Sysorex (SYSX) Risk Analysis

On May 17, 2022, subsequent to the evaluation as of December 31, 2021, management, in agreement with the audit committee of the Company's Board of Directors, determined that the previously issued financial statements for the Affected Periods (as hereinafter defined) should no longer be relied upon and required restatement. We then filed Amendment No. 1 to our Form 10-K for the year ended December 31, 2021 (the "Amendment No. 1") on May 23, 2022 to restate the Company's previously issued consolidated financial statements and financial information as of and for the fiscal year ended December 31, 2021, as well as to provide restated interim financial information as of September 30, 2021 and for the three and nine months then ended (collectively, the "Affected Periods"), contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with the Securities and Exchange Commission (the "SEC") on April 14, 2022 (the "Original Form 10-K") and in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (the "Form 10-Q"). On June 1, 2022, we filed Amendment No. 2 to our Form 10-K because Amendment No. 1 contained a typographical error on the date of the audit report of Friedman LLP ("Friedman"). Although Friedman's audit report was dated April 14, 2022, except for the effects of the restatement discussed in Note 1A, Note 12, Note 13, and Note 19 to the consolidated financial statements, as to which the date is May 23, 2022, the copy of Friedman's audit report that was included in Amendment No. 1 incorrectly included a date of April 13, 2022 (instead of April 14, 2022). Amendment No. 2 on Form 10-K ("Amendment No. 2") was filed to correct the typographical error regarding the date on Friedman's audit report, such that the date of Friedman's audit report is April 14, 2022, except for the effects of the restatement discussed in Note 1A, Note 12, Note 13, and Note 19 to the consolidated financial statements, as to which the date is May 23, 2022. As discussed in Note 1A, "Restatement of Consolidated Financial Statements," of the notes to the accompanying consolidated financial statements as of and for the year ended December 31, 2021 included in Amendment No. 1 and Amendment No. 2, the correction of certain errors, as discussed in Amendment No. 1 and Amendment No. 2, from previously reported information for the year ended December 31, 2021, has resulted in an increase in net loss of $8.4 million, primarily as a result of a $6.3 million in expense related to the revaluation on the derivative conversion liability, an increase in interest expense of $0.9 million, and an increase in the loss contingency on debt default of $1.2 million. As previously disclosed in the Company's Current Report on Form 8-K filed on May 17, 2022 with the SEC, on May 17, 2022, the Company's management determined that its prior conclusion that the "conversion feature" of the Company's 12.5% senior secured convertible debentures (the "Debentures") qualified for equity classification and, therefore, qualified for the application of the guidance in the Financial Accounting Standards Board's (the "FASB") Accounting Standards Update (ASU) 2020-06 was incorrect. Management has determined that the conversion feature was a liability classified derivative under the FASB's Accounting Standards Codification (ASC) 815-40, Derivatives and Hedging – Contracts in Entity's Own Equity from the inception requiring recognition at fair value for each reporting period. The Company's management, in agreement with the audit committee of the Company's Board of Directors, have determined that the previously issued financial statements for the Affected Periods should no longer be relied upon due to this error and require restatement. Amendment No. 1 and Amendment No. 2 (i) reflect the changes discussed above for the Affected Periods, (ii) restates the Company's consolidated financial statements as and for the year ended December 31, 2021, and (iii) provides restated unaudited financial information as of September 30, 2021, and for the three and nine months then ended. The error does not impact the Company's consolidated financial statements for the quarters ended March 31, 2021, or June 30, 2021. As a result of the factors described above, the Company has included in Amendment No. 1 and Amendment No. 2 the restated consolidated financial statements as of and for the year ended December 31, 2021: - Total net loss – Restated to reflect the understatement of total other income (expense), and net loss by $8.4 million for the year ended December 31, 2021 - Liabilities and accumulated deficit – Restated to reflect the understatement of liabilities and accumulated deficit by $8.4 million as of December 31, 2021 A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Effective internal control over financial reporting is necessary for us to provide reliable financial reporting and prevent fraud. We continue to evaluate steps to remediate the material weaknesses. These remediation measures may be time consuming and costly and there is no assurance that these initiatives will ultimately have the intended effects. Any failure to maintain effective internal control over financial reporting could adversely impact on our ability to report our financial position and results from operations on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. Likewise, if our financial statements are not filed on a timely basis, we could be subject to sanctions or investigations by the SEC or other regulatory authorities. In either case, there could be a material adverse effect on our business, financial condition, and results of operations. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock. We can give no assurance that the measures we are taking and plan to take in the future will remediate the material weaknesses identified or that any additional material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls, and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.

The recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in the crypto asset markets. Additionally, although we are not directly connected to the recent cryptocurrency market events, we may still suffer reputational harm due to our association with the cryptocurrency industry in light of the recent disruption in the crypto asset markets. Although we previously engaged in the mining of cryptocurrency, and previously held cryptocurrency assets, the Company no longer holds any Ethereum or other crypto tokens or crypto assets at this time and the company does not conduct any mining activities and does not have any plans to mine crypto tokens in the future. The recent disruptions in the crypto asset markets have caused regulators, such as the SEC, to more closely focus on companies with any level of involvement in crypto assets, whether past or present, such as the Company. With the recent developments in the market, our assets (GPUs and datacenter) may be impacted from a valuation perspective due to the uncertainty in the market. GPUs, which are typically used to mine cryptocurrencies, have returned to pricing that is closer to retail value rather than overvalued (i.e., marked up above retail due to supply constraints and demand). Additionally, there has been general reputational harm to the market due to the volatility of crypto exchanges, which has affected crypto token pricing negatively as well as pricing of mining equipment. The Company has minimized its impact, since it stopped mining crypto tokens on September 15, 2022, and the Company liquidated its crypto token holdings before the mass disruption in the market due to bankruptcies and increased risks in the market. Additionally, the Company's crypto assets were not based on client holdings and crypto tokens were mined for the benefit of the Company and its shareholders' value. However, the volatility in the market has caused the Company's assets (GPUs and datacenter) to decline in value. The Company no longer holds any Ethereum or other crypto tokens or crypto assets at this time and the company does not conduct any mining activities and does not have any plans to mine crypto tokens in the future.

As a public reporting company, we are subject to the reporting requirements of the Exchange Act. These requirements generate significant accounting, legal and financial compliance costs and make some activities more difficult, time-consuming, or costly and may place significant strain on our personnel and resources. The Exchange Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to establish the requisite disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required. As a result, management's attention may be diverted from other business concerns, which could have an adverse and even material effect on our business, financial condition, and results of operations. These rules and regulations may also make it more difficult and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent, could be adversely impacted.