| Summary of Significant Accounting Policies | Note
4 — Summary of Significant Accounting Policies Principles
of Consolidation The condensed consolidated financial statements
have been prepared using the accounting records of Sysorex, TTM and SGS. All material inter-company balances and transactions have been
eliminated in consolidation. The Company’s wholly owned subsidiary, TTM has a 50% interest
in Up North Hosting, LLC (“UNH”), which is accounted for as an equity method investment and is not consolidated. See Note
1 and 6 for additional information around UNH. 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:
● Revenue recognition
● Fair
value of digital assets
● Expected useful lives and valuation of assets
● Business combinations and reverse merger accounting Cash
and Cash Equivalents The
Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash
equivalents. Concentrations
of Credit Risk Financial instruments that potentially subject the Company to credit
risk consist primarily of cash. The Company’s cash is deposited with commercial banks in the United States but exceeds federally
insured limits from time to time. The recorded carrying amount of cash and cash equivalents approximates their fair value. The Company
uses an Exchange to store and trade its digital assets. If demand for crypto assets decline the Exchange could be negatively impacted. Mining
Equipment Mining Equipment is stated at cost. Depreciation is computed using
the straight-line method regardless of the category of asset. The Company has determined that the useful life of graphics processing units
(“GPUs”) is 3-years and remaining mining equipment (primarily chassis, power supply units, computer memory, motherboards,
risers, and fans) is depreciated over the estimated useful life of 5-years. Expenditures
for repairs and maintenance are charged to expense as incurred. Upon disposition, the cost and related accumulated depreciation are removed
from the accounts and the resulting gain or loss is reflected in the statement of operations. The
rate at which the Company generates digital assets and, therefore, consumes the economic benefits of its transaction verification servers
are influenced by several factors including the following:
- the complexity of the transaction
verification process which is driven by the algorithms contained within the Ethereum open-source software;
- the general availability of
appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured
in Terahash units); and
- technological obsolescence
reflecting rapid development in the transaction verification server industry such that more recently developed hardware is more economically
efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs. i.e., the speed of
hardware evolution in the industry is such that later hardware models generally have faster processing capacity combined with lower
operating costs and a lower cost of purchase. The
Company operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized
equipment. Management will review this estimate quarterly and will revise such estimates as and when data comes available. To
the extent that any of the assumptions underlying management’s estimate of useful life of its mining equipment are subject to revision
in a future reporting period either because of changes in circumstances or through the availability of greater quantities of data then
the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets. Impairment
of Long-lived Assets The
Company reviews its long-lived assets, including mining equipment, for impairment whenever events or changes in circumstances indicate
the carrying value of an asset or group of assets may not be recoverable. The carrying amount is considered not recoverable if the sum
of the undiscounted cash flows to be generated from the use and eventual disposition of the asset group is less than the carrying amount
of the asset group. If the carrying amount exceeds the undiscounted cash flows, then the carrying amount is compared to the fair value
and an impairment loss is recorded for the difference between the fair value and the carrying amount. No impairment charges were identified
during the periods ended June 30, 2021, or June 30, 2020. Revenue Recognition The Company recognizes revenue
in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in
exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized:
● Identification of the contract, or contracts, with a
customer;
● Identification of the performance obligations in the contract;
● Determination of the transaction price;
● Allocation of the transaction price to the performance obligations in
the contract; and
● Recognition of revenue when, or as, the Company satisfies a performance
obligation. Mining Revenue TTM Digital has entered into mining pools with the operators to provide
computing power to the mining pool. The Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator
receives (less transaction fees to the mining pool operator) for successfully adding a block to the blockchain. The Company’s fractional
share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed
by all mining pool participants in solving the current algorithm. Providing computing power in digital asset transaction verification
services is an output of the Company’s ordinary activities. The provision of such computing power is the only performance obligation
in the Company’s contracts with mining pool operators The transaction consideration the Company receives, if any, is non-cash consideration.
The transaction price of the Company’s share of the cryptocurrency award is measured at fair value on the date received, which is
not materially different than the fair value at the time the Company has earned the award from the mining pool. The consideration is all
variable under the definition within ASC 606. Because it is not probable that a significant reversal of cumulative revenue will not occur,
the consideration is constrained until the Company successfully places a block and the Company receives confirmation of the consideration
it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. Fair value of the digital asset
award received is determined using the quoted price of the related digital asset at the time of receipt. There is currently no specific
definitive guidance under GAAP or alternative accounting framework for the accounting for digital assets recognized as revenue or held,
and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance
is enacted by the FASB, the Company may be required to change its policies, which could impact the Company’s consolidated financial
position and results from operations. Hardware
and Software Revenue Recognition SGS is a primary resale channel for a large group
of vendors and suppliers, including original equipment manufacturers (“OEMs”), software publishers and wholesale distributors. The
Company accounts for a contract when it has approval and commitment from both parties, the
rights of the parties are identified, payment terms are established, the contract has commercial
substance and collectability of consideration is probable. The Company evaluates the following
indicators amongst others when determining whether it is acting as a principal in the transaction
and recording revenue on a gross basis: (i) the Company is primarily responsible for fulfilling
the promise to provide the specified product or service, (ii) the Company has inventory risk
before the specified good or service has been transferred to a customer or after transfer
of control to the customer and (iii) the Company has discretion in establishing the price
for the specified good or service. If the terms of a transaction do not indicate the Company
is acting as a principal in the transaction, then the Company is acting as an agent in the
transaction and the associated revenues are recognized on a net basis. The
Company recognizes revenue once control has passed to the customer. The following indicators are evaluated in determining when control
has passed to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the
product, (iii) the Company has transferred physical possession of the product to the customer, (iv) the customer has the significant
risk and rewards of ownership of the product and (v) the customer has accepted the product. The Company’s products can be delivered
to customers in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment
by the vendor or supplier or (iii) via electronic delivery of keys for software licenses. The Company’s shipping terms typically
specify F.O.B. destination. The
Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having
to physically hold the inventory at its warehouse. The Company is the principal in the transaction and recognizes revenue for drop-shipment
arrangements on a gross basis. The
Company may provide integration of products from multiple vendors as a solution it sells to the customer. In this arrangement, the Company
provides direct warranty to the customer with the Company’s own personnel as the customer requires warranty on the solution and
not individual vendor products. This type of warranty is sold integral to the overall solution quoted to the customer. The Company considers
these service-type warranties to be performance obligations of the principal from the underlying products that make up a solution and
therefore is acting as a principal in the transaction and records revenue on a gross basis at the point of sale. License
and Maintenance Services Revenue Recognition SGS provides a customized design and configuration
solution for its customers and in this capacity resells hardware, software and other IT equipment license and maintenance services in
exchange for fixed fees. The Company selects the vendors and sells the products and services, including maintenance services, that best
fit the customer’s needs. For sales of maintenance services and warranties, the customer obtains control at the point in time that
the services to be provided by a third-party vendor are purchased by the customer and therefore the Company’s performance obligation
to provide the overall systems solution is satisfied at that time. The Company’s customers generally pay within 30 to 60 days from
the receipt of a customer-approved invoice. For
resale of services, including maintenance services, warranties, and extended warranties, the Company is acting as an agent as the primary
activity for those services are fulfilled by a third party. While the Company may facilitate and act as a first responder for these services,
the third-party service providers perform the primary maintenance and warranty services for the customer. Therefore, the Company is not
primarily responsible for performing these services and revenue is recorded on a net basis. Professional
Services Revenue Recognition SGS’s professional services include fixed
fee contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. 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 three months ended
June 30, 2021, SGS did not incur any such losses. These amounts are based on known and estimated factors. Revenues from time and material
or firm fixed price long-term and short-term contracts are derived principally with various United States government agencies. 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 $0.6 million as of June 30, 2021.
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 $.05 million
as of June 30, 2021. Equity Method Investments Equity method investments are equity securities
in entities the Company does not control but over which it can exercise significant influence. These investments are accounted for under
the equity method of accounting in accordance with ASC 323, Investments- Equity Method and Joint Ventures. Equity method investments
are measured at cost minus impairment, if any, plus or minus the Company’s share of an investee’s income or loss. Digital Assets Digital assets (predominantly Ethereum) are included
in current assets in the accompanying consolidated balance sheets. The classification of digital assets as a current asset has been made
after the Company’s consideration of the consistent daily trading volume on cryptocurrency exchange markets, there are no limitations
or restrictions on Company’s ability to sell Ethereum, and the pattern of actual sales of Ethereum by the Company. Digital assets
purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection
with the Company’s revenue recognition policy disclosed above.
Digital assets held are accounted
for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed
for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not
that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using
the quoted price of the digital asset at the time its fair value is being measured. In testing for impairment, the Company has the option
to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined
that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes
otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes
the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. No impairment was determined to have existed
at the quarter-end periods reported herein. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting. The Company recognized realized gains through the sale and disbursement of digital assets during the three and six months ended June 30, 2021, of $0.001 million and $0.09 million, respectively. For the three and six months ended June 30, 2020, the Company recognized realized gains of $0.01 million and $0.008 million, respectively.
Fair Value The Company accounts for digital assets and other operating assets
under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820, Fair Value Measurements. This statement
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows: Level 1 — quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 — observable inputs other than Level
1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and Level 3 — assets and liabilities whose significant
value drivers are unobservable. Observable inputs are based on market data obtained from independent
sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management
judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value
hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant
to the fair value measurement. Such determination requires significant management judgment. The carrying amounts of the Company’s financial assets and liabilities,
such as cash and cash equivalents, and accounts payable, approximate fair value due to the short-term nature of these instruments. The
Company determined the fair value of digital assets earned during the periods ended June 30, 2021, and 2020 by using quoted prices in
active markets. The Company evaluates all accessible active markets and then selects the market which they determine to be the principal
market. Fair value is determined by the USD spot at the time digital assets are earned. Digital assets mined by the Company are classified
within Level II of the fair value hierarchy. Income Taxes Management assesses the available positive and
negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing Deferred tax assets
(“DTAs”). Based on this evaluation as of June 30, 2021, a valuation allowance of $6.4 million has been recorded through acquisition
accounting to recognize only the portion of the DTA that is more likely than not to be realized. Additionally, the Company has not booked
an income tax benefit for the current period pretax loss of $24.5 million. This is the primary reason the effective income tax rate differs
from the statutory rate of 21 percent. The amount of the DTA considered realizable, however, could be adjusted if estimates of future
taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional
weight is given to subjective evidence such as our projections for growth. Utilization of the net operating loss and credit
carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue
Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and
credits before utilization. The Company is currently in the process of evaluating the current NOL as a result of the merger 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 antidilutive. The Company reported a net loss for the
three- and six-month periods ended June 30, 2021, and 2020, respectively, and as a result, all potentially dilutive common shares are considered
antidilutive for these periods. The Company includes potentially issuable shares
in the Weighted-average common shares – basic that include warrants and other agreements that are exercisable for little or no consideration
without substantive contingencies and others once any contingencies relative to the issuance of the shares is resolved. Computations of basic and diluted weighted average
common shares outstanding were as follows for the periods reported:
Six Months Ended Three Months Ended
June 30, June 30,
2021 2020 2021 2020
Weighted-average common shares outstanding 110,063,554 55,776,240 139,087,196 55,776,240
Weighted-average potential common shares considered outstanding 8,004,843 13,944,060 14,009,685 13,944,060
Weighted-average common shares outstanding - basic 118,068,397 69,720,300 153,096,881 69,720,300
Dilutive effect of options, warrants and restricted stock units - - - -
Weighted-average common shares outstanding - diluted 118,068,397 69,720,300 153,096,881 69,720,300
Options and restricted stock units excluded from the computation of diluted loss per share because the effect of inclusion would be anti-dilutive - - - - Recent
Accounting Standards In December 2019, the FASB issued ASU 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes 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, with
early adoption permitted. The Company adopted ASU 2016-02 effective January 1, 2020. ASU 2016-02 did not have a material impact on the
financial statements or disclosures. In
January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity
Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). Any
new accounting standards, not disclosed above, that have been issued or proposed by FASB that do not require adoption until a future
date are not expected to have a material impact on the consolidated financial statements upon adoption. 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 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. |
