continue the development of
our technology. Management believes our technology has significant long-term profit potential, and to date, management continues
to allocate existing resources to develop products and services to seek returns on its investment. We continue to seek additional
resources, through both capital raising efforts and meeting with industry experts, as part of our continued efforts. Although
there can be no assurance that these efforts will be successful, we intend to allocate financial and personnel resources when
deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available,
the related development of our technology (resulting in our lack of ability to expand our business), may be subject to significant
impairment.
As
described previously, we continue to experience weakness in market conditions, a depressed stock price, and challenges in executing
our business plans. The Company will continue to monitor these uncertainties in future periods, to determine the impact.
We
evaluate the remaining useful lives of long-lived assets and identifiable intangible assets whenever events or circumstances indicate
that a revision to the remaining period of amortization is warranted. Such events or circumstances may include (but are not limited
to): the effects of obsolescence, demand, competition, and/or other economic factors including the stability of the industry in
which we operate, known technological advances, legislative actions, or changes in the regulatory environment. If the estimated
remaining useful lives change, the remaining carrying amount of the long-lived assets and identifiable intangible assets would
be amortized prospectively over that revised remaining useful life. We have determined that there were no events or circumstances
during the years ended December 31, 2020 and 2019, which would indicate a revision to the remaining amortization period related
to any of our long-lived assets. Accordingly, we believe that the current estimated useful lives of long-lived assets reflect
the period over which they are expected to contribute to future cash flows and are therefore deemed appropriate.
Impairment
of Long-Lived Assets Subject to Amortization
We
amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment
indicator exists. We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived
assets, including our intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess
recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future
cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment
loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize any intangible asset impairment
charges for the years ended December 31, 2020 and 2019.
Deferred
Income Taxes
In
accordance with ASC 740 “Income Taxes” (“ASC 740”), we routinely evaluate the likelihood of the realization
of income tax benefits and the recognition of deferred tax assets. In evaluating the need for any valuation allowance, we will
assess whether it is more likely than not that some portion, or all, of the deferred tax asset may not be realized. Ultimately,
the realization of deferred tax assets is dependent upon the generation of future taxable income during those periods in which
temporary differences become deductible and/or tax credits and tax loss carryforwards can be utilized. In performing our analyses,
we consider both positive and negative evidence including historical financial performance, previous earnings patterns, future
earnings forecasts, tax planning strategies, economic and business trends and the potential realization of net operating loss
carryforwards within a reasonable timeframe. To this end, we considered (i) that we have had historical losses in the prior years
and cannot anticipate generating a sufficient level of future profits in order to realize the benefits of our deferred tax asset;
(ii) tax planning strategies; and (iii) the adequacy of future income as of and for the year ended December 31, 2020, based upon
certain economic conditions and historical losses through December 31, 2020. After consideration of these factors, we deemed it
appropriate to establish a full valuation allowance.
A
liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax filings that do not
meet these recognition and measurement standards. As of December 31, 2020 and 2019, no liability for unrecognized tax benefits
was required to be reported. The guidance also discusses the classification of related interest and penalties on income taxes.
Our policy is to record interest and penalties on uncertain tax positions as a component of general and administrative expense.
No interest or penalties were recorded during the years ended December 31, 2020 and 2019.
Allowance
for Doubtful Accounts
We
maintain our reserves for credit losses at a level we believe to be adequate to absorb potential losses inherent in the respective
balances. We assign an internal credit quality rating to all new customers and update these ratings regularly, but no less than
annually. Our determination of the adequacy of the reserve for credit losses for our accounts and notes receivable is based on
the age of the receivable balance, the customer’s credit quality rating, an evaluation of historical credit losses, current
economic conditions, and other relevant factors.
The
Company’s allowance for doubtful accounts was $50,000 as of December 31, 2020 and December 31, 2019, respectively.
Rounding
All
dollar amounts in this section have been rounded to the nearest thousand.
Discussion
of Results of Operations for the years ended December 31, 2020 and 2019
The
following table sets forth selected financial data as a percentage of our revenue and the percentage of period-over-period
change:
Years ended
December 31, 2020 December 31, 2019
(in thousands, except percentages) Amount % of
Revenues Amount % of
Revenues %
Change
Product Revenues $ 7,934 69 % $ 3,548 67 % 124 %
Services Revenues $ 3,592 31 % $ 1,727 33 % 108 %
Cost of revenues - Products $ 6,720 58 % $ 3,172 60 % 112 %
Cost of revenues - Services $ 2,458 21 % $ 984 19 % 150 %
Gross profit $ 2,348 26 % $ 1,119 21 % 110 %
Operating expenses $ 4,110 36 % $ 5,426 103 % 24 %
Loss from operations $ (1,762 ) (15 )% $ (4,307 ) (82 )% (59 )%
Net loss $ (3,464 ) (30 )% $ (5,415 ) (103 )% (36 )%
Net
Revenues
Net revenues for the year ended December 31, 2020 were $11.5 million compared to $5.3 million for the prior year, an increase of approximately 119%. The increase in revenues of $6.3 million is primarily associated with increased orders from existing contracts mainly attributable to service assessment studies performed and better cash management with suppliers, which has enabled the Company to accept more orders from our customers.
Cost of Revenues
Cost of revenues for the year ended December 31, 2020 was $9.2 million compared to $4.2 million for the prior year, an increase of approximately 112%. The increase in cost of revenues of $5.0 million is primarily attributable to increased revenues, paying higher fees for cash needs such as supplier prepays, financing ARs, and continued inability to receive more discounted costs through supplier diversity due to credit risk.
The gross profit margin for the year ended December 31, 2020 was 26% compared to 21% during the prior year. This increase in gross margin is primarily due to gains on settlement of liabilities offset by the capital constraints resulting in our inability to obtain affordable pricing.
Operating
Expenses
Operating expenses for the year ended December 31, 2020 were $4.1 million compared to $5.4 million for the prior year, a decrease of approximately 24%. This decrease of 1.3 million is primarily attributable to a decrease in amortization of its intangible assets, offset by increases in amortization of finance costs and right of use assets.
Loss
from Operations
Loss from operations for the year ended December 31, 2020 was $1.8 million compared to $4.3 million for the prior year, a decrease of approximately 59%. This decrease in loss of $2.5 million was primarily attributable to a decrease in amortization of intangibles of $1.3 million and an increase in gross profit of $1.2 million, as described above.
Provision
for Income Taxes
There
was no provision for income taxes for the years ended December 31, 2020 and 2019. Deferred tax assets resulting from such losses
are fully reserved as of December 31, 2020 and 2019 since, at present, we have no history of taxable income and it is more likely
than not those such assets will not be realized.
Net
Loss
Net loss for the year ended December 31, 2020 was $3.5 million compared to $5.4 million for the prior year, a decrease of approximately 36%. This decrease in net loss of $1.9 million was attributable to the changes discussed above.
Non-GAAP
Financial information
EBITDA
EBITDA
is defined as net income (loss) before interest, provision for (benefit from) income taxes, and depreciation and amortization.
Adjusted EBITDA is used by our management as the matrix in which it manages the business. It is defined as EBITDA plus adjustments
for other income or expense items, non-recurring items and non-cash stock-based compensation.
Adjusted EBITDA for the year ended December 31, 2020 was a loss of $1.8 million compared to a loss of $2.7 million for the prior year period.
The
following table presents a reconciliation of net loss attributable to stockholders, which is our GAAP operating performance measure,
to Adjusted EBITDA for the year ended December 31, 2020 and 2019 (in thousands):
For the Years Ended
December 31,
Net loss $ (3,464 ) $ (5,415 )
Adjustments:
Non-recurring one-time charges:
Gain on earnout - (62 )
Gain on the settlement of obligations (702 ) (62 )
Interest expense 1,721 1,049
Amortization of debt discount
Depreciation and amortization 1,676
Adjusted EBITDA $ (1,858 ) $ (2,709 )
We
rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:
● to review and assess
the operating performance of our Company as permitted by Accounting Standards Codification Topic 280, Segment Reporting;
● to compare our current
operating results with corresponding periods and with the operating results of other companies in our industry;
● as a basis for allocating
resources to various projects;
● as a measure to evaluate
potential economic outcomes of acquisitions, operational alternatives and strategic decisions; and
● to evaluate internally
the performance of our personnel.
We
have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results.
We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and
the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding
of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:
● we believe Adjusted
EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest,
income taxes, depreciation and amortization and other non-cash items including stock based compensation, amortization
of intangibles, change in the fair value of shares to be issued, change in the fair value of derivative liability, impairment
of goodwill and one time charges including gain/loss on the settlement of obligations, severance costs, provision for doubtful
accounts, acquisition costs and the costs associated with the public offering;
● we believe that it is
useful to provide to investors a standard operating metric used by management to evaluate our operating performance; and
● we believe that the
use of Adjusted EBITDA is helpful to compare our results to other companies.
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 consolidated of operations
data prepared in accordance with GAAP. Some of these limitations include the fact that:
● Adjusted EBITDA does
not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
● Adjusted EBITDA does
not reflect changes in, or cash requirements for, our working capital needs;
● Adjusted EBITDA does
not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments
on our debt;
● Although depreciation
and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future,
and Adjusted EBITDA does not reflect any cash requirements for such replacements;
● Adjusted EBITDA does
not reflect income or other taxes or the cash requirements to make any tax payments; and
● other companies in our
industry may calculate Adjusted EBITDA differently than we do, thereby potentially limiting its usefulness as a comparative
measure.
Because
of these limitations, Adjusted EBITDA should not be considered a measure of discretionary cash available to us to invest in the
growth of our business or as a measure of performance in compliance with GAAP. We compensate for these limitations by relying
primarily on our GAAP results and providing Adjusted EBITDA only as supplemental information.
Indebtedness of the Company
Related
Party Note
On
December 31, 2018, the Company entered into a note purchase agreement with Inpixon (the “Note Purchase Agreement”)
pursuant to which Inpixon, the Company’s former parent, agreed to purchase from the Company at a purchase price equal to
the Loan Amount (as defined below), a secured promissory note (the “Related Party Note”) for up to an aggregate principal
amount of 3,000,000 (the “Principal Amount”), including any amounts advanced through the date of the Related Party
Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with the Prior
Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent (10%) per
annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount. In addition,
the Company agreed to pay $20,000 to Inpixon to cover Inpixon’ legal fees, accounting costs, due diligence, monitoring and
other transaction costs incurred in connection with the purchase and sale of the Related Party Note (the “Transaction Expense
Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any amounts
disbursed to the Company and the Transaction Expense Amount.
The
Company may borrow under the Related Party Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest,
not to exceed the Principal Amount at any one time.
All
sums advanced by Inpixon to the maturity date pursuant to the terms of the Note Purchase Agreement will become part of the aggregate
Loan Amount underlying the Related Party Note. All outstanding principal amounts and accrued unpaid interest owing under the Related
Party Note shall become immediately due and payable on the earlier to occur of (i) December 31, 2020 (the “Maturity Date”),
(ii) at such date when declared due and payable by Inpixon upon the occurrence of an Event of Default (as defined in the Related
Party Note), or (iii) at any such earlier date as set forth in the Related Party Note. All accrued unpaid interest shall be payable
in cash.
Pursuant
to the terms of the Related Party Note, the Company granted Inpixon, subject to any and all Payplant Liens (as defined in the
Related Party Note) and Permitted Liens (as defined in the Related Party Note), a continuing first priority security interest
in all assets of the Company whether owned as of the date of the Related Party Note or subsequently acquired, including all proceeds
therefrom (collectively, the “Collateral”) to secure the payment of the Related Party Note and all other loans and
advances (including all renewals, modifications and extensions thereof) and all obligations of any and every kind and nature of
the Company to Inpixon, whether arising prior to, under or after the Related Party Note, however incurred or evidenced, plus all
interest, reasonable costs, reasonable expenses and reasonable attorneys’ fees, which may be made or incurred by Inpixon
in the disbursement, administration, and collection of such amounts, and in the protection, maintenance, and liquidation of the
Collateral.
On
February 4, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any time
under the Related Party Note from $3,000,000 to $5,000,000. On April 15, 2019, the Related Party Note was amended to increase
the maximum principal amount that may be outstanding at any time under the Related Party Note from $5,000,000 to $8,000,000.
On
May 22, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any time
under the Related Party Note from $8,000,000 to $10,000,000.
On March 1, 2020, the Related Party Note was amended to extend the maturity date from December 31, 2020 to December 31, 2022, to increase the default interest rate from 18% to 21% or the maximum rate allowable by law and to require a cash payment by the Company to Inpixon against the loan amount in an amount equal to no less than 6% of the aggregate gross proceeds raised following the completion of any financing, or series of related financings, in which the Company raises aggregate gross proceeds of at least $5 million.
On June 30, 2020, the “Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., and the Company has acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security interest in the assets of the Company.
Inpixon is the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. entered into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. Inpixon agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note, with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note to be in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement (the “Closing Date”), the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date. Nadir Ali, a member of the Company’s board of directors, is also Inpixon’s Chief Executive Officer and a member of its board of directors. The transactions disclosed herein were approved by all of the disinterested members of the Company’s board of directors. See Note 7 -Long-Term Debt for further discussion on the Promissory Note Assignment.
The proceeds received and interest and legal costs accrued, in accordance with the Related Party Note as of December 31, 2020 is $9,043,859.
Short
Term Debt
Chicago
Venture Convertible Note Payable
On
December 31, 2018, the Company issued a $625,000 principal face amount convertible promissory note (the “Convertible Note”)
to Chicago Venture Partners, L.P. (“CVP”), which yielded net proceeds of $500,000 to the Company pursuant to a Securities
Purchase Agreement, dated as of December 31, 2018, by and between the Company and CVP. The Convertible Note bears interest at
the rate of 10% per year and is due and payable 10 months after the date of issuance. The Convertible Note carries an original
issue discount of $105,000 and the Company agrees to pay $20,000 to the CVP to cover its transaction costs incurred with the purchase
and sale of the Convertible Note.
The agreement states that CVP has the right to convert all or part of the outstanding balance into fully paid and non-assessable common stock. The conversion formula is as follows: The number of shares will equal the amount of the outstanding note balance being converted divided by $5.00 per share. The Company determined since the value of the underlying equity on the commitment date was $2.29 per share, was less than conversion price $5.00, the Company determined there was no beneficial conversion feature.
The Lender Conversion Price is subject to certain adjustment such as down-round features whereby the agreement notes that if the Company were to sell, issue or grant any common stock, option to purchase common stock, right to reprice, preferred shares convertible into common stock, or debt, warrants, options or other securities which are convertible, exercisable, or exchangeable for shares of common stock at a price per share less than the conversion price, then the conversion price shall be reduced to equal the new lower price, subject to a floor of $1.00 per share. When and if there is an adjustment under the down-round provision, the Company will analyze the accounting treatment of the adjustment.
Redemption
Redemptions
may occur at any time after the 6-month anniversary of the date of issuance of the Convertible Note with a minimum redemption
price equal to the Conversion Price. If the conversion rate is less than the market price, then the redemptions must be made in
cash.
On
July 5, 2019, the Company issued 22,857 shares of common stock for the settlement of approximately $20,000 on its short-term debt.
On
October 15, 2019, the Company and CVP entered into a waiver agreement (the “Waiver Agreement”) in connection with
CVP delivery of a redemption notice for $7,600 (the “Redemption Amount”) in accordance with that certain Securities
Purchase Agreement, dated as of December 31, 2018, and that certain Convertible Promissory Note issued to the Lender by the Company
on December 31, 2018 (the “Note”). Pursuant to the Waiver Agreement, the Lender agreed to waive certain Equity Conditions
Failures (as defined in the Note) in order to receive shares of common stock of the Company instead of cash to satisfy the Redemption
Amount. In addition, the Company and the Lender agreed to issue such shares below the minimum redemption conversion price of $1.00
at a modified redemption conversion price equal to $0.210140, which is equal to 70% multiplied by the lowest closing bid price
during the twenty (20) trading days immediately preceding this redemption. Accordingly, the Company issued the Lender 36,166 shares
of common stock to satisfy the Redemption Amount.
Short-Term
Note Extension
On July 7, 2020, the Company entered into a note extension (the “Extension”) with Chicago Venture Partners, L.P. (“CVP”), pursuant to which the maturity date of that certain Convertible Promissory Note, issued by the Company to CVP on December 31, 2018 (the “Note”), was extended to December 31, 2020.
See
Financial Statement Note-12 Subsequent Events, regarding extension of the promissory note maturity date to March 31, 2021.
Wells
Fargo N.A. SBA -Payroll Protection program
On May 7, 2020, Sysorex, Inc. was granted a loan (the “Loan”) from Wells Fargo, N.A. in the principal amount of $349,693, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020.
The
Loan, which was in the form of a Note dated May 3, 2020 issued by the Company (the “Note”), matures on May 3, 2022
and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the
Company at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and
maintain payroll or make mortgage payments, lease payments and utility payments. The Company intends to use the entire Loan amount
for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act.
Revolving
Credit Facility
On
August 31, 2018, the Company entered in an agreement with Payplant Alternatives Funds LLC, pursuant to which Payplant may purchase
from the Borrowers, in Payplant’s sole and absolute discretion, Eligible Receivables, as that term is defined in the agreement,
in exchange for cash advances, subject to the terms and conditions in the agreement.
On
September 21, 2018, the Company entered into the Payplant Loan and Security Agreement (the “Loan Agreement”) with
Payplant LLC as agent for Payplant Alternatives Fund LLC (“Payplant”). Pursuant to the Loan Agreement and the terms
set forth in the form of promissory note attached as Exhibit A to the Loan Agreement, (the “Note”), Payplant, in its
sole and absolute discretion, may loan money to the Borrowers on the basis of purchase orders or invoices issued by the Borrowers
to customers for goods and services provided. The term of any loan made to the Borrowers may not exceed 360 days. The principal
amount of any loan will accrue interest at a 30-day rate of 2%, calculated per day. Upon the occurrence and during the continuance
of an Event of Default, as defined in the Loan Agreement, interest will accrue at a rate equal to the interest rate plus 0.42%
per 30 days. In no event will interest, when combined with all fees that may be characterized as interest, exceed the Maximum
Rate, as defined in the Loan Agreement. All computations of interest will be made on the basis of a 360-day year. The Borrowers
will have the right to prepay any loan upon the payment of a premium of at least 30 days of interest.
As
security for the repayment of any loans and the performance of the Borrowers’ Obligations, as defined in the Loan Agreement,
the Borrowers granted to Payplant a security interest in the Collateral, as defined in the Loan Agreement. As of May 22, 2020
the Company terminated its services with Payplant Alternatives Funds LLC.
Non-Recourse
Factoring and Security Agreement
Effective
as June 19, 2020 (the “Effective Date”), the Company and SouthStar Financial, LLC (“SouthStar”) entered
into a Non-Recourse Factoring and Security Agreement (the “Agreement”) pursuant to which SouthStar may purchase receivables
from the Company (the “Purchased Receivables”) for a price not to exceed 85% of the face value of the Purchased Receivables
or a lesser percentage agreed upon between the Company and SouthStar. In consideration of SouthStar’s purchase of the Purchased
Receivables, the Company will pay to SouthStar an amount equal to 0.8% of the face amount of the Purchased Receivables for the
first 10-day period after payment for the Purchased Receivables is transmitted to SouthStar plus 0.9% for each additional 10-day
period or part thereof, calculated from the date of purchase until payments received by SouthStar in collected funds on the Purchased
Receivables equals the purchase price of the Purchased Receivables plus all charges due SouthStar from the Company at the time.
An additional 1.0% per 10-day period will be charged for invoices exceeding 60 days from invoice date.
As of December 31, 2020, the Company has financed approximately $323,000 of its receivables.
Systat
Promissory Note Payable
On
June 30, 2020, the Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”),
an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form
of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment
Documents”). Pursuant to the Assignment Documents, Inpixon agrees to assign to Systat Software, Inc., and the Company has
acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software,
Inc. will be granted a security interest in the assets of the Company.
Inpixon
is the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original
Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding
Balance”). Inpixon and Systat Software, Inc. are entering into an Exclusive Software License and Distribution Agreement
with Cranes Software International Ltd. (the “License Agreement”). Inpixon has agreed to partition the Original Note
into four new secured promissory notes in the Form of Partitioned Note (each a “Partitioned Note” and collectively,
the “Partitioned Notes”), with the first Partitioned Note to be in the original principal amount of $3,000,000, the
second Partitioned Note to be in the original principal amount of $1,300,000, the third Partitioned Note to be in the original
principal amount of $1,000,000 and the fourth Partitioned Note to be in the original principal amount of $1,000,000 plus all accrued
unpaid interest under the Original Note included in the Outstanding Balance, and to assign and deliver to Systat Software, Inc.
the Closing Note on the closing date of the License Agreement, the Initial Installment Note on the three month anniversary of
the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note
on the nine month anniversary of the Closing Date.
The
Promissory Note balance outstanding as of December 31, 2020 is $5,390,068.
Future
Receivables Agreement
On
January 21, 2020, SGS and GCF Resources LLC (“GCF”) entered into a Future Receivables Agreement pursuant to which
GCF agreed to purchase receivables from SGS with a value of $497,000 for the sum of $350,000. The terms of the agreement call
for weekly installments of $20,710, until paid in full. On April 27, 2020, the Company paid off its GCF loan balance.
Liquidity
and Capital Resources as of December 31, 2020 Compared with December 31, 2019
The
Company’s net cash flows used in operating, investing and financing activities for the year ended December 31, 2020 and
2019 and certain balances as of the end of those periods are as follows (in thousands):
For the Years Ended
December 31,
Net cash used in operating activities $ (2,328 ) $ (9,364 )
Net cash provided by investing activities
-
Net cash provided by financing activities 2,467 9,386
Net increase (decrease) in cash $ 139 $ 22
As of December 31,
As of December 31,
Cash and cash equivalents $ 167 $ 28
Working capital (deficit) $ (9,121 ) $ (9,474 )
Liquidity
and Capital Resources as of December 31, 2020
Our capital resources and operating results as of and through December 31, 2020, consist of:
1) an overall working capital deficit of $9.1 million;
2) cash of $167,000;
3) we entered into an unlimited
revolving credit facility of which $323,000 was received on December 31, 2020;
4) net cash used in operating
activities for the year of $2.3 million;
5) net cash provided by
financing activities for the year of $2.5 million.
The
breakdown of our overall working capital deficit is as follows (in thousands):
Working Capital Assets Liabilities Net
Cash $ 167 $ - $ 167
Accounts receivable, net / accounts payable 2,186 9,838 (7,652 )
Other assets/other liabilities (121 )
Short-term debt - 1,515 (1,515 )
Total $ 2,735 $ 11,856 $ (9,121 )
Accounts payable and accrued liabilities exceed the accounts receivable by $7.6 million. These deficits are expected to be funded by our anticipated cash flow from operations and financing activities, over the next twelve months. The Company plans to maintain its cost stabilization and reductions in 2020 into 2021. It is expected that the necessary costs to achieve increased revenue will be incurred. The Company will continue to work with its key distributors and financing partners to address our credit limitation issues. The Company’s capital resources as of December 31, 2020, availability on the unlimited SouthStar Facility to finance purchase orders and invoices, the Related Party Note with its ability to receive revolving amounts not to exceed $10 million at any time, and its short-term borrowings, may not be sufficient to fund planned operations during the year ending December 31, 2021. The Company will need to raise additional capital through the issuance of equity, equity-linked or debt securities. A further discussion below of liquidity and capital resources outlines the Company’s current resources.
Going
Concern and Management’s Plans
As of December 31, 2020, the Company had a minimal cash balance and a working capital deficit of approximately $9.1 million. In addition, the Company has a stockholders’ deficit of approximately $23.5 million. For the years ended December 31, 2020 and 2019, the Company incurred net losses of approximately $3.5 million and $5.4 million, respectively. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern. 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 expects its capital resources as of December 31, 2020, availability on the SouthStar facility to finance purchase orders
and invoices in an amount equal to 80% of the face value of purchase orders received, funds from financing from our Related Party
Note and other Short Term borrowings, higher margin public sector contracts capture, reauthorization of key vendors and credit
limitation improvements may not be sufficient to fund planned operations during the year ending December 31, 2021. The Company
will need additional funds to support its obligations for the next twelve months. The Company may raise additional capital as
needed, through the issuance of equity, equity-linked or debt securities. The Company realizes that our ability to increase revenue
is to have more diverse sources of IT products and therefore the Company has focused on reducing its trade debt so that distributors
and vendors will resume supply of IT products to us. The Company has made significant progress towards the paying down on existing
trade debt liabilities. The Company started with $23 million of trade debt as of January 1, 2018 and had a balance of $5.6 million
of trade debt as of December 31, 2020. This represents a reduction of 75% over the course of 36-months ending December 31, 2020.
The
Company’s consolidated financial statements as of December 31, 2020 have been prepared under the assumption that we will
continue as a going concern for the next twelve months from the date the financial statements are issued. Management’s plans
and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s
ability to continue as a going concern, is dependent upon the ability to attain funding to secure additional resources to generate
sufficient revenues and increased margin, which without these represent the principal conditions that raise substantial doubt
about our ability to continue as a going concern. The Company’s consolidated financial statements as of December 31, 2020
do not include any adjustments that might result from the outcome of this uncertainty.
Liquidity
and Capital Resources - SouthStar
See
the discussion above in the section titled “Short Term Debt” for information concerning this loan. As of December
31, 2020, the principal amount outstanding under the Loan Agreement was $323,000.
Liquidity
and Capital Resources Inpixon Note
See
the discussion above in the section titled “Related Party Note” for information concerning this loan. As of December
31, 2020, the principal amount outstanding under the Loan Agreement was $9.0 million.
Liquidity
and Capital Resources - Systat Note
See
the discussion above in the section titled “Short Term Debt” for information concerning this loan. As of December
31, 2020, the principal amount outstanding under the Loan Agreement was $5.4 million.
Liquidity
and Capital Resources - Chicago Venture
See
the discussion above in the section titled “Short Term Debt” for information concerning this loan. As of December
31, 2020, the principal amount outstanding under the Loan Agreement was $842,000.
Operating
Activities for the year ended December 31, 2020
Net cash used in operating activities during the year ended December 31, 2020 was $2.8 million. Net cash used in operating activities during the year ended December 31, 2019 was $9.4 million. The cash flows related to the year ended December 31, 2020 consisted of the following (in thousands):
Net loss $ (3,464 )
Non-cash income and expenses 1,283
Net change in operating assets and liabilities (147 )
Net cash used in operating activities $ (2,328 )
The non-cash income and expense of $1.3 million consisted primarily of the following (in thousands):
$ 440 Depreciation and amortization expenses (including amortization of intangibles)
Gain on settlement of liabilities
(6 ) Accrued issuable equity
Amortization of debt discount
$ 1,283 Total non-cash expenses
The net use of cash in the change in operating assets and liabilities aggregated $0.1 million and consisted primarily of the following (in thousands):
$ 53 Decrease in accounts receivable and other receivables
(354 ) Increase in prepaid expenses and other current assets
(2,432 ) Decrease in accounts payable
2,219 Increase in accrued liabilities and other liabilities
Increase in deferred revenue
$ (147 ) Net use of cash in the changes in operating assets and liabilities
Operating
Activities for the year ended December 31, 2019
Net
cash used in operating activities during the year ended December 31, 2019 was $9.4 million. The cash flows related to the year
ended December 31, 2019 consisted of the following (in thousands):
Net
loss $ (5,415 )
Non-cash
income and expenses 1,578
Net
change in operating assets and liabilities (5,527 )
Net
cash used in operating activities $ (9,364 )
The
non-cash income and expense of $1.6 million consisted primarily of the following (in thousands):
$ 1,676 Depreciation
and amortization expenses (including amortization of intangibles)
(62 ) Gain
on settlement of liabilities
(62 ) Gain
on earnout
(64 ) Accrued
issuable equity
Amortization
of debt discount
(15 ) Other
$ 1,578 Total
non-cash expenses
The
net use of cash in the change in operating assets and liabilities aggregated $5.5 million and consisted primarily of the following
(in thousands):
$ (1,734 ) Increase
in accounts receivable and other receivables
Decrease
in prepaid licenses and maintenance contracts
Decrease
other assets and other liabilities
(3,643 ) Decrease
in accounts payable
(55 ) Decrease
in accrued liabilities and other liabilities
(147 ) Decrease
in deferred revenue
$ (5,527 ) Net
use of cash in the changes in operating assets and liabilities
Cash
Flows from Investing Activities as of December 31, 2020 and 2019
There
were no investing activities in 2020.
Cash
Flows from Financing Activities as of December 31, 2020 and 2019
Net cash flows provided by financing activities during the year ended December 31, 2020 was 2.5 million. The net cash provided by financing activities during the year ended December 31, 2020 was primarily comprised of net advances from Inpixon on a related party note from Inpixon of $2.7 million, proceeds from financing, proceeds from the Wells Fargo N.A. SBA -Payroll Protection Program SBA, offset by payments made to pay-off the future receivables note and the revolving line of credit. Net cash flows provided by financing activities during the year ended December 31, 2019 was $9.4 million. During the year ended December 31, 2019, the Company received $9.3 million from a related party note and $73,000 from its Payplant facility.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts.
Recently
Issued Accounting Standards
For
a discussion of recently issued accounting pronouncements, please see Note 2 to our financial statements, which are included in
this report beginning on page.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM
7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a smaller reporting company, we are not required to provide this information.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Sysorex, Inc. and Subsidiary
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sysorex, Inc. and Subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America
Explanatory Paragraph - Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2012.
Marcum llp
New York, NY
March 29, 2021
SYSOREX,
INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except number of shares and par value data)
December
31,
Assets
Current
Assets
Cash $ 167 $ 28
Accounts
receivable, net 2,186 2,069
Notes
and other receivables - -
Prepaid
assets and other current assets
Total
Current Assets 2,735 2,125
Property
and equipment, net -
Operating
lease right-of-use asset, net
Intangible
assets, net
Other
assets
Total
Assets $ 3,463 $ 3,077
The
accompanying notes are an integral part of these financial statements.
SYSOREX,
INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS, continued
(In
thousands, except number of shares and par value data)
December 31,
Liabilities and Stockholders’ Deficit
Current Liabilities
Accounts payable $ 8,541 $ 10,271
Accrued liabilities 1,297
Operating lease obligation -
Short Term debt, net of debt discount 1,515
Deferred revenue
Total Current Liabilities 11,856 11,599
Long Term Liabilities
Related party- loan payable 9,044 10,901
Payable to related party
Long term debt-promissory note 5,390 -
Other liabilities
Total Liabilities 26,976 23,126
Commitments and Contingencies
Stockholders’ Deficit
Common stock, par value $0.00001 per share, 500,000,000 shares authorized; 485,423 and 482,923 shares issued and 410,044 and 407,544 shares outstanding as of December 31, 2020 and December 31, 2019, respectively - -
Treasury stock, at cost, 75,379 shares at December 31, 2020 and December 31, 2019, respectively - -
Additional paid-in-capital (11,511 ) (11,511 )
Accumulated Deficit (12,002 ) (8,538 )
Total Stockholders’ Deficit (23,513 ) (20,049 )
Total Liabilities and Stockholder’s Deficit $ 3,463 $ 3,077
The
accompanying notes are an integral part of these financial statements.
SYSOREX,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
For the Years Ended
December 31,
Revenues
Products $ 7,934 $ 3,548
Services 3,592 1,727
Total Revenues 11,526 5,275
Cost of Revenues
Products 6,720 3,172
Services 2,458
Total Cost of Revenues 9,178 4,156
Gross Profit 2,348 1,119
Operating Expenses (Income)
Sales and marketing 1,166 1,065
General and administrative 2,631 2,765
Gain on earnout - (62 )
Amortization of intangibles 1,658
Total Operating Expenses, Net 4,110 5,426
Loss from Operations (1,762 ) (4,307 )
Other Income (Expense)
Interest expense (1,721 ) (1,049 )
Other income (expense), net (59 )
Total Other Income (Expense) (1,702 ) (1,108 )
Net Loss $ (3,464 ) $ (5,415 )
Net Loss per share - basic and diluted $ (8.46 ) $ (14.76 )
Weighted Average Shares Outstanding - basic and diluted 409,667 366,883
The
accompanying notes are an integral part of these financial statements.
SYSOREX,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
(in
thousands, except per share data)
Additional
Common
Stock Treasury
Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
Balance
- January 1, 2019 416,842 $ - 81,250 $ - $ (11,539 ) $ (3,123 ) $ (14,662 )
Net
loss - - - - - (5,415 ) (5,415 )
Fractional
shares round up as a result of the reverse stock split 7,418 - - - - - -
Shares
issued for payment of short-term debt 59,023 - - - -
Shares
reissued from Treasury related to exercise of former parent warrants - - (5,871 ) - - - -
Balance
- December 31, 2019 482,923 - 75,379 - $ (11,511 ) $ (8,538 ) $ (20,049 )
The
accompanying notes are an integral part of these financial statements.
SYSOREX,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
(in
thousands, except per share data)
Additional
Common Stock Treasury Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
Balance - January 1, 2020 482,923 $ - 75,379 $ $ (11,511 ) $ (8,538 ) (20,049 )
Net loss - - - - - (3,464 ) (3,464 )
Shares issued for trademark 2,500 - - - - - -
Balance - December 31, 2020 485,423 $ - 75,379 $ - $ (11,511 ) $ (12,002 ) $ (23,513 )
The
accompanying notes are an integral part of these financial statements.
SYSOREX,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands of dollars)
For the Years Ended
December 31,
Cash Flows from Operating Activities
Net loss $ (3,464 ) $ (5,415 )
Adjustment to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation
Amortization of intangibles 1,659
Gain on earnout - Integrio acquisition - (62 )
Amortization of right of use asset -
Gain on the settlement of liabilities (62 )
Amortization of debt discount
Change in fair value of accrued issuable equity (6 ) (64 )
Changes in operating assets and liabilities:
Accounts receivable and other receivables (1,749 )
Prepaid assets and other current assets (354 )
Other assets -
Accounts payable (2,432 ) (3,643 )
Accrued liabilities and other current liabilities 2,335 (56 )
Payments on lease obligations (116 ) -
Deferred revenue (147 )
Total Adjustments 1,136 (3,949 )
Net Cash Used In Operating Activities (2,328 ) (9,364 )
Cash Flows From Financing Activities
Related party advances 2,687 9,313
Repayments to related party (410 ) -
Repayments on short term debt (497 ) -
Proceeds on long term debt -
Proceeds on short-term debt -
(Repayments) advances on revolver line of credit (13 )
Net Cash Provided By Financing Activities 2,467 9,386
Net Increase in Cash
Cash - beginning of year
Cash - end of year $ 167 $ 28
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $ 61 $ 58
Income taxes $ 10 $ 5
Supplemental Disclosure of non-cash investing and financing activities:
Common shares issued for short-term debt payment $ - $ 28
The accompanying notes are an integral part of these financial statements.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
1 - Description of Business, the Spin-Off and Going Concern and Management’s Plans
Description
of Business
Sysorex,
Inc., through its wholly-owned subsidiary, Sysorex Government Services, Inc., formerly known as (f/k/a) Inpixon Federal, Inc.
(“SGS”), (unless otherwise stated or the context otherwise requires, the terms “SGS” “we,”
“us,” “our” and the “Company” refer collectively to Sysorex, Inc. and SGS), 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. The Company is
headquartered in Virginia.
The
Spin-Off
On
August 31, 2018 (the “Distribution Date”), the Company became an independent company through the pro rata distribution
by Inpixon of 100% of the outstanding common stock of Sysorex to Inpixon equity holders (the “Distribution”). Each
Inpixon equity holder of record as of the close of business on August 21, 2018 received one share of the Company’s common
stock for every three shares of Inpixon common stock held on the record date or such number of shares of common stock issuable
upon complete conversion of Inpixon convertible preferred stock or exercise of certain participating warrants. Approximately 40
million shares of the Company’s common stock were distributed on the Distribution Date to Inpixon equity holders. In connection
with the initial Distribution of its common stock, the Company has 117,917 shares of common stock reserved for issuance in treasury
(a) to the holders of certain Inpixon warrants who will be entitled to receive shares of the Company’s common stock if the
warrants are exercised, and (b) the holders of Inpixon securities that were subject to beneficial ownership limitations in connection
with the distribution and for future issuances. The Company’s common stock began regular-way trading on the OTC Markets
under the symbol “SYSX” on September 4, 2018.
Immediately
prior to the Distribution, Inpixon transferred substantially all of the assets and liabilities and operations of Inpixon’s
value added reseller business to the Company, which was completed on August 31, 2018 (the “Capitalization”). The Company’s
consolidated financial statements prior to the Capitalization were prepared on a stand-alone basis and were derived from Inpixon’s
consolidated financial statements and accounting records. The consolidated financial statements included herein reflect the Company’s
financial position, results of operations, and cash flows as the Company’s business was operated as part of Inpixon’s
prior to the Capitalization. Following the Capitalization, the consolidated financial statements include the accounts of the Company
and SGS. All periods presented have been accounted for in conformity with the accounting principles that are generally accepted
in the United States of America (“GAAP”).
Going
Concern and Management’s Plans
As of December 31, 2020, the Company had a cash balance of $167 thousand and a working capital deficit of approximately $9.1 million. In addition, the Company has a stockholders’ deficit of approximately $23.5 million. For the years ended December 31, 2020 and 2019, the Company incurred net losses of approximately $3.5 million and $5.4 million, respectively. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern. 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, 2020, availability on the SouthStar facility to finance purchase orders and invoices, funds from financing from our related party note (as defined in Note 8 below) and other short-term borrowings, higher margin public sector contracts capture, reauthorization of key vendors and credit limitation improvements will be sufficient to fund planned operations during the year ending December 31, 2021. As a result, the Company will need 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. Management’s plans and assessment of the probability that such plans will mitigate and alleviate any substantial doubt about the Company’s ability to continue as a going concern, is dependent upon the ability to attain funding to secure additional resources to generate sufficient revenues and increased margin, which without these represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. The Company’s consolidated financial statements as of December 31, 2020 do not include any adjustments that might result from the outcome of this uncertainty.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
1 - Description of Business, the Spin-Off and Going Concern and Management’s Plans (continued)
Impact
of COVID 19
The
outbreak of the novel coronavirus, SARS-CoV-2, which causes coronavirus disease 2019 (COVID-19), has evolved into a global pandemic.
COVID -19 has spread to many regions of the world, including the United States. In response to the pandemic, the Company has implemented
a work from home policy, with all employees continuing their work outside of the Company’s office. COVID-19 is causing disruption
and curtailment of our product offering and services due to our customers, predominantly the Federal and local governments have
closed offices and field locations.
The
Company is maintaining its overall headcount but continues to identify potential reductions in cash flows for operating expenses
and other purchases to the extent possible. On May 3, 2020, the Company received a loan of approximately $349,700 under the Payroll
Protection Program as part of the Coronavirus Aid, Relief and Economic Security Act. While the Company expects some degree of
an adverse impact on revenues in the fourth quarter of 2020, the Company will need to implement its plan as discussed above in
Going Concern and Management’s Plans.
Note
2 - Basis of Presentation and Significant Accounting Policies
The
consolidated financial statements have been prepared using the accounting records of Sysorex and SGS. All material inter-company
balances and transactions have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during each of the reporting periods. Actual results could differ
from those estimates. The Company’s significant estimates consist of:
● the allowance for doubtful
accounts;
● the valuation allowance
for the deferred tax asset; and
● the impairment of long-lived
assets.
Revenue
Recognition
The
Company reports revenues under ASC 606, “Revenue from Contracts with Customers” and all the related amendments (Topic
606)
The
Company recognizes revenue after applying the following five steps:
1) Identification
of the contract, or contracts, with a customer,
2) Identification
of the performance obligations in the contract, including whether they are distinct within
the context of the contract
3) Determination
of the transaction price, including the constraint on variable consideration
4) Allocation
of the transaction price to the performance obligations in the contract
5) Recognition
of revenue when, or as, performance obligations are satisfied
Hardware
and Software Revenue Recognition
The
Company is a primary resale channel for a large group of vendors and suppliers, including original equipment manufacturers (“OEMs”),
software publishers and wholesale distributors.
The
Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified,
payment terms are established, the contract has commercial substance and collectability of consideration is probable. The Company
evaluates the following indicators amongst others when determining whether it is acting as a principal in the transaction and
recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling the promise to provide the specified
product or service, (ii) the Company has inventory risk before the specified good or service has been transferred to a customer
or after transfer of control to the customer and (iii) the Company has discretion in establishing the price for the specified
good or service. If the terms of a transaction do not indicate the Company is acting as a principal in the transaction, then the
Company is acting as an agent in the transaction and the associated revenues are recognized on a net basis.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
2 - Summary of Significant Accounting Policies (continued)
The
Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when
control has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal
title to the product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer
has the significant risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s
products can be delivered to customers in a variety of ways, including (i) as physical product shipped from the Company’s
warehouse, (ii) via drop-shipment by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The
Company’s shipping terms typically specify F.O.B. destination.
The
Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without
having to physically hold the inventory at its warehouse. The Company is the principal in the transaction and recognizes revenue
for drop-shipment arrangements on a gross basis.
The
Company may provide integration of products from multiple vendors as a solution it sells to the customer. In this arrangement,
the Company provides direct warranty to the customer with the Company’s own personnel as the customer requires warranty
on the solution and not individual vendor products. This type of warranty is sold integral to the overall solution quoted to the
customer. The Company considers these service-type warranties to be performance obligations of the principal from the underlying
products that make up a solution and therefore is acting as a principal in the transaction and records revenue on a gross basis
at the point of sale.
License
and Maintenance Services Revenue Recognition
The
Company provides a customized design and configuration solution for its customers and in this capacity resells hardware, software
and other IT equipment license and maintenance services in exchange for fixed fees. The Company selects the vendors and sells
the products and services, including maintenance services, that best fit the customer’s needs. For sales of maintenance
services and warranties, the customer obtains control at the point in time that the services to be provided by a third-party vendor
are purchased by the customer and therefore the Company’s performance obligation to provide the overall systems solution
is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from the receipt of a customer-approved
invoice.
For
resale of services, including maintenance services, warranties, and extended warranties, the Company is acting as an agent as
the primary activity for those services are fulfilled by a third party. While the Company may facilitate and act as a first responder
for these services, the third-party service providers perform the primary maintenance and warranty services for the customer.
Therefore, the Company is not primarily responsible for performing these services and revenue is recorded on a net basis.
Professional
Services Revenue Recognition
The
Company’s professional services include fixed fee and time and materials contracts. Fixed fees are paid monthly, in phases,
or upon acceptance of deliverables. The Company’s time and materials contracts are paid weekly or monthly based on hours
worked. Revenue on time and material contracts is recognized based on a fixed hourly rate as direct labor hours are expended.
Materials, or other specified direct costs, are reimbursed as actual costs and may include markup. The Company has elected the
practical expedient to recognize revenue for the right to invoice because the Company’s right to consideration corresponds
directly with the value to the customer of the performance completed to date. For fixed fee contracts, the Company recognizes
revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Because
the Company’s contracts have an expected duration of one year or less, the Company has elected the practical expedient in
ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized
as soon as they become known. For the years ended December 31, 2020 and 2019, the Company did not incur any such losses. These
amounts are based on known and estimated factors. Revenues from time and material or firm fixed price long-term and short-term
contracts are derived principally with various United States government agencies.
Contract
Balances
The
timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue
is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision
of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had
deferred revenue of $402 thousand and $35 thousand as of December 31, 2020 and 2019. Please see Note 5- Deferred Revenue to the financial statements, as for the Company’s deferred revenue rollforward and analysis as issued under the Accounting Standards Update Revenue from Contracts with Customers (Topic 606).
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
2 - Summary of Significant Accounting Policies (continued)
Recent
Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires
an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also
require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the
amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December
15, 2018. As an emerging growth company, the Company delayed adoption of ASU 2016-02 until January 1, 2020.
As
a result of the new standard, all of the Company’s leases greater than one year in duration are recognized in its balance
sheets as both operating lease liabilities and right-of-use assets upon adoption of the standard. The Company adopted the standard
using the modified-retrospective method effective January 1, 2020. This adoption primarily affected the Company’s consolidated
balance sheet based on the recording of right-of-use assets and the lease liability, current and noncurrent, for its operating
leases. The adoption of ASU 2016-02 did not change the Company’s historical classification of these leases or the straight-line
recognition of related expenses. Upon adoption, the Company recorded approximately $217,000 in right-of-use assets and operating
lease liabilities on the Company’s balance sheet.
In
December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (‘ASU”)
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which
simplifies income tax accounting in various areas including, but not limited to, the accounting for hybrid tax regimes, tax implications
related to business combinations, and interim period accounting for enacted changes in tax law, along with some codification improvements.
ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with
early adoption permitted. Certain changes in the standard require retrospective or modified retrospective adoption, while other
changes must be adopted prospectively. The Company is currently evaluating ASU 2019-12 and its impact on our consolidated financial
statements.
Emerging
Growth Company
Sysorex
is an “emerging growth company” as defined in the JOBS Act. As such, Sysorex will be eligible to take advantage of
certain exemptions from various reporting requirements that apply to other public companies that are not emerging growth companies,
including compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. In addition, Section 107
of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 13(a)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting
standards, meaning that Sysorex, as an emerging growth company, can delay the adoption of certain accounting standards until those
standards would otherwise apply to private companies. Sysorex has elected to take advantage of this extended transition period,
and therefore our financial statements may not be comparable to those of companies that comply with such new or revised accounting
standards.
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash, checking accounts, money market accounts and temporary investments with maturities of three
months or less when purchased. As of December 31, 2020 and 2019, the Company had no cash equivalents.
Accounts
Receivable, net
Account receivables are stated at the amount the Company expects to collect. The Company recognizes an allowance for doubtful accounts to ensure accounts receivables are not overstated due to un-collectability. Bad debt reserves are maintained for various customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings, or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. The Company’s allowance for doubtful accounts was $50,000 as of December 31, 2020 and 2019, respectively.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
2 - Summary of Significant Accounting Policies (continued)
Property
and Equipment, net
Property
and equipment are recorded at cost less accumulated depreciation and amortization. The Company depreciates its property and equipment
for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range from
three to seven years. Leasehold improvements are amortized over the lesser of the useful life of the asset, or the initial lease
term. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged
to operations as incurred, and expenditures, which extend the economic life, are capitalized. When assets are retired, or otherwise
disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss
on disposal is recognized.
Intangible
Assets
Intangible
assets primarily consist of customer relationships, supplier relationships and trade name/trademarks. They are amortized ratably
over their deemed useful life of one to seven years. The Company assesses the carrying value of its intangible assets for impairment
each year. Based on its assessments, the Company did not incur any impairment charges for the years ended December 31, 2020 and
2019.
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
The Company has adopted Section 360-10-35 of the FASB Accounting Standards Codification for its long-lived assets. Pursuant to ASC Paragraph 360-10-35-17 an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. Pursuant to ASC Paragraph 360-10-35-20 if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited. The Company tests its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. Based on its assessments, the Company did not record any impairment charges for the years ended December 31, 2020 and 2019.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
2 - Summary of Significant Accounting Policies (continued)
Shipping
and Handling Costs
Shipping
and handling costs are expensed as incurred as part of cost of revenues. These costs were deemed to be nominal for the years ended
December 31, 2020 and 2019.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs, which are included in selling, general and administrative expenses, were deemed
to be nominal for the years ended December 31, 2020 and 2019.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change
is effective. Income tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance
is established when it is more likely than not that all or a portion of a deferred tax asset will either expire before the Company
is able to realize the benefit, or that future deductibility is uncertain.
Net
Loss per Share
Basic
loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding, plus potentially dilutive common shares. Convertible
debt, preferred stock, restricted stock units, stock options and warrants are excluded from the diluted net loss per share calculation
when their impact is anti-dilutive. The Company reported a net loss for the years ended December 31, 2020 and 2019, respectively,
and as a result, all potentially dilutive common shares are considered anti-dilutive for these periods. The Company had no potentially
issuable shares as of December 31, 2020.
Subsequent
Events
The
Company evaluates events and/or transactions occurring after the balance sheet date and before the issue date of the financial
statements to determine if any of those events and/or transactions require adjustment to or disclosure in the financial statements.
Note
3 - Property and Equipment, net
Property
and equipment at December 31, 2020 and 2019 consisted of the following (in thousands of dollars):
As of December 31,
Computer and office equipment $ 39 $ 39
Furniture and fixtures
Software
Total
Less: accumulated depreciation and amortization (160 ) (150 )
Total Property and Equipment, Net $ - $ 10
Depreciation
and amortization expense were $9,000 and $18,000 for the years ended December 31, 2020 and 2019, respectively.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
4 - Intangible Assets
Intangible
assets at December 31, 2020 and 2019 consisted of the following (in thousands of dollars):
Gross
Carrying
Amount
December 31, Accumulated
Amortization
December 31,
2019
Trade
Name/Trademarks $ 3,250 $ 3,250 $ (3,250 ) $ (3,250 )
Customer
Relationships 4,003 4,003 (3,403 ) (3,090 )
Supplier
Relationships 2,985 2,985 (2,985 ) (2,985 )
Totals $ 10,238 $ 10,238 $ (9,638 ) $ (9,325 )
Aggregate amortization expense for the years ended December 31, 2020 and 2019 was $0.3 million and $1.7 million, respectively.
Future amortization expense on intangible assets is anticipated to be as follows (in thousands of dollars):
Years Ending December 31, Amount
Total $ 600
Note
5 - Deferred Revenue
Analysis of deferred revenue as of December 31, 2020 is as follows (in thousands of dollars):
Balance - December 31, 2019 $ 35
Amounts collected or invoiced 1,036
Revenue recognized (669 )
Balance- December 31, 2020 $ 402
The deferred revenue expected to be recognized in the future is as follows:
$ 82
2023 and thereafter
Total $ 402
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
6 - Income Taxes
The income tax provision (benefit) for the years ended December 31, 2020 and 2019 consists of the following (in thousands of dollars):
U.S. federal
Current $ - $ -
Deferred (793 ) (745 )
State and Local
Current - -
Deferred (1,176 )
(42 ) (1,921 )
Change in valuation allowance (1,921 )
Income tax provision (benefit) $ - $ -
The
reconciliation between the U.S. statutory federal income tax rate and the Company’s effective rate for the years ended December
31, 2020 and 2019 is as follows:
Pretax Income 21.0 % 21.0 %
State Taxes, net of federal benefit 4.7 5.2
Federal and State rate change and other (25.1 ) 11.6
Prior year Deferred True-up 0.0 (3.6 )
Other permanent items 0.1 1.3
Change in valuation allowance (0.7 ) (35.5 )
Effective rate (0.0 )% (0.0 )%
As
of December 31, 2020 and 2019, the Company’s deferred tax assets consisted of the effects of temporary differences attributable
to the following (in thousands of dollars):
As of December 31,
Deferred Tax Assets
Net operating loss carryovers $ 2,025 $ 1,681
Fixed assets
Accrued compensation
Reserves
Intangible assets 4,038 4,826
Business interest limitation
Total deferred tax assets 7,019 6,998
Less: valuation allowance (7,019 ) (6,998 )
Deferred tax assets, net of valuation allowance $ 0 $ 0
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
6 - Income Taxes (continued)
In
accordance with applicable U.S. tax laws, the Spin Off as described in Note 1 was determined to result in a taxable gain to Inpixon.
Inpixon made an election pursuant to the Internal Revenue Code Section 336(e) to treat the Distribution as a sale of assets. Accordingly,
the tax effects of the changes in the tax basis of assets and liabilities, as offset by a valuation allowance, have been recognized
in equity.
As of December 31, 2020 and 2019, the Company had approximately $8.3 million and $6.3 million, respectively, of U.S. federal net operating loss (“NOL”) carryovers available to offset future taxable income. As of December 31, 2020 and 2019, the Company had approximately $7.7 million and $6.2 million, respectively, of state NOL carryovers available to offset future taxable income. NOL’s generated prior to the Distribution were charged off to equity. The NOL’s generated in 2019 and 2020 do not expire and have an indefinite life. Although some state NOLs begin to expire in 2038, $7.2 million state NOLs have an indefinite life.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In assessing the realization of deferred tax assets, management
considers, whether it is “more likely than not”, that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become deductible.
ASC 740, “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. After consideration of all the information available, management believes that uncertainty exists with respect to future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of December 31, 2020 and 2019. As of December 31, 2020 and 2019 the change in valuation allowance was $20 thousand and $1.9 million, respectively.
ASC
740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and
prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not
to be sustained upon examination by taxing authorities. ASC 740 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. The Company is required to file federal
and state income tax returns. Based on the Company’s evaluation, it has been concluded that there are no material uncertain
tax positions requiring recognition in the Company’s consolidated financial statements for the years ended December 31,
2020 and 2019.
The
Company’s policy for recording interest and penalties associated with unrecognized tax benefits is to record such interest
and penalties as interest expense and as a component of general and administrative expense, respectively. There were no amounts
accrued for interest or penalties for the years December 31, 2020 and 2019. Management does not expect any material changes in
its unrecognized tax benefits in the next year.
The
Company operates in multiple tax jurisdictions and, in the normal course of business, its tax returns are subject to examination
by various taxing authorities. Such examinations may result in future assessments by these taxing authorities. The Company is
subject to examination by U.S. tax authorities beginning with the year ended December 31, 2018. Currently, the Company is not
subject to any examinations.
On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increasing the limitation under Section 163(j) of the Internal Revenue Code of 1986, as amended (the “IRC”) for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits The CARES Act did not have a material impact on the Company.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
7 - Related Party Note
On December 31, 2018, the Company entered into a note purchase agreement with Inpixon (the “Note Purchase Agreement”) pursuant to which Inpixon, the Company’s former parent, agreed to purchase from the Company at a purchase price equal to the Loan Amount (as defined below), a secured promissory note (the “Related Party Note”) for up to an aggregate principal amount of $3,000,000 (the “Principal Amount”), including any amounts advanced through the date of the Related Party Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with the Prior Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent (10%) per annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount. In addition, the Company agreed to pay $20,000 to Inpixon to cover Inpixon’ legal fees, accounting costs, due diligence, monitoring and other transaction costs incurred in connection with the purchase and sale of the Related Party Note (the “Transaction Expense Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any amounts disbursed to the Company and the Transaction Expense Amount.
The
Company may borrow under the Related Party Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest,
not to exceed the Principal Amount at any one time.
All
sums advanced by Inpixon to the maturity date pursuant to the terms of the Note Purchase Agreement will become part of the aggregate
Loan Amount underlying the Related Party Note. All outstanding principal amounts and accrued unpaid interest owing under the Related
Party Note shall become immediately due and payable on the earlier to occur of (i) December 31, 2020 (the “Maturity Date”),
(ii) at such date when declared due and payable by Inpixon upon the occurrence of an Event of Default (as defined in the Related
Party Note), or (iii) at any such earlier date as set forth in the Related Party Note. All accrued unpaid interest shall be payable
in cash.
Pursuant
to the terms of the Related Party Note, the Company granted Inpixon, subject to any and all Payplant Liens (as defined in the
Related Party Note) and Permitted Liens (as defined in the Related Party Note), a continuing first priority security interest
in all assets of the Company whether owned as of the date of the Related Party Note or subsequently acquired, including all proceeds
therefrom (collectively, the “Collateral”) to secure the payment of the Related Party Note and all other loans and
advances (including all renewals, modifications and extensions thereof) and all obligations of any and every kind and nature of
the Company to Inpixon, whether arising prior to, under or after the Related Party Note, however incurred or evidenced, plus all
interest, reasonable costs, reasonable expenses and reasonable attorneys’ fees, which may be made or incurred by Inpixon
in the disbursement, administration, and collection of such amounts, and in the protection, maintenance, and liquidation of the
Collateral.
On
February 4, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any time
under the Related Party Note from $3,000,000 to $5,000,000. On April 15, 2019, the Related Party Note was amended to increase
the maximum principal amount that may be outstanding at any time under the Related Party Note from $5,000,000 to $8,000,000.
On
May 22, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any time
under the Related Party Note from $8,000,000 to $10,000,000.
On March 1, 2020, the Related Party Note was amended to extend the maturity date from December 31, 2020 to December 31, 2022, to increase the default interest rate from 18% to 21% or the maximum rate allowable by law and to require a cash payment by the Company to Inpixon against the loan amount in an amount equal to no less than 6% of the aggregate gross proceeds raised following the completion of any financing, or series of related financings, in which the Company raises aggregate gross proceeds of at least $5,000,000.
On June 30, 2020, the “Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., and the Company acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security interest in the assets of the Company.
Inpixon was the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. entered into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. Inpixon agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note, with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement (the “Closing Date”), the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date. Nadir Ali, a member of the Company’s board of directors, is also Inpixon’s Chief Executive Officer and a member of its board of directors. The transactions disclosed herein were approved by all of the disinterested members of the Company’s board of directors. See Note 7 -Long-Term Debt for further discussion on the Promissory Note Assignment.
The proceeds received and interest and legal costs accrued, in accordance with the Related Party Note as of December 31, 2020 is $9,043,859.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
8 - Debt
Short
Term Debt as of December 31, 2020 and 2019 consisted of the following (in thousands):
As
of December 31,
Short-Term Debt
Chicago
Venture Convertible Note payable (A)
$
$
Wells Fargo N.A. SBA
loan (B)
-
Revolving Credit Facility
(C)
Total Short-Term
Debt
$ 1,515
$
Long
Term Debt as of December 31, 2020 and 2019 consisted of the following (in thousands):
Long-Term
Debt
Systat
Promissory Note Payable (D) $ 5,390 $ -
(A) Chicago
Venture Convertible Note Payable
On
December 31, 2018, the Company issued a $625,000 principal face amount convertible promissory note (the “Convertible Note”)
to an investor, which yielded net proceeds of $500,000 to the Company pursuant to a Securities Purchase Agreement, dated as of
December 31, 2018, by and between the Company and the investor. The Convertible Note bears interest at the rate of 10% per year
and is due and payable 10 months after the date of issuance. The Convertible Note carries an original issue discount of $105,000
and the Company agrees to pay $20,000 to the Lender to cover its transaction costs incurred with the purchase and sale of the
Convertible Note.
The agreement states that the Lender has the right to convert all or part of the outstanding balance into fully paid and non-assessable common stock. The conversion formula is as follows: The number of shares will equal the amount of the outstanding note balance being converted divided by $5.00 per share. The Company determined since the value of the underlying equity on the commitment date was $2.29 per share, was less than the Lender Conversion Price $5.00, the Company determined there was no beneficial conversion feature.
The Lender Conversion Price is subject to certain adjustment such as down-round features whereby the agreement notes that if the Company were to sell, issue or grant any common stock, option to purchase common stock, right to reprice, preferred shares convertible into common stock, or debt, warrants, options or other securities which are convertible, exercisable, or exchangeable for shares of common stock at a price per share less than the Lender Conversion Price, then the Lender Conversion Price shall be reduced to equal the new lower price, subject to a floor of $1.00 per share. When and if there is an adjustment under the down-round provision, the Company will analyze the accounting treatment of the adjustment.
Redemption
Redemptions
may occur at any time after the 6-month anniversary of the date of issuance of the Convertible Note with a minimum redemption
price equal to the Conversion Price. If the conversion rate is less than the market price, then the redemptions must be made in
cash.
On
July 5, 2019 the Company issued 22,857 shares of common stock for the settlement of approximately $20,000 on its short-term debt.
On
October 15, 2019, the Company and CVP entered into a waiver agreement (the “Waiver Agreement”) in connection with
CVP delivery of a redemption notice for $7,600 (the “Redemption Amount”) in accordance with that certain Securities
Purchase Agreement, dated as of December 31, 2018, and that certain Convertible Promissory Note issued to the Lender by the Company
on December 31, 2018 (the “Note”). Pursuant to the Waiver Agreement, the Lender agreed to waive certain Equity Conditions
Failures (as defined in the Note) in order to receive shares of common stock of the Company instead of cash to satisfy the Redemption
Amount. In addition, the Company and the Lender agreed to issue such shares below the minimum redemption conversion price of $1.00
at a modified redemption conversion price equal to $0.210140, which is equal to 70% multiplied by the lowest closing bid price
during the twenty (20) trading days immediately preceding this redemption. Accordingly, the Company issued the Lender 36,166 shares
of common stock to satisfy the Redemption Amount.
Short-Term
Note Extension
On July 7, 2020, the Company entered into a note extension (the “Extension”) with Chicago Venture Partners, L.P. (“CVP”), pursuant to which the maturity date of that certain Convertible Promissory Note, issued by the Company to CVP on December 31, 2018 (the “Note”), was extended to December 31, 2020.
See
Note-12 Subsequent Events, regarding extension of the promissory note maturity date to March 31, 2021 and settlement of debt for issuance of common stock.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
8 - Short Term Debt (continued)
(B)
Wells Fargo N.A. SBA -Payroll Protection program
On May 7, 2020, the Company was granted a loan (the “Loan”) from Wells Fargo, N.A. in the principal amount of $349,693, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020.
The
Loan, which was in the form of a Note dated May 3, 2020 issued by the Company (the “Note”), matures on May 3, 2022
and bears interest at a rate of 1.0% per annum, payable monthly commencing on November 1, 2020. The Note may be prepaid by the
Company at any time prior to maturity without payment of any premium. Funds from the Loan may only be used to retain workers and
maintain payroll or make mortgage payments, lease payments and utility payments. The Company intends to use the entire Loan amount
for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act.
(C) Revolving
Credit Facility
On
August 31, 2018, the Company entered in an agreement with Payplant Alternatives Funds LLC, pursuant to which Payplant may purchase
from the Borrowers, in Payplant’s sole and absolute discretion, Eligible Receivables, as that term is defined in the agreement,
in exchange for cash advances, subject to the terms and conditions in the agreement.
On
September 21, 2018, the Company entered into the Payplant Loan and Security Agreement (the “Loan Agreement”) with
Payplant LLC as agent for Payplant Alternatives Fund LLC (“Payplant”). Pursuant to the Loan Agreement and the terms
set forth in the form of promissory note attached as Exhibit A to the Loan Agreement, (the “Note”), Payplant, in its
sole and absolute discretion, may loan money to the Borrowers on the basis of purchase orders or invoices issued by the Borrowers
to customers for goods and services provided. The term of any loan made to the Borrowers may not exceed 360 days. The principal
amount of any loan will accrue interest at a 30-day rate of 2%, calculated per day. Upon the occurrence and during the continuance
of an Event of Default, as defined in the Loan Agreement, interest will accrue at a rate equal to the interest rate plus 0.42%
per 30 days. In no event will interest, when combined with all fees that may be characterized as interest, exceed the Maximum
Rate, as defined in the Loan Agreement. All computations of interest will be made on the basis of a 360-day year. The Borrowers
will have the right to prepay any loan upon the payment of a premium of at least 30 days of interest.
As
security for the repayment of any loans and the performance of the Borrowers’ Obligations, as defined in the Loan Agreement,
the Borrowers granted to Payplant a security interest in the Collateral, as defined in the Loan Agreement. As of May 22, 2020
the Company terminated its services with Payplant Alternatives Funds LLC.
Non-Recourse
Factoring and Security Agreement
Effective
as June 19, 2020 (the “Effective Date”), the Company and SouthStar Financial, LLC (“SouthStar”) entered
into a Non-Recourse Factoring and Security Agreement (the “Agreement”) pursuant to which SouthStar may purchase receivables
from the Company (the “Purchased Receivables”) for a price not to exceed 85% of the face value of the Purchased Receivables
or a lesser percentage agreed upon between the Company and SouthStar. In consideration of SouthStar’s purchase of the Purchased
Receivables, the Company will pay to SouthStar an amount equal to 0.8% of the face amount of the Purchased Receivables for the
first 10-day period after payment for the Purchased Receivables is transmitted to SouthStar plus 0.9% for each additional 10-day
period or part thereof, calculated from the date of purchase until payments received by SouthStar in collected funds on the Purchased
Receivables equals the purchase price of the Purchased Receivables plus all charges due SouthStar from the Company at the time.
An additional 1.0% per 10-day period will be charged for invoices exceeding 60 days from invoice date.
As of December 31, 2020, the Company has financed approximately $323,000 of its receivables.
(D)
Systat Promissory Note Payable
On June 30, 2020, the Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., and the Company acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security interest in the assets of the Company.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
8 - Short Term Debt (continued)
Inpixon is the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. are entering into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. (the “License Agreement”). Inpixon has agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note (each a “Partitioned Note” and collectively, the “Partitioned Notes”), with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note to be in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement, the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date.
The
Promissory Note balance outstanding as of December 31, 2020 is $5,390,068.
(E)
Future Receivables Agreement
On
January 21, 2020, SGS and GCF Resources LLC (“GCF”) entered into a Future Receivables Agreement pursuant to which
GCF agreed to purchase receivables from SGS with a value of $497,000 for the sum of $350,000. The terms of the agreement call
for weekly installments of $20,710, until paid in full. On April 27, 2020, the Company paid off its GCF loan balance.
Note
9 - Credit Risk and Concentrations
Financial
instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash. The Company performs
certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company
believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based
upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently,
believes that its accounts receivable credit risk exposure beyond such allowances is limited.
The
Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. The
Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash.
The
following table sets forth the percentages of revenue derived by the Company from those customers, which accounted for at least
10% of revenues during the years ended December 31, 2020 and 2019 (in thousands of dollars):
For
the Years Ended
December 31
$
%
$
%
Customer
A
5,208
%
3,305
%
Customer B
-
-
%
Customer C
-
-
%
Customer D
3,941
%
-
-
As
of December 31, 2020 and 2019, Customer A represented approximately 83% and 75%, of total accounts receivable, respectively.
For
the year ended December 31, 2020, three vendors represented approximately 37%, 36% and 23% of total purchases. Purchases from
these vendors during the year ended December 31, 2020 were $3.3 million, $3.2 million and $2.0 million. For the year ended December
31, 2019, four vendors represented approximately 31%, 23%,15% and 10% of total purchases. Purchases from these vendors during
the year ended December 31, 2018 were $1.3 million, $1.0 million, $0.6 million and $0.4 million.
As of December 31, 2020, three vendors represented
approximately 34%, 16% and 12% of total accounts payable. As of December 31, 2019, three vendors represented approximately 28%,
13% and 13% of total accounts payable.
Note
10 - Commitments and Contingencies
Operating
Leases/Right of -Use Assets and Lease Liability
On October 1, 2018, the Company’s principal executive offices moved to 13880 Dulles Corner Lane, Suite 175, Herndon, Virginia 20171. We lease these premises, which consist of approximately 5,800 square feet, pursuant to a lease that expires on November 30, 2021. Provided that there is no event of default under this lease, rent will be abated for the last 8 calendar months of the term prior to the expiration date. The total amount of rent expense under the leases is recognized on a straight-line basis over the term of the leases. As of December 31, 2020 and 2019, prepaid rent was $10,441 and $22,590, respectively. The company has no other operating or financing leases with terms greater than 12 months.
As noted in Note 2 Recent Accounting Standards, to the financial statements, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases (topic 842) effective January 1, 2020. The Company recorded a right-of use-asset and operating lease obligation of $217,000. The Company determined the lease liabilities using the Company’s estimated incremental borrowing rate of 10% to estimate the present value of the remaining lease payments.
The remaining lease term is .92 year (11 months) and the discount rate is 10%.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
10 - Commitments and Contingencies (continued)
Future minimum lease payments under the above operating lease commitments are as follows (in thousands of dollars):
Years Ending December 31, Amount
Less: Imputed Interest (5 )
Present value of our lease liability $ 101
Litigation
Certain
conditions may exist as of the date the financial statements are issued which may result in a loss to the Company, but which will
only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and
such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that
are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements.
If
the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable
but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would
be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business,
financial position, and results of operations or cash flows.
On
February 20, 2019, Inpixon, the Company and Atlas Technology Group, LLC (“Atlas”) entered into a settlement agreement
(the “Settlement Agreement”) in connection with the satisfaction of an arbitration award in an aggregate amount of
$1,156,840 plus pre-judgment interest equal to an aggregate of $59,955 (the “Award”) granted to Atlas following arbitration
proceedings arising out of an engagement agreement, dated September 8, 2016, by and between Atlas and Inpixon as well as its subsidiaries,
including the predecessor to the Company (the “Engagement Agreement”).
Pursuant
to the Settlement Agreement, Atlas agreed to (a) reduce the Award by $275,000 resulting in a net award of $941,795 (the “Net
Award”) and (b) accept an aggregate of 749,440 shares of freely-tradable common stock of Inpixon (the “Settlement
Shares”), in satisfaction of the Award, which was determined by dividing 120% of the Net Award by $1.508, which was the
“minimum price,” as defined under Nasdaq Listing Rule 5635(d), of Inpixon’s common stock. The closing occurred
on February 21, 2019.
The
Award is deemed satisfied in full and the parties are deemed to have released each other from any claims arising out of the
Engagement Agreement.
In
connection with the Spin-off, the Company and Inpixon each agreed pursuant to the terms and conditions of that certain Separation
and Distribution Agreement, dated August 7, 2018, as amended, that 50% of the costs and liabilities related to the arbitration
action arising from the Engagement Agreement would be shared by each party following the spin-off. As a result, the Company is
obligated to indemnify Inpixon for half of the total amount paid by Inpixon to satisfy the Award.
In
the event that the total net proceeds received by Atlas or its designees from the sale of the Settlement Shares (exclusive of
brokerage fees) exceeds the amount of the Net Award, Atlas agreed to deliver an amount equal to the difference between the sale
proceeds and the Net Award to the legal counsel for Inpixon and the Company to be applied against fees incurred in connection
with the arbitration and the Settlement Agreement.
The
balance of this obligation as of December 31, 2020 including interest is $682,026.
As of December 31,2020, the Company is subject to a claim for non-payment by a vendor for approximately $732,000 including interest which has been accrued for as of December 31, 2020 and is recorded in Accounts Payable and Accrued Liabilities.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
10 - Commitments and Contingencies (continued)
Gain
on Earnout
Under
the terms of the asset purchase agreement between Integrio and Emtec Federal, LLC (its wholly owned subsidiary) (collectively,
the “Seller”) and Inpixon and SGS (collectively, the “Buyer”), the Seller was eligible for an earnout
that was included as part of the purchase consideration. During 2019 the Company determined that the Seller was ineligible for
a portion of the earnout as the Seller did not meet the terms of the earnout provisions under the agreement and therefore recorded
a gain on earnout of $62,000 which is included in the operating expenses section of the consolidated statement of operations.
Note
11 - Stockholders’ Deficit
Authorized
capital
The
Company is authorized to issue 500,000,000 shares of common stock, $0.00001 par value, and 10,000,000 shares of preferred stock,
$0.00001 par value. The holders of the Company’s common stock are entitled to one vote per share. As of December 31, 2020,
500,000,000 common stock shares authorized; 485,423 shares were issued and 410,044 shares are outstanding. No preferred stock
has been designated or issued.
Equity Incentive Plan
On July 30, 2018, the board of directors of the Company and its sole director approved the Company’s 2018 Equity Incentive Plan (the “2018 Plan”), which enables the Company to grant stock options, share appreciation rights, restricted stock, restricted stock units, share awards, performance unit awards, and cash awards to associates, directors, consultants, and advisors of the Company and its affiliates, and to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company. Stock options granted under the 2018 Plan may be non-qualified stock options or incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986. Each option, or portion thereof, that is not an incentive stock option, shall be considered a non-qualified option. The option price must be at least 100% of the fair market value on the date of grant and if an Incentive Stock Option is issued to a 10% or greater shareholder the grant must be 110% of the fair market value on the date of the grant. The 2018 Plan is to be administered by the Board, which shall have discretion over the awards and grants there under. The aggregate maximum number of shares of common stock for which stock options or awards may be granted pursuant to the 2018 Plan is 80,000, which number will be automatically increased on the first day of each quarter, beginning on January 1, 2019 and for each quarter thereafter, by a number of shares of common stock equal to the least of (i) 10,000 shares,(ii) 10% of the shares of common stock issued and outstanding on that date, or (iii) a lesser number of shares that may be determined by the board. No awards may be issued after July 30, 2028. As of December 31, 2020, there were no awards outstanding under the plan, except for an outstanding option granted to the CEO to purchase up to 17 shares of common stock. As of December 31, 2020, there were 83,027 securities available for future issuance under the 2018 Plan.
SYSOREX,
INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note
11 - Stockholders’ Deficit (continued)
Common
Stock
On August 31, 2018, as part of the Spin-off, the Company entered into a Trademark License Agreement with Sysorex Consulting, Inc. for use of the mark “Sysorex”. As consideration for the license, the Company issued 10,000 shares of its common stock with a fair value of $40,000 to Sysorex Consulting, Inc. and has agreed to issue to Sysorex Consulting, Inc. 2,500 shares of its common stock on each anniversary of the completion of the Spin-off until the License Agreement is terminated. The Company has expensed the licensing fee during the year ended December 31, 2018. The Company is currently in negotiations on future issuances of common stock.
During the year ended December 31, 2019, the Company issued 59,023 shares of common stock with issuance date fair values of approximately $28,000 for payment of short-term debt. In 2020, the Company issued 0 shares of common stock.
Treasury Stock
As part of the Spin-off, and in connection with the initial Distribution of its common stock, the Company has 117,917 shares of common stock reserved for issuance in treasury (a) for the holders of certain Parent warrants who will be entitled to receive shares of the Company’s common stock if the warrants are exercised, and (b) for the holders of Parent securities that were subject to beneficial ownership limitations in connection with the distribution and for future issuances.
During the year ended December 31, 2019, the Company reissued 5,871 shares of common stock from treasury in connection with the exercise of Parent warrants. In 2020, the Company issued 0 shares of common stock from treasury in connection with the exercise of Parent warrants.
Reverse Stock Split
On July 25, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of the State of Nevada to affect a 1-for-100 reverse stock split of the Company’s issued and outstanding shares of common stock, effective as of July 30, 2019. The financial statements and accompanying notes give effect to the 1-for-100 reverse stock split as if they occurred at the first period presented. There was no change to reported net loss in any period presented.
Note 12 - Subsequent Events
On January 21, 2021, the Company entered into a note extension (the “Extension”) with Chicago Venture Partners, L.P. (“CVP”), pursuant to which the maturity date of that certain Convertible Promissory Note, issued by the Company to CVP on December 31, 2018 (the “Note”), was extended to March 31, 2021.
On January 22, 2021, the Company issued 40,616 shares of common stock for the settlement of $7,250 on its short-term debt with CVP.
SYSOREX, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Note 12 - Subsequent Events (continued)
On March 4, 2021, the Company amended the employment agreement with its Chief Financial Officer, Vincent Loiacono. The amendment increases the base salary to $250,000 per year and amends the Company’s obligations with respect to indemnification and insurance. This description of the Amendment is a summary only, is not intended to be complete, and is qualified in its entirety by reference to the full text of the Amendment, a copy of which is filed herewith as Exhibit 10.28 and which is incorporated herein by reference.
On March 9, 2021, Sysorex, Inc. (the “Company”) and Chicago Venture Partners, L.P. (the “Lender”) entered into a waiver agreement (the “Waiver Agreement”) in connection with the Lender’s delivery of a redemption notice for $11,000 (the “Redemption Amount”) in accordance with that certain Securities Purchase Agreement, dated as of December 31, 2018, and that certain Convertible Promissory Note issued to the Lender by the Company on December 31, 2018, as amended (the “Note”). Pursuant to the Waiver Agreement, the Lender agreed to waive certain Equity Conditions Failures (as defined in the Note) in order to receive shares of common stock of the Company instead of cash to satisfy the Redemption Amount. In addition, the Company and the Lender agreed to issue such shares below the minimum redemption conversion price at a modified redemption conversion price equal to $0.252 per share, which is equal to 70% multiplied by the lowest closing bid price during the twenty (20) trading days immediately preceding this redemption. Accordingly, the Company issued the Lender 43,651 shares of common stock to satisfy the Redemption Amount, which issuance occurred on or around March 15, 2021.
On March 11, 2021, the Company and Quantum Lexicon, LLC (the "Lender") entered into a Commercial Loan Agreement and related transaction documents (“Term Loan”) dated as of March 11, 2021 providing for the issuance of a Secured Promissory Note in the principal amount of $125,000 (the "Note"). The Note is secured pursuant to a Pledge Agreement dated as of March 11, 2021 (the “Pledge Agreement”) by a pledge of the Company’s common stock equal to three hundred percent (300%) of the principal amount and accrued interest outstanding from time to time under the Note, which may be issued under certain conditions (“Events of Default”). The Company has set aside 625,000 shares (the “Set-aside Shares”) of Common Stock for issuance to the Lender upon uncured Events of Default. The Term Loan matures in ninety (90) days and bears interest at the rate of one percent (1%) per month. The Company may prepay principal and accrued interest at any time without penalty. The Lender funded the Term Loan on March 15, 2021.
On March 19, 2021, the Company, Systat and First Choice International Company, Inc. (“Lender”) entered into a Letter Agreement (“Letter Agreement”), providing for the advance payment by the Lender of $2,000,000 (“Advance”) to Systat on behalf of the Company. In consideration of the Advance, Systat agreed it would (a) enter into a Securities Settlement Agreement (“SSA”) with the Company for the cancellation of three promissory notes owed (or to be owed) by the Company in the aggregate principal amount of $3,300,000 (“Notes One - Three”) to Systat; and (b) assign a fourth note dated June 30, 2020, in the principal amount of $3,000,000 (“Fourth Note”) to Lender to be held as collateral pending repayment by the Company of the Advance as further set forth below. In further consideration of the Advance, under the terms of an SSA (a form SSA is attached to the Letter Agreement), Systat has agreed that upon the Company’s issuance of shares of the Company’s restricted common stock to Systat in full satisfaction of the $3,300,000 in promissory notes and accrued interest owed to Systat, all indebtedness owed to Systat pursuant to Notes One - Three (specifically excluding the debt arising from the Fourth Note) will be fully extinguished and cancelled. The number of shares to be issued will be determined at a later date. The description of the Letter Agreement is a summary only, is not intended to be complete, and is qualified in its entirety by reference to the full text of the Letter Agreement, a copy of which is filed herewith as Exhibit 10.31 and which is incorporated herein by reference. The Company and the Lender are continuing to negotiate the terms of a loan agreement providing for repayment by the Company of the Advance as well as the terms of a second SSA to be entered into between the Lender and the Company whereby the Lender will cancel the Fourth Note on substantially similar terms as will be negotiated between the Company and Systat for Notes One-Three, except that the shares that are issued by the Company in consideration for cancellation of the Fourth Note shall be held by the Company’s transfer agent as collateral for the Advance and will only be released to the Lender in the event that the Company does not comply with the terms of the loan agreement or otherwise timely repay the Advance to Lender inclusive of accrued interest and any fees.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM
9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM
9A: CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed with the objective of providing reasonable assurance that information
required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As
of December 31, 2020, the end of the period covered by this report, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e).
This type of evaluation is performed on a quarterly basis so that conclusions of management, including our Chief Executive Officer
and Chief Financial Officer, concerning the effectiveness of the disclosure controls can be reported in our periodic reports on
Form 10-Q and Form 10-K. The overall goals of these evaluation activities are to monitor our disclosure controls and to modify
them as necessary. We intend to maintain the disclosure controls as dynamic systems that we adjust as circumstances merit. Based
on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of the end of the period covered by this report.
Management’s
Report on Internal Control over Financial Reporting
Our
principal executive officer and principal financial officer are responsible for establishing and maintaining internal control
over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under
the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers
and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:
● pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
● provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management
and our directors; and
● provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
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. Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk. Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company.
Management
has used the 2013 framework set forth in the report entitled “Internal Control-Integrated Framework” published
by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal
control over financial reporting. Management has concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2020.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f)
under the Exchange Act) during the fourth quarter of the last fiscal year that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM
9B: OTHER INFORMATION
Not
applicable.
PART
III

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM
10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 the Directors (the “Board”) and/or our Chief Executive
Officer.
Name
Age
Position
Nadir Ali
Director
Zaman Khan
Director, President
and Chief Executive Officer
Douglas Cole
Director
Vincent Loiacono
Chief Financial Officer
Nadir
Ali
Mr.
Ali has served as a member of our Board since March 2013. Mr. Ali has served as Chairman of our Board since August 2018. Mr. Ali
has also served as the sole member of the board of directors of SGS since August 2002. From November 2015 until the completion
of the Spin-off in August 2018, Mr. Ali served as the Chief Executive Officer of Sysorex. Since September 2011, Mr. Ali has served
as a member of the board of directors and the Chief Executive Officer of Inpixon (Nasdaq: INPX), a leading indoor positioning
and data analytics company, which was Sysorex’s parent company prior to the Spin-off. From July 2001 until August 2011,
Mr. Ali served as President of Sysorex Consulting, Inc. and its subsidiaries. From 1998 to 2001, Mr. Ali was the co-founder and
Managing Director of Tira Capital, an early stage technology fund. Immediately prior thereto, Mr. Ali served as Vice President
of Strategic Planning for Isadra, Inc., an e-commerce software start-up, which was acquired by VerticalNet. From 1995 through
1998, Mr. Ali was Vice President of Strategic Programs at Sysorex Information Systems, a computer systems integrator, which was
acquired by Vanstar Government Systems in 1997. Mr. Ali received a Bachelor of Arts degree in Economics from the University of
California at Berkeley in 1989. Mr. Ali’s valuable entrepreneurial, management, mergers and acquisitions and technology
experience together with his in-depth knowledge of the business of Sysorex led us to the conclusion that he should serve as a
member of our Board.
Zaman
Khan
Mr.
Khan has served as our Chief Executive Officer and 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.
Douglas
Cole
Mr. Cole has served as a member of our Board since December 2019. Mr. Cole has been a partner of Objective Equity LLC since 2005, a boutique investment bank focused on the high technology, data analytics and the mining sector. Mr. Cole currently serves on the Board of Directors of eWellness Healthcare Corporation (OTCQB: EWLL). He obtained his BA in Social Sciences from UC Berkeley in 1978. Mr. Cole’s extensive experience in global M&A and global distributions 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 no meeting during 2020 and acted through ten written consents. No officer or member of our board of directors was delinquent in filing any Section 16 reports during 2020. 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. Members of our Board are invited and encouraged to attend our annual meeting of stockholders.
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 not have a separately designated standing audit committee. The Board performs the functions of an audit committee, but no written
charter governs the actions of the Board when performing the functions that would generally be performed by an audit committee.
The Board 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 Board 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
and Nominations Committees
We
currently have no compensation or nominating committee or other Board committee performing equivalent functions. Currently, the
members of our Board participate in discussions concerning executive officer compensation and nominations to the Board.
Stockholder
Communications
The
Company does not have a process for security holders to send communications to the Board due to the fact that minimal
securities are traded.
Stockholder
Proposals and Director Nominations
Stockholder
proposals are reviewed by the Secretary for compliance with the requirements for such proposals set forth in Regulation 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/business-conduct-and-ethics/.
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.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM
11: EXECUTIVE COMPENSATION
Special
Note Regarding the Spin-off
This report discloses the compensation of our named executive officers based on compensation for the year ended December 31, 2020 (collectively, the “NEOs”).
Summary
Compensation Table
The following table summarizes the total compensation earned by each of our NEOs for the fiscal years ended December 31, 2020 and 2019.
Name
and Principal Position
Year
Salary
($)
Bonus
($)
Option
Awards
($)
All
Other
Compensation
($)
Total
($)
Zaman Khan,
$ 291,084
$ 200,000
$ -
$ -
$ 491,084
Chief Executive Officer
$ 291,099
$ 200,000
$ -
$ -
$ 491,099
Vincent Loiacono,
$ 171,136
$ 60,000
$ -
$ -
$ 231,136
Chief Financial Officer
$ 171,141
$ 60,000
$ -
$ -
$ 231,141
Employment
Agreements and Arrangements
Zaman
Khan
In connection with the Spin-off, on August 31, 2018, the Company entered into an Amended and Restated Employment Agreement with Zaman Khan, pursuant to which Mr. Khan acts as the Chief Executive Officer for the Company and as the President of SGS. The term of the agreement is 24 months. Mr. Khan is paid an annual salary of $300,000 a year for his services (the “Kahn Base Salary”). In addition to the Khan Base Salary, Mr. Khan receives a quarterly incentive bonus in the amount of $50,000 and is eligible to participate in any executive bonus pools, discretionary performance bonuses (based on targets or other performance objectives) or deferred compensation plans that the Company may establish in its sole discretion. Mr. Khan also receives medical, dental, and vision insurance coverage for him, his spouse and his children, to the same extent and on the same terms and conditions that such coverage is provided to other senior management employees of the Company and may participate in the Company’s 401(k) plan to the same extent and on the same terms and conditions that other senior management employees of the Company are permitted to participate. Mr. Khan is entitled to three weeks paid vacation per year and paid sick days to the same extent and on the same terms and conditions that the Company provides to its other senior management employees.
The
Company may, in its sole discretion, terminate the agreement, including for Just Cause, as defined in the agreement. Mr. Kahn
may resign from his employment as a result of a material diminution of his duties, responsibilities, authority, and position with
both the Company and SGS, or a material reduction in his compensation and benefits, or if he ceases to hold the position of Chief
Executive Officer at the Company after a Change of Control, as defined in the agreement (each a “Khan Termination Event”).
If the Company terminates the agreement without Just Cause or within 24 months following a Change of Control, or if Mr. Khan resigns
his position as a result of a Termination Event, the Company must: (i) continue to pay to Mr. Khan the Khan Base Salary, subject
to customary payroll practices and withholdings, for six months or for 12 months if he was employed for more than 24 months after
the Effective Date (subject to and conditioned upon Mr. Khan signing a full general release of any and all known and unknown claims
against the Company, SGS and their related parties) (the “Khan Severance Payment”); (ii) within 45 days of termination
or resignation, pay to Mr. Khan 100% of the value of any accrued but unpaid bonus that he otherwise would have received; (iii)
pay to Mr. Khan the value of any accrued but unpaid vacation time; (iv) pay to Mr. Khan any unreimbursed business expenses and
travel expenses that are reimbursable under the agreement; (v) pay an amount equal to the Company’s monthly COBRA premium
in effect on the date of termination for the number of months applicable to the Khan Severance Payment; and (vi) to the extent
required under the terms of any benefit plan the vested portion of any benefit under such plan. If the Company terminates the
agreement for Just Cause, Mr. Khan will receive only that portion of the Khan Base Salary, accrued but unused vacation pay, and
unreimbursed business expenses, that has been earned or have been incurred through the date of termination and, to the extent
required under the terms of any benefit plan, the vested portion of any benefit under such plan. Mr. Khan’s employment will
be terminated immediately upon (i) his Disability, as defined in the agreement, for a period exceeding 3 months in any twelve-month period, or (ii) his death. If Mr. Khan’s employment is terminated due to Disability or death, the Company will be
required to pay to him or his estate, unrelated to any amounts that he may receive pursuant to any short-term and long-term disability
plans or life insurance plans, the Khan Base Salary and accrued but unpaid vacation pay earned through the date of termination,
unreimbursed business expenses and to the extent required under the terms of any benefit plan, the vested portion of any benefit
under such plan.
Mr.
Khan has agreed to certain confidentiality, non-compete and non-solicitation provisions and the Company has agreed to indemnify
Mr. Khan for acts undertaken in the course of his service so long as (i) he acted in good faith and in a manner he believed to
be in, or not opposed to, the best interests of the Company and SGS, and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful, and (ii) his conduct did not constitute gross negligence or willful or wanton misconduct.
Vincent
Loiacono
In connection with the Spin-off, on August 31, 2018, the Company entered into an Employment Agreement with Vincent Loiacono, pursuant to which Mr. Loiacono acts as the Chief Financial Officer for the Company and SGS. Mr. Loiacono is paid an annual salary of $175,000 a year for his services (the “Loiacono Base Salary”). In addition to the Loiacono Base Salary, Mr. Loiacono receives a quarterly incentive bonus in the amount of $15,000 and is eligible to participate in any executive bonus pools, discretionary performance bonuses (based on targets or other performance objectives) or deferred compensation plans that the Company may establish in its sole discretion. Mr. Loiacono also receives medical, dental, and vision insurance coverage for him, his spouse and his children, to the same extent, and on the same terms and conditions that such coverage is provided to other senior management employees of the Company and may participate in the Company’s 401(k) plan to the same extent and on the same terms and conditions that other senior management employees of the Company are permitted to participate. Mr. Loiacono is entitled to three weeks paid vacation per year and paid sick days to the same extent and on the same terms and conditions as the Company provides to its other senior management employees.
The
Company may, in its sole discretion, terminate the agreement, including for Just Cause, as defined in the agreement. Mr. Loiacono
may resign from his employment as a result of a material diminution of his duties, responsibilities, authority, and position with
both the Company and SGS, or a material reduction in his compensation and benefits, or if he ceases to hold the position of Chief
Financial Officer at the Company after a Change of Control, as defined in the agreement (each a “Loiacono Termination Event”).
If the Company terminates the agreement without Just Cause or within 24 months following a Change of Control, or if Mr. Loiacono
resigns his position as a result of a Termination Event, the Company must: (i) continue to pay to Mr. Loiacono the Loiacono Base
Salary, subject to customary payroll practices and withholdings, for one month for every 3 months of employment after the Effective
Date up to a maximum of 6 months (subject to and conditioned upon Mr. Loiacono signing a full general release of any and all known
and unknown claims against the Company, SGS and their related parties) (the “Loiacono Severance Payment”); (ii) within
45 days of termination or resignation, pay to Mr. Loiacono 100% of the value of any accrued but unpaid bonus that he otherwise
would have received; (iii) pay to Mr. Loiacono the value of any accrued but unpaid vacation time; (iv) pay to Mr. Loiacono any
unreimbursed business expenses and travel expenses that are reimbursable under the agreement; (v) pay an amount equal to the Company’s
monthly COBRA premium in effect on the date of termination for the number of months applicable to the Loiacono Severance Payment;
and (vi) to the extent required under the terms of any benefit plan the vested portion of any benefit under such plan. If the
Company terminates the agreement for Just Cause, Mr. Loiacono will receive only that portion of the Loiacono Base Salary, accrued
but unused vacation pay, and unreimbursed business expenses, that has been earned or have been incurred through the date of termination
and, to the extent required under the terms of any benefit plan, the vested portion of any benefit under such plan. Mr. Loiacono’s
employment will be terminated immediately upon (i) his Disability, as defined in the agreement, for a period exceeding 3 months
in any twelve-month period, or (ii) his death. If Mr. Loiacono’s employment is terminated due to Disability or death, the
Company will be required to pay to him or his estate, unrelated to any amounts that he may receive pursuant to any short-term
and long-term disability plans or life insurance plans, the Loiacono Base Salary and accrued but unpaid vacation pay earned through
the date of termination, unreimbursed business expenses and to the extent required under the terms of any benefit plan, the vested
portion of any benefit under such plan.
Mr.
Loiacono has agreed to certain confidentiality, non-compete and non-solicitation provisions and the Company has agreed to indemnify
Mr. Loiacono for acts undertaken in the course of his service so long as (i) he acted in good faith and in a manner he believed
to be in, or not opposed to, the best interests of the Company and SGS, and, with respect to any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful, and (ii) his conduct did not constitute gross negligence or willful or wanton misconduct.
Outstanding
Equity Awards at Fiscal Year-End
Other
than as set forth below, there were no outstanding unexercised options, unvested stock, and/or equity incentive plan awards issued
to our NEOs as of December 31, 2020. All share information described below relates to Sysorex common stock.
Name
Grant
Date
Number
of
securities
underlying
unexercised
options (#)
exercisable
Number
of
securities
underlying
unexercised
options (#)
unexercisable
Option
exercise
price
($)
Option
expiration
date
Zaman Khan
02/03/2017 (1)
22.76
02/03/2027
(1) This option vests 1/48th
per month at the end of each month starting on February 3, 2017, the grant date.
Securities
Authorized for Issuance under Equity Compensation Plans
On
July 30, 2018, Inpixon, as the sole stockholder of Sysorex, approved the Sysorex, Inc. 2018 Equity Incentive Plan (the “Plan”)
pursuant to which, upon completion of the Spin-off, Sysorex may issue up to 80,000 shares of its common stock which number will
be automatically increased on the first day of each quarter, beginning on January 1, 2019 and for each quarter thereafter, by
a number of shares of common stock equal to the least of (i) 10,000 shares, (ii) 10% of the shares of common stock issued and
outstanding on that date, or (iii) a lesser number of shares that may be determined by the Board. The purpose of the Plan is to
(x) to align the interests of Sysorex’s stockholders and the recipients of awards under the Plan by increasing the proprietary
interest of such recipients in Sysorex’s growth and success, (y) to advance the interests of Sysorex by attracting and retaining
directors, officers, employees and other service providers and (z) to motivate such persons to act in the long-term best interests
of Sysorex and its stockholders. As of December 31, 2020, there were 83,027 securities available for future issuance under the
2018 Plan.
Plan
Category
Number
of
securities
to be issued
upon
exercise of
outstanding
options
(a)
Weighted-
average
exercise
price of
outstanding
(b)
Number
of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column a)
(c)
Equity compensation
plans approved by security holders
(1)
$ 32.70
83,008
Equity compensation
plans not approved by security holders
-
-
-
Total
$ 32.70
83,008
(1) These
outstanding options were assumed by the Company in connection with the Spin-off.
The
following discussion summarizes the material terms of the Plan. This discussion is not intended to be complete and is qualified
in its entirety by reference to the full text of the Plan, which is included as an exhibit to this registration statement.
Administration
The
Plan will be administered by a committee designated by the Board, provided, however, that if the Board fails to designate a committee,
the Board will administer the Plan. The committee has the authority to authorize awards to eligible persons, including employees
(including our executive officers), directors and other service providers. The committee has the authority to determine the terms
of awards, including exercise and purchase price, the number of shares subject to awards, the value of our common stock, the vesting
schedule applicable to awards, the form of consideration, if any, payable upon exercise or settlement of an award and the terms
of award agreements for use under the Plan.
All
grants under the Plan will be evidenced by an award agreement that will incorporate the terms and conditions of the Plan as the
committee deems necessary or appropriate.
Types
of Awards
The
Plan provides for the granting of (i) options to purchase shares of our common stock in the form of Incentive Stock Options or
Nonqualified Options, (ii) stock appreciation rights (SARs) in the form of Tandem SARs or Free-Standing SARs, (iii) share awards
in the form of Bonus Shares, Restricted Shares or Restricted Share Units, (iv) Performance Units and (v) Cash-Based Awards.
● Incentive
and Nonqualified Stock Options. The committee determines the exercise price of each stock option. The exercise price of an
NQSO may not be less than the fair market value of our common stock on the date of grant. The exercise price of an incentive stock
option may not be less than the fair market value of our common stock on the date of grant if the recipient holds 10% or less
of the combined voting power of our securities, or 110% of the fair market value of a share of our common stock on the date of
grant otherwise.
● Stock
Grants. The committee may grant stock, including restricted stock, to any eligible person. The stock grant will be subject
to the conditions and restrictions determined by the committee. The recipient of a stock grant shall have the rights of a stockholder
with respect to the shares of stock issued to the holder under the Plan.
● Stock-Based
Awards. The committee may grant other stock-based awards, including SARs and restricted share units, with terms approved by
the committee, including restrictions related to the awards. The holder of a stock-based award shall not have the rights of a
stockholder.
● Performance
Unit Awards. The committee may grant performance unit awards. A performance unit is a right to receive, contingent upon
the attainment of specified performance measures within a specified performance period, a specified cash amount or, in lieu thereof
and to the extent set forth in the applicable award agreement, shares having a fair market value equal to such cash amount.
Coverage
Eligibility
The
committee determines the individuals who are eligible to receive awards from the Plan.
Termination
of Service
Upon
termination of an award recipient’s service, the disposition of any award shall be determined by the committee and be set
forth in the award agreement.
Transferability
Awards under the Plan may not be transferred except by will or by the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company or, to the extent expressly permitted in the agreement relating to such award, to the holder’s family members, a trust or entity established by the holder for estate planning purpose or a charitable organization designated by the holder, in each case, without consideration.
Adjustment
In
the event of a stock dividend, stock split, recapitalization or reorganization or other change in the capital structure, the committee
will make appropriate adjustments to the awards.
Change
in Control
In
the event of a Change in Control, as defined in the Plan, the Board, in its sole discretion, may (i) allow the immediate exercise
of awards subject to vesting or deem lapsed any restriction period or performance period to which an award is subject, (ii) provide
that some or all outstanding awards shall terminate without consideration as of the date of such Change in Control, (iii) require
that shares of the corporation or other entity resulting from such Change in Control, or a parent thereof, be substituted for
some or all of the shares subject to an outstanding award, with an appropriate and equitable adjustment to such award as shall
be determined by the Board, and/or (iv) require outstanding awards, in whole or in part, to be surrendered to the Company by the
holder, and to be immediately cancelled by the Company, and to provide for the holder to receive (A) a cash payment in an amount
equal to (1) in the case of an option or an SAR, the number of shares then subject to the portion of such option or SAR surrendered
multiplied by the excess, if any, of the fair market value of a share as of the date of the Change in Control, over the purchase
price or base price per share subject to such option or SAR, (2) in the case of an award of shares, the number of shares then
subject to the portion of such award surrendered multiplied by the fair market value of a share as of the date of the Change in
Control, and (3) in the case of awards based on performance, the value of the performance units then subject to the portion of
such award surrendered; (B) shares of the corporation or other entity resulting from such Change in Control, or a parent thereof,
having a fair market value not less than the amount determined under clause (A) above; or (C) a combination of the payment of
cash pursuant to clause (A) above and the issuance of shares pursuant to clause (B) above.
Amendment
and Termination
The
Plan was approved by the Board and its sole stockholder on July 30, 2018. Unless terminated earlier by the Board, the Plan will
terminate on July 30, 2028. Termination of the Plan will not affect the terms or conditions of any award granted prior to termination
The Board may amend the Plan as it deems advisable, subject to any requirement of stockholder approval required by applicable
law, rule or regulation, including any rule of the Nasdaq Capital Market or any other stock exchange on which shares are then
traded; provided, however, that no amendment may materially impair the rights of a holder of an outstanding award without the
consent of such holder.
DIRECTOR
COMPENSATION
Any non-employee directors of Sysorex will be paid an annual fee equal to $30,000, payable quarterly. Accordingly, Nadir Ali earned fees of $30,000 and $30,000 for his service as a non-employee director during 2020 and 2019, respectively. Douglas Cole earned fees of $30,000 and $0 for his service as a non-employee director during 2020and 2019, respectively.
In
addition, upon the designation of committees of the Board, we expect that the Board will approve an additional annual fee to be
paid to the chair of each committee of the Board. Fees to independent directors may be made by issuance of common stock, based
on the value of such common stock at the date of issuance, rather than in cash, provided that any such issuance does not prevent
such director from being determined to be independent. We expect that each director that is not an executive officer may also
receive grants under the Plan. We expect that any of our executive officers who also serve as directors, however, will not be
separately compensated by us for their service as directors. We expect that all members of the Board will be reimbursed for reasonable
costs and expenses incurred in attending meetings of our Board.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM
12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, based on our knowledge, certain information as of March 26, 2021, regarding the beneficial ownership of our common stock by the following persons:
● each person or entity
who, to our knowledge, owns more than 5% of our common stock;
● our NEOs;
● each director; and
● all of our directors
and current executive officers as a group.
We
have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe,
based on the information furnished to us, that the persons and entities named in the following table have sole voting and investment
power with respect to all shares of our common stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 491,276 shares of our common stock outstanding as of March 26, 2021. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options or other convertible securities held by that person that are currently exercisable or that will become exercisable within 60 days of March 27, 2021. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each beneficial owner listed in the following table is c/o Sysorex, Inc., 13880 Dulles Corner Lane, Suite 175, Herndon, Virginia 20171.
Name of Beneficial Owner Amount
and
nature of
beneficial
ownership Percent of
Class(1)
Named Executive Officers and Directors:
Nadir Ali 10,011 (1) 2.0 %
Zaman Khan *
Vincent Loiacono *
All Directors and Current Executive Officers as a Group (3 persons) 10,015 *
More than 5% Beneficial Owners
None
(1) Includes (i) 1 shares
of common stock held of record by Nadir Ali, (ii) 3 shares of common stock held of record by Lubna Qureishi, Mr. Ali’s
wife, (iii) 1 shares of common stock held of record by Naheed Qureishi, Mr. Ali’s mother-in-law, (iv) 1 shares of common
stock held by of record by the Qureishi Ali Grandchildren Trust, of which Nadir Ali is the joint-trustee (with his wife Lubna
Qureishi) and has voting and investment control over the shares held, (v) 5 shares of common stock held of record by the Qureishi
1998 Family Trust, of which Nadir Ali’s father-in-law, A. Salam Qureishi, is the sole trustee and has voting and investment
control over the shares held, and (vi) 10,000 shares of common stock held of record by Sysorex Consulting, Inc., of which
Nadir Ali’s father-in-law, A. Salam Qureishi, has voting and investment control over the shares held.
* less than 1% of the
issued and outstanding shares of common stock.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM
13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review,
Approval or Ratification of Transactions with Related Persons.
The Board reviews issues involving potential conflicts of interest, and reviews and approves all related party transactions, including those required to be disclosed as a “related party” transaction under applicable federal securities laws. The Board has not adopted any specific procedures for conducting reviews of potential conflicts of interest and considers each transaction in light of the specific facts and circumstances presented. However, to the extent a potential related party transaction is presented to the Board, the Company expects that the Board would become fully informed regarding the potential transaction and the interests of the related party and would have the opportunity to deliberate outside of the presence of the related party. The Company expects that the Board would only approve a related party transaction that was in the best interests of the Company, and further would seek to ensure that any completed related party transaction was on terms no less favorable to the Company than could be obtained in a transaction with an unaffiliated third party. Other than as described below, no transaction requiring disclosure under applicable federal securities laws occurred during fiscal year 2019 that was submitted to the Board for approval as a “related party” transaction.
Related
Party Transactions
SEC
regulations define the related person transactions that require disclosure to include any transaction, arrangement or relationship
in which the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for
the last two completed fiscal years in which we were or are to be a participant and in which a related person had or will have
a direct or indirect material interest. A related person is: (i) an executive officer, director or director nominee, (ii) a beneficial
owner of more than 5% of our common stock, (iii) an immediate family member of an executive officer, director or director nominee
or beneficial owner of more than 5% of our common stock, or (iv) any entity that is owned or controlled by any of the foregoing
persons or in which any of the foregoing persons has a substantial ownership interest or control.
For
the period from January 1, 2017, through the date of this report (the “Reporting Period”), described below are certain
transactions or series of transactions between us and certain related persons.
On
August 31, 2018, we entered into a Trademark License Agreement (the “License Agreement”) with Sysorex Consulting,
Inc. for use of the mark “Sysorex.” A. Salam Qureishi, Mr. Nadir Ali’s father-in-law and a member of his household,
is the majority owner and the chief executive officer of Sysorex Consulting, Inc. The term of the License Agreement is perpetual.
As consideration for the license, we issued 10,000 shares of our common stock to Sysorex Consulting, Inc. and have agreed to issue
to Sysorex Consulting, Inc. 2,500 shares of our common stock on each anniversary of the agreement date until the License Agreement
is terminated. The number of shares of common stock that will be issued in the future is subject to adjustment for changes in
the outstanding shares of our common stock as a result of stock dividends, stock splits, reverse stock splits, recapitalizations,
mergers, consolidations, combinations or exchanges of shares, separations, reorganizations or liquidations. The License Agreement
may be terminated as a result of a breach of the License Agreement by us that remains uncured; our bankruptcy; the discontinuance
of our business or a change in our name so that the word “Sysorex” is no longer used in the name or on our products
or services; the license is attached, assigned or transferred; or we experience a Change of Control, as defined in the License
Agreement.
On
December 31, 2018, the Company entered into a note purchase agreement with Inpixon (the “Note Purchase Agreement”)
pursuant to which Inpixon, the Company’s former parent, agreed to purchase from the Company at a purchase price equal to
the Loan Amount (as defined below), a secured promissory note (the “Related Party Note”) for up to an aggregate principal
amount of 3,000,000 (the “Principal Amount”), including any amounts advanced through the date of the Related Party
Note (the “Prior Advances”), to be borrowed and disbursed in increments (such borrowed amount, together with the Prior
Advances, collectively referred to as the “Loan Amount”), with interest to accrue at a rate of ten percent (10%) per
annum on all such Loan Amounts, beginning as of the date of disbursement with respect to any portion of such Loan Amount. In addition,
the Company agreed to pay $20,000 to Inpixon to cover Inpixon’ legal fees, accounting costs, due diligence, monitoring and
other transaction costs incurred in connection with the purchase and sale of the Related Party Note (the “Transaction Expense
Amount”), all of which amount is included in the Principal Amount. The initial Loan Amount, therefore, includes any amounts
disbursed to the Company and the Transaction Expense Amount.
The
Company may borrow under the Related Party Note, as needed, for a total outstanding balance, exclusive of any unpaid accrued interest,
not to exceed the Principal Amount at any one time.
All
sums advanced by Inpixon to the maturity date pursuant to the terms of the Note Purchase Agreement will become part of the aggregate
Loan Amount underlying the Related Party Note. All outstanding principal amounts and accrued unpaid interest owing under the Related
Party Note shall become immediately due and payable on the earlier to occur of (i) December 31, 2020 (the “Maturity Date”),
(ii) at such date when declared due and payable by Inpixon upon the occurrence of an Event of Default (as defined in the Related
Party Note), or (iii) at any such earlier date as set forth in the Related Party Note. All accrued unpaid interest shall be payable
in cash.
Pursuant
to the terms of the Related Party Note, the Company granted Inpixon, subject to any and all Payplant Liens (as defined in the
Related Party Note) and Permitted Liens (as defined in the Related Party Note), a continuing first priority security interest
in all assets of the Company whether owned as of the date of the Related Party Note or subsequently acquired, including all proceeds
therefrom (collectively, the “Collateral”) to secure the payment of the Related Party Note and all other loans and
advances (including all renewals, modifications and extensions thereof) and all obligations of any and every kind and nature of
the Company to Inpixon, whether arising prior to, under or after the Related Party Note, however incurred or evidenced, plus all
interest, reasonable costs, reasonable expenses and reasonable attorneys’ fees, which may be made or incurred by Inpixon
in the disbursement, administration, and collection of such amounts, and in the protection, maintenance, and liquidation of the
Collateral.
On
February 4, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any time
under the Related Party Note from $3,000,000 to $5,000,000. On April 15, 2019, the Related Party Note was amended to increase
the maximum principal amount that may be outstanding at any time under the Related Party Note from $5,000,000 to $8,000,000.
On
May 22, 2019, the Related Party Note was amended to increase the maximum principal amount that may be outstanding at any time
under the Related Party Note from $8,000,000 to $10,000,000.
On
March 1, 2020, the Related Party Note was amended to extend the maturity date from December 31, 2020 to December 31, 2022, to
increase the default interest rate from 18% to 21% or the maximum rate allowable by law and to require a cash payment by the Company
to Inpixon against the loan amount in an amount equal to no less than 6% of the aggregate gross proceeds raised following the
completion of any financing, or series of related financings, in which the Company raises aggregate gross proceeds of at least
$5 million.
On June 30, 2020, the “Company entered into a Promissory Note Assignment and Assumption Agreement (the “Assignment Agreement”), an Intercreditor Agreement (the “Intercreditor Agreement”), a form of partitioned Secured Promissory Note (the “Form of Partitioned Note”), and other related transaction documents with Inpixon, and Systat Software, Inc. (the “Assignment Documents”). Pursuant to the Assignment Documents, Inpixon agreed to assign to Systat Software, Inc., and the Company acknowledged and consented to the assignment of, certain partitioned promissory notes, and in connection therewith Systat Software, Inc. was granted a security interest in the assets of the Company.
Inpixon is the holder of a secured promissory note, dated December 31, 2018, issued by the Company to Inpixon, as amended, (the “Original Note”) in the aggregate principal amount of $10,000,000 (together with all accrued unpaid interest thereon, the “Outstanding Balance”). Inpixon and Systat Software, Inc. entered into an Exclusive Software License and Distribution Agreement with Cranes Software International Ltd. Inpixon agreed to partition the Original Note into four new secured promissory notes in the Form of Partitioned Note, with the first Partitioned Note in the original principal amount of $3,000,000, the second Partitioned Note in the original principal amount of $1,300,000, the third Partitioned Note in the original principal amount of $1,000,000 and the fourth Partitioned Note in the original principal amount of $1,000,000 plus all accrued unpaid interest under the Original Note included in the Outstanding Balance, and assigned and delivered to Systat Software, Inc. the Closing Note on the closing date of the License Agreement (the “Closing Date”), the Initial Installment Note on the three month anniversary of the Closing Date the Second Installment Note on the six month anniversary of the Closing Date, and the Third Installment Note on the nine month anniversary of the Closing Date. Nadir Ali, a member of the Company’s board of directors, is also Inpixon’s Chief Executive Officer and a member of its board of directors. The transactions disclosed herein were approved by all of the disinterested members of the Company’s board of directors. See Note 7 -Long-Term Debt for further discussion on the Promissory Note Assignment.
The proceeds received and interest and legal costs accrued, in accordance with the Related Party Note as of December 31, 2020 is $9,043,859.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM
14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Set
forth below are approximate fees for services rendered by Marcum LLP, our independent registered public accounting firm, for the
fiscal years ended December 31, 2020 and 2019.
Audit Fees(1) $ 141,032 $ 134,440
Audit Related Fees $ - $ 16,480
Tax Fees $ - $ -
All Other Fees $ - $ -
(1) Audit
fees represent fees for professional services provided in connection with the audit of
our financial statements and review of our quarterly financial statements and audit services
provided in connection with other statutory or regulatory filings.
Audit
Fees. The “Audit Fees” are the aggregate fees of Marcum attributable to professional services rendered in 2020
and 2019 for the audit of our annual financial statements, for review of financial statements included in our quarterly reports
on Form 10-Q or for services that are normally provided by Marcum in connection with statutory and regulatory filings or engagements
for that fiscal year. These fees include fees billed for professional services rendered by Marcum for the review of registration
statements or services that are normally provided in connection with statutory and regulatory filings or engagements for those
fiscal years.
Audit-Related
Fees. Marcum billed us for professional services that were reasonably related to the performance of the audit or review of
financial statements in 2020 and 2019, which are not included under Audit Fees above including the filing of our Form 10 and S-1
registration statements.
Tax
Fees. Marcum did not perform any tax advice or planning services in 2020 or 2019.
All
Other Fees. Marcum did not perform any services for us or charge any fees other than the services described above in 2020
and 2019.
Pre-approval
Policies and Procedures
The
Audit Committee is required to review and approve in advance the retention of the independent auditors for the performance of
all audit and lawfully permitted non-audit services and the fees for such services. The Audit Committee may delegate to one or
more of its members the authority to grant pre-approvals for the performance of non-audit services, and any such Audit Committee
member who pre-approves a non-audit service must report the pre-approval to the full Audit Committee at its next scheduled meeting.
The Audit Committee is required to periodically notify the Board of their approvals. The required pre-approval policies and procedures
were complied with during 2020 and 2019.
PART
IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
15(a)(1)
Financial Statements
The
financial statements filed as part of this report are listed and indexed in the table of contents. Financial statement schedules
have been omitted because they are not applicable or the required information has been included elsewhere in this report.
15(a)(2)
Financial Statement Schedules
Not applicable as a smaller reporting company.
15(a)(3)
Exhibits
The
exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits.
The Company has identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual
Report on Form 10-K in response to Item 15(a)(3) of Form 10-K.
EXHIBIT
INDEX
Exhibit
Number
Exhibit
Description
Form
File
No.
Exhibit
Filing
Date
Filed
Herewith
2.1*
Agreement and Plan of Merger between Inpixon USA and Sysorex, Inc., dated as of July 25, 2018
8-K
001-36404
2.1
July
31, 2018
2.1
Separation and Distribution Agreement dated August 7, 2018 between Inpixon and Sysorex, Inc.
10-Q
001-36404
2.1
August 13,
3.1.1
Articles of Incorporation of Sysorex, Inc.
10-12G/A
000-55924
3.1
August
13, 2018
3.1.2
Certificate of Amendment to Articles of Incorporation, effective as of July 30, 2019.
8-K
000-55924
3.1
July
29, 2019
3.2.1
Articles of Merger pursuant to NRS Chapter 92A between Inpixon USA and Sysorex, Inc.
10-12G/A
000-55924
3.2.1
August
13, 2018
3.2.2
By-Laws of Sysorex, Inc.
10-12G/A
000-55924
3.2.2
August
13, 2018
4.1
Form of Sysorex, Inc.’s common stock certificate
S-1
333-228992
4.1
December 21, 2018
4.3
Convertible Promissory Note, dated as of December 31 2018
8-K
000-55924
4.1
December
31, 2018
4.4
Secured Promissory Note, dated as of December 31, 2018.
8-K
000-55924
4.2
December 31, 2018
4.5
Description of Registrant’s Securities
10-K
000-55924
4.5
March 31, 2020
10.1
Amended and Restated Sublease Agreement between Dell Marketing L.P. and Inpixon Federal, Inc., dated June 4, 2018
10-12G/A
000-55924
10.12
August
13, 2018
10.4
Employee Matters Agreement dated August 1, 2018 between Inpixon and Sysorex, Inc.
8-K
000-55924
10.3
September
4, 2018
10.8
Trademark License Agreement dated August 31, 2018 between Sysorex, Inc. and Sysorex Consulting, Inc.
8-K
000-55924
10.8
September
4, 2018
10.9+
Sysorex, Inc. 2018 Equity Incentive Plan and form of option award agreement
10-12G/A
000-55924
4.1
August
13, 2018
10.10+
Employment Agreement dated August 31, 2018 between Sysorex, Inc. and Sysorex Government Services, Inc. and Zaman Khan
8-K
000-55924
10.10
September 4, 2018
Exhibit Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed Herewith
10.11+
Employment Agreement dated August 31, 2018 between Sysorex, Inc. and Sysorex Government Services, Inc. and Vincent Loiacono
8-K
000-55924
10.11
September 4, 2018
10.12+
Form of Indemnification Agreement
10-12G/A
000-55924
10.8
August 13, 2018
10.14
Securities Purchase Agreement, dated as of December 31, 2018
8-K
000-55924
10.1
December 31, 2018
10.15
Note Purchase Agreement, dated as of December 31, 2018, by and between Sysorex, Inc. and Inpixon
8-K
000-55924
10.2
December 31, 2018
10.16
First Amendment Agreement dated February 4, 2019 by and between Sysorex, Inc. and Inpixon
8-K
000-55924
10.1
February 8, 2019
10.17
Second Amendment Agreement, dated as of April 2, 2019, between Inpixon and Sysorex, Inc.
8-K
000-55924
10.1
April 5, 2019
10.18
Third Amendment Agreement, dated as of May 22, 2019, between Inpixon and Sysorex, Inc.
8-K
000-55924
10.1
May 22,
10.19
Note Extension, dated as of November 11, 2019, by and between Sysorex, Inc. and Chicago Venture Partners, L.P.
10-Q
000-55924
10.3
November 12, 2019
10.20
Amendment to Convertible Promissory Note
8-K
000-55924
10.1
January 2, 2020
10.21
PPP Promissory Note, dated as of May 3, 2020, between Wells Fargo SBA Lending and Inpixon Federal
10-Q
000-55924
4.2
May 13, 2020
10.22
Fourth Amendment Agreement, dated as of March 1, 2020, between Sysorex, Inc. and Inpixon
8-K
000-55924
10.1
March 3, 2020
10.23
Convertible Note Extension, date as of April 23, 2020, by and between Sysorex, Inc. and Chicago Venture Partners, LLP.
10-Q
000-55924
10.5
May 13, 2020
10.24
Non-recourse Factoring and Security Agreement, dated June 19, 12020 by and between Sysorex, Inc. and SouthStar Financial LLC
8-K
000-55924
10.1
June 25, 2020
10.25
Promissory Note Assignment and Assumption, dated June 30, 2020, by and between Sysorex, Inc with Inpixon and Systat Software, Inc.
8-K
000-55924
10.1
July 6, 2020
10.26
Convertible Note Extension, dated as of October 29, 2020, by and between Sysorex, Inc and Chicago Venture Partners, LLP
10-Q
000-55924
10.1
November 6, 2020
Exhibit Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed Herewith
10.27
Waiver Agreement, dated as of January 22, 2021, by and between Sysorex, Inc. and Chicago Venture Partners, L.P.
8-K
000-55924
10.1
January 28, 2021
10.28
Amendment to Employment, dated March 4, 2021, by and between Sysorex, Inc. and Vincent Loiacono
X
10.29
Waiver Agreement, dated as of March 9, 2021, by and between Sysorex, Inc. and Chicago Venture Partners, L.P.
8-K
000-55924
10.1
March 15, 2021
10.30
Commercial Loan Agreement,dated as of March 11, 2021, between Sysorex, Inc. and Quantum Lexicon
8-K
000-55924
10.1
March 17, 2021
10.31
Letter Agreement, dated as of March 19, 2021 by and among Sysorex, Inc., Systat Software, Inc., and First Choice International Company, Inc.
8-K
000-55924
10.1
March 25, 2021
List of Subsidiaries
10-12G/A
000-55924
21.1
August 13, 2018
23.1
Consent of Marcum LLP
X
24.1
Power of Attorney (see signature page)
X
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
32.1#
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
101.INS
XBRL Instant Document
X
101.SCH
XBRL Taxonomy Extension Schema Document
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
* Exhibits,
schedules and similar attachments have been omitted pursuant to Item 601 of Regulation
S-K and the registrant undertakes to furnish supplemental copies of any of the omitted
exhibits and schedules upon request by the SEC.
+ Management
contract or compensatory plan or arrangement.
# This
certification is deemed not filed for purposes of Section 18 of the Exchange Act
or otherwise subject to the liability of that section, nor shall it be deemed incorporated
by reference into any filing under the Securities Act or the Exchange Act.