UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
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For the transition period from to
Commission
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by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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| ☒ | Smaller reporting company | ||
| Emerging growth company |
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As of November 10, 2021, there were
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND OTHER INFORMATION CONTAINED IN THIS REPORT
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may” or other similar expressions in this Form 10-Q. In particular, these include statements relating to future actions; prospective products, applications, customers, and technologies; future performance or results of anticipated products; anticipated expenses; and projected financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
| ● | our ability to successfully integrate acquired businesses or new products, or to realize anticipated synergies in connection with mergers and acquisitions; |
| ● | the effect of COVID-19, closure of offices and site location(s); on our ability to service our customers resulting in less revenues; |
| ● | our cash position and our history of losses; |
| ● | our ability to achieve profitability; |
| ● | customer demand for the products and services we offer; |
| ● | the impact of competitive or alternative services, products, technologies, and pricing; |
| ● | general economic conditions and events and the impact they may have on us, on our customers, and on our potential customers; |
| ● | a security breach, through cyber-attack, cyber intrusion, insider threats or otherwise, or other significant disruption of our IT networks and related systems; |
| ● | general cryptocurrency risks; |
| ● | technological changes and developments in the blockchain and cryptocurrencies; |
| ● | risks related to changes of rules and regulations in connection with cryptocurrencies in general and Ethereum in particular; |
| ● | risks related to Ethereum’s transition from “proof-of-work” to “proof-of-stake” model that may render mining activities within Ethereum blockchain obsolete; |
| ● | risks related to the geographical locations of our cryptocurrency mining facilities; |
| ● | competition for blockchain platforms and technologies, including but not limited to Non-Fungible tokens (“NFTs”); |
| ● | our ability to obtain adequate financing in the future; |
ii
| ● | our ability to continue as a going concern; |
| ● | our ability to complete strategic transactions, which may include acquisitions, mergers, dispositions, joint ventures, or investments; |
| ● | lawsuits and other claims by third parties; |
| ● | our success at managing the risks involved in the foregoing items; and |
| ● | other risks and uncertainties set forth in this Quarterly Report on Form 10-Q or the Company’s periodic filings in the section entitled “Risk Factors,” which is incorporated herein by reference. |
We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.
You should read this Form 10-Q and the documents that we have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Unless otherwise stated or the context otherwise requires, the terms “Sysorex,” “we,” “us,” “our,” and the “Company” refer collectively to Sysorex, Inc. and its subsidiaries, TTM Digital Assets & Technologies, Inc. (“TTM Digital”) and Sysorex Government Services, Inc. (“SGS”).
iii
PART I—FINANCIAL INFORMATION
| Item 1. | Financial Statements |
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information which are the accounting principles that are generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, the condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.
The results for the period ended September 30, 2021, are not necessarily indicative of the results of operations for the full year. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s 8-K/A filed with the Securities and Exchange Commission (the “SEC”) on June 24, 2021.
1
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands of dollars, except number of shares and par value data)
(Unaudited)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Digital assets | ||||||||
| Accounts receivable, net | ||||||||
| Related party receivables | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Mining equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Investment in Style Hunter | - | |||||||
| Investment in Up North Hosting, LLC | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Related Party loan | - | |||||||
| Convertible Debt, net | - | |||||||
| Deferred revenue | ||||||||
| Total Current Liabilities | ||||||||
| Commitments and Contingencies – Note 13 | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, par value $ | ||||||||
| Treasury stock, at cost, | ||||||||
| Subscription receivable | ( | ) | ||||||
| Additional paid-in-capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
2
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands of dollars, except number of shares and per share data)
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | ||||||||||||||||
| Mining income | $ | $ | $ | $ | ||||||||||||
| Product revenue | ||||||||||||||||
| Services revenue | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Operating costs and expenses | ||||||||||||||||
| Mining cost | ||||||||||||||||
| Product cost | ||||||||||||||||
| Services cost | ||||||||||||||||
| Sales and marketing | - | |||||||||||||||
| General and administrative | ||||||||||||||||
| Management Fees | ||||||||||||||||
| Impairment of digital assets | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Total Operating Costs and Expenses | ||||||||||||||||
Gain (Loss) from Operations
| ( |
) | ( |
) | ||||||||||||
| Other Income (Expenses) | ||||||||||||||||
| Merger charges | ( |
) | ||||||||||||||
| Debt Restructuring fee | ( |
) | ||||||||||||||
| Interest expense | ( |
) | ( |
) | ||||||||||||
| Realized gain (loss) on sale of digital assets | ( |
) | ||||||||||||||
| Gain/(loss) on disposal of assets | ( |
) | ( |
) | ||||||||||||
| Other expense, net | - | |||||||||||||||
| Total Other Income (Expense) | ( |
) | ( |
) | ||||||||||||
| Income (Loss) before Income taxes and loss in equity method investee | ( |
) | ( |
) | ||||||||||||
| Income tax benefit | ||||||||||||||||
| Income (Loss) before Income in equity method investee | ( |
) | ( |
) | ||||||||||||
| Share of net loss of equity method investee | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net Income (Loss) | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Net Income (Loss) per share - basic and diluted | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Weighted Average Shares Outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
3
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended September 30, 2021, and September 30, 2020
(In thousands of dollars, except share data)
(Unaudited)
| Common Stock | Treasury Stock | Additional Paid-In |
Subscription | Accumulated | ||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Receivables | Deficit | Total | |||||||||||||||||||||||||
| Balance – December 31, 2019 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Distributions to shareholders | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance – March 31, 2020 | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Distributions to shareholders | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance – June 30, 2020 | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Shares issued | - | |||||||||||||||||||||||||||||||
| Distributions to shareholders | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Balance - September 30, 2020 | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Balance - December 30, 2020 | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Payment of subscription receivable | - | - | ||||||||||||||||||||||||||||||
| Distributions to shareholders | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Exercise of Moon warrants | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||
| Balance – March 31, 2021 | ||||||||||||||||||||||||||||||||
| Shares issued: | ||||||||||||||||||||||||||||||||
| Mining equipment | - | - | - | - | - | |||||||||||||||||||||||||||
| Sysorex Recapitalization | - | |||||||||||||||||||||||||||||||
| TTM digital/Sysorex merger | ||||||||||||||||||||||||||||||||
| Professional services | - | |||||||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance – June 30, 2021 | ( |
) | ||||||||||||||||||||||||||||||
| Convertible debt warrants | - | - | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Shares issued for services | - | |||||||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Balance - September 30, 2021 | $ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | |||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Stock compensation | - | |||||||
| Amortization of debt discount and debt issuance costs | - | |||||||
| (Gain) Loss on the sale/disposal of mining equipment | ( | ) | ||||||
| Realized (gain) loss on sale of digital assets | ( | ) | ( | ) | ||||
| Gain on settlement of vendor liabilities | ( | ) | - | |||||
| Impairment of digital assets | ||||||||
| Equity in earnings of equity method investments | ||||||||
| Change in fair value of accrued issuable equity | ( | ) | - | |||||
| Issuance of shares in exchange for services | - | |||||||
| Merger charges | - | |||||||
| Debt restructuring fee | - | |||||||
| Changes in assets and liabilities: | ||||||||
| Digital assets - mining net of pool fees and mgmt fees | ( | ) | ( | ) | ||||
| Related party receivable | ||||||||
| Prepaid assets and other current assets | ( | ) | ( | ) | ||||
| Accounts receivable and other receivables | ||||||||
| Accounts payable | ( | ) | - | |||||
| Accrued liabilities and other current liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Proceeds from sale of digital assets | ||||||||
| Reverse acquisition of Sysorex business | - | |||||||
| Purchase of mining equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of mining equipment | ||||||||
| Investments in Up North & Style Hunter | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Repayment of loans | ( | ) | ( | ) | ||||
| Issuance of members’ interests | ||||||||
| Proceeds received for convertible debt | - | |||||||
| Cash paid for convertible debt transaction costs | ( | ) | - | |||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
5
Sysorex, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands of dollars)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Sysorex recapitalization | $ | $ | - | |||||
| Payments of short-term borrowing with digital assets | - | |||||||
| Debt discount attributed to the fair value of the warrants | - | |||||||
| Distribution of digital assets to members | ||||||||
| Equipment exchanged for equity | - | |||||||
| Equipment acquired through lease purchase arrangement | - | |||||||
| Settlement of loan with mining equipment | - | |||||||
6
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature and description of Business
Description of Business
Sysorex, Inc. is a digital asset technology company primarily focused on Ethereum mining and the Ethereum blockchain. The Company has two wholly owned subsidiaries: TTM Digital Assets& Technologies, Inc. (“TTM Digital”) and Sysorex Government Services, Inc. (“SGS”). Following the Company’s Merger with TTM Digital in April 2021, the Company shifted its primary business focus to the mining of Ethereum and opportunities related to the Ethereum blockchain. In addition to the mining of Ethereum, the Company continues to operate its wholly owned subsidiary, SGS, a business that provides information technology products, solutions, and services to federal, state, and local government, including system integrators. The Company is headquartered in Virginia.
Note 2 — Going Concern
As of September 30, 2021, the Company had an approximate
cash balance of $
Funding the Company’s operations on a go-forward basis will rely significantly on the Company’s ability to continue to mine cryptocurrency and the spot or market price of the cryptocurrency mined. The Company expects to generate ongoing revenues from the mining of cryptocurrencies, primarily Ethereum currency rewards, in its mining facilities. The Company’s ability to liquidate Ethereum currency rewards if needed at future values will be evaluated from time to time to generate cash for operations. Generating Ethereum currency rewards which exceed our production and overhead costs will determine the Company’s ability to report profit margins related to such mining operations. If the Company is unable to generate sufficient revenue from Ethereum mining when needed or secure additional sources of funding, it may be necessary to significantly reduce the current rate of spending or explore other strategic alternatives. The Company’s priority is to build Ethereum (“ETH’) holdings, however, the Company will liquidate parts of its ETH holdings if other strategic alternatives are not achieved.
Note 3 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with 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 and nine-month periods ended September 30, 2021, is 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 8-K/A filed with the SEC on June 24, 2021.
TTM Digital Reverse Merger and Sysorex Recapitalization
On April 8, 2021, the Company, TTM Digital, and TTM Acquisition Corp., a Nevada corporation, a wholly owned subsidiary of Sysorex (“MergerSub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the Merger Agreement, the parties agreed that Sysorex would acquire TTM Digital by way of a reverse triangular merger, subject to certain closing conditions (the “Merger”). On April 14, 2021 (the “Effective Time”), the closing conditions delineated in the Merger Agreement were satisfied and the Merger closed. At the Effective Time, the MergerSub was merged with and into TTM Digital with TTM Digital surviving the Merger.
7
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Under the terms of the Merger Agreement, the shareholders
of TTM Digital received a right to receive an aggregate of
As discussed in Note 5 Segment Reporting after the completion of the Merger the Company reports two segments (“TTM Digital” and “Sysorex Government Services”) which are also defined as reporting units for impairment assessment purposes.
The Company is in the process of finalizing the purchase allocation, thus the provisional measures of deferred income taxes, intangibles, and goodwill are subject to change. The Company expects the purchase price allocation to be finalized prior to the filing of its 2021 Annual Report on Form 10-K.
In
the purchase price allocation of the fair value of assets acquired and liabilities assumed, the Company has recognized an excess of net
liabilities assumed over the determined fair value of the Sysorex Government Services Reporting Unit. The excess of the purchase price
over the net liabilities assumed was allocated to goodwill in the amount of $
Subsequent
to the Merger Agreement the majority of the Sysorex debt, certain liabilities classified as current and a forward consulting contract
with a former member Sysorex board of director’s (the “Debt Items”) aggregating $
8
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the fair value of the identified assets acquired and liabilities assumed at the Merger date, the effect of the Sysorex Recapitalization on the assets acquired and liabilities assumed, and the net assets acquired, and liabilities assumed for the aggregate of the reverse acquisition and Merger Charges and Sysorex Recapitalization separate transactions:
| (In thousands of dollars) | Reverse
Acquisition Fair Value | Sysorex
Recapitalization Fair Value | Aggregate
Fair Value | |||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable | ||||||||||||
| Prepaid assets and other current assets | ( | ) | ||||||||||
| Property and equipment | ||||||||||||
| Goodwill | ||||||||||||
| Customer Relationships Intangible | ||||||||||||
| Tradename Intangible | ||||||||||||
| Other assets | ||||||||||||
| Accounts payable | ( | ) | ( | ) | ||||||||
| Accrued liabilities | ( | ) | ( | ) | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||||||
| Short term debt | ( | ) | ( | ) | ||||||||
| Long term debt | ( | ) | ||||||||||
| Other liabilities | ( | ) | ( | ) | ||||||||
| Fair value allocated to net assets / (liabilities) | $ | ( | ) | $ | $ | ( | ) | |||||
| Fair value of consideration and recapitalization equity | $ | $ | $ | |||||||||
| Merger charges | ( | ) | ( | ) | ||||||||
| Debt restructuring fees | ( | ) | ( | ) | ||||||||
| Net Sysorex equity and charges to income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
For the nine months ended September 30, 2021, the
Company incurred approximately $
9
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Financial Information
The
following unaudited proforma results of operations are presented for information purposes only. The unaudited proforma results of operations
are not intended to present actual results that would have been attained had the reverse merger and Sysorex Recapitalization been completed
as of January 1, 2020, or to project potential operating results as of any future date or for any future periods. The revenue and net
loss of the reverse merger accounting acquiree for the three and nine months ended September 30, 2021, included in the consolidated statement
of operations amounted to approximately $
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Income (Loss) per share - basic and diluted | ( | ) | ( | ) | ( | ) | ||||||||||
| Weighted Average Shares Outstanding - basic and diluted | ||||||||||||||||
| Supplemental Pro forma Information (a) | ||||||||||||||||
| Merger charges | ||||||||||||||||
| Restructuring fee | ||||||||||||||||
| Transaction costs - Accounting acquirer and acquiree | ||||||||||||||||
| Total Nonrecurring Pro forma Adjustments | ||||||||||||||||
| (a) | Supplemental Pro forma Information consists of material, nonrecurring pro forma adjustments directly attributable to the reverse acquisition and Sysorex Recapitalization |
10
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Digital and SGS. All material inter-company balances and transactions have been eliminated in consolidation.
The
Company’s wholly owned subsidiary, TTM Digital has a
On
November 2, 2021, the Company acquired the other
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
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. |
11
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 for long-lived assets during the periods ended September 30, 2021, or September 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.
12
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 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 $0.7 million as of September 30, 2021.
13
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $
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.
Investments
The
Company accounts for its investments that represent less than
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. The Company recorded
a $
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 (losses) through the sale and disbursement of digital assets during the three and nine months ended September 30, 2021,
of $
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.
14
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 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 September 30, 2021, a valuation allowance
of $
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 net operating loss (“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 nine-month periods ended September 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:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||||
| Weighted-average potential common shares considered outstanding | ||||||||||||||||
| Weighted-average common shares outstanding - basic | ||||||||||||||||
| Dilutive effect of options, warrants and restricted stock units | ||||||||||||||||
| Weighted-average common shares outstanding - diluted | ||||||||||||||||
| 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 | ||||||||||||||||
15
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies income tax accounting in various areas including, but not limited to, the accounting for hybrid tax regimes, tax implications related to business combinations, and interim period accounting for enacted changes in tax law, along with some codification improvements. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Certain changes in the standard require retrospective or modified retrospective adoption, while other changes must be adopted prospectively. The Company implemented ASU 2019-12 and it did not have a material impact on our consolidated financial statements.
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). The ASU amends and clarifies certain interactions between the guidance under Topic 321, Topic 323 and Topic 815, by reducing diversity in practice and increasing comparability of the accounting for these interactions. The amendments in the ASU should be applied on a prospective basis. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period for which financial statements have not yet been issued. The new standard has not had a material impact on the consolidated financial statements or disclosures.
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Most significantly, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company has early adopted the new guidance on January 1, 2021, with no impact to prior period financial statements given that the first applicable instrument, ‘2021 Convertible Debentures& Warrants’ was not executed until Q3 2021. See Note 10 for further disclosure on the instrument.
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 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. 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.
Note 5 — Segment Reporting
Operating
segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly
by the chief operating decision maker (CODM) for purposes of allocating resources and evaluating financial performance. The Company’s
CODM is the chief financial officer who reviews financial information presented at the subsidiary level for purposes of allocating resources
and evaluating financial performance. As such, the Company’s operations constitute
The following tables reflect the results of continuing operations of the company’s segments consistent with the management and measurement system utilized within the company. Performance measurement is primarily based on revenue and gross profit. These results are used, in part, by the chief operating decision maker, both in evaluating the performance of, and in allocating resources to, each of the segments. The CODM does not evaluate performance or allocate resources based on segment asset data, and therefore such information is not included.
16
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of the revenue, cost of revenue for our subsidiary segments for the nine and three months ended September 30, 2021 (in thousands):
| For the three months ended September 30, 2021 | ||||||||||||
| Revenues | TTM Digital | Sysorex Government Services | Consolidated | |||||||||
| Products Revenue | $ | $ | $ | |||||||||
| Services Revenue | ||||||||||||
| Mining Income | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Product Cost | $ | $ | $ | |||||||||
| Services Cost | ||||||||||||
| Mining Cost | ||||||||||||
| Other Operating Expenses | $ | $ | $ | |||||||||
| Operating Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| For the nine months ended September 30, 2021 | ||||||||||||
| TTM Digital | Sysorex Government Services | Consolidated | ||||||||||
| Revenues | ||||||||||||
| Products Revenue | $ | $ | $ | |||||||||
| Services Revenue | ||||||||||||
| Mining Income | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Product Cost | $ | $ | $ | |||||||||
| Services Cost | ||||||||||||
| Mining Cost | ||||||||||||
| Other Operating expenses | $ | $ | $ | |||||||||
| Operating Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Total Segment Assets | $ | $ | $ | |||||||||
Note 6 — Mining Equipment, net
Mining equipment, net, was comprised of the following (in thousands of dollars):
| Balance as of | ||||||||
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Gross Mining Equipment: | ||||||||
| Mining Equipment (non-GPUs) | $ | $ | ||||||
| GPUs | ||||||||
| Accumulated Depreciation | ||||||||
| Mining Equipment (non-GPUs) | ( | ) | ( | ) | ||||
| GPUs | ( | ) | ( | ) | ||||
| Mining Equipment, net | $ | $ | ||||||
17
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
An
Ethereum mining server consists of multiple commodity Graphics Processing Units (GPUs) and ancillary components such as chassis, CPU,
motherboard, and power supply. The GPUs are solely responsible for the compute power to generate the cryptographic hashes for mining,
while the other components act to support the system. Depreciation expense was approximately $
The
Company (TTM Digital) purchased approximately 4,500 GPUs with specialized Cryptocurrency Mining Processors through execution of an Asset
Contribution and Exchange Agreement and a Purchase Order for a lease to buy financing arrangement which total $
Note 7 — Equity Method Investments
The Up North Hosting balance sheet was as follows as of September 30, 2021, and December 31, 2020 (in thousands of dollars):
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Current assets | $ | $ | ||||||
| Non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities | ||||||||
| Total liabilities | ||||||||
| Members’ equity | ||||||||
| Retained Earnings (Deficit) | ( | ) | ||||||
| Total Members’ Equity | ||||||||
| Total Liabilities and Members’ Equity | $ | $ | ||||||
As of September 30, 2021, and December 31, 2020, Up North Hosting’s assets and liabilities were primarily comprised of fixed assets and short-term accrued liabilities as reflected on the consolidated balance sheet.
Fixed assets, net, which are owned by Up North Hosting, were comprised of the following (in thousands of dollars):
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Building | $ | $ | ||||||
| Electrical Infrastructure Assets | ||||||||
| Machinery & Equipment Assets | ||||||||
| Mechanical (HVAC) Assets | ||||||||
| Server and Network Assets | ||||||||
| Gross value | ||||||||
| Accumulated depreciation | ( |
) | ( |
) | ||||
| Property, plant, and equipment, net | $ | $ | ||||||
18
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Up North Hosting statement of operations for the three and nine months ended September 30, 2021, and 2020 was as follows (in thousands of dollars):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues, excluding depreciation | ||||||||||||||||
| Selling, general, and administrative | ||||||||||||||||
| Other (Income)/Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Income (loss) attributable to TTM | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The Company’s main cost of revenues relates to the hosting and electricity expenses used to power the Datacenter and the hosted equipment.
Note 8 — Intangible Assets
Intangible assets as of September 30, 2021, consist of the following:
| Gross | Net | |||||||||||
| Carrying | Accumulated | Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Trade Name | $ | $ | ( | ) | $ | |||||||
| Customer Relationships | ( | ) | ||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | |||||||
| Calendar Years ending December 31, | Amount | ||||
| Remaining 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 9 — Credit Risk and Concentrations
Financial instruments that subject the Company to credit risk consist principally of trade accounts receivable and cash. The Company performs certain credit evaluation procedures and does not require collateral for financial instruments subject to credit risk. The Company believes that credit risk is limited because the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, consequently, believes that its accounts receivable credit risk exposure beyond such allowances is limited.
The Company maintains cash deposits with financial institutions, which, from time to time, may exceed federally insured limits. The Company has not experienced any losses and believes it is not exposed to any significant credit risk from cash.
19
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
following table sets forth the percentages of sales derived by SGS from those customers that accounted for at least
| For the Three
Months Ended September 30, 2021 | For the Period
April 15, 2021, through September 30, 2021 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
| Customer A | % | % | ||||||||||||||
| Customer B | -- | - | % | |||||||||||||
| Customer C | % | -- | - | |||||||||||||
As
of September 30, 2021, Customers A and C represented approximately
For
the period April 15, 2021, through September 30, 2021, four vendors represented approximately
Mining
equipment purchased from one TTM Digital vendor during the nine months ended September 30, 2021, was $
Geographic and Technology Concentration
The Company had geographic concentration risk with mining operations being exclusively carried out within New York in the first Quarter of 2021 and throughout 2020, while the Company has added geographic diversity during April 2021 using a colocation datacenter in North Carolina. Any legislation that restricts or bans the mining of proof-of-work related digital asset mining in New York State would have a negative impact on the Company’s ability to operate and generate revenues.
Further, the Company had concentrated exposure to the Ethereum blockchain infrastructure through its mining operations during the periods presented. There is a possibility of digital asset mining algorithms transitioning to proof-of-stake validation and other mining related risks, which could make us less competitive and ultimately adversely affect our business and our ability to generate revenues. When and if Ethereum switches to proof-of stake the Company’s GPUs will no longer be able to mine Ethereum. Additionally, on August 5, 2021, the London Hard Fork protocol went into effect which includes changes in Ethereum’s handling of transaction fees. These changes could have an impact on the Company’s future potential Ethereum revenue stream due to less Ethereum being distributed per mined block, if not offset by an increase in the value of ETH and/or additional transaction tipping, the process by which a user can pay an additional amount to ensure a transaction is processed very quickly. The Company did not see any financial impact during the quarter ended September 30, 2021.
Note 10 — Convertible Debentures & Warrants
Convertible debt as of September 30, 2021, and December 31, 2020, consisted of the following (in thousands):
| As of September 30, | As of December 31, | |||||||
| 2021 | 2020 | |||||||
| Convertible Debentures & Warrants, net of debt discount and debt issuance costs of $ | $ | $ | ||||||
2021 Convertible Debentures & Warrants
On July 7, 2021, the Company consummated the initial
closing of a private placement offering (the “Offering”) pursuant to the terms and conditions of a Securities Purchase Agreement.
At the initial closing, the Company sold the purchasers (i)
On August 13, 2021, the company consummated the
second closing of the offering pursuant to the same terms and conditions of the Securities Purchase Agreement dated July 7, 2021. At the
second closing, the Company sold the purchasers (i)
20
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the Convertible
Debentures, the Company entered into a Warrant Purchase Agreement (the “Agreement”) providing investors the right to purchase
common stock of Sysorex.
The Company recorded the debt net of the
The
Convertible Note bears interest at the rate of
Under the conversion terms of the Debentures, the
Debenture is convertible, in whole or in part, into shares of Common Stock at the option of the Holder at any time until the Debenture
is no longer outstanding. The Holder executes a conversion by delivering to the Company a Notice of Conversion specifying the principal
amount to be converted and the date on which the conversion is to be executed.
Note 11 — Digital Assets
The following table presents the roll forward of digital asset activity during the periods ended:
| Nine
months ended September 30, |
||||||||
| 2021 | 2020 | |||||||
| Opening Balance | $ | $ | ||||||
| Revenue from mining | ||||||||
| Received for membership interest | ||||||||
Payment of Mining equipment under lease to buy arrangement | ( |
) | ||||||
| Mining pool operating fees | ( |
) | ( |
) | ||||
| Management fees | ( |
) | ( |
) | ||||
| Owners distributions | ( |
) | ( |
) | ||||
| Proceeds from sale of digital assets | ( |
) | ( |
) | ||||
| Impairment of digital assets | ( |
) | ||||||
| Realized gain on sale of digital assets | ||||||||
| Ending Balance | $ | $ | ||||||
| Three
months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Opening Balance | $ | $ | ||||||
| Revenue from mining | ||||||||
| Received for membership interest | ||||||||
| Payment of Mining equipment under lease to buy arrangement | ( | ) | ||||||
| Mining pool operating fees | ( | ) | ( | ) | ||||
| Management fees | ( | ) | ||||||
| Owners’ distributions | ( | ) | ||||||
| Proceeds from sale of digital assets | ( | ) | ( | ) | ||||
| Impairment of digital assets | ( | ) | ||||||
| Realized gain on sale of digital assets | ( | ) | ||||||
| Ending Balance | $ | $ | ||||||
21
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Equity
As discussed in Note 2 Basis of Presentation the
Company completed a reverse merger of Sysorex and TTM Digital with TTM Digital being the accounting acquirer and reporting entity. In
a reverse merger, the capital accounts of the reporting entity (TTM Digital) are restated to reflect the legal capital structure of the
legal acquirer (Sysorex). As a result, the share data of the reporting entity has been retroactively restated for all periods presented
to the equivalent share values of Sysorex for the capital transaction activity of TTM Digital, as if the reverse merger occurred on January
1, 2020. The share data of the reporting entity has been retroactively stated for all periods presented to the equivalent share values
of Sysorex. The Company is authorized to issue
As
of December 31, 2019, the Company had
During
the quarter ended March 31, 2021, the Company issued to Moon Manager LLC,
Effective
on April 1, 2021, TTM Digital entered into an Asset Contribution and Exchange Agreement (Mining Equipment) to acquire approximately 4,500
GPUs with CoreWeave. In connection with the Contribution and Exchange Agreement, TTM Digital issued equity representing
On
April 14, 2021, the reverse merger of Sysorex and TTM Digital closed.
As discussed in Note 2, the majority of the Sysorex debt, certain liabilities classified as current and a forward consulting contract with a former Sysorex Board Member (the “Debt Items”) aggregating $19.4 million were converted to 34,097,255 Sysorex shares when fully issued (the “Sysorex Recapitalization”). 25,985,633 shares were immediately issued, prefunded rights were exchanged from an investor’s issued shares for 5,111,622 shares and the right to receive 3,000,000 shares of Sysorex stock at a future date at the option of the holder subject to certain events.
During
the three months ended June 30, 2021, the Company additionally issued an aggregate of
During the three months ended September 30, 2021, the Company issued
an aggregate of
Stock Options
A summary of stock option activity for the nine-month period ended September 30, 2021 is as follows:
| Number
of Options (in Shares) | Weighted
Average Exercise Price | |||||||
| Outstanding, January 1, 2020 | ||||||||
| Granted | $ | |||||||
| Exercised | ||||||||
| Forfeited or cancelled | ||||||||
| Outstanding, September 30, 2021 | $ | |||||||
| Exercisable, September 30, 2021 | $ | |||||||
The Company’s valued the stock options based
on the Monte Carlo valuation methodology on July 20, 2021, the stock options grant date. The stock options were immediately vested and
have a life of
22
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Commitments and Contingencies
Contractual Commitments
The
Company agreed to hosting arrangements whereby each month, the Company is to pay approximately $
The Company entered into a Registration Rights
Agreement (the “RRA”) dated April 13, 2021. The Company had ninety (90) calendar days following the closing date of its Merger
with TTM Digital Assets & Technologies, Inc. on April 14, 2021 (“Merger”) to file an initial registration statement covering
the Shares. The ninety (90) calendar day filing date was July 13, 2021 (“Filing Deadline”). The Company did not fulfil its
obligation to file a registration statement covering the Shares by July 13, 2021, nor any date thereafter up to and including the filing
of this 10Q Filing and therefore has accounted for an accrued liability in the amount of $
Litigation
Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements.
If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. There are no pending legal proceedings to which the Company is a party to.
Note 14 — Related Party Transactions
Effective April 1, 2021, the Company entered a variety of contracts with CoreWeave, Inc. (“CoreWeave”).
Asset Contribution and Exchange Agreement
On
April 1, 2021, CoreWeave contributed 3,130 GPU of data mining equipment with 150 gigahash of computing power to the Company in exchange
for an equity interest representing
Lease to Buy Purchase Order
The
Company acquired 1,344 GPU data mining equipment with 125 gigahash of computing power in a lease to buy arrangement. The Company agreed
to total payments of $
Hosting Facilities Services Order
The
Hosting Facility Services Order (the “Hosting Contract”) provided for the provision of hosting facility space and services
by CoreWeave. The services are paid for in advance of the service month and the initial term of the hosting services is through June
30, 2022 and renews automatically for successive one year renewal terms unless either party terminates within sixty (60) days of the
expiration of the then current term.
23
SYSOREX, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Services Agreement
The initial term of the Services Agreement runs from April 1, 2021, through September 30, 2022, and automatically renews thereafter for successive one (1)-year terms unless either party provides written notice to the other of nonrenewal within sixty (60) days of the expiration of the then current Term. The initiation of the Services Agreement required a one-time payment of $100,000. The monthly base management fee was set to $20.00 per GPU-based Mining System (approximately $20,000 per month), and $6.50 per ASIC-based Mining System. Base management fees are paid in arrears and due within fifteen (15) days of invoice receipt. If, during any calendar month of the Term, CoreWeave operates on average, more than 1,500 Mining Systems on behalf of the Company, the Base Management Fee with respect to the excess Mining Systems above 1,500 is discounted by 40%. The Company recorded $140,000 and $70,000 in mining costs for the nine and three months ended September 30, 2021.
Master Services Agreement
On April 29, 2021, the Company entered into a Master
Services Agreement with CoreWeave to provide support to management relating to cryptocurrency expertise, marketing, and other operational
matters for a three-month term. The compensation for these services is a fixed fee of $
First Choice International Company, Inc (“First Choice”)
On July 9, 2021, the Company executed an agreement
whereby First Choice will provide consulting services to the Company. The Company paid First Choice a fully earned flat fee of $
Bespoke Growth Partners, Inc. (“Bespoke”)
Effective as of April 15, 2021, the Company entered
into a consulting agreement with Bespoke. Under the terms of the consulting agreement, the Company may request Bespoke to expand
its services to advise the Company with respect to an up-listing to a national stock exchange. The Company has agreed pay the consultant
a $500,000 success fee within 5 days of commencement of trading on a national exchange.
Ressense LLC
On August 4, 2021, the Company executed a six (6)
month business advisory services agreement with Ressense LLC. The services to be provided include potential business activities including
acquisition, merger and reverse merger opportunities.
Style Hunter, Inc.
On
September 26, 2021,
after the 180-day anniversary of Closing the Option Price will be $2.03670 (a $25,000,000 Company valuation).
Note 15 — Subsequent Event
On November 2, 2021,
24
| 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 the Company’s audited consolidated financial statements and notes for the years ended December 31, 2020, and 2019 and the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with SEC on March 31, 2021 and in conjunction with the Company’s 8-K/A filed with the SEC on June 24, 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 were a stand-alone company.
Overview of the Company’s Subsidiaries
TTM Digital
TTM Digital is a digital asset technology and mining company that owns and operates a large number of specialized cryptocurrency mining processors and is currently focused on the Ethereum blockchain ecosystem. Following the Merger, the business of TTM Digital has become a primary business segment of the Company.
TTM Digital was originally formed as a Delaware limited liability company on June 28, 2017, under the name of TTM Ventures LLC. Thereafter, on March 30, 2021, it filed a certificate of conversion to a non-Delaware entity with the Secretary of State of the State of Delaware together with Articles of Conversion and Articles of Incorporation with the Secretary of State of the State of Nevada filed on the same date. As a result, of such conversion, TTM Digital has become a Nevada corporation under the name of “TTM Digital Assets & Technologies, Inc.”
Sysorex Government Services
SGS is a 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, allow us to reach multiple customer public sector segments including federal, state and local governments, as well as educational institutions.
The financial statements present the combined results of operations, financial condition, and cash flows of Sysorex and its subsidiaries. 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.
25
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with 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 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 nine-month period ended September 30, 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 8-K/A filed with the SEC on June 24, 2021.
Known Trends or Uncertainties
TTM Digital has an evolving business model which is subject to various uncertainties. As digital assets and blockchain technology become more widely utilized on a mass scale, we anticipate that the services and products associated with the technologies will continue to evolve. To successfully continue in the industry, our business model may need to evolve to reflect the trends of the industry. Over time, we may modify aspects of our business model relating to our strategy. We cannot offer any assurance that we will be successful or that the future industry or business operation changes will not result in harm to our business. We may not be able to manage growth effectively, which could damage our reputation, limit our growth and negatively affect our operating results. Management cannot provide any assurances that we will identify all emerging trends and growth opportunities in this business sector, and we may lose out on those opportunities to current or future competitors. As anticipated, any such circumstances could have a material adverse effect on our business, prospects, or operations. There is a possibility of digital asset mining algorithms transitioning to proof-of-stake validation and other mining-related risks, which could make us less competitive and ultimately adversely affect our business and our ability to generate revenues. When and if Ethereum switches to “proof-of-stake” our GPUs will no longer be able to mine Ethereum. TTM Digital will mine other coins with the GPUs. At that time, instead of mining with GPUs, the amount of Ethereum accumulated in our treasury will be used to staked to the network in the “proof-of-stake model” When you proof-of-stake, you earn rewards based on the amount of Ethereum you have. Further, TTM Digital is concentrated in operations to support the ‘Web 3.0’ movement of leveraging the decentralized blockchain protocol for processing financial transactions and ownership rights. Additionally, on August 5, 2021, the London Hard Fork protocol (EIP 1559) went into effect which includes changes in Ethereum’s handling of transaction fees. EIP 1559 improves the efficiency of commissions, mainly on the user side. At the block level, EIP 1559's scheme allows the base fee to vary by up to 12.5% from block to block, allowing users to predict and pay a relatively accurate fee based on the rules to improve the user experience. This comes at the expense of Ethereum miners by not providing the base fee as part of the block reward for mining a block. EIP 1559 is designed to make Ethereum less inflationary by taking or “burning” ETH out of circulation, which is the excess ETH leftover from the lower transaction fee. These changes could have an impact on the Company’s future potential Ethereum revenue stream due to less Ethereum being distributed per mined block, if not offset by an increase in the value of ETH and/or additional transaction tipping, the process by which a user can pay an additional amount to ensure a transaction is processed very quickly. The Company did not see any financial impact during the quarter ended September 30, 2021.
SGS experiences variability in our net sales and operating results on a quarterly basis as a result of many factors. SGS experiences 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. SGS generally sees 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). SGS 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, may be impacted by a number of events outside of our control.
Material Changes
On April 8, 2021, the Company, TTM Digital, “MergerSub”, entered into the Merger Agreement. Under the terms of the Merger Agreement, the parties agreed that Sysorex would acquire TTM Digital by way of a reverse triangular merger, subject to certain closing conditions. On the Effective Time, the closing conditions delineated in the Merger Agreement were satisfied and the Merger closed. At the Effective Time, the MergerSub was merged with and into TTM Digital with TTM Digital surviving the Merger.
26
Under the terms of the Merger Agreement, the shareholders of TTM Digital received a right to receive an aggregate of 124,218,268 Merger Shares in exchange for their shares of TTM Digital. Simultaneously, upon the issuance of the Merger Shares to the TTM Digital shareholders, Sysorex was issued all of the authorized capital of TTM Digital and TTM Digital became a wholly owned subsidiary of Sysorex. The Merger resulted in a change of control, with the shareholders of TTM Digital receiving that number of Merger Shares equal to approximately eighty percent (80%) of the outstanding shares of capital stock of Sysorex including the effect of the Sysorex Recapitalization as discussed in TTM Digital Reverse Merger and Sysorex Recapitalization.
Effective on April 1, 2021, TTM Digital entered into an Asset Contribution and Exchange Agreement to acquire 3,130 GPUs, and thereafter a Purchase Order on April 1, 2021, for a lease-to-buy financing arrangement to acquire 1,344 GPUs with CoreWeave, with both CoreWeave agreements closing on or after April 1, 2021. In connection with the Contribution and Exchange Agreement, TTM Digital issued equity to the sellers representing 28.65% of the pre-merger equity outstanding for TTM Digital and agreed to installment payments of $2.2 million over 180 days subject to acceleration based on the completion of certain corporate events. Additionally, the parties entered a service agreement on the same date providing for installation and configuration, operation, and management of the mining systems of TTM Digital by CoreWeave. It includes the use of the management software to monitor, maintain, troubleshoot, and communicate with the hosting service providers as well as certain physical repairs. As part of the arrangement, the Company made an initial down payment of $100,000 which was applied to future invoices. The ongoing fee is determined based on the number of specific mining systems under the Service Agreement. Based on the number and type of units at the arrangement’s inception, monthly costs are expected to be $32,400. All third-party software costs associated with the Services and operation of the equipment will be passed through to the Company. The initial term of the agreement expires on June 30, 2022, and shall automatically renew thereafter for successive one (1)-year terms unless either party terminates within sixty (60) days of the then current term.
On July 7, 2021, the Company consummated the initial closing of a private placement offering (the “Offering”) pursuant to the terms and conditions of a Securities Purchase Agreement. At the initial closing the Company sold the purchasers (i) 12.5% Original Issue Discount Convertible Debentures in an aggregate principal amount of $9,990,000 and (ii) warrants to purchase up to 3,534,751 shares of common stock of the Company. The Company received total gross proceeds of $8,880,000 taking into account the 12.5% discount before deducting placement agent fees and expenses of approximately $913,000. The Debentures mature on July 7, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder.
On August 13, 2021, the Company consummated the second closing of the offering pursuant to the same terms and conditions of the Securities Purchase Agreement dated July 7, 2021. At the second closing, the Company sold the purchasers (i) 12.5% Original Issue Discount Senior Secured Convertible Debentures in an aggregate principal amount of $3,976,875 and (ii) warrants to purchase up to 1,862,279 shares of common stock of the Company. The Company received a total of $3,535,000 in gross proceeds following the second closing taking into account the 12 % discount before deducting placement agent fees and expenses of approximately $354,000. The Debentures mature on August 13, 2022, subject to a three-month extension upon mutual agreement of the Company and the holder.
Three Months Ended September 30, 2021, Compared to Three Months Ended September 30, 2020
Summary of Mining Result
The following table presents the roll forward of digital asset activity during the respective periods:
| Three
months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Opening Balance | $ | 105 | $ | 26 | ||||
| Revenue from mining | 2,992 | 614 | ||||||
| Received for membership interest | - | 46 | ||||||
Payment of Mining equipment under lease to buy arrangement | (72 | ) | - | |||||
| Mining pool operating fees | (30 | ) | (1 | ) | ||||
| Management fees | - | (87 | ) | |||||
| Owners’ distributions | - | (345 | ) | |||||
| Impairment of digital assets | (325 | ) | - | |||||
| Proceeds from sale of digital assets | (339 | ) | (180 | ) | ||||
| Realized gain on sale of digital assets | 3 | (8 | ) | |||||
| Ending Balance | $ | 2,334 | $ | 65 | ||||
Revenues
Revenues for the three months ended September 30, 2021, and 2020 were $4.9 million and $0.6 million, respectively. TTM mining revenues for the three months ended September 30, 2021, and 2020, were approximately $3.0 million and $0.6 million, respectively. As disclosed in the notes to the financial statements, Note 2 - Basis of Presentation, the acquisition/merger was effective April 14, 2021, which resulted in SGS’s reporting period of April 15, 2021 through September 30, 2021. SGS revenues for the three months ended September 30, 2021, was approximately $1.9 million. SGS revenues resulted from product sales to U.S. governmental agencies and local county governments. Revenues from mining are impacted significantly by volatility in cryptocurrency prices. For the three months ended September 30, 2021, and 2020, TTM mined 1,069 ETH and 1,739 ETH respectively, with approximately 9,000 GPUs and 5,000 GPU’s per respective period. In 2021, due to increased competition, it became four times harder to mine compared to2020, where there were fewer miners and the Company could generate more ETH with fewer GPU’s. The average price of Ethereum mined in Q3 2021 was approximately $2,771 compared to approximately $353 in Q3 2020.
27
Mining, Product, and Service Costs
Mining, product, and service costs for the three months ended September 30, 2021, of approximately $1.9 million consisted of TTM’s direct production costs of mining operations were approximately $0.4 million, including utilities and fees, but excluding depreciation, which are separately stated and SGS’s cost primarily of product sales of approximately $1.1 million. Mining costs for the three months ended September 30, 2020, was approximately $0.4 million. TTM’s direct cost did not increase in a direct linear correlation with the increase in operational Gigahash capacity due to the increased efficiencies of the new and replacement equipment, in addition to the seasonality of power pricing.
Depreciation
Depreciation expense in the three months ended September 30, 2021, totaled approximately $1.3 million, compared to $0.2 million during the three months ended September 30, 2020. The increase in depreciation is primarily attributable to the CoreWeave assets acquired disclosed in the notes to the financial statements. The increased asset base of approximately $14.2 million resulted in increased depreciation year over year.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) for the three months ended September 30, 2021, was $3.7 million, which were associated with non-employee compensation costs, professional fees incurred related to the acquisition, and corporate transaction costs incurred. TTM Digital has minimal SG&A costs for the three months ended September 30, 2020, due to efforts to limit expenditures while expanding operational capacities.
Other Income and Expense
Other income and expense for the three months ended September 30, 2021, and 2020 were approximately $1.0 million, primarily related to interest expense and $0.03 million, primarily related to gain on disposal of assets, respectively
Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020
Summary of Mining Result
The following table presents the roll forward of digital asset activity during the respective periods:
| Nine
months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Opening Balance | $ | 24 | $ | 26 | ||||
| Revenue from mining | 9,244 | 614 | ||||||
| Received for membership interest | - | 46 | ||||||
Payment of Mining equipment under lease to buy arrangement | (1,091 | ) | - | |||||
| Mining pool operating fees | (96 | ) | (1 | ) | ||||
| Management fees | (322 | ) | (87 | ) | ||||
| Owners’ distributions | (1,521 | ) | (345 | ) | ||||
| Impairment of digital assets | (325 | ) | - | |||||
| Proceeds from sale of digital assets | (3,670 | ) | (180 | ) | ||||
| Realized gain on sale of digital assets | 91 | (8 | ) | |||||
| Ending Balance | $ | 2,334 | $ | 65 | ||||
Revenues
Revenues for the nine months ended September 30, 2021, and 2020 were $13.1 million and $1.2 million, respectively. TTM mining revenues for the nine months ended September 30, 2021, and 2020 were approximately $9.2 million and $1.2 million, respectively. As disclosed in the notes to the financial statements, Note 3 Basis of Presentation, the acquisition/merger was effective April 14, 2021 which resulted in SGS’s reporting period of April 15, 2021 through September 30, 2021. SGS revenues for the period April 15, 2021 through September 30, 2021, was approximately $3.9 million. SGS revenues resulted from product sales to U.S governmental agencies and local county governments. Revenues from mining are impacted significantly by volatility in cryptocurrency prices and as a result, revenues per Ethereum unit increased greatly year to year in addition to a 110% increase in Gigahash processing power in the quarter ended September 30, 2021. The average price of Ethereum mined in the first three quarters of 2021 was approximately $2,276 compared to approximately $256 in the first three quarters of 2020.
Mining, Product, and Service Costs
Mining, product, and service costs for the nine months ended September 30, 2021, of approximately $4.0 million consisted of TTM’s direct production costs of mining operations of approximately $0.9 million, including utilities and fees, but excluding depreciation, which are separately stated and SGS’s cost primarily of product sales of approximately $3.1 million. TTM’s direct cost did not increase in a direct linear correlation with the increase in operational Gigahash capacity due to the increased efficiencies of the new and replacement equipment, in addition to the seasonality of power pricing.
28
Depreciation
Depreciation expense in the nine months ended September 30, 2021, totaled approximately $2.8 million, compared to $0.6 million during the nine months ended September 30, 2020. The increase in depreciation is primarily attributable to the CoreWeave assets acquired disclosed in the notes to the financial statements. The increased asset base of approximately $14.2 million resulted in increased depreciation year over year.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses (“SG&A”) for the nine months ended September 30, 2021, was $8.4 million, which were associated with non-employee compensation costs and professional fees incurred related to the acquisition and corporate transaction costs incurred. TTM Digital has minimal SG&A costs for the nine months ended September 30, 2020, due to efforts to limit expenditures while expanding operational capacities.
Other Income and Expense
Other income and expense for the nine months ended September 30, 2021, and 2020 were approximately $25 million and $0.4 million primarily related to a gain on disposal of assets, respectively. For the nine months ended September 30, 2021, SGS recorded approximately $22.0 million in merger charges, $2.0 million in debt restructuring fees and $1.0 million in interest costs, related to the acquisition as disclosed in Note 2 Basis of Presentation to the financial statements.
Liquidity and Capital Resources as of September 30, 2021
Going Concern
As of September 30, 2021, the Company had an approximate cash balance of $4.3 million, working capital deficit of approximately $10.6 million, and an accumulated deficit of approximately $28.1 million. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months following the issuance of these financial statements. 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.
Funding our operations on a go-forward basis will rely significantly on the Company’s ability to continue to mine cryptocurrency and the spot or market price of the cryptocurrency mined. The Company expects to generate ongoing revenues from the mining of cryptocurrencies, primarily Ethereum currency rewards, in its mining facilities. The Company’s ability to liquidate Ethereum currency rewards at future values will be evaluated from time to time to generate cash for operations. Generating Ethereum currency rewards which exceed our production and overhead costs will determine the Company’s ability to report profit margins related to such mining operations. If the Company is unable to generate sufficient revenue from Ethereum mining when needed or secure additional sources of funding, it may be necessary to significantly reduce the current rate of spending or explore other strategic alternatives.
Our capital resources and operating results as of and through September 30, 2021, consist of the:
1) An overall working capital deficit of $10.6 million,
2) Cash and cash equivalents of $4.3 million,
3) Net cash used in operating activities of $5.8 million,
4) Net cash provided by investing activities of $3.1 million, and
5) Net cash provided in financing activities of $6.9 million.
Operating Activities
Net cash used in operating activities was $5.8 million during the nine months ended September 30, 2021. Cash was consumed from continuing operations by the net loss of $28.0 million, plus non-cash and one-time items of $30.5 million, consisting primarily of merger charges of $22.0 million, non-employee compensation costs of $2.4 million, shares issued in exchange for services, restructuring fees of $2.0 million, and depreciation and amortization of $3.0 million offset by, changes in assets and liabilities of $8.0 million.
Net cash used in operating activities was $0.4 million during the nine months ended September 30, 2020. Cash was consumed from the net loss of less than $0.2 million, plus non-cash items of $1.2 million, consisting of depreciation of $0.6 million, offset primarily by decreases in digital assets of $1.1 million.
29
Investing Activities:
Net cash provided by investing activities during the nine months ended September 30, 2021, was approximately $3.1 million, primarily driven from proceeds from the sale of digital assets and offset in its’ investments Up North and Style Hunter. Net cash provided by investing activities for the nine months ended September 30, 2020, was approximately $0.1 million, driven primarily from the proceeds from the sale of digital assets.
Financing Activities:
Net cash provided by financing activities during the nine months ended September 30, 2021, was approximately $6.9 million. Net cash provided by financing activities for the nine months ended September 30, 2020, was less than $0.6 million. The net cash provided by financing activities during the nine months ended September 30, 2021, was from the repayment of loans of $4.3 million and offset by net proceeds received for short term debt of $11.2 million.
Liquidity and Capital Resources as of September 30, 2021, Compared to September 30, 2020
The Company’s net cash flow used in operating, investing and financing activities for the nine months ended September 30, 2021, and 2020 and certain balances as of the end of those periods are as follows (in thousands):
| For the Nine Months Ended September 30, | ||||||||
| (Thousands, except per share data) | 2021 | 2020 | ||||||
| Net cash used in operating activities | $ | (5,799 | ) | $ | (433 | ) | ||
| Net cash provided by (used in) investing activities | 3,095 | (110 | ) | |||||
| Net cash provided by financing activities | 6,905 | 570 | ||||||
| Net increase in cash | $ | 4,201 | $ | 27 | ||||
30
| September
30, 2021 | December 31, 2020 | |||||||
| Cash | $ | 4,268 | $ | 67 | ||||
| Working capital (deficit) | $ | (10,592 | ) | $ | (91 | ) | ||
Operating Activities:
Net cash used in operating activities during the nine months ended September 30, 2021, and 2020, was $6.9 million and $0.4 million, respectively. Net cash used in operating activities during the nine months ended September 30, 2021, consisted of the following (in thousands):
| Net loss | $ | (27,994 | ) | |
| Non-cash income and expenses | 30,532 | |||
| Net change in operating assets and liabilities | (8,337 | ) | ||
| Net cash used in operating activities | $ | (5,799 | ) |
The non-cash income and expenses of $30,532 consisted of (in thousands):
| $ | 2,824 | Depreciation expense | ||
| 28 | Stock compensation | |||
| 631 | Amortization of debt discount | |||
| 264 | Amortization of intangibles | |||
| 2,000 | Debt extinguishment fee | |||
| 22,004 | Merger charges | |||
| (38 | ) | Gain on settlement of vendor liabilities | ||
| 325 | Impairment of digital assets | |||
| (91 | ) | Realized gain on sale of digital assets | ||
| 79 | Equity in earnings of equity method investment | |||
| (9 | ) | Change in fair value of accrued issuable equity | ||
| 138 | Loss on sale of mining equipment | |||
| 2,377 | Issuance of shares in exchange for services | |||
| $ | 30,532 | Total non-cash income and expenses |
The net proceeds of cash due to changes in operating assets and liabilities totaled $(8,337) and consisted of the following (in thousands):
| $ | 4,010 | Increase in accounts receivable and other receivables | ||
| (72 | ) | Prepaid assets and other current assets | ||
| (3,908 | ) | Decrease in accounts payable | ||
| 442 | Decrease in accrued liabilities and other payables | |||
| (8,826 | ) | Decrease in digital assets | ||
| 17 | Related party receivable | |||
| $ | (8,337 | ) | Net use of cash in the changes in operating assets and liabilities |
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Investing Activities:
Net cash provided by investing activities during the nine months ended September 30, 2021, was approximately $3.1 million, primarily driven from proceeds from the sale of digital assets of $3.7 million, offset by investments in Style Hunter and Up North of $0.6 million. Net cash used in financing activities for the nine months ended September 30, 2020, was approximately $0.1 million, driven by the purchase of mining equipment.
Financing Activities:
Net cash provided by financing activities during the nine months ended September 30, 2021, was approximately $6.9 million. Net cash provided by financing activities for the nine months ended September 30, 2020, was approximately $0.6 million. The net cash used in financing activities during the nine months ended September 30, 2021, was from the repayment of loans of $4.3 million and offset by net proceeds received from short term debt.
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 4 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.
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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. Cryptocurrencies 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 nine months ended September 30, 2021, of $0.004 million and $0.09 million, respectively. For the three and nine months ended September 30, 2020, the Company recognized realized gains of $(0.008) million and $0.06 million, respectively.
Impairment of Long-lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset. If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
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. |
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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 providing 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.
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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 nine months ended September 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.
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 September 30, 2021, was a loss of $1.1 million compared to a gain of $0.4 million for the prior year period. Adjusted EBITDA for the nine months ended September 30, 2021, was a gain of $3.1 million compared to a gain of $0.8 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 and nine months ended September 30, 2021, and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net gain (loss) | $ | (3,462 | ) | $ | 241 | $ | (27,994 | ) | $ | 160 | ||||||
| Interest expense | 897 | - | 926 | - | ||||||||||||
| Income taxes | - | - | - | - | ||||||||||||
| Depreciation and amortization | 1,422 | 213 | 3,088 | 619 | ||||||||||||
| EBITDA | (1,143 | ) | 454 | (23,980 | ) | 779 | ||||||||||
| Adjustments: | ||||||||||||||||
| Non-recurring one-time charges: | ||||||||||||||||
| Merger charges | - | - | 22,004 | - | ||||||||||||
| Debt Restructuring fee | - | - | 2,000 | - | ||||||||||||
| Acquisition related costs – Accounting acquirer | - | - | 2,884 | - | ||||||||||||
| Acquisition related costs – Accounting acquiree | - | - | 209 | - | ||||||||||||
| Adjusted EBITDA | $ | (1,143 | ) | $ | 454 | $ | 3,117 | $ | 779 | |||||||
We have presented Adjusted EBITDA above because we believe it conveys useful information to investors regarding our operating results. We believe it provides an additional way for investors to view our operations, when considered with both our GAAP results and the reconciliation to net income (loss). By including this information, we can provide investors with a more complete understanding of our business. Specifically, we present Adjusted EBITDA as supplemental disclosure because of the following:
| ● | we believe Adjusted EBITDA is a useful tool for investors to assess the operating performance of our business without the effect of interest, income taxes, depreciation and amortization and other non-cash items including stock based compensation, amortization of intangibles, change in the fair value of shares to be issued, impairment of goodwill and one time charges including gain/loss on the settlement of obligations, severance costs, provision for doubtful accounts, acquisition costs and the costs associated with public offerings; and |
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| ● | we believe that it is useful to provide to investors a standard operating metric used by management to evaluate our operating performance. |
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.
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.
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.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our principal executive officer and our principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were ineffective. As a result of the Merger transaction, the Company is in the process of assessing and improving its internal control processes and expanding its financial operations and reporting infrastructure.
Changes in Internal Controls
Following the completion of the Merger, our management is still in the process of evaluating any related changes to our internal control over financial reporting as a result of this integration. Except for any changes relating to this integration, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations of the Effectiveness of Control
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
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PART II—OTHER INFORMATION
| Item 1. | Legal Proceedings |
There are no material pending legal proceedings as defined by Item 103 of Regulation S-K, to which we are a party or of which any of our property is the subject, other than ordinary routine litigation incidental to the Company’s business.
No material developments relating to our legal proceedings during the quarterly period September 30, 2021, occurred, since the filing of our Quarterly Report on Form 10-Q for the period ended June 30, 2021, (“Second Quarterly Report”). Information regarding our legal proceedings included in Part II, item 1 of the Second Quarterly Report is incorporated herein by reference.
There are no proceedings in which any of the directors, officers, or affiliates of the Company, or any registered or beneficial holder of more than 5% of the Company’s voting securities, is an adverse party or has a material interest adverse to that of the Company.
| Item 1A. | Risk Factors |
RISK FACTORS
Certain factors may have a material adverse effect on our business, financial condition, and results of operations. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K and in conjunction with the Company’s 8-K/A filed with the SEC on June 24, 2021, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of our Common Stock could decline, and you could lose part or all your investment.
Risks Related to our Business
The ongoing coronavirus outbreak, and measures taken in response thereto, could continue to have a material adverse effect on our business, results of operations, and financial condition.
Our business is highly susceptible to changes in economic conditions. Our products and services are directly tied to the production and sale of goods and, more generally, to the North American economy. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to financial markets. Efforts to control the spread of COVID-19 have led governments and other authorities to impose restrictions which have resulted in business closures and disrupted supply chains worldwide. As a result, transportation and supply chain companies such as ours have experienced slowdowns and reduced demand and could continue to further negatively impact our business.
Furthermore, quarantines, shelter in place orders, labor shortages due to illness and otherwise, business and facility closures or other disruptions to our operations, or our customers’ operations, have also adversely impacted demand for our services and our ability to provide services to our customers.
We are a holding company whose subsidiaries are given a certain degree of independence and our failure to integrate our subsidiaries may adversely affect our financial condition.
We have given our subsidiary companies and their executives a certain degree of independence in decision-making. On the one hand, this independence may increase the sense of ownership at all levels, on the other hand, it has also increased the difficulty of the integration of operation and management, which has resulted in increased difficulty of management integration. In the event we are not able to successfully manage our subsidiaries this will result in operating difficulties and have a negative impact on our business.
We are a relatively small company with limited staff and without an accounting department. Our limited staff and resources may affect our internal controls over financial reporting. Our failure to implement measures that will ensure adequate controls over our financial and other reporting processes could cause us to fail to meet our financial and other reporting obligations.
While we continue to evaluate and improve our internal controls following the Merger, we are a relatively small company with limited staff, particularly without an accounting department. The Company currently relies on the part-time services of third-party consultants to help us with our financial accounting, our reporting obligations, and our controls over financial processes and reporting.
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Our limited accounting staff may not allow for effective internal controls over financial reporting due to the lack of adequate segregation of duties and insufficient secondary review of GAAP. Due to our current staffing limitations, we cannot be certain that the measures we implement in the future will ensure that we design, undertake, and maintain adequate controls over our financial processes and reporting. Any failure by us to hire and retain experienced accounting and financial reporting personnel, implement required new or improved controls, or any difficulties we encounter in their implementation, could cause us to fail to meet our reporting obligations.
Adverse judgments or settlements in legal proceedings could materially harm our business, financial condition, operating results and cash flows.
We are subject to pending claims for non-payment by certain vendors in an aggregate amount of approximately $5.1 million as of September 30, 2021, which is approximately 19% of our total assets. We may also be a party to other claims that arise from time to time in the ordinary course of our business, which may include those related to, for example, contracts, sub-contracts, protection of confidential information or trade secrets, adversary proceedings arising from customer bankruptcies, employment of our workforce and immigration requirements or compliance with any of a wide array of state and federal statutes, rules and regulations that pertain to different aspects of our business. We may also be required to initiate expensive litigation or other proceedings to protect our business interests. There is a risk that we will not be successful or otherwise be able to satisfactorily resolve any pending or future litigation. In addition, litigation and other legal claims are subject to inherent uncertainties and management’s view of currently pending legal matters may change in the future. Those uncertainties include, but are not limited to, litigation costs and attorneys’ fees, unpredictable judicial or jury decisions and the differing laws and judicial proclivities regarding damage awards among the states in which we operate. Unexpected outcomes in such legal proceedings, or changes in management’s evaluation or predictions of the likely outcomes of such proceedings (possibly resulting in changes in established reserves), could have a material adverse effect on our business, financial condition, results of operations and cash flows. Due to recurring losses and net capital deficiency, our current financial status may increase our default and litigation risks and may make us more financially vulnerable in the face of pending or threatened litigation.
Future issuances of our common stock pursuant to various existing instruments including the right to shares letter agreements and pre-funded warrants could result in additional significant dilution of the percentage ownership of our shareholders and could cause the price of our common stock to decline.
In the future, the Company will have an obligation to issue its common stock pursuant to various securities instruments entitling their holders to receive shares of the Company’s common stock, including but not limited to rights to shares letter agreements and pre-funded warrants. Although such instruments typically provide for the limitation of the percentage of the common stock of the respective beneficial owners, the holders of such instruments are expected to obtain shares of common stock from time-to-time or, in some instances, to direct the Company to issue the shares of common stock to designated third parties. As a result, our shareholders may be materially diluted, and the price of our common stock may decline.
All our assets are encumbered to secure the payment of secured convertible debentures that will require payments if not previously converted to Common Stock.
We encumbered all our assets to secure the payment of indebtedness and accrued interest due on secured convertible debentures required to be repaid by approximately July of 2022, subject to certain extensions, if not previously converted. In the event of default in repayment, our secured creditor could exercise its remedies, including the execution on all our assets, which would result in the termination of our activities. Unless we generate enough cash, we may not have sufficient funds to pay our debentures and other indebtedness when due. In such event, we might be required to sell our assets and properties to meet our obligations, or to seek an extension to our debentures, or alternative debt or equity financing. If full repayment, conversion, sale, extension, or refinancing is not obtained or consummated, we could default in our obligations.
Even if we are not in default of the debentures, the existence of these secured obligations and the terms of securities purchase agreement may impair our ability to obtain capital from external sources in certain manner.
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Risks Related to Acquired Cryptocurrency Mining Business
Our inability to successfully integrate new acquisitions could adversely affect our combined business; our operations are widely disbursed.
Our growth strategy through acquisitions is fraught with risk. On April 14, 2021, we acquired the entirety of outstanding shares of TTM Digital, a U.S.-based business engaged in the mining of the cryptocurrency Ethereum with capabilities to mine other digital assets. This line of business is new to the Company. Our strategy and business plan are dependent on our ability to successfully integrate TTM Digital and our other acquisition’s operations, particularly those that pertain to computational capabilities and mining of digital assets. Said integration and achievement of the synergy will stretch our resources and management time to transform the Company’s business. Further, failure to quickly and adequately integrate all of these operations and personnel could adversely affect our combined business and our ability to achieve our objectives and strategy. No assurance can be given that we will realize synergies in the areas we currently operate.
We may be classified as an inadvertent investment company.
We are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. Under the Investment Company Act of 1940, as amended (the “Investment Company Act”), however, a company may be deemed an investment company under section 3(a)(1)(C) of the Investment Company Act if the value of its investment securities is more than 40% of its total assets (exclusive of government securities and cash items) on a consolidated basis.
We are commencing operations of digital asset mining, the output of which is cryptocurrencies. We cannot guarantee that such cryptocurrencies or digital assets we will mine are deemed as commodities and not as securities. In the event that the digital assets held by us exceed 40% of our total assets, exclusive of cash, we inadvertently become an investment company. An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace period of one year from the earlier of: (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis, and (b) the date on which an issuer owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. We expect to establish policies that we would work to keep the investment securities held by us at less than 40% of our total assets, which may include acquiring assets with our cash, liquidating our investment securities, or seeking a no-action letter from the Commission if we are unable to acquire sufficient assets or liquidate sufficient investment securities in a timely manner.
As Rule 3a-2 is available to a company no more than once every three years, and assuming no other exclusion were available to us, we would have to keep within the 40% limit for at least three years after we cease being an inadvertent investment company. This may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading securities.
Classification as an investment company under the Investment Company Act requires registration with the Commission. If an investment company fails to register, it would have to stop doing almost all business, and its contracts would become voidable. Registration is time-consuming and restrictive and would require a restructuring of our operations, and we would be very constrained in the kind of business we could do as a registered investment company. Further, we would become subject to substantial regulation concerning management, operations, transactions with affiliated persons, and portfolio composition, and would need to file reports under the Investment Company Act regime. The cost of such compliance would result in our incurring substantial additional expenses, and the failure to register if required would have a materially adverse impact on our operations.
Changes in laws, regulations, or requirements applicable to our software and services could impose increased costs on us, delay or prevent our introduction of new products and services or impair the function or value of our existing products and services.
Our digital assets mining operations may become subject to increasing regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our operations to comply with them.
For example, the adoption of new money transmitter (“MT”) or money services business (“MSB”) statutes in jurisdictions or changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, could subject us to registration or licensing, or limit business activities, cause us to enter into relationships with one or more third parties for payment services until we are appropriately licensed. The activities of TTM Digital may cause it to be deemed a MSB under the regulations promulgated by FinCEN under the authority of the U.S. Bank Secrecy Act, TTM Digital may be required to comply with FinCEN regulations, including those that would mandate TTM Digital to implement anti-money laundering programs, make certain reports to FinCEN and maintain certain records.
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Compliance and classifications are dependent on federal and state regulatory actions and our business activities. We do not believe that we are a money transmitter, because our activities do not cause us to hold, possess or control payment funds on behalf of a consumer or merchant. If we were deemed to be a money transmitter, we would be subject to significant additional regulation. This could increase our costs in operating our business. In addition, a regulator could take action against us if it views our payment solution platform as a violation of existing law. Any of these outcomes would negatively affect the market price for our shares and could cause us to cease operations in the certain U.S. States.
Additionally, we are not licensed to conduct a virtual currency business in New York and do not intend to become licensed in any other state that may require licensing in the future. We have taken the position that the New York State Department of Financial Services (“NYSDFS”) BitLicense Regulatory Framework (23 NYCRR 200.2(q)) does not apply to our business. It is possible, however, that the NYSDFS could disagree with our position. If we were deemed to be conducting an unlicensed virtual currency business in New York, we could be subject to significant additional regulation and/or regulatory consequences. There are a number of states that review the adaptation that the Conference of State Bank Supervisors has proposed a model form of state-level “virtual currency” regulation. There are at least thirty-one states that have pending legislation in the 2021 legislative session regarding blockchain and cryptocurrency.
The recent New York Senate Bill 6486A sought to halt all crypto mining for three years in order to conduct environmental impact reviews on mining operations in the tri-state area. The amended version of the bill is now focused on preventing mining operations powered by non-renewable energy sources. Depending on the development of the situation, our New York mining operations that are powered by renewable energy may or may not be affected by the legislative initiative.
It may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries, and ownership of, holding, or trading in our securities may also be considered illegal and subject to sanction.
Although currently digital assets are not regulated or are lightly regulated in most countries, including the United States, one or more countries such as China, India, and Russia may take regulatory actions in the future that severely restricts the right to acquire, own, hold, sell, or use digital assets or to exchange digital assets for fiat currency. Such an action may also result in the restriction of ownership, holding, or trading in our securities. Such restrictions may adversely affect an investment in us. For example, the Bank of England issued a paper for comments in which it explains that stablecoins should have the same regulations as fiat currencies.
The cost of obtaining new and replacement miners and parts has historically been capital intensive and is likely to continue to be very capital intensive, which may have a material and adverse effect on our business and results of operations.
Our mining operations can only be successful and ultimately profitable if the costs, including hardware and electricity costs, associated with mining cryptocurrencies are lower than the price of the cryptocurrencies we mine when we sell them. Our miners experience ordinary wear and tear from the operation and may also face more significant malfunctions caused by factors that may be beyond our control. Additionally, as the technology evolves, we may acquire newer models of miners to remain competitive in the market. Over time, we replace those miners that are no longer functional with new miners.
Once this happens, these new miners will need to be repaired or replaced along with other equipment from time-to-time for us to stay competitive. This upgrading process requires substantial capital investment, and we may face challenges in doing so on a timely and cost-effective basis based on the availability of new miners and our access to adequate capital resources. If we are unable to obtain adequate numbers of new and replacement miners at scale, we may be unable to remain competitive in our highly competitive and evolving industry. If this happens, we may not be able to mine cryptocurrency as efficiently or in similar amounts as our competition and, as a result, our business and financial results could suffer. Alternatively, the return of investment of mining equipment may take significantly longer. This could, in turn, materially and adversely affect the trading price of our securities, and our investors could lose part or all of their investment.
The price of new miners may be linked to the market price of Ethereum and other cryptocurrencies, and, if the current relatively high market price of Ethereum persists, our costs of obtaining new and replacement miners may increase, which may have a material and adverse effect on our financial condition and results of operations.
Reports have been released that the prices of new miners are adjusted according to the price of the cryptocurrency they mine. As a result, the cost of new machines can be unpredictable, and could also be significantly higher than our historical cost for new miners. Similarly, as Ethereum prices have risen, we have observed a significant increase in the demand for miners. As a result, at times, we may obtain Ethereum miners and other hardware at exuberant prices, to the extent they are available.
On the other hand, we incur significant up-front capital costs each time we acquire new miners, and, if future prices of Ethereum are not sufficiently high, we may not realize the benefit of these capital expenditures. If this occurs, our business, results of operations, and financial condition could be materially and adversely affected, which may have a negative impact on the trading price of our securities, which may have a materially adverse impact on investors’ investment in our Company.
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There are numerous new and existing competitors in our industry that are purchasing mining equipment at scale, which may cause delays or difficulty in us obtaining new miners, which could materially and adversely affect our business and the results of operations.
Many of the competitors in our industry have also been purchasing mining equipment at scale, which has caused a worldwide shortage of mining equipment and extended the corresponding delivery schedules for new miner purchases. It is uncertain how manufacturers will respond to this increased global demand and whether they can deliver on the schedules promised to all of their customers.
The COVID-19 pandemic has disrupted and may continue to disrupt international shipping and we may not be able to obtain new miners or replacement parts for our existing miner fleet in a timely or cost-effective manner, which could materially and adversely affect our business and results of operations.
The novel strain of the coronavirus (“COVID-19”) has spread as a global pandemic throughout the world and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus. Although the United States and countries around the world have been releasing a vaccine, there are no assurances that the vaccine will be effective, and what impact it will have on reducing the spread or containment of COVID-19. In addition to vaccinations, these efforts include travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our vendors, suppliers, and manufacturing partners. The extent to which the COVID-19 pandemic will continue to affect our business, results of operations and financial condition is difficult to predict and depends on numerous evolving factors, including: the duration and scope of the pandemic and its impact on overall global uncertainty; government, social, business and other actions that have been and will be taken in response to the pandemic; and the effect of the pandemic on short- and long-term general economic conditions.
Current and future restrictions or disruptions of transportation, such as reduced availability of air and ground transport, port closures or congestion, and increased border controls or closures, can also impact our ability to meet demand and could materially adversely affect us. These increased costs could have a material adverse effect on our financial condition and results of operations, particularly if the effects of COVID-19 are prolonged.
The COVID-19 global pandemic has disrupted and may continue to disrupt the manufacture and availability of new miners, which could materially and adversely affect our business and the results of operations.
Various COVID-19-related restrictions on travel, work, and movement of goods and supplies, as well as the cumulative impact of the mounting number of lost working days as a result of COVID-19, has already put a strain on our manufacturing partners, suppliers, and logistics partners to produce and deliver a sufficient number of products needed to meet the global demand for miners. This has had a particularly strong impact on the global supply chain and availability of semiconductors, which are used in the manufacture of the ASIC chips used in the miners we operate. The strain on the global supply of semiconductors, largely stemming from manufacturing interruptions due to COVID-19-related disruptions, has resulted in decreased production across many industrial sectors.
While our manufacturing partners and component suppliers mostly have been able to continue to operate to date in compliance with applicable regulations and current limitations, future restrictions on their operations could impact their ability to meet global demand for new miners. Concurrently, along with an increased trading price of Ethereum and other cryptocurrencies in the fourth quarter of 2020 and continuing into the first quarter of 2021, we have observed an increased demand for GPU-based rigs during this period. During the second half of 2020 we have already experienced increased per-unit costs for new GPUs, and, if the scarcity of GPUs continues, this trend may continue. If we are unable to acquire new GPUs for our rigs, or if our cost for new GPUs is excessively high, we may not be able to keep up with our competitors, which may materially and adversely affect our business and results of operations. Some manufacturers, such as NVIDIA are splitting their processors into two categories, one for gamers (GPUs) and another for miners now being marketed as Cryptocurrency Mining Processor (CMP) for miners. Manufacturers are attempting to slow down the processing speed of GPUs so that it deters miners from acquiring GPUs and moves them to purchase CMPs for mining purposes. However, miners have developed ways to tweak GPUs to operate as fast as CMPs and this continues to create supply-chain issues for mining processors.
Our mining operating costs could outpace our mining revenues, which could seriously harm our business or increase our losses.
Our mining operations are costly, and our expenses may increase in the future. Future increase in expenses may not be offset by a corresponding increase in revenue. If our expenses are greater than we anticipate, and our business investments are not successful, our expenses may outpace monetization efforts. Increases in our costs without a corresponding increase in our revenue would increase our losses and could seriously harm our business and financial performance.
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To the extent that the profit margins of Ethereum mining operations are not high, operators of Ethereum mining operations are more likely to immediately sell Ethereum rewards earned by mining in the market, thereby constraining the growth of the price of Ethereum that could adversely impact us, and similar actions could affect other cryptocurrencies.
Over the past two years, Ethereum mining operations have evolved. Currently, new processing power is predominantly added by incorporated and unincorporated “professional” mining operations utilizing GPUs.
Professional mining operations may use proprietary hardware or specialized machines. Acquiring specialized hardware at scale requires the investment of significant up-front capital, and miners incur significant expenses related to the operation of this hardware at scale, such as the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs to run the miners and the employment of technicians to operate the mining farms. As a result, professional mining operations are of a greater scale and have more defined and regular expenses and liabilities. These regular expenses and liabilities require professional mining operations to maintain profit margins on the sale of Ethereum. To the extent the price of Ethereum declines and such profit margin is constrained, professional miners are incentivized to more immediately sell Ethereum earned from mining operations, whereas it is believed that individual miners in past years were more likely to hold newly mined Ethereum for more extended periods. The immediate selling of newly mined Ethereum greatly increases the trading volume of Ethereum, creating downward pressure on the market price of Ethereum rewards.
The extent to which the value of Ethereum mined by a professional mining operation exceeds the allocable capital and operating costs determines the profit margin of such operation. A professional mining operation may be more likely to sell a higher percentage of its newly mined Ethereum rapidly if it is operating at a low-profit margin and it may partially or completely cease operations if its profit margin is negative. In a low-profit margin environment, a higher percentage could be sold more rapidly, thereby potentially depressing Ethereum prices. Lower Ethereum prices could result in further tightening of profit margins for professional mining operations creating a network effect that may further reduce the price of Ethereum until mining operations with higher operating costs become unprofitable forcing them to reduce mining power or cease mining operations temporarily.
The foregoing risks associated with Ethereum could be equally applicable to other cryptocurrencies, whether existing now or introduced in the future. Such circumstances could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects, or operations and potentially the value of Ethereum and any other cryptocurrencies we mine or otherwise acquire or hold for our own account, and thus harm investors.
We may not be able to realize the benefits of forks.
To the extent that a significant majority of users and miners on a cryptocurrency network install software that changes the cryptocurrency network or properties of a cryptocurrency, including the irreversibility of transactions and limitations on the mining of new cryptocurrency, the cryptocurrency network would be subject to new protocols and software. However, if less than a significant majority of users and miners on the cryptocurrency network consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “fork” of the network, with one prong running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of the cryptocurrency running in parallel yet lacking interchangeability and necessitating exchange-type transactions to convert currencies between the two forks. Additionally, it may be unclear following a fork which fork represents the original asset and which is the new asset. Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core developers of a cryptocurrency, blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains with the longest chain. A fork in the network of a particular cryptocurrency could adversely affect an investment in our securities or our ability to operate.
We may not be able to realize the economic benefit of a fork, either immediately or ever, which could adversely affect an investment in our securities. If we hold a cryptocurrency at the time of a hard fork into two cryptocurrencies, industry standards would dictate that we would be expected to hold an equivalent amount of the old and new assets following the fork. However, we may not be able, or it may not be practical, to secure or realize the economic benefit of the new asset for various reasons. For instance, we may determine that there is no safe or practical way to custody the new asset, that trying to do so may pose an unacceptable risk to our holdings in the old asset, or that the costs of taking possession and/or maintaining ownership of the new cryptocurrency exceed the benefits of owning the new cryptocurrency. Additionally, laws, regulations, or other factors may prevent us from benefitting from the new asset even if there is a safe and practical way to custody and secure the new asset.
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There is a possibility of cryptocurrency mining algorithms transitioning to proof-of-stake validation and other mining-related risks, which could make us less competitive and ultimately adversely affect our business and the value of our stock.
Proof-of-stake is an alternative method in validating cryptocurrency transactions. Should the algorithm shift from a proof-of-work validation method to a proof-of-stake method, mining would likely require less energy, which may render any company that maintains advantages in the current climate (for example, from lower-priced electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to optimize and improve the efficiency of our cryptocurrency mining operations, may be exposed to the risk in the future of losing the benefit of our capital investments and the competitive advantage we hope to gain from this as a result, and may be negatively impacted if a switch to proof-of-stake validation were to occur. Such events could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects, or operations and potentially the value of any Ethereum or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
Our future success will depend in large part upon the value of Ethereum, and any sustained decline in its value could adversely affect our business and the results of operations.
Our operating results will depend in large part upon the value of Ethereum because it is the cryptocurrency we currently mine. Specifically, our revenues from our Ethereum mining operations are based upon two factors: (1) the number of Ethereum rewards we successfully mine, and (2) the value of Ethereum. In addition, our operating results are directly impacted by changes in the value of Ethereum, because under the value measurement model, both realized and unrealized changes will be reflected in our statement of operations (i.e., we will be marking Ethereum to fair value each quarter).
Our mining operations, including the facilities in which our miners are operated, may experience damages, including damages that are not covered by insurance.
Our current mining operation is, and any future mines we establish will be, subject to a variety of risks relating to physical condition and operation, including, but not limited to:
| ● | the presence of construction or repair defects or other structural or building damage; |
| ● | any noncompliance with or liabilities under applicable environmental, health, or safety regulations or requirements or building permit requirements; |
| ● | any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods, and windstorms; and |
| ● | claims by employees and others for injuries sustained at our properties. |
For example, our mine could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist or other attack on the mine. The security and other measures we take to protect against these risks may not be sufficient. Additionally, our mine could be materially adversely affected by a power outage or loss of access to the electrical grid or loss by the grid of cost-effective sources of electrical power generating capacity. Given the power requirement, it would not be feasible to run miners on backup power generators in the event of a power outage. Our insurance covers the replacement cost of any lost or damaged miners, but does not cover any interruption of our mining activities; therefore, our insurance, therefore, may not be adequate to cover the losses we suffer as a result of any of these events. In the event of an uninsured loss, including a loss in excess of insured limits, at any of the mines in our network, such mines may not be adequately repaired in a timely manner or at all and we may lose some or all of the future revenues anticipated to be derived from such mines. The potential impact on our business is currently magnified because we are only operating a single mine.
We are subject to risks associated with our need for significant electrical power.
Our Ethereum mining operations have required significant amounts of electrical power, and, as we continue to expand our mining fleet, we anticipate our demand for electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power to operate our miners on a cost-effective basis, we may not realize the anticipated benefits of our significant capital investments in new miners.
Additionally, our mining operations could be materially adversely affected by prolonged power outages. Although our miners may be powered by backup generators on a temporary basis, it would not be feasible or cost-effective to run miners on backup power generators for extended periods of time. Therefore, we may have to reduce or cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business and results of operations could be materially and adversely affected, and investors in our securities could be harmed.
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Interruptions to our power supply and Internet access could disrupt our operations, which could adversely affect our business and the results of operations.
Our cryptocurrency mining operations require a significant amount of electrical power and access to high-speed internet to be successful. If we are unable to secure sufficient electrical power, or if we lose internet access for a prolonged period, we may be required to reduce our operations or cease them altogether. If this occurs, our business and results of operations may suffer, and our investors may be materially and adversely affected.
Ethereum mining is subject to cyber-security risks, which could adversely affect an investment in the Company or the ability of the Company to operate.
Digital asset networks, including the Ethereum network, may be subject to control by entities that capture a significant amount of the network’s processing power or a significant number of developers important for the operation and maintenance of such digital asset network.
If a majority of the processing power dedicated to mining or staking on the network is controlled by a bad actor (often referred to as a “51% attack”), it may be able to alter the Ethereum blockchain on which the transactions rely. This could occur if the bad actor were to construct fraudulent blocks or prevent certain transactions from completing in a timely manner, or at all. It could be possible for the malicious actor to control, exclude or modify the ordering of transactions, though it could not generate new Ether or transactions. Further, a bad actor could “double-spend” its own Ether (i.e., spend the same tokens in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintained control. To the extent that such malicious actor or botnet did not yield its control of the processing power on the Ethereum network or the network community did not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Further, a malicious actor or botnet could create a flood of transactions in order to slow down confirmations of transactions on the network. Other digital asset networks have been subject to malicious activity achieved through control of over 50% of the processing power on the network. For example, on May 24, 2018, it was reported that attackers compromised the Bitcoin Gold network in this manner and were successfully able to double-spend units of bitcoin gold in a series of transactions over the course of at least one week and in a total amount of at least $18 million.
Moreover, certain hardware providers may create hardware that collectively has majority power and the manufacturer could potentially exert control itself. For example, it was discovered that the mining machines produced by Bitmain contained backdoor code that would allow Bitmain to remotely shut down the mining machines. This vulnerability is colloquially referred to as the “Antbleed backdoor.” At worst, the Antbleed backdoor could have allowed Bitmain to shut off up to an estimated 70% of the global hash rate. Bitmain released an official response to the controversy claiming that the Antbleed backdoor had no malicious intent, and on April 28, 2017, the day following the discovery of the Antbleed backdoor, Bitmain released a new source code and firmware upgrades for its mining hardware to remove the backdoor.
If the feasibility of a bad actor gaining control of the processing power on the Ethereum network increases, there may be a negative effect on an investment in the Company. To the extent that the Ethereum ecosystem, including the core developers and the administrators of mining pools, does not act to ensure greater decentralization of mining processing power, the feasibility of a malicious actor obtaining control of the processing power on the Ethereum network will increase, which may adversely affect the value of our common stock.
The Company’s reliance on third-party mining pool service providers may have a negative impact on the Company’s operations.
We use third-party mining pools to receive our mining rewards from the network. Ethereum mining pools allow miners to combine their computing power, increasing their chances of solving a block and getting paid by the network. The rewards are distributed by the pool operator, proportionally to our contribution to the pool’s overall mining power used to generate each block. Should the pool operator’s system suffer downtime due to a cyber-attack, software malfunction, or other similar issues, it will negatively impact our ability to mine and receive revenue.
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The open-source structure of the Ethereum network protocol means that the core developers and other contributors are generally not directly compensated for their contributions in maintaining and developing the Ethereum network protocol. A failure to properly monitor and upgrade the Ethereum network protocol could damage the Ethereum network and the Company’s business.
The Ethereum network operates based on an open-source protocol maintained by the core developers and other contributors. As the Ethereum network protocol is not sold or made available subject to licensing or subscription fees and its use does not generate revenues for its development team, the core developers are generally not compensated for maintaining and updating the Ethereum network protocol. Consequently, there is a lack of financial incentive for developers to maintain or develop the Ethereum network and the core developers may lack the resources to adequately address emerging issues with the Ethereum network protocol. Although the Ethereum network is currently supported by the core developers, there can be no guarantee that such support will continue or be sufficient in the future. Alternatively, some developers may be funded by entities whose interests are at odds with other participants in the Ethereum network. To the extent that material issues arise with the Ethereum network protocol and the core developers and open-source contributors are unable to address the issues adequately or in a timely manner, the Ethereum network and the business of the Company may be adversely affected.
Flaws in the source code of Ethereum may be unknown to us and may negatively affect the Company’s business in multiple ways.
In the past, flaws in the source code for digital asset networks have been exposed and exploited, including flaws that disabled some functionality for users, exposed users’ personal information, and/or resulted in the theft of users’ digital assets. Several errors and defects have been publicly found and corrected, including those that disabled some functionality for users and exposed users’ personal information. Discoveries of flaws in or exploitations of the source code that allow malicious actors to take or create money in contravention of known network rules have occurred. The cryptography underlying Ethereum could prove to be flawed or ineffective, or developments in mathematics and/or technology, such as advances in digital computing, algebraic geometry, and quantum computing. In any of these circumstances, a malicious actor may be able to steal Ether held by others, which could adversely affect the demand for Ether and therefore adversely impact the price of Ether and the results of our operations. Even if another digital asset other than Ethereum were affected by similar circumstances, any reduction in confidence in the robustness of the source code or cryptography underlying digital assets generally could negatively affect the demand for all digital assets, including Ethereum-based, and therefore adversely affect our business and operations.
Our tokens and other cryptocurrencies that we hold may be subject to loss, theft, or restriction on access. Ether transactions are irrevocable and stolen or incorrectly transferred ether may be irretrievable. As a result, any incorrectly executed ether transactions could adversely affect an investment in the Company.
There is an inherent risk that some or all of our cryptocurrencies could be lost or stolen. Access to our coins could also be restricted by cybercrime. We hold some of our cryptocurrencies in internet-based programmatic wallets, which may be more vulnerable to cybercrime. Additionally, Ether transactions are not reversible. Once a transaction has been verified and recorded in a block that is added to the Ethereum blockchain, an incorrect transfer of cryptocurrency, such as Ether, or theft of Ether generally will not be reversible, and the Company may not be capable of seeking compensation for any such transfer or theft. To the extent that the Company is unable to successfully seek redress for such error or theft, such loss could adversely affect an investment in the Company.
Risks Related to Ownership of our Common Stock
A large number of shares of Common Stock has recently become eligible for public sale or may be subject to rights requiring us to register them for public sale which could depress the market price of our Common Stock, even if our business is doing well. A substantial number of shares of our Common Stock may be sold in the near future.
The market price of our Common Stock could decline as a result of sales of a large number of shares of our Common Stock in the market. The perception that these sales could occur may also depress the market price of our Common Stock. Stockholders owning an aggregate of up to 25,824,848 shares of our Common Stock in connection with the Merger have recently become entitled, under agreements providing for registration rights or pursuant to Rule 144 promulgated under the Securities Act (and subject to limitations of Rule 144 and applicable securities laws), to sell or to require us to register shares owned by them for public sale in the United States.
Exempted sales of our shares of Common Stock or sales pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause the trading price of our Common Stock to fall and make it more difficult for investors to sell shares
of our Common Stock.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On July 20, 2021, the Company issued 75,000 shares of Common Stock to a law firm in consideration of legal services provided.
On August 5, 2021, the Company issued 50,000 shares of Common Stock to an attorney in consideration of legal services provided.
On September 2, 2021, the Company issued the aggregate of 150,000 shares of Common Stock to an individual in consideration of corporate advisory services pursuant to an advisory agreement.
On September 7, 2021, the Company issued the aggregate of 200,000 shares of Common Stock to an individual in consideration of corporate advisory services pursuant to an advisory agreement.
The issuance of the shares in the aforementioned issuances was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933 and/or Rule 506 of Regulation D promulgated thereunder, since, among other things, the transactions did not involve a public offering.
| Item 3. | Defaults Upon Senior Securities |
Not applicable.
| Item 4. | Mine Safety Disclosure |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
See the Exhibit Index following the signature page to this Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 15, 2021 | SYSOREX, INC. | |
| By: | /s/ Vincent Loiacono | |
Vincent Loiacono Chief Financial Officer (Principal Financial Officer) | ||
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EXHIBIT INDEX
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| 101.INS | Inline XBRL Instance Document. | X | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | X | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | X |
| # | This certification is deemed not filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
| * | Agreement with management or compensatory plan or arrangement. |
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