SYSX Sysorex Inc (CE)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the combined financial statements and the related notes included elsewhere in this Form 10-Q and with our audited financial statements and related notes included on Form 10-K, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 29, 2021. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

The historical financial statements we have included in this Form 10-Q may not reflect what our business, financial position or results of operations would have been had we been a publicly traded company during the periods presented or what our results of operations, financial position and cash flows will be in the future when we are a stand-alone company.

Overview

Sysorex was incorporated in California on January 3, 1994 as Lilien Systems and was acquired by Inpixon on March 20, 2013. Effective January 1, 2016, Inpixon consummated a reorganization transaction pursuant to which certain Inpixon subsidiaries were merged with and into Lilien and Lilien changed its name to “Sysorex USA”. 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. 

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”).

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.

Sysorex is a leading provider of information technology solutions from multiple vendors, including hardware products, software, services, including warranty and maintenance support, offered through our dedicated sales force, ecommerce channels, existing federal contracts and service team. Since our founding, we have served our customers by offering products and services from key industry vendors such as Aruba, Cisco, Dell, GETAC, Lenovo, Microsoft, Panasonic, Samsung, Symantec, VMware and others. We provide our customers with comprehensive solutions incorporating leading products and services across a variety of technology practices and platforms such as cyber, cloud, networking, security, and mobility. We utilize our professional services, consulting services and partners to develop and implement these solutions. Our sales and marketing efforts in collaboration with our vendor partners, 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 three months ended March 31, 2021, 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.

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 30th and September 30th, 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. Each contract can be utilized by any agency/departments of the Executive, Judiciary, and Legislative Branch, and government contractors in support of a contract. In addition to the federal government, the GSA FSS IT 70 is available to all 50-states, U.S. territories, and local government. 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, and 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 impacted 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 of our existing contracts until the budget issue is resolved, and some accounts receivables may be delayed. 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 impact our ability to source from vendors who 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. 

COVID-19 Update 

In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. While certain of these restrictions and guidelines have been lifted or relaxed, they may be reinstituted in response to continuing effects of the pandemic. The pandemic and the various governments’ response have caused, and continue to cause, significant and widespread uncertainty, volatility, and disruptions in the U.S. and global economies, including in the regions in which we operate.

On May 3, 2020, the Company received a loan of $349,693 under the Payroll Protection Program as part of the Coronavirus Aid, Relief and Economic Security Act which was subsequently forgiven by the Small Business Administration on April 2, 2021.

Through March 31, 2021, we have not experienced a material impact to our business, operations or financial results as a result of the pandemic. However, in the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material.

We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We have been able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. Among these steps, we have transitioned to primarily working remotely and ceasing travel, which has not resulted in a material disruption to the Company’s operations. We expect to maintain many of these steps for the near future.

Recent Events

On March 31, 2021, the Company and First Choice International Company, Inc. (the “Lender”) into a Commercial Loan Agreement (“Loan Agreement”) and Promissory Note (“Note”) (collectively, the “Loan Documents”). Under the terms of the Note, the Company must repay the principal amount of $2,000,000 plus any accrued and unpaid interest as a balloon payment no later than June 30, 2021. The Loan Agreement includes a pledge of 5,272,407 shares of Common Stock securing repayment of the Note.

On April 6, 2021, the Company entered a definitive settlement agreement (the “Settlement”) with VMS Software, Inc. (“VMS”), whereby (i) the Company paid to VMS, seventy-five thousand dollars ($75,000.00); (ii) the Company is required to make four (4) additional periodic payments to VMS, commencing thirty (30) days from the effective date of the Settlement (the “Effective Date”), each in the amount of one hundred sixty-five thousand sixty-eight dollars and fifty cents ($165,068.50); (iii) if VMS receives from the Company payments totaling six hundred twenty-five thousand dollars ($625,000.00) within forty-five (45) days from the Effective Date, VMS will accept such six hundred twenty-five thousand dollars ($625,000.00) as full satisfaction of the Company’s payment obligations under the Settlement; (iv) if VMS receives from the Company payments totaling six hundred fifty thousand dollars ($650,000.00) within sixty (60) days from the Effective Date, VMS will accept such six hundred fifty thousand dollars ($650,000.00) as full satisfaction of Company’s payment obligations under the Settlement; (v) if, within ninety-one (91) days of VMS’s receipt of any of the Company’s payments pursuant to its obligations in paragraph 1 of the Settlement, the Company commences, or a third party commences against the Company, any case, proceeding, or other action under the United States Bankruptcy Code, 11 U.S.C. § 101 et seq, which is not dismissed within thirty (30) days, then VMS’s release of the Company contained in paragraph 2 of the Settlement shall be null, void, and of no force or effect, and the Parties shall be returned to the position they were in prior to execution of this Agreement, except that VMS may retain any payment made to it by the Company, crediting same against those sums claimed by VMS. In connection with the Settlement, on April 14, 2021, the Company and the Lender entered into a commercial loan agreement, secured promissory note, and stock pledge agreement (“Loan Documents”) whereby the Lender has provided an immediate loan of $278,368.50 to the Company (the “Loan”) in consideration of a promissory note secured with a pledge of that number of shares of the Company’s common stock equal to three hundred percent (300%) of the Loan inclusive of the outstanding balance of the settlement entered into by and between the Company and VMS, for a reserved amount of 2,631,708 shares of Common Stock. As of May 17, 2021, $384,932 was paid, in full satisfaction of the Company’s obligations of the Settlement.

On April 8, 2021, the Company, TTM Digital Assets & Technologies, Inc. (“TTM Digital”), and TTM Acquisition Corp., a Nevada corporation, a wholly-owned subsidiary of the Company (“MergerSub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), which resulted in a change of control, with the shareholders of TTM Digital receiving the number of shares of the Company’s common stock equal to not less than eighty percent (80%) of the outstanding shares of capital stock of the Company in exchange for their shares of TTM Digital. As a result of the Merger, the Company now has two wholly owned subsidiaries: TTM Digital and Sysorex Government Services, Inc. The closing of the Merger Agreement occurred on April 14, 2021. Further, the Company entered a number of agreements as conditions of the Merger Agreement’s closing.

Basis of Presentation

Sysorex, Inc., through its wholly owned subsidiaries, Sysorex Government Services, Inc., formerly known as Inpixon Federal, Inc. (“SGS”), and TTM Digital (unless otherwise stated or the context otherwise requires, the terms “SGS” “we,” “us,” “our” and the “Company” refer collectively to Sysorex and its subsidiaries), is focused on two lines of business. The Company provides information technology which include cybersecurity, professional services, engineering support, IT consulting, enterprise level technology, networking, wireless, help desk, blockchain technology, and custom IT solutions. The Company is headquartered in Virginia.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information, which are the accounting principles that are generally accepted in the United States of America. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of the Company’s operations for the three-month period ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited condensed consolidated financial statements and notes for the years ended December 31, 2020 and 2019 included in the Form 10-K filed with SEC on March 29, 2021.

Critical Accounting Policies and Estimates

In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 3 of the condensed consolidated financial statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. There have been no changes to estimates during the periods presented in the filing. Historically, changes in management estimates have not been material.

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:

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 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 Accounting Standards Codification (“ASC”) 606-10-50-14(a) to not disclose information about its remaining performance obligations. Anticipated losses are recognized as soon as they become known. For the three months ended March 31, 2021 and 2020, 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.

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:

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 also 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 three months ended March 31, 2021.

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 the 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 three months ended March 31, 2021, 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.

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 carry-forwards 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 carry-forwards 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 three months ended March 31, 2021, based upon certain economic conditions and historical losses through March 31, 2021. 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 March 31, 2021 and the year ended December 31, 2020, 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 income tax expense. No interest or penalties were recorded during the three months ended March 31, 2021 and 2020.

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 March 31, 2021 and December 31, 2020.

Revenues

Revenues for the three months ended March 31, 2021 were $1.4 million compared to $2.3 million for the comparable period in the prior year. This decrease of $0.9 million is primarily associated with timing of orders which were based on shipment and acceptance dates and as a result were recorded in April 2021.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2021 was $1.2 million compared to $2 million for the prior year period. This decrease of $0.8 million was primarily associated with timing of orders which were based on shipment and acceptance dates and as a result were recorded in April 2021.

The gross profit margin for the three months ended March 31, 2021 was 18% compared to 12% during the three months ended March 31, 2020. This increase in gross margin is primarily due to gains on settlement of liabilities in the current year offset by certain federal and local government sales in the prior year that drove margins down

Operating Expenses

Operating expenses for the three months ended March 31, 2021 were $1.1 million compared to $1.1 million for the prior year period. This is a relatively stable cost structure and will increase as new contracts are added throughout the year. Compensation costs, occupancy costs and travel costs have remained relatively stable year over year.

Loss from Operations

Loss from operations for the three months ended March 31, 2021 was $829 thousand compared to $845 thousand for the prior year period. The efficiencies and cost reductions in prior periods have allowed us not to increase the Company’s costs and losses.

Provision for Income Taxes

There was no provision for income taxes for the three months ended March 31, 2021 and 2020. Deferred tax assets resulting from such losses would be fully reserved as of March 31, 2021 and 2020 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 three months ended March 31, 2021 was $1.4 million compared to $1.2 million for the prior year period. This increase in loss of $0.2 million was attributable to the changes described for the various reporting captions 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 three months ended March 31, 2021 was a loss of $0.8 million compared to a loss of $0.6 million for the prior year period.

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

We rely on Adjusted EBITDA, which is a non-GAAP financial measure for the following:

We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:

Even though we believe Adjusted EBITDA is useful for investors, it does have limitations as an analytical tool. Thus, we strongly urge investors not to consider this metric in isolation or as a substitute for net income (loss) and the other combined carve-out statement of operations data prepared in accordance with GAAP. Some of these limitations include the fact that:

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 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.

The proceeds received and interest and legal costs accrued, in accordance with the Related Party Note as of March 31, 2021 was $9,088,176.

On April 14, 2021, to satisfy the Inpixon Debt (in the amount of $9,088,176 as of the date) in full, the Company entered into (i) a securities settlement agreement with Inpixon under which the Company agreed to issue Inpixon 12,972,189 shares of Common Stock, and (ii) a right to shares letter agreement through which the Company granted to Inpixon rights to the further issuance of 3,000,000 shares of Common Stock at no cost, in whole or in part, from time-to-time. The Right to Shares Letter Agreement includes a beneficial ownership limitation that states that in no event shall Inpixon be issued that number of shares which would result in Inpixon’s beneficial ownership exceeding 9.99%.

See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

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.

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.

During the three months ended March 31, 2021 the Company issued 84,267 shares of common stock for the settlement of approximately $19,000 on its short-term debt.

Prior to March 31, 2021, the Company entered into discussions and a definite agreement to convert its outstanding debt and interest for the common stock of the Company. The balance outstanding as of March 31, 2021 is $870,413. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

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. See Note 8 Subsequent Events, regarding notice approval for forgiveness of the debt on April 2, 2021.

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 March 31, 2021, there is no outstanding balance due to SouthStar.

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 March 31, 2021 is $3,623,250. See Note 8 – Subsequent Events, regarding merger and discussion of conversion of its debt to equity.

Related Party - Quantum Lexicon Promissory Note Payable

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. Additional costs in excess of the $125,000 were funded in March 2021 and recorded as payable to Quantum Lexicon.

The balance outstanding as of March 31, 2021 is $200,645.

First Choice Promissory Note Payable

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 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 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.

The Promissory Note balance outstanding as of March 31, 2021 is $5,000,000, which includes the $3,000,000 Fourth Note and the $2,000,000 First Choice Note.

Liquidity and Capital Resources as of March 31, 2021 

Our capital resources and operating results as of and through March 31, 2021, consist of:

The breakdown of our overall working capital deficit is as follows (in thousands):

Accounts payable and accrued liabilities exceed the accounts receivable by $8.3 million. These deficits are expected to be funded by our anticipated cash flow from operations and financing activities, as described below, over the next twelve months.

Net cash used in operating activities during the three months ended March 31, 2021 of $125 thousand consists of net loss of $1.4 million plus non-cash adjustments of $1.1 million thousand and net cash used in changes in operating assets and liabilities of $145 thousand. We expect net cash from operations to increase during the remainder of 2021, as a result of, the following:

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. 

The Company’s continuation is dependent upon attaining and maintaining profitable operations and raising additional capital as needed, but there can be no assurance that we will be able to close on any financing. The Company’s ability to generate positive cash flow from operations is dependent upon sustaining certain cost reductions and generating sufficient revenues.

Based on future debt and /or equity offerings, projected revenues, the revolving credit facility that the Company entered into in order to continue to finance purchase orders and invoices following the Spin-off and the $10 million related party note from Inpixon, credit limitation improvements resulting or anticipated to result from negotiated vendor settlement arrangements have occurred. There are, however, no guarantees that these sources will be sufficient to provide the capital necessary to fund the Company’s operations during the next twelve months, therefore, the Company does intend to seek other sources of capital to supplement and strengthen its financial position under financing structures that are available to it. We expect as a result of the merger as note in Note 8- Subsequent events, we will have the ability to negotiate better terms and pricing with our vendors.

Our history of operating losses, the amount of our indebtedness 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.  

Liquidity and Capital Resources – SouthStar

See the discussion above in the section titled “Indebtedness of the Company” for information concerning this loan. As of March 31, 2021, there was no principal amount outstanding under the Loan Agreement.

Liquidity and Capital Resources Inpixon Note

On April 14, 2021, to satisfy the Inpixon Debt in full, the Company entered into (i) a Securities Settlement Agreement with Inpixon under which the Company agreed to issue Inpixon 12,972,189 shares of Common Stock, and (ii) a Right to Shares Letter Agreement through which the Company granted to Inpixon rights to the further issuance of 3,000,000 shares of Common Stock at no cost, in whole or in part, from time-to-time. The Right to Shares Letter Agreement includes a beneficial ownership limitation that states that in no event shall Inpixon be issued that number of shares which would result in Inpixon’s beneficial ownership exceeding 9.99%.

Liquidity and Capital Resources – Systat Note

On April 14, 2021, the Company entered into a Securities Settlement Agreement with Systat under which the Company agreed to issue Systat 6,367,750 shares of Common Stock in full satisfaction of the Systat Debt in accordance with the terms and conditions of the Systat Securities Settlement Agreement.

Liquidity and Capital Resources – Chicago Venture

On April 14, 2021, the Company entered into an Exchange Agreement with CVP (the “CVP Exchange Agreement”) under which the Company agreed to issue CVP 1,530,149 shares of Common Stock in exchange for the cancellation of the CVP Debt in accordance with the terms and conditions of the CVP Exchange Agreement.

Liquidity and Capital Resources – Related Party - Quantum Lexicon Note

See the discussion above in the section titled “Indebtedness of the Company” for information concerning this loan. As of March 31, 2021, the principal amount outstanding was $200,645.

Liquidity and Capital Resources – First Choice Note

On April 14, 2021, the Company entered into a Securities Settlement Agreement and Right to Shares Letter Agreement with First Choice International Company, Inc. (“First Choice”), through which the Company granted to First Choice rights to the issuance of 5,272,407 shares of Common Stock at no cost, in whole or in part, from time-to-time. The Right to Shares Letter Agreement includes a beneficial ownership limitation that states that in no event shall First Choice’s beneficial ownership exceed 9.99%. The background regarding the Securities Settlement Agreement was previously disclosed in the Company’s Current Report on Form 8-K/A filed with the SEC on April 6, 2021.

Operating Activities:

Net cash used in operating activities during the three months ended March 31, 2021 was 125 thousand. Net cash used in operating activities during the three months ended March 31, 2019 was $576 thousand. Net cash used in operating activities during the three months ended March 31, 2021 consisted of the following (in thousands):

The non-cash income and expenses of $145,000 consisted primarily of (in thousands):

The net proceeds of cash due to changes in operating assets and liabilities total $399 thousand and consisted primarily of the following (in thousands):

Financing Activities:

Net cash provided by financing activities during the three months ended March 31, 2021 was approximately $2.0 million. Net cash provided by financing activities during the three months ended March 31, 2020 was approximately $548 thousand. The net cash provided by financing activities during the three months ended March 31, 2021 was primarily comprised of advances from Inpixon on a related party note from Inpixon, proceeds from Quantum Lexicon and First Choice financings, payments on a revolving line of credit with SouthStar.

Going Concern and Management Plans

Our condensed consolidated financial statements as of March 31, 2021 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. Footnote 1 to the notes to our financial statements as of March 31, 2021 include language referring to our recurring and continuing losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. 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 obtain additional equity or debt financing, attain further operating efficiency, reduce expenditures, and, ultimately, to generate sufficient levels of revenue, which together represent the principal conditions that raise substantial doubt about our ability to continue as a going concern. Our condensed consolidated financial statements as of March 31, 2021 do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

Recently Issued Accounting Standards

For a discussion of recently issued accounting pronouncements, please see the Recent Accounting Standards section of Note 3 to our condensed consolidated financial statements, which is included in this Form 10-Q in Item 1.