Note
2. Going Concern and Management’s Plans
The
accompanying unaudited 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. As of June 30, 2018, the Company
had incurred significant operating losses since inception and continues to generate losses from operations. As of June 30, 2018,
the Company had an accumulated deficit of $392,468. As of June 30, 2018, MGT’s cash and cash equivalents were $2,298. As
of August 14, 2018, MGT’s cash and cash equivalents were $226.
Management’s
plans include maximizing the utilization of its cryptocurrency mining machines, which were delivered during early 2018. As discussed
in Note 1, the Company experienced additional delays and costs due to the non-performance of a key vendor. The Company
has assumed the role of direct operator in its primary mining facility and considers this facility to be materially complete.
Based on current budget assumptions, the Company believes that it will be able to meet its operating expenses and obligations
for one year from the date these consolidated financial statements are issued. The Company will need to raise additional funding
to grow its operations and to pay current maturities of debt. There can be no assurance however that the Company will be able
to raise additional capital when needed, or at terms deemed acceptable, if at all. Such factors raise substantial doubt about
the Company’s ability to sustain operations for at least one year from the issuance of these unaudited condensed consolidated
financial statements. Management’s plans, including the operation of its existing cryptocurrency mining machines, the raising
of additional capital and potentially curtailing its operations alleviate such substantial doubt. The accompanying unaudited condensed
consolidated financial statements do not include any adjustments related 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.
Note
3. Summary of Significant Accounting Policies
Principles
of consolidation
The
unaudited condensed consolidated financial statements include the accounts of MGT and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated. Non-controlling interest represents the non-controlling equity investment in MGT
subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to
the non-controlling interest.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to current period presentation. These reclassifications had no effect
on the previously reported net loss.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Use
of estimates and assumptions and critical accounting estimates and assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those
which result from using such estimates. Management utilizes various other estimates, including but not limited to determining
the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued,
the fair value of stock options, the fair value of conversion features, the fair value of the deemed dividend, the recognition
of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes
in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates
and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to
be necessary.
Revenue
recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) which was subsequently amended by ASU 2015-14, ASU 2016-08, ASU
2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
The guidance includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify
the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In July
2015, the FASB deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. A full
retrospective or modified retrospective approach was required upon adoption. The Company has adopted ASU No. 2014-09 effective
January 1, 2018.
The
Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the condensed
consolidated financial statements. Accordingly, the new revenue standard has been applied prospectively in its condensed consolidated
financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not
be revised and will continue to be reported under the accounting standards in effect during those historical periods.
The
Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company
determined that its methods of recognizing revenues have not been significantly impacted by the new guidance.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Revenue
recognition, continued
The
Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction verification services within the digital currency
networks of cryptocurrencies, such as Bitcoin and Ethereum, commonly termed “cryptocurrency mining.” In consideration
for these services, the Company receives digital currency (“Coins”). The Coins are recorded as revenue, using the
average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance sheet at their fair value and re–measured
at each reporting date. Costs of revenues includes equipment depreciation, rent, and electricity costs. Revaluation gains or losses,
as well gains or losses on sale of Coins are also recorded as a part of cost of revenue in the unaudited condensed consolidated
statements of operations.
The
Company also recognizes revenue from its Management Agreements (as defined in Note 9). The Company receives a fee from each Management
Agreement based on the amount of Bitcoin mined and is reimbursed for any electricity costs incurred to run the bitcoin mining
machines it manages in its facility.
Income
taxes
The
Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Income
Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and established
for all the entities a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain
expanded disclosures. The provision for income taxes is based upon income or loss after adjustment for those permanent items that
are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between
the financial reporting and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the
years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes
a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made. If actual taxable
income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
The
Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate
tax rate from 35% to 21%. As of the completion of these unaudited condensed consolidated financial statements and related disclosures,
we have made a reasonable estimate of the effects of the Tax Act. This estimate incorporates assumptions made based upon the Company’s
current interpretation of the Tax Act, and may change as the Company may receive additional clarification and implementation guidance
and as the interpretation of the Tax Act evolves. In accordance with the Securities and Exchange Commission (the “SEC”)
Staff Accounting Bulletin No. 118, the Company will finalize the accounting for the effects of the Tax Act no later than the fourth
quarter of 2018. Future adjustments made to the provisional effects will be reported as a component of income tax expense in the
reporting period in which any such adjustments are determined. Based on the new tax law that lowers corporate tax rates, the Company
revalued its deferred tax assets. Future tax benefits are expected to be lower, with the corresponding one time charge being recorded
as a component of income tax expense.
The
Company was previously delinquent in the filing of its 2015 and 2016 US Federal and state tax returns. On August 10, 2018, the
Company filed its delinquent returns and is now in good standing in all income tax jurisdictions.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Loss
per share
Basic
loss per share is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders
by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during
the period. Potential dilutive securities, comprised of unvested restricted shares, convertible debt stock warrants and stock
options, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s
net loss.
Accordingly,
the computation of diluted loss per share for the three and six months ended June 30, 2018 excludes 1,250,000 shares issuable
to the investors of the December 2017 private placement, 3,600,000 unvested restricted shares, 6,000,000 shares issuable under
stock options, and 9,440,796 shares issuable under warrants. The computation of diluted loss per share for the three and six months
ended June 30, 2017 excludes 1,500,000 unvested restricted shares, 6,000,000 shares issuable under options and 11,716,819 shares
issuable under warrants, as they are anti–dilutive due to the Company’s net loss.
Stock–based
compensation
The
Company recognizes compensation expenses for all equity–based payments in accordance with ASC 718 “Compensation –
Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net
of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service
period of the award.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company. These awards
are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 24-month
period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share
of the Company’s common stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s
common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity
Based Payments to Non–Employees.” The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of unvested equity instruments
is re-measured each reporting period and such re-measured value is amortized over the requisite remaining service period.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Equity-linked
instruments
The
Company accounts for equity-linked instruments with certain anti-dilution provisions in accordance with ASC 815 and ASC 260. Under
this guidance, the Company excludes instruments with certain down round features when determining whether a financial instrument
(or embedded conversion feature) is considered indexed to the Company’s own stock. As a result, financial instruments (or
embedded conversion features) with down round features are not required to be classified as derivative liabilities. The Company
recognizes the value of a down round feature only when it is triggered and the exercise or conversion price has been adjusted
downward. For equity-classified freestanding financial instruments, such as warrants, the Company treats the value of the effect
of the down round, when triggered, as a deemed dividend and a reduction of income available to common stockholders in computing
basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, the
Company recognizes the value of the down round as a beneficial conversion discount to be amortized to earnings.
Recent
accounting pronouncements
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying unaudited condensed consolidated financial statements, other than those disclosed below and in the
Company’s Annual Report on Form 10-K, filed with the SEC on April 2, 2018.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees. The guidance is effective for public entities, certain not-for-profit entities, and certain employee benefit
plans for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities,
ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company
is evaluating the impact of adopting this pronouncement.
In
July 2018, the FASB issued ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted
Improvements, to provide additional guidance for the adoption of Topic 842. ASU 2018-10 clarifies certain provisions and correct
unintended applications of the guidance such as the application of implicit rate, lessee reassessment of lease classification,
and certain transition adjustments that should be recognized to earnings rather than to stockholders' equity. ASU 2018-11 provides
an alternative transition method and practical expedient for separating contract components for the adoption of Topic 842. In
February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) which requires an entity to recognize assets and liabilities arising
from a lease for both financing and operating leases with terms greater than 12 months. ASU 2018-11, ASU 2018-10, and ASU 2016-02
(collectively, “the new lease standards”) are effective for fiscal years beginning after December 15, 2018, with early
adoption permitted. The Company is currently evaluating the effect the new lease standards will have on its Condensed Consolidated
Financial Statements; however, the Company anticipates recognizing assets and liabilities arising from any leases that meet the
requirements under the new lease standards on the adoption date and including qualitative and quantitative disclosures in the
Company’s Notes to the Condensed Consolidated Financial Statements.
Management’s
evaluation of subsequent events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the review, other than what is described in Note 12 – Subsequent Events, the Company did not identify any recognized
or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated
financial statements.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
4. Sale of Cybersecurity Assets
On
March 16, 2018, the Company sold its Sentinel product line to a new entity formed by the unit’s management team for consideration
of $60 and a $1,000 promissory note, convertible into a 20% equity interest of the buyer. Due to the early stage nature of the
buyer’s business, the Company believes the collection of the promissory note is doubtful and therefore has determined the
fair value to be zero. The Company recorded a loss on sale as follows:
|
Cash proceeds
|
|
$
|
60
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
Assets sold
|
|
|
(27
|
)
|
|
Separation payments
to former management
|
|
|
(40
|
)
|
|
Common
stock issued to former management, at fair value
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
Loss on sale
of cybersecurity assets
|
|
$
|
(127
|
)
|
Note
5. Property and Equipment
Property
and equipment consisted of the following:
|
|
|
As
of
|
|
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
Computer hardware and software
|
|
$
|
17
|
|
|
$
|
10
|
|
|
Crypto-currency
mining machines
|
|
|
10,197
|
|
|
|
3,685
|
|
|
Property and equipment, gross
|
|
|
10,214
|
|
|
|
3,695
|
|
|
Less: Accumulated
depreciation
|
|
|
(1,767
|
)
|
|
|
(579
|
)
|
|
Property and
equipment, net
|
|
$
|
8,447
|
|
|
$
|
3,116
|
|
The
Company recorded depreciation expense of $708 and $97 for the three months ended June 30, 2018 and 2017, respectively. The Company
recorded depreciation expense of $1,189 and $196 for the six months ended June 30, 2018 and 2017, respectively.
On
February 9, 2018, the Company sold Bitcoin machines with an aggregate book value of $474 for gross proceeds of $427 and recorded
a loss on the sale of $47.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
6. Notes Payable
On
May 23, 2018, the Company entered into a securities purchase agreement with two accredited investors, pursuant to which the Company
issued $840 in unsecured promissory notes for aggregate consideration of $700 (the “May 2018 Notes”). The outstanding
balance of the May 2018 Notes is to be made in nine equal monthly installments beginning July 23, 2018. The May 2018 Notes
mature on March 23, 2019. Subject to the terms and conditions set forth in the May 2018 Notes, the Company may prepay all or any
portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event of default, the outstanding
balance of the May 2018 Notes shall immediately increase to 120% of the outstanding balance immediately prior to the event of
default and become immediately due and payable.
On
June 1, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company issued
an unsecured promissory note in the amount of $3,600 (the “June 2018 Note”) for consideration of $3,000. The
outstanding balance of the June 2018 Note is to be made in nine equal monthly installments beginning August 1, 2018. The
June 2018 Note matures on April 1, 2019. Subject to the terms and conditions set forth in the June 2018 Note, the Company may
prepay all or any portion of the outstanding balance at any time without pre-payment penalty. Upon the occurrence of an event
of default, the outstanding balance of the June 2018 Note shall immediately increase to 120% of the outstanding balance immediately
prior to the event of default and become immediately due and payable.
Notes
payable consisted of the following:
|
|
|
As
of June 30, 2018
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
May 2018 Notes
|
|
$
|
840
|
|
|
$
|
(113
|
)
|
|
$
|
727
|
|
|
June 2018
Note
|
|
|
3,600
|
|
|
|
(510
|
)
|
|
|
3,090
|
|
|
Total
notes payable
|
|
$
|
4,440
|
|
|
$
|
(623
|
)
|
|
$
|
3,817
|
|
As
of December 31, 2017, the Company had no notes payable outstanding.
During
the three months ended June 30, 2018 and 2017, the Company recorded amortization of debt discount of $117 and $11, respectively.
During
the six months ended June 30, 2018 and 2017, the Company recorded amortization of debt discount of $117 and $48, respectively.
Note
7. Common Stock and Warrant Issuances
Sale
of common stock
On
January 17, 2018, the Company received $281 from the exercise of warrants to purchase 375,000 shares of common stock.
On
March 15, 2018, the Company issued 200,000 shares of common stock to an investor for $80 in gross proceeds.
On
April 30, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.
On
May 2, 2018, the Company received $313 from the exercise of warrants to purchase 625,000 shares of common stock.
During
the six months ended June 30, 2018 the Company issued an aggregate of 3,799,250 shares of common stock in exchange for the cashless
exercise of warrants to purchase 3,554,947 shares of common stock.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
7. Common Stock and Warrant Issuances, continued
Sale
of common stock, continued
During
the six months ended June 30, 2018, the Company issued 1,178,551 shares of its common stock to consultants in exchange for services.
These services were valued using the value of the shares issued of $1,714. During the six months ended June 30, 2017, the Company
issued 1,010,000 shares of its common stock to consultants in exchange for services. These services were valued using the value
of the shares issued of $969.
On
December 7, 2017, a holder of one of the Company’s convertible notes payable converted their note but requested that the
Company not issue the shares due to ownership limitation provisions. On February 6, 2018 and March 26, 2018, the ownership limitations
were satisfied and the Company issued 3,381,816 shares of its common stock to this former noteholder.
On
December 15, 2017, the Company sold 2,000,000 shares of its common stock in a private placement, but the owners of the shares
requested that these shares not be issued due to ownership limitations. On June 20, 2018, the Company issued 750,000 of these
shares. On July 13, 2018 and July 20, 2018, the Company issued the remaining shares not issued under the December private placement.
Warrants
The
following table summarizes information about shares issuable under warrants outstanding at June 30, 2018:
|
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average remaining life
|
|
|
Intrinsic
value
|
|
|
Outstanding at January 1, 2018
|
|
|
13,720,742
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional warrants issued for trigger
of anti-dilution protection
|
|
|
1,000,000
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,179,947
|
)
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
Expired or cancelled
|
|
|
(100,000
|
)
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
9,440,795
|
|
|
$
|
0.79
|
|
|
|
2.92
|
|
|
$
|
1,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
9,440,795
|
|
|
$
|
0.79
|
|
|
|
2.92
|
|
|
$
|
1,352
|
|
During
the six months ended June 30, 2018, the Company changed the exercise terms of certain of its warrants to allow for and induce
a cashless exercise. During the six months ended June 30, 2018, the Company recorded $139 in warrant modification expense due
to the modifications.
Deemed
dividend
On
March 15, 2018, an anti-dilution protection feature in certain of the Company’s warrants was triggered, causing a decrease
in the exercise price of those warrants from $4.50 to $0.40. In accordance with ASC 260-10-25, the Company has recorded a deemed
dividend equal to the change in fair value of the warrants due to the decrease in exercise price in the amount of $2,514.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
8. Stock–Based Compensation
Issuance
of restricted common stock – directors, officers and employees
On
March 1, 2018, the Company granted 750,000 shares of restricted common stock to Mr. Robert Lowrey in connection with his employment
agreement to serve as the Company’s Chief Financial Officer. The Company valued the award on its grant date and is expensing
the grant date fair value over the 24 month vesting period.
On
April 6, 2018, the Company granted 900,000 shares of restricted common stock to certain of its officers and directors in connection
with the commencement of operations in Sweden. The Company valued the awards on their grant date and is expensing the grant date
fair value over the 12 month vesting period.
On
April 6, 2018, the Company granted 600,000 shares of restricted common stock to Mr. Robert Ladd in connection with his employment
agreement to serve as the Company’s Chief Executive Officer. The Company valued the award on its grant date and is expensing
the grant date fair value over the 24 month vesting period.
The
Company’s activity in restricted common stock was as follows for the six months ended June 30, 2018:
|
|
|
Number
of shares
|
|
|
Weighted
average
grant date fair
value
|
|
|
Non–vested at January 1, 2018
|
|
|
3,850,000
|
|
|
$
|
1.42
|
|
|
Granted
|
|
|
2,250,000
|
|
|
$
|
1.48
|
|
|
Vested
|
|
|
(2,100,000
|
)
|
|
$
|
1.44
|
|
|
Forfeited
|
|
|
(550,000
|
)
|
|
$
|
1.06
|
|
|
Non–vested at June 30, 2018
|
|
|
3,450,000
|
|
|
$
|
1.52
|
|
For
the three months ended June 30, 2018 and 2017, the Company has recorded $1,247 and $666, respectively, in employee and director
stock-based compensation, which is a component of general and administrative expenses in the unaudited condensed consolidated
statements of operations and comprehensive loss.
For
the six months ended June 30, 2018 and 2017, the Company has recorded $2,334 and $666, in employee and director stock–based
compensation expense, which is a component of general and administrative expenses in the unaudited condensed consolidated statement
of operations and comprehensive loss.
As
of June 30, 2018, unamortized stock-based compensation costs related to restricted share arrangements was $4,157, and will be
recognized over a weighted average period of 1.21 years.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
8. Stock–Based Compensation, continued
Stock
options
The
following is a summary of the Company’s stock option activity for the six months ended June 30, 2018:
|
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average Grant date fair value
|
|
|
Weighted
average remaining life
|
|
|
Intrinsic
value
|
|
|
Outstanding – January 1, 2018
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – June 30, 2018
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
4.13
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – June 30, 2018
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
4.13
|
|
|
$
|
1,000
|
|
For
the three months ended June 30, 2018 and 2017, the Company has recorded $0 and $962, respectively, in stock option related stock-based
compensation expense, which is a component of general and administrative expenses in the unaudited condensed consolidated statement
of operations and comprehensive loss.
For
the six months ended June 30, 2018 and 2017, the Company has recorded $0 and $1,925, respectively, in stock option related stock-based
compensation expense, which is a component of general and administrative expenses in the unaudited condensed consolidated statement
of operations and comprehensive loss.
As
of June 30, 2018, there were no unrecognized compensation costs, as all outstanding stock options are fully vested.
Note
9. Commitments and Contingencies
Operating
commitments
On
December 7, 2017 and January 9, 2018, the Company entered into agreements with Beacon whereby Beacon agreed to provide
hosting services to the Company for purposes of its mining operations and provide 15 megawatts of uninterrupted power in Sweden.
The agreement is for a term of 24 months for a fee of $810 per month. The Company prepaid the first and last month of service
in the amount of $1,620.
As
described in Note 1, Beacon did not meet its obligations under the agreement with the Company. On May 16, 2018, the Company notified
Beacon that it was in breach of the agreement, demanding reimbursement of the Company’s prepayment and notifying Beacon
that it would not be paying the monthly fee due under the agreement. Beacon has not responded to the Company’s notification
and the Company is currently exploring its potential remedies against Beacon.
On
June 30, 2018, the Company wrote off the un-recognized portion of its prepayment in the amount of $1,350 to restructuring charge
on the Company’s unaudited condensed consolidated statements of operations and consolidated loss.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Commitments and Contingencies, continued
Management
agreements
On
October 12, 2017, MGT entered into two management agreements with two accredited investors, Deep South Mining LLC and BDLM, LLC.
On November 21, 2017, the Company entered into a third management agreement with another accredited investor, Buckhead Crypto,
LLC (“Buckhead Crypto”) (all three accredited investors together are “Users”, each agreement a “Management
Agreement”, and all three agreements together are “Management Agreements”). Each of the Users agreed on substantially
similar terms to purchase an aggregate of 2,376 Bitmain Antminer S9 mining computers (the “Bitcoin Hardware”) for
a total of $3,650 to mine Bitcoin with the Company acting as the exclusive manager for each of the Users. In addition, the Users
have agreed to pay to the Company, in advance, the first three months of expected electricity costs of the Bitcoin mining operations
in the sum of $691, which is included in Other Payables on the Company’s consolidated balance sheet as of December 31, 2017.
Initial electricity cost for the first three months following delivery of the Bitcoin Hardware shall be reimbursed to the Users
within the first three months of operation. Each Management Agreement is in effect for 24 months from the date that the Bitcoin
Hardware begins mining operations, and may be terminated by mutual written agreement.
Pursuant
to the Management Agreements, the Company shall provide for installation, hosting, maintenance and repair and provide ancillary
services necessary to operate the Bitcoin Hardware. In accordance with each of the Management Agreements, each of the Users will
gain a portion of the Bitcoin mined called the user distribution portion (“User Distribution Portion”). The
User Distribution Portion is 50% of the amount of Bitcoin mined net of the operating fee (10% of the total Bitcoin mined) and
the electricity cost.
Furthermore,
upon execution of the Management Agreements, as an incentive to the Users, the Company issued to the Users an aggregate of 436,100
shares of the Company’s common stock and a Series F warrant to purchase 436,100 shares of the Company’s common stock
at an initial exercise price of $2.00 per share exercisable for a period of three years to the Users. The Company issued the shares
of common stock and issued all three Series F warrants for the benefits of the three Users on the respective dates of the execution
of the Management Agreements.
On
February 28, 2018, the Company and Buckhead Crypto terminated their Management Agreement. The Company purchased the Bitcoin mining
machines for $767 and refunded prepaid electricity paid by Buckhead Crypto of $133.
On
February 13, 2018, the Company entered into a new management agreement with a third party with terms similar to the other Management
Agreements. The third party agreed to purchase 200 Bitmain Antminer S9 mining computers for a total of $428 to mine Bitcoin with
the Company acting as the exclusive manager. This management agreement is in effect for 24 months from the date that the Bitcoin
Hardware begins mining operations, and may be terminated by mutual written agreement.
As
of June 30, 2018 and December 31, 2017, the Company owed $193 and $0, respectively, to the Users as the User Distribution Portion
under the Management Agreements. This amount is included as accrued expenses on the Company’s unaudited condensed consolidated
balance sheet.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
9. Commitments and Contingencies, continued
Legal
On
April 4, 2017, an action was filed against the Company by a former shareholder Barry Honig and others in the United States District
Court for the Southern District of New York (the “Court”) against the Company and certain of its officers and directors
(the “Breach of Contract Action”). The Breach of Contract Action alleged claims for breach of contract, tortious interference
with contractual relations, and unjust enrichment related to the Company’s unsuccessful attempt to acquire D–Vasive,
Inc. (“D-Vasive”) and Demonsaw LLC (“Demonsaw”) in 2016 and the alleged resulting harm to certain D–Vasive,
and Demonsaw noteholders. The defendants filed a motion to dismiss on June 5, 2017. On June 26, 2012 the plaintiffs filed an amended
complaint. On July 24, 2017, the defendants subsequently filed a second motion to dismiss that amended complaint. On March 19,
2018, the Court issued a Memorandum Opinion & Order dismissing the breach of contract and tortious interference claims, but
permitting the unjust enrichment claim to proceed. On April 2, 2018, the defendants filed a motion asking the Court to reconsider
its decision to permit the unjust enrichment claim to proceed. On April 30, the Court issued a civil case management plan and
scheduling order setting deadlines for discovery in the action. The Court denied the defendant’s motion for reconsideration
by order dated May 4, 2018.
On
May 23, 2018, the plaintiffs and the defendants agreed to dismiss the Breach of Contract Action and filed a stipulation of dismissal
with prejudice (the “Stipulation of Dismissal”) with the Court. The Court “so ordered” the Stipulation
of Dismissal on May 24, 2018 and dismissed the case in its entirety.
Employment
agreements
On
March 8, 2018, the Company entered into an employment with Mr. Robert Lowrey, effective March 1, 2018. Mr. Lowrey’s employment
agreement provides that he has been appointed for an initial term of two years. Mr. Lowrey is entitled to receive an annualized
base salary of $240. Mr. Lowrey will also receive a one-time signing bonus of $10. Mr. Lowrey is also eligible for a cash and/or
equity bonus as the Compensation Committee may determine, from time to time, based on meeting performance objectives and bonus
criteria to be mutually identified by Mr. Lowrey and the Compensation Committee. In connection with the execution of his employment
agreement, the Company issued to Mr. Lowrey 750,000 shares of the Company’s restricted common stock, pursuant to the Company’s
2016 Stock Option Plan vesting over a two year period.
On
April 1, 2018, the Company entered into an Amended and Restated Executive Employment Agreement (the “Employment Agreement”)
with Mr. Robert Ladd, which was executed on April 6, 2018. The Employment Agreement provides that Mr. Ladd has been reappointed
for an initial term of two years. Mr. Ladd is entitled to receive an annualized base salary of $360 and is also eligible for a
cash and/or equity bonus as the Compensation Committee may determine, from time to time, based on meeting performance objectives
and bonus criteria to be mutually identified by Mr. Ladd and the Compensation Committee. In connection with the execution of the
Employment Agreement, the Company issued to Mr. Ladd 600,000 shares of the Company’s restricted common stock, pursuant to
the Company’s 2016 Stock Option Plan, vesting over a two-year period.
Note
10. Related Party Transactions
Janice
Dyson, wife of John McAfee, the Company’s former Chief Cybersecurity Visionary, is the sole director of Future Tense Secure
Systems, Inc. (“FTS”) and owns 33% of the outstanding common shares of FTS.
On
May 9, 2016, the Company entered a consulting agreement with FTS, pursuant to which FTS would provide advice, consultation, information
and services to the Company including assistance with executive management, business and product development and potential acquisitions
or related transactions. On January 26, 2018, the Company terminated its agreement with FTS. During the six months ended June
30, 2018 and 2017, the Company recorded consulting fees of $137 and $135, respectively, to FTS for such services. As of June 30,
2018, the Company owed $0 to FTS.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARIES
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per–share amounts)
Note
11. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially
all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary
contributions of up to 100% of employee contributions. During the six months ended June 30, 2018 and 2017, the Company made contributions
to the 401(k) Plan of $18 and $2, respectively.
Note
12. Subsequent Events
The
Company has evaluated the impacts of subsequent events through August 14, 2018, and has determined that no such events occurred
that were required to be reflected in the consolidated financial statements, except as described within the above notes and described
below.
Shares
issued to consultants
Subsequent
to June 30, 2018 through August 14, 2018, the Company issued 302,000 shares of its common stock to consultants in exchange
for services.
Restricted
shares issued to employees
On
August 1, 2018 the Company granted 250,000 shares of restricted common stock to an officer. The award vests over an 18 month period.
Subsequent
to June 30, 2018 through August 14, 2018, the Company granted 105,000 shares of restricted common stock to two employees. The
awards vest over an 18-month period.
Appointment
of chief operating officer
On
July 11, 2018, the board of directors appointed Mr. Stephen Schaeffer as Chief Operating Officer of the Company. Pursuant to Mr.
Schaeffer’s employment agreement dated August 17, 2017, as amended, Mr. Schaeffer receives annual cash compensation of $250
plus bonuses for achieving certain milestones.
Warrant
exercises
Subsequent
to June 30, 2018 through August 14, 2018, the Company issued 1,975,000 shares of common stock upon the cashless exercise of warrants
to purchase 235,211 shares of common stock.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed
or implied by such forward–looking statements. The statements contained herein that are not purely historical are forward–looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of
words such as, but not limited to, “anticipate,” “estimates,” “should,” “expect,”
“guidance,” “project,” “intend,” “plan,” “believe” and similar expressions
or variations intended to identify forward–looking statements. These statements are based on the beliefs and assumptions
of our management based on information currently available to management. Such forward–looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially
from future results expressed or implied by such forward–looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”
included in our Annual Report on Form 10–K filed with the Securities and Exchange Commission (“SEC”) on April
2, 2018, in addition to other public reports we filed with the SEC. The forward–looking statements set forth herein speak
only as of the date of this report. Except as required by law, we undertake no obligation to update any forward–looking
statements to reflect events or circumstances after the date of such statements.
Executive
summary
MGT
Capital Investments, Inc. (“MGT”, “the Company”, “we”, or “us”) is a Delaware
corporation, incorporated in 2000. The Company was originally incorporated in Utah in 1977. MGT is comprised of the parent company,
wholly–owned subsidiaries MGT Cybersecurity, Inc. Medicsight, Inc., MGT Sports, Inc., MGT Studios, Inc. (“MGT Studios”),
MGT Interactive, LLC, MGT Gaming, Inc., MGT Mining One, Inc., MGT Mining Two, Inc. and MGT Sweden AB. MGT Studios also owns a
controlling minority interest in the subsidiary M2P Americas, Inc. Our corporate office is located in Durham, North Carolina.
All
figures set forth in this Quarterly Report on this Form 10-Q are in thousands, except share and per-share amounts.
In
September 2016, MGT commenced its Bitcoin mining operations in the Wenatchee Valley area of central Washington. Throughout 2017,
the Company expanded its mining capacity with the purchase of additional Bitcoin mining machines and by entering into hosting
and power agreements with Washington facilities owners. The Company also entered into management agreements with third party investors
whereby the investors purchased the mining hardware, and the Company received both a fee to manage the mining operations plus
one-half of the net operating profit.
Towards
the end of 2017, the Company determined that there was a lack of adequate electric power in Washington to support the Company’s
growth, and the Company moved swiftly to find a new facility to conduct its mining operations. By the end of 2017, the Company
made the decision to move its principal mining operations to northern Sweden, a geographic location with historically low ambient
temperatures and available inexpensive electricity. The Company entered into a hosting agreement (the “Hosting Agreement”)
with Beacon Leasing LLC (“Beacon”), pursuant to which Beacon agreed to deliver a turn-key solution in northern Sweden,
which included a facility with power, cooling, and hosting services with up to 15 megawatts of electricity capacity for a fixed
price of $810 per month. The facility in Sweden is owned by the city of Älvsbyn and leased by Beacon. Beacon committed to
provide a fully functional facility by the end of March 2018. The Hosting Agreement required the Company to pay $1,620 to Beacon,
representing the first and last month of service. During the first quarter of 2018, the Company took delivery of an additional
2,000 Bitcoin mining machines in Sweden and moved 4,300 machines (including 2,100 investor-owned machines) from Washington to
Sweden.
Beacon
failed to deliver the fully built out facility and necessary power supply levels required by MGT by the end of March 2018. Through
the first quarter of 2018 and into the second quarter, MGT personnel made visits to Sweden and assisted Beacon with efforts to
get the facility up and running. The Company also advanced additional funds to Beacon to maximize operational capacity as quickly
as possible. During April 2018, the Company became involved in the design and setup of the Sweden facility due to concern that
Beacon may have overstated their construction abilities and financial capacity.
On
May 16, 2018, the Company was notified by the utility provider that none of the amounts due to them from Beacon related to the
facility were paid and that they would be shutting down the existing power to the Company’s facility. In order to avoid
a shutdown of the facility, the Company paid the utility provider $368, representing the customer deposit required in order to
run the new transformers that had been ordered under the direction of Beacon. During July, the Company paid an additional aggregate
of $947 to the utility provider, representing power fees through June 30, 2018. On May 16, 2018, the Company notified Beacon that
is was in material breach of the Hosting Agreement.
Subsequent
to May 16, 2018, the Company intensified its efforts to determine the extent of Beacon’s non-performance under the Hosting
Agreement. Management made several more trips to Sweden to supervise the completion of the facility as well as investigate Beacon’s
accounting records. The Company determined that Beacon also was faced with unpaid invoices from various other service providers
to the facility.
Beginning
in late May 2018, the Company took steps to become the direct operator of the Swedish facility to gain control of the situation,
protect its assets, and maximize operational capacity as quickly as possible. These actions included paying the outstanding
amounts owed by Beacon in order to maintain the vendor relationships needed to complete the facility and forming MGT Sweden AB
to assume the building lease and the power agreements.
During
the three months ended June 30, 2018, the Company recorded restructuring expense of $2,499, which included the write-off of the
unamortized balance of the initial deposit paid to Beacon in the amount of $1,350 and $1,149, for additional costs paid by the
Company to service providers and vendors engaged to complete the build out of the facility. These costs consist of unpaid obligations
for services provided prior to the second quarter of 2018, including:
|
Costs
to bring electricity provider current and set up additional transformers
|
|
$
|
893
|
|
|
Satisfaction
of payables for materials, repairs and supplies
|
|
|
206
|
|
|
Satisfaction
of payables for payroll and consulting fees
|
|
|
50
|
|
|
TOTAL
|
|
$
|
1,149
|
|
As
of June 30, 2018, MGT owned and operated approximately 500 miners located in a leased facility in Quincy, Washington and 4,200
miners located in the leased facility in Sweden. In addition, the Company operates about 2,100 miners in the Sweden location pursuant
to management agreements. All miners owned or managed by MGT are S9 Antminers sold by Bitmain Technologies LTD. In addition to
the S9 Antminers, the Company owns 50 custom designed GPU-based Ethereum mining rigs. During the six months ended June 30, 2018,
the Company mined 145.8 Bitcoin for total revenue of $1,355.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The notes to the consolidated financial statements contained in this Quarterly Report describe our significant accounting
policies used in the preparation of the consolidated financial statements. The preparation of these financial statements requires
us 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 the reporting
periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our consolidated financial statements.
Revenue
recognition
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) which was subsequently amended by ASU 2015-14, ASU 2016-08, ASU
2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
The guidance includes a five-step framework that requires an entity to: (i) identify the contract(s) with a customer, (ii) identify
the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue when the entity satisfies a performance obligation. In July
2015, the FASB deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. A full
retrospective or modified retrospective approach was required upon adoption. The Company has adopted ASU No. 2014-09 effective
January 1, 2018.
The
Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the condensed
consolidated financial statements. Accordingly, the new revenue standard has been applied prospectively in our condensed consolidated
financial statements from January 1, 2018 forward and reported financial information for historical comparable periods will not
be revised and will continue to be reported under the accounting standards in effect during those historical periods.
The
Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company
determined that its methods of recognizing revenues have not been significantly impacted by the new guidance.
The
Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving
“blocks” to be added to the blockchain and providing transaction verification services within the digital currency
networks of cryptocurrencies, such as Bitcoin and Ethereum, commonly termed “cryptocurrency mining.” In consideration
for these services, the Company receives digital currency (“Coins”). The Coins are recorded as revenue, using the
average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance sheet at their fair value and re–measured
at each reporting date. Costs of revenues includes equipment depreciation, rent, and electricity costs. Revaluation gains or losses,
as well gains or losses on sale of Coins are also recorded as a part of cost of revenue in the unaudited condensed consolidated
statements of operations.
The
Company also recognizes revenue from its management agreements. The Company receives a fee from each management agreement based
on the amount of Bitcoin mined and is reimbursed for any electricity costs incurred to run the bitcoin mining machines it manages
in its facility.
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with Accounting Standards Codification
(“ASC”) 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company
recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those
shares expected to vest over the requisite service period of the award.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company. These awards
are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 24
month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a
share of the Company’s common stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s
common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded
risk–free rates for the appropriate term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity
Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of unvested equity instruments
is re–measured each reporting period and such re-measured value is amortized over the requisite remaining service period.
Results
of operations
Three
months ended June 30, 2018 and 2017
Revenues
Our
revenues for the three months ended June 30, 2018 increased by $21, or 5%, to $409 as compared to $388 for the three months ended
June 30, 2017. Our revenue is derived from cryptocurrency mining. The increase in revenues
is a result of our increased mining capacity through the acquisition of additional machines during the year ended December 31,
2017 and during the first quarter of 2018.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2018 increased by $2,289, or 51%, to $6,797 as compared to $4,508 for the three months
ended June 30, 2017. The increase in operating expenses was primarily due to a 2018 charge of $2,499 for the Sweden restructuring
and a $827 increase in cost of revenues from the increase in cryptocurrency mining operations, offset by a decrease of $889 in
general and administrative expenses.
The
decrease in general and administrative expenses was primarily due to a decrease in stock-based compensation of $916, a
decrease in legal and professional fees of $646, offset by an increase in payroll and related expenses of $351 and administrative
costs to operate our Sweden facility of $396.
Other
Income and Expense
For
the three months ended June 30, 2018, non–operating expenses consisted of interest expense of $117. During the comparable
period ended June 30, 2017, non–operating expenses consisted of interest expense of $163 offset by a gain on property and
equipment of $48.
Six
months ended June 30, 2018 and 2017
Revenues
Our
revenues for the six months ended June 30, 2018 increased by $665, or 95%, to $1,365 as compared to $700 for the six months ended
June 30, 2017. Our revenue is derived from cryptocurrency mining. The significant increase
in revenues is a result of our increased mining capacity through the acquisition of additional machines during the year ended
December 31, 2017 and during the first quarter of 2018.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2018 increased by $4,224, or 54%, to $11,989 as compared to $7,765 for the six months
ended June 30, 2017. The increase in operating expenses was primarily due to a charge of $2,499 for the Sweden restructuring,
$1,507 increase in cost of revenues from the increase in cryptocurrency mining operations, and an increase of $485 in general
and administrative expenses.
The
increase in general administrative expenses was primarily due to an increase of $881 in payroll and related expenses, an increase
of $396 due to administrative costs to run our Sweden facility, expenses of $282 in 2018 for investor relations, corporate communications,
and our special meeting of shareholders in March 2018, offset by a decrease of $1,132 in legal and professional fees.
Other
Income and Expense
For
the six months ended June 30, 2018, non–operating expenses primarily consisted of interest expense of $117, warrant modification
expense of $139, loss on the sale of cybersecurity assets of $127 and a loss on sale of property and equipment of $47. During
the comparable period ended June 30, 2017, non–operating expenses of $3,061 primarily consisting of an impairment charge/loss
on sale of investments of $2,871.
Liquidity
and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt and equity interests. As of June 30, 2018, we have incurred significant
operating losses since inception and continue to generate losses from operations and as of June 30, 2018 have an accumulated deficit
of $392,468. At June 30, 2018, our cash and cash equivalents were $2,298 and our working capital deficit was $3,017. As of June
30, 2018, we had notes payable outstanding with a face value of $4,440. As of August 14, 2018, our cash and cash equivalents were
$226.
Management’s
plans include maximizing the utilization of its cryptocurrency mining machines, which were delivered during early 2018. As discussed
in Note 1 to the unaudited condensed consolidated financial statements, the Company experienced additional delays and costs
due to the non-performance of a key vendor. The Company has assumed the role of direct operator in its primary mining facility
and considers this facility to be materially complete. Based on current budget assumptions, the Company believes that it will
be able to meet its operating expenses and obligations for one year from the date these consolidated financial statements are
issued. The Company will need to raise additional funding to grow its operations and to pay current maturities of debt. There
can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable,
if at all. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year
from the issuance of these unaudited condensed consolidated financial statements. Management’s plans, including the operation
of its existing cryptocurrency mining machines, the raising of additional capital and potentially curtailing its operations alleviate
such substantial doubt. The accompanying unaudited condensed consolidated financial statements do not include any adjustments
related 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.
The
price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin has a negative impact in
our operating results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors,
including, but not limited to, government regulation, security breaches experienced by service providers, as well as political
and economic uncertainties around the world. Since we record revenue based on the price of earned Bitcoin and we may retain such
Bitcoin as an asset or as payment for future expenses, the relative value of such revenues may fluctuate, as will the value of
any Bitcoin we retain. The high and low exchange rate per Bitcoin for the six months ending June 30, 2018, as reported by Blockchain.info,
were approximately $6 and $17 respectively.
|
|
|
Six
Months ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash
(used in) / provided by
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,317
|
)
|
|
$
|
(2,152
|
)
|
|
Investing
activities
|
|
|
(6,507
|
)
|
|
|
(1,003
|
)
|
|
Financing
activities
|
|
|
4,603
|
|
|
|
3,113
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(7,221
|
)
|
|
$
|
(22
|
)
|
Cash
Flows
Operating
activities
Net
cash used in operating activities was $5,317 for the six months ended June 30, 2018 as compared to $2,152 for the six months ended
June 30, 2017. Cash used in operating activities for the six months ended June 30, 2018 primarily consisted of a net loss of $11,054
partially offset by non-cash stock-based compensation of $3,908, and depreciation expense of $1,189, and an increase due to changes
in working capital of $210. Cash used in operating activities for the six months ended June 30, 2017 primarily consisted of a
net loss of $10,126, partially offset by stock-based compensation of $3,896 and impairment/loss on sale of long-term investments
of $2,871, plus an increase due to changes in working capital of $810.
Investing
activities
Net
cash used in investing activities was $6,507 for the six months ended June 30, 2018 as compared to net cash provided by investing
activities of $1,003 for the six months ended June 30, 2017. Net cash used in investing activities for the six months ended June
30, 2018 was primarily due to our purchases of property and equipment of $6,994 partially offset by proceeds from the sale of
property and equipment of $427 and proceeds from the sale of our cybersecurity assets of $60. During the six months ended June
30, 2017, the Company used $1,339 in the purchase of property and equipment, and realized $26 in net proceeds from sales of various
investments in the open market and $310 from the sale of property and equipment.
Financing
activities
During
six months ended June 30, 2018, cash provided by financing activities totaled $4,603, comprised of $3,700 from the net proceeds
of notes payable, $80 from private placements of our common stock and $906 from the exercise of stock purchase warrants offset
by $83 in deferred offering costs paid. During six months ended June 30, 2017, cash provided by financing activities totaled $3,133,
comprised of $1,883 in net proceeds from convertible debt instruments, $100 from the proceeds of exercise of warrants, and $1,150
from the proceeds of a private placement of common stock.
Off–balance
sheet arrangements
As
of June 30, 2018 we had no obligations, assets or liabilities which would be considered off–balance sheet arrangements.
We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often
referred to as variable interest entities, which would have been established for the purpose of facilitating off–balance
sheet arrangements.