| Summary of Significant Accounting Policies | Note 4 — Summary of Significant Accounting Policies Principles of Consolidation The unaudited condensed consolidated financial
statements have been prepared using the accounting records of Sysorex, TTM Digital and SGS. All inter-company balances and transactions
have been eliminated in consolidation. 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
● Fair value of the Company’s common stock
● Expected useful lives and valuation of long lived-assets
● Fair value of derivative liabilities 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. For the three and six months ended June 30, 2022, the Company incurred $1.0 million of
impairment charges. No impairment charges were identified for long-lived assets during the three and six months ended June 30, 2021. 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 Condensed 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 over time. 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. SGS’s professional services include fixed
fee contracts. Fixed fees are paid monthly, in phases, or upon acceptance of deliverables. For fixed fee contracts, the Company recognizes
revenue evenly over the service period using a time-based measure because the Company is providing continuous service. Anticipated losses
are recognized as soon as they become known. For the three and six months ended June 30, 2022, 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. Digital Assets Digital assets (predominantly Ethereum) are included
in current assets in the accompanying Condensed 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. During the three and six months ended June 30, 2022,
the Company recorded impairment of $1.2 million and $2.4 million, respectively. The Company did not incur any impairment losses for the
three and six months ended June 30, 2021. Digital assets awarded to the Company through
its mining activities are included within operating activities on the accompanying Condensed Consolidated statements of cash flows. The
sales of digital assets are included within investing activities in the accompanying Condensed Consolidated statements of cash flows.
The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting. Fair Value The Company follows the accounting guidance under
FASB’s ASC 820, Fair Value Measurements for its fair value measurements of financial assets and liabilities measured at fair value
on a recurring basis. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such,
fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing
an asset or a liability. 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, accounts receivable, accrued liabilities, and accounts payable, approximate
fair value due to the short-term nature of these instruments. Derivative Liabilities The Company evaluates its convertible instruments,
options, warrants, or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for under ASC Topic 815, Derivatives and Hedging. The Company evaluates whether the amount of common stock
on a as converted basis is in excess of its authorized share total which, if in excess, would result in derivative accounting treatment.
The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded
as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of
operations as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value
at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity
that become subject to reclassification under ASC Topic 815 are reclassified to a liability at the fair value of the instrument on the
reclassification date. Held for Sale and Discontinued Operations Classification The Company classifies a business as held for
sale in the period in which management commits to a plan to sell the business, the business is available for immediate sale in its present
condition, an active program to complete the plan to sell the business is initiated, the sale of the business within one year is
probable and the business is being marketed at a reasonable price in relation to its fair value. Newly acquired businesses that meet the held-for-sale
classification criteria upon acquisition are reported as discontinued operations. Upon a business’ classification as held for sale,
net assets are measured for impairment. Goodwill impairment is measured in accordance with the method described in the accounting policy.
An impairment loss is recorded for long-lived assets held for sale when the carrying amount of the asset exceeds its fair value less
cost to sell. Other assets and liabilities are generally measured for impairment by comparing their carrying values to their respective
fair values. A long-lived asset shall not be depreciated or amortized while it is classified as held for sale. Convertible Debt The Company’s debt instruments contain a
host liability, freestanding warrants, and an embedded conversion feature. The Company uses the guidance under FASB ASC Topic 815 Derivatives
and Hedging (“ASC 815”) to determine if the embedded conversion feature must be bifurcated and separately accounted for as
a derivative under ASC 815. It also determines whether any embedded conversion features requiring bifurcation and/or freestanding warrants
qualify for any scope exceptions contained within ASC 815. Generally, contracts issued or held by a reporting entity that are both (i)
indexed to its own stock, and (ii) classified in shareholders equity, would not be considered a derivative for the purposes of applying
ASC 815. Any embedded conversion features and/or freestanding warrants that do not meet the scope exception noted above are classified
as derivative liabilities, initially measured at fair value, and remeasured at fair value each reporting period with change in fair value
recognized in the Condensed Consolidated statements of operations. Any embedded conversion features and/or freestanding warrants that
meet the scope exception under ASC 815 are initially recorded at their relative fair value in paid-in-capital and are not remeasured
at fair value in future periods. The host debt instrument is initially recorded
at its relative fair value in long-term debt. The host debt instrument is accounted for in accordance with guidance applicable to non-convertible
debt under FASB ASC Topic 470 Debt (“ASC 470”) and is accreted to its face value over the term of the debt with accretion
expense and periodic interest expense recorded in the unaudited condensed consolidated statements of operations. Issuance costs are allocated to each instrument
in the same proportion as the proceeds that are allocated to each instrument. Issuance costs allocated to the debt hosted instrument
are netted against the proceeds allocated to the debt host. Issuance costs allocated to freestanding warrants classified in equity are
recorded in paid-in-capital. 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, restricted stock, 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 months
ended June 30, 2022, and as a result, all potentially dilutive common shares are considered antidilutive for this period. 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:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Weighted-average common shares outstanding 438,012,811 110,063,554 305,731,572 139,087,196
Weighted-average potential common shares considered outstanding 3,000,000 8,004,813 3,000,000 14,009,685
Weighted-average common shares outstanding - basic 441,012,811 118,068,367 308,731,572 153,096,881
Dilutive effect of options, warrants and restricted stock units - - - -
Weighted-average common shares outstanding - diluted 441,012,811 118,068,367 308,731,572 153,096,881
Options, restricted stock units, and warrants and convertible debt excluded from the computation of diluted loss per share because the effect of inclusion would be anti-dilutive 1,177,949,083 - 141,166,211 - Emerging Growth Company Sysorex is an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). As such, Sysorex is 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 of 2002, as
amended. In addition, Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition
period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, 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. |
