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 March 31, 2019, the Company
had incurred significant operating losses since inception and continues to generate losses from operations. As of March 31, 2019,
the Company had an accumulated deficit of $406,425.
Management’s
plans include overseeing the operation of approximately 5,700 cryptocurrency mining machines in Colorado and Ohio and continuing
to execute on an expansion model to secure low cost power and grow its cryptocurrency assets. As discussed in Note 1, the Company
decided not to commence the majority of its mining operations during the first quarter of 2019 as it believed that it was
not economically responsible to do so based on unfavorable Bitcoin mining economics. The Company’s revenue in the
first quarter of 2019 was significantly less than historical results, as it had only 500 machines in operation. 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 condensed 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 MGT Sweden AB. All intercompany transactions
and balances have been eliminated.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
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 and other long-lived assets, the
fair value of warrants issued, the fair value of conversion features, 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.
Prior
Period Financial Statement Correction of an Immaterial Misstatement
During
the first quarter of 2019, the Company identified certain adjustments required to correct balances within notes payable, accretion
of debt discount, and the gain on extinguishment of debt relating to the modification to the June 2018 Note that had occurred
on December 10, 2018. The Company had incorrectly calculated the fair value of the June 2018 Note as the date of its modification,
which in turn, led the Company to calculate an incorrect gain on extinguishment and an incorrect accretion of debt discount. The
errors discovered resulted in an overstatement of the Company’s notes payable balance of $566 as of December 31, 2018, and
an overstatement of the accretion of debt discount of $14 and understatement on the gain on extinguishment of $580 for the year
ended December 31, 2018.
Based
on an analysis of Accounting Standards Codification (“ASC”) 250 – “Accounting Changes and Error Corrections”
(“ASC 250”), Staff Accounting Bulletin 99 – “Materiality” (“SAB 99”) and Staff Accounting
Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”), the Company determined that these errors were immaterial to the previously-issued
consolidated financial statements, and as such no restatement was necessary. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended.
Such correction may be made the next time the registrant files the prior year financial statements. Accordingly, the misstatements
were corrected during the period ended March 31, 2019 in the accompanying consolidated balance sheet as of December 31, 2018.
The
effect on these revisions on the Company’s consolidated balance sheet as of December 31, 2018 is as follows:
|
|
As previously
reported at
December 31, 2018
|
|
|
Adjustment
|
|
|
As
revised at
December
31, 2018
|
|
Notes payable, net of discount
|
|
$
|
1,851
|
|
|
$
|
(566
|
)
|
|
$
|
1,285
|
|
Total current liabilities
|
|
|
2,398
|
|
|
|
(566
|
)
|
|
|
1,832
|
|
Total liabilities
|
|
|
2,398
|
|
|
|
(566
|
)
|
|
|
1,832
|
|
Accumulated deficit
|
|
|
(405,285
|
)
|
|
|
566
|
|
|
|
(404,719
|
)
|
Total stockholders’ deficit
|
|
|
(1,875
|
)
|
|
|
566
|
|
|
|
(1,309
|
)
|
Revenue
recognition
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 as an intangible digital asset
valued at the lower of cost or net realizable value. Net realizable value adjustments, to reduce the value of the Coins to their
market value, is included in cost of revenue on the Company’s consolidated statements of operation. Any gain or loss on
sale would be recorded to cost of revenues. Costs of revenues includes equipment depreciation, rent, net realizable value adjustments,
and electricity costs.
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
3. Summary of Significant Accounting Policies, continued
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.
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 months ended March 31, 2019 excludes 2,650,001 unvested restricted
shares, 6,000,000 shares issuable under stock options, 100,743,629 shares issuable upon the conversion of convertible debt,
and 5,477,975 shares issuable under warrants. The computation of diluted loss per share for the three months ended March 31, 2018
excludes 2,000,000 shares issuable to the investors of a private placement in December 2017, 3,250,000 unvested restricted shares,
6,000,000 shares issuable under stock options, and 11,034,642 shares issuable under warrants.
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
3. Summary of Significant Accounting Policies, continued
Stock–based
compensation, continued
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.
Gain
(Loss) on Modification/Extinguishment of Debt
In
accordance with ASC 470, a modification or an exchange of debt instruments that adds a substantive conversion option or eliminates
a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and must
be measured by determining the extinguishment of the debt. Additionally, the Company evaluated the discounted cash flows under
the terms of the obligations for the May 2018 Notes and June 2018 Note, both before and after the effect of the extension fees
in order to determine whether this change should be accounted for as a loan extinguishment or as a modification. The Company determined
that the transactions were extinguishments, since the difference between the discounted cash flows exceeded 10%. In addition
to the changes in the payment terms of the notes, the debt holders agreed to change the convertibility terms of the Notes from
non-convertible notes to convertible notes. The debt holders can elect to be paid in cash (within three trading days of notification)
or shares of the Company’s common stock. During the three months ended March 31, 2019, the Company recognized a gain
on the extinguishment of debt of $1,275 in conjunction with amending certain of its notes payable on January 7, 2019 and again
on March 28, 2019, as well as on January 28, 2019.
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.
In
June 2018, the Financial Accounting Standards Board (“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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
3. Summary of Significant Accounting Policies, continued
Recent
accounting pronouncements, continued
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 corrects
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’ (deficit) 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.
On
January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and as part of that process the Company
made the following elections:
|
●
|
The
Company did not elect the hindsight practical expedient, for all leases.
|
|
|
|
|
●
|
The
Company elected the package of practical expedients to not reassess prior conclusions related to contracts containing leases,
lease classification and initial direct costs for all leases.
|
|
|
|
|
●
|
In
March 2018, the FASB approved an optional transition method that allows companies to use the effective date as the date of
initial application on transition. The Company elected this transition method, and as a result, will not adjust its comparative
period financial information or make the newly required lease disclosures for periods before the effective date.
|
|
|
|
|
●
|
The
Company elected to not separate lease and non-lease components, for all leases.
|
The
Company recorded a Right of Use Asset of $87 with a corresponding Lease Liability of $84 and a corresponding cumulative
adjustment to accumulated deficit of $3 in accordance with Topic 842.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of fair value measurement
disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this pronouncement.
In
August 2018, the FASB issued ASU 2018-15, Intangible – Goodwill and Other – Internal-Use Software (“ASU 2018-15”),
which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is
effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. Early adoption is permitted. The Company is currently evaluating the impact of adopting this pronouncement.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
3. Summary of Significant Accounting Policies, continued
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 10 – 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.
Note
4. 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 was to be made in nine equal monthly installments beginning July 23, 2018. The May 2018 Notes
were scheduled to 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 was to be made in nine equal monthly installments beginning August 1, 2018. The June 2018
Note was scheduled to mature 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.
On
December 6, 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 $598 (the “December 2018 Note”) for consideration of $500. The
outstanding balance of the December 2018 Note had a maturity date of May 6, 2019 and was paid in full in March 2019. The December
2018 Note bore interest at a rate of 8% per annum and, subject to the terms and conditions set forth in the December 2018
Note, the Company was permitted to prepay all or any portion of the outstanding balance at any time without pre-payment
penalty.
On
January 7, 2019, and again on March 28, 2019 the Company entered into amendments to one of the May 2018 Notes. Pursuant to the
amendments, the borrower has agreed to extend the maturity date of the note to July 15, 2019 and does not require the Company
to make its monthly installment payments due from December 2018, through March 2019, provided that the Company makes all installment
payments for the months thereafter beginning April 15, 2019. Installment payments shall be paid in cash unless the Company elects
to make payments in shares of the Company’s common stock, in which case the number of shares to be issued will be based
on the lowest VWAP of the Company’s common stock during the preceding twenty trading days multiplied by 70%, or any lower
price made available to any other holder of the Company’s securities. In consideration of these amendments, the Company
incurred extension fees payable to the Borrower of $121.
On
January 28, 2019, the Company entered into an amendment to the June 2018 Note. Pursuant to the amendment, the borrower
has agreed to extend the maturity date to October 1, 2019 and not require the Company to make its installment payment due under
the Note Purchase Agreement during January, February, and March 2019. The Company and the borrower have agreed that the Company
is to pay all installment payments in cash unless both the Company and the borrower agree to make payments in shares of the Company’s
common stock, in which case the number of shares to be issued will be based on the lowest intra-day trade price of the Company’s
common stock during the preceding twenty trading days multiplied by 70%. In consideration of this amendment, the Company incurred
an extension fee payable to the borrower of $527.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
4. Notes Payable, continued
Because
the January 2019 and March 2019 amendments were considered a substantive change, the Company has treated the modification as an
extinguishment of debt and determined the gain or loss on the exchange of instruments. Based on the analysis performed, the Company
determined that there was a gain on extinguishment of debt of $1,275.
Notes
payable consisted of the following:
|
|
As
of March 31, 2019
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
May
2018 Notes
|
|
$
|
500
|
|
|
$
|
(350
|
)
|
|
$
|
150
|
|
June
2018 Note
|
|
|
3,159
|
|
|
|
(2,641
|
)
|
|
|
518
|
|
Total
notes payable
|
|
$
|
3,659
|
|
|
$
|
(2,991
|
)
|
|
$
|
668
|
|
|
|
As
of December 31, 2018
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
May
2018 Notes
|
|
$
|
400
|
|
|
$
|
(25
|
)
|
|
$
|
375
|
|
June
2018 Note
|
|
|
2,448
|
|
|
|
(1,803
|
)
|
|
|
645
|
|
December
2018 Note
|
|
|
351
|
|
|
|
(86
|
)
|
|
|
265
|
|
Total
notes payable
|
|
$
|
3,199
|
|
|
$
|
(1,914
|
)
|
|
$
|
1,285
|
|
During
the three months ended March 31, 2019 and 2018, the Company recorded amortization of debt discount of $1,091 and $0, respectively.
Note
5. Leases
On
August 9, 2016, the Company entered into a sublease agreement for an office lease in Durham, North Carolina. The lease commenced
on September 1, 2016 and expires on January 31, 2020. Monthly rent was $6 for the first 12 -month period and $7 each month thereafter
until expiration of the lease. A security deposit of $13 was required upon execution of the sublease.
Lease
rental expense totaled $20 and $17 during the period ended March 31, 2019 and 2018, respectively.
Total
future minimum payments required under the sublease agreement are as follows:
Years
ended December 31,
|
|
Amount
|
|
2019
(remaining nine months)
|
|
$
|
62
|
|
2020
|
|
|
7
|
|
Total
undiscounted minimum future lease payments
|
|
$
|
69
|
|
Less
Imputed interest
|
|
|
(3
|
)
|
Present
value of operating lease liabilities
|
|
$
|
66
|
|
At
March 31, 2019, the weighted average remaining lease term and discount rate for operating leases was 0.83 years and 10.8%, respectively.
The
Company’s lease agreement does not contain any material residual value guarantees or material restrictive covenants.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
5. Leases, continued
Right
of use asset
Right
of use asset is included in the unaudited condensed consolidated Balance Sheet are as follows:
|
|
March
31, 2019
|
|
Non-current assets
|
|
|
|
|
Right of use asset,
operating lease, net of amortization
|
|
$
|
69
|
|
Note
6. Common Stock
and Warrant Issuances
Issuance
of common stock
During
the three months ended March 31, 2019, the Company issued 160,500 shares of its common stock to consultants in exchange for services.
These services were valued using the value of the shares issued of $60. During the three months ended March 31, 2018, the Company
issued 448,551 shares of its common stock to consultants in exchange for services. These services were valued using the value
of the shares issued of $839.
Equity
Purchase Agreement
On
August 30, 2018, the Company and Oasis Capital, LLC (formerly known as L2 Capital, LLC) (“Oasis Capital”),
a Kansas limited liability company, entered into an equity purchase agreement (the “August Equity Purchase Agreement”),
pursuant to which the Company may issue and sell to Oasis Capital from time to time up to $35,000 of the Company’s
common stock that is registered with the SEC under a registration statement on a Form S–3. Pursuant to the August Equity
Purchase Agreement, the Company may require Oasis Capital to purchase shares of common stock that is equal to the lesser
of $500 and 200% of the average trading volume of the common stock in the ten prior trading days, upon the Company’s delivery
of a put notice to Oasis Capital. Oasis Capital shall purchase such number of shares of common stock at a per share
price that equals to the lowest volume weighted average trading price of the common stock during the five prior trading days multiplied
by 93.5%.
On
November 30, 2018, the Company and Oasis Capital entered into an amendment (the “EPA Amendment”) to the August
Equity Purchase Agreement. The EPA Amendment amends the aggregate value of the common stock that can be sold to Oasis Capital
from $35,000 to $50,000. Subject to the terms of the EPA Amendment, the Company may by notice (a “Put Notice”)
delivered to Oasis Capital require Oasis Capital to purchase a number of shares (the “Put Shares”) of
the common stock that is equal to the lesser of $500 and 200% of the average trading volume of the common stock in the ten trading
days immediately preceding the date of such Put Notice. The Amendment and EPA provide that the purchase price for such Put Shares
will be the lowest traded price on the principal market for any trading day during the five trading days either following or beginning
on the date on which Oasis Capital receives delivery of the Put Shares into its brokerage account, which period is referred
to as the Valuation Period, multiplied by 95.0%.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
6. Common Stock and Warrant Issuances, continued
Equity
Purchase Agreement, continued
During
the three months ended March 31, 2019, the Company issued 43,100,000 shares of its common stock in exchange for $2,154.
Of that amount, $354 was applied directly as payment against the December 2018 Note. On March 28, 2019, the Company sold 7,500,000
shares of its common stock for proceeds of $346. Since the proceeds were collected in April 2019, the Company recorded a subscription
receivable for this amount as of March 31, 2019.
On
April 16, 2019, the Company became ineligible to issue shares under its registration statement on Form S-3 as the aggregate
market of the Company’s common stock held by non-affiliates was below the regulatory threshold of $75,000. In connection
with this ineligibility, the Company’s August Equity Purchase Agreement was terminated.
Warrants
The
following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31,
2019:
|
|
Warrant
shares
outstanding
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average remaining life
|
|
|
Intrinsic
value
|
|
Outstanding
at January 1, 2019
|
|
|
5,477,975
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2019
|
|
|
5,477,975
|
|
|
$
|
1.01
|
|
|
|
1.13
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2019
|
|
|
5,477,975
|
|
|
$
|
1.01
|
|
|
|
1.13
|
|
|
$
|
-
|
|
Note
7. Stock–Based Compensation
Issuance
of restricted common stock – directors, officers and employees
The
Company’s activity in restricted common stock was as follows for the three months ended March 31, 2019:
|
|
Number
of shares
|
|
|
Weighted
average
grant date fair
value
|
|
Non–vested
at January 1, 2019
|
|
|
3,355,000
|
|
|
$
|
1.46
|
|
Vested
|
|
|
(704,999
|
)
|
|
$
|
1.63
|
|
Non–vested
at March 31, 2019
|
|
|
2,650,001
|
|
|
$
|
1.41
|
|
For
the three months ended March 31, 2019 and 2018, the Company has recorded $894 and $1,087, in employee and director stock–based
compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations
and comprehensive loss.
As
of March 31, 2019, unamortized stock-based compensation costs related to restricted share arrangements was $1,573, and
will be recognized over a weighted average period of 0.54 years.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
7. Stock–Based Compensation, continued
Stock
options
The
following is a summary of the Company’s stock option activity for the three months ended March 31, 2019:
|
|
Options
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
Grant date fair value
|
|
|
Weighted
average remaining life
|
|
|
Intrinsic
value
|
|
Outstanding
– January 1, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– March 31, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
0.84
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– March 31, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
0.84
|
|
|
$
|
–
|
|
As
of March 31, 2019, there were no unrecognized compensation costs, as all outstanding stock options are fully vested.
Note
8. Commitments and Contingencies
Operating
commitments
On
October 23, 2018, the Company entered into a hosting agreement (“Hosting Agreement”) with a hosting facility in Colorado
where the mining machines have been relocated from Sweden into the U.S. Pursuant to the Hosting Agreement, the service provider
will provide a facility to host the Company’s Bitcoin computing servers. The Hosting Agreement states that after payment
of an initial fee of $170, all future amounts due to the service provider will be calculated based on electricity consumed by
the Company’s 2,500 miners, as determined via separate metered connections on two transformers. The Hosting Agreement commenced
on November 1, 2018 and terminates on November 1, 2020.
Legal
There
have not been any material updates to the Company’s legal proceedings, as disclosed in the Company’s Form 10-K, as
filed with the SEC on April 16, 2019.
Note
9. 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 three months ended March 31, 2019 and 2018, the Company made
contributions to the 401(k) Plan of $4 and $18, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share
amounts)
Note
10. Subsequent Events
The
Company has evaluated the impacts of subsequent events through May 17, 2019, and has determined that no such events occurred
that were required to be reflected in the unaudited condensed consolidated financial statements, except as described
within the above notes and described below.
Modification
of Notes Payable
On
April 9, 2019, the Company entered into an amendment to one of its May 2018 Notes to (a) forego the installment payments
due on February 23, 2019 and March 23, 2019; and (b) extend the maturity date of the note to August 15, 2019. In exchange
for the amendment, the Company compensated the holder of the note by increasing the outstanding principal due by
$50.
On
May 10, 2019, the two holders of the May 2018 Notes assigned and sold all notes to a single unaffiliated investor. On the
same date, the Company and new investor executed a letter agreement to amend the terms of the May 2018 Notes to allow the new
investor to convert the total outstanding principal amount of $427 into shares of the Company’s common stock, at a
price equal to 70% of the lowest trading price during the 20 days preceding the conversion dates, or any lower price made
available to any other holder of the Company’s securities. This amendment also eliminates the Company’s mandatory
monthly amortization payments and extended the maturity of the May 2018 Notes until August 15, 2019. After such date, and
within 10 business days, any outstanding balance shall be satisfied, at the Company’s election, either with: cash,
common stock conversion or any combination thereof. On May 15, 2019, the Company issued 10,568,087 shares of its common stock
pursuant to the full conversion of the May 2018 Notes.
Also
on May 10, 2019, the Company executed a letter agreement with the holder of the June 2018 Note to amend the terms of the June
2018 Notes to allow the holder to covert the total outstanding principal amount of $3,159 into shares of the Company's common
stock, at a price equal to 70% of the lowest trading price during the 20 day preceding the conversion dates, or any lower price
made available to any other holder of the Company’s securities. This amendment also eliminates the Company's mandatory monthly
amortization payments and extended the maturity of the June 2018 Note until December 15, 2019. After such date, and within 10
business days, any outstanding balance shall be satisfied, at the Company’s election, either with: cash, common stock conversion,
or any combination thereof.
Modification
of Warrants
On
May 9, 2019, the Company reached a modification agreement with the holder of six separate warrants entitling the holder to purchase
a total of 4,000,000 shares of the Company’s common stock at prices of between $0.50 per share and $2.00 per share at various
times until September 2022. In return for the immediate exercise of all warrants, the holder was permitted to exercise at a price
of $0.03 per share, or $120.
Sale
of Preferred Stock
On
April 12, 2019, the Company’s Board of Directors approved the authorization of 200 shares of Series C Convertible Preferred
Stock with a par value of $0.001 and a stated value of $10,000 per share (“Preferred Shares”). The holders of the
Preferred Shares are not entitled to vote their shares or receive dividends. At any time prior to the one-year anniversary from
the issuance date, the Company may redeem the Preferred Shares at 1.4 times the stated value, following which the Company may
redeem the Preferred Shares at 1.2 times the stated value.
Each
Preferred Share is convertible into shares of the Company’s common stock in an amount equal to the greater of: (a) 200,000
shares of common stock or (b) the amount derived by dividing the stated value by the product of 0.7 times the market price of
the Company’s common stock, defined as the lowest trading price of the Company’s common stock during the ten day period
preceding the conversion date. The holder may not convert any Preferred Shares if the total amount of shares, together with holdings
of its affiliates, following a conversion shall exceed 9.99% of the Company’s common stock. The common shares issued upon
conversion have been registered under the Company’s registration statement on Form S-3. On April 12, 2019, the Company sold
190 Preferred Shares for $1,900. During April and May 2019, holders of the preferred shares converted 35
of their Preferred Shares into 8,463,465 shares of common stock.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per–share amounts)
Note
10. Subsequent Events, continued
Sale
of Common Stock
On
April 12, 2019, the Company entered into a purchase agreement with an accredited investor whereby it sold 17,500,000 shares of
its common stock for $525 pursuant to the Company’s registration statement on Form S-3. The holder of these shares is also
the holder of the June 2018 Note and an affiliate of the holder of 150 shares of the Preferred Shares.
Equity
Purchase Agreement
Subsequent
to March 31, 2019, through April 16, 2019, the Company issued 23,900,000 shares of its common stock under the Equity Purchase
Agreement in exchange for $1,575.
Hosting
Agreement
On
May 10, 2019, the Company, N 4
th
Street LLC (the “Service Provider”), and Bit5ive LLC (the “Operator”)
entered into a profit sharing agreement, effective as of May 10, 2019, relating to the generation of Bitcoin mining revenues at
a facility located in Coshocton, Ohio (the “Facility”) for a term that is the earlier of (i) two years, or (ii) when
the parties determine that the Bitcoin mining business at the Facility is uneconomic (the “Agreement”).
Under
the terms of the Agreement, the Company agreed to provide the necessary hardware to conduct Bitcoin mining at the Facility. In
addition, the Company is required to deliver a security deposit in the amount of $240,000 to the Service Provider (the “Security
Deposit”). The Service Provider agreed, among other things, to provide necessary hosting capacity, equipment, infrastructure
and electricity to operate the mining hardware at the Facility. The Operator agreed, among other things, to and maintain the Facility
in accordance with prudent industry standards (as defined in the Agreement) and to maintain the hardware.
The
Service Provider is required to disburse on a monthly basis: (i) the total electricity costs to the utility provider; (ii) 10%
of Gross Profits (as defined in the Agreement) to the Operator; (iii) the Net Profits (as defined in the Agreement) such that
10% of all Gross Profits shall be paid to the Company, 40% of all Gross Profits shall be paid to Service Provider, and 40% of
all Gross Profits will be paid into the Security Deposit account until such time as the Security Deposit is paid in full; and
(iv) subsequent to the satisfaction of the Security Deposit, Net Profits equally between the Company and the Service Provider.
Employment
Agreements
On
May 1, 2019, the Company’s board of directors reappointed Mr. Robert Ladd as Chief Executive Officer of the Company. Mr.
Ladd’s previous employment agreement with the Company remains in effect.
On
May 13, 2019, Stephen Schaeffer, the Company’s Chief Operating Officer, resigned effective May 10, 2019. In connection
with his resignation, Mr. Schaeffer and the Company entered into a resignation and release agreement dated May 13, 2019 (the
“Resignation Agreement”), pursuant to which Mr. Schaeffer’s Executive Employment Agreement, dated August
15, 2017 was terminated. The Resignation Agreement provides that Mr. Schaeffer will be paid a lump sum of $100,000, net of
appropriate payroll and withholding deductions. In addition, the Resignation Agreement provides for the immediate vesting of
440,000 shares of common stock previously granted to Mr. Schaeffer under the Company’s 2016 Stock Equity Plan and for
Company-paid COBRA health insurance coverage.
Management
Agreements
On
May 2, 2019, the Company entered into amended management agreements with two accredited investors, Deep South Mining LLC and BDLM,
LLC (the “Users”). The Users’ miners shall be reconnected and resume mining Bitcoin upon execution of these
agreements. Due to wear and tear, the parties acknowledge the Users’ Bitcoin Hardware consist of 1,800 Bitmain Antminer
S9 mining computers, collectively.
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
16, 2019, 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,
and its wholly–owned subsidiary MGT Sweden AB. Our corporate office is located in Durham, North Carolina.
All
dollar figures set forth in this Quarterly Report on this Form 10-Q are in thousands, except share and per-share amounts.
As
of March 31, 2019, MGT owned and or managed approximately 5,700 mining machines. Approximately 2,500 machines are
located in Colorado and 3,200 machines are located in Ohio. Of the 5,700 machines, 3,700 are owned by the
Company, and the remaining machines are investor owned. 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. Because the price of
Bitcoin steadily decreased during 2018 and throughout the first quarter of 2019, the Company decided it was not economically responsible
to commence mining operations in Colorado or Ohio. On May 14, 2019, the Company announced commencement of operations in
both Colorado and Ohio.
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 unaudited condensed consolidated financial statements contained in this Quarterly Report describe
our significant accounting policies used in the preparation of the unaudited condensed 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 unaudited condensed consolidated financial statements.
Revenue
recognition
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 as an intangible digital asset
valued at the lower of cost or net realizable value. Net realizable value adjustments, to reduce the value of the Coins to their
market value, is included in cost of revenue on the Company’s consolidated statements of operation. Any gain or loss on
sale would be recorded to cost of revenues. Costs of revenues includes equipment depreciation, rent, net realizable value adjustments,
and electricity costs.
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 March 31, 2019 and 2018
Revenues
Our
revenues for the three months ended March 31, 2019 decreased by $928, or 97%, to $28 as compared to $956 for the three months
ended March 31, 2018. Our revenue is derived from cryptocurrency mining. The decrease in revenues is a result of our decision
to not operate the majority of our miners due to the unfavorable economics of decreased price of Bitcoin and increased difficulty.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2019 decreased by $3,192, or 61%, to $2,000 as compared to $5,192 for the three
months ended March 31, 2018. The decrease in operating expenses was primarily due to a decrease in general and administrative
expenses, as well as no costs associated with marketing or research and development, and a decrease of $795 in cost of sales from
cryptocurrency mining operations.
The
decrease in general and administrative expenses of $2,295, or 55% to $1,914 as compared to $4,209 for the three months ended
March 31, 2018, was primarily due to a decrease in stock-based compensation of $1,273 and a decrease in payroll and
related expenses of $426, offset by an increase in legal and professional fees of $57.
Other
Income and Expense
For
the three months ended March 31, 2019, non–operating expenses consisted of interest expense of $3, accretion of debt discount
of $1,091, gain on sale of property and equipment of $82 and a gain on extinguishment of debt of $1,275. During
the comparable period ended March 31, 2018, non–operating expenses consisted of a warrant modification expense of $139,
loss on sale of business unit of $127, and a loss on sale of property and equipment of $47.
Liquidity
and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt and equity interests. As of March 31, 2019, we have incurred
significant operating losses since inception and continue to generate losses from operations and as of March 31, 2019 have an
accumulated deficit of $406,425. At March 31, 2019, our cash and cash equivalents were $362 and our working capital deficit
was $526. As of March 31, 2019, we had notes payable outstanding with a face value of $3,659.
Management’s
plans include overseeing the operation of approximately 5,700 cryptocurrency mining machines in Colorado and Ohio and continuing
to execute on an expansion model to secure low cost power and grow its cryptocurrency assets. As discussed in Note 1 to the
unaudited condensed consolidated financial statements, the Company decided not to commence the majority of its mining
operations during the first quarter of 2019 as it believed that it was not economically responsible to do so based on unfavorable
Bitcoin economics. The Company’s revenue in the first quarter of 2019 was significantly less than historical results, as
it had only 500 machines in operation. 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 condensed 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 three months ended March 31, 2019, as reported by Blockchain.info,
were approximately $3 and $5 respectively.
The
Company’s primary source of operating funds has been through debt and equity financing. On August 30, 2018, the Company
and Oasis Capital, LLC (formerly known as L2 Capital, LLC) (“Oasis Capital”), a Kansas limited liability company,
entered into an equity purchase agreement (the “Equity Purchase Agreement”), pursuant to which the Company may issue
and sell to Oasis Capital from time to time up to $35,000 of the Company’s Common Stock that is registered with the SEC
under a registration statement on a Form S–3. The amount of the Equity Purchase Agreement was amended to $50,000 on December
3, 2018. During the year ended December 31, 2018, the Company issued 33,650,000 shares of its Common Stock in exchange for $2,459.
During the period January 1, 2019 through April 15, 2019, the Company issued 58,600,000 shares of its Common Stock in exchange
for $3,277. On April 16, 2019, the Company’s registration statement on Form S–3 lost its effectiveness as the aggregate
market value of the Company’s Common Stock held by non-affiliates was below the regulatory threshold of $75,000. Therefore
the Company will not be able to use its Equity Purchase Agreement as a source of operating funds.
Sale
of Preferred Stock
On
April 12, 2019, the Company’s Board of Directors approved the authorization of 200 shares of Series C Convertible Preferred
Stock with a par value of $0.001 and a stated value of $10,000 per share (“Preferred Shares”). The holders of the
Preferred Shares are not entitled to vote their shares or receive dividends. At any time prior to the one-year anniversary from
the issuance date, the Company may redeem the Preferred Shares at 1.4 times the Stated Value, following which the Company may
redeem the Preferred Shares at 1.2 times the Stated Value.
Each
Preferred Share is convertible into shares of the Company’s common stock in an amount equal to the greater of: (a) 200,000
shares of common stock or (b) the amount derived by dividing the Stated Value by the product of 0.7 times the market price of
the Company’s common stock, defined as the lowest trading price of the Company’s common stock during the ten day period
preceding the conversion date. The holder may not convert any Preferred Shares if the total amount of shares, together with holdings
of its affiliates, following a conversion shall exceed 9.99% of the Company’s common stock. The common shares issued upon
conversion have been registered under the Company’s registration statement on Form S-3. On April 12, 2019, the Company sold
190 Preferred Shares for $1,900.
Sale
of Common Stock
On
April 12, 2019, the Company entered into a Purchase Agreement with an accredited investor whereby it sold 17,500,000 shares of
its common stock for $525 pursuant to the Company’s registration statement on Form S-3. The holder of these shares is
also the holder of the June 2018 Note and an affiliate of the holder of 150 shares of the Preferred Shares.
|
|
Three
Months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash (used in) /
provided by
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(1,109
|
)
|
|
$
|
(2,919
|
)
|
Investing activities
|
|
|
-
|
|
|
|
(6,500
|
)
|
Financing activities
|
|
|
1,375
|
|
|
|
361
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
266
|
|
|
$
|
(9,058
|
)
|
Cash
Flows
Operating
activities
Net
cash used in operating activities was $1,109 for the three months ended March 31, 2019 as compared to $2,919 for the three
months ended March 31, 2018. Cash used in operating activities for the three months ended March 31, 2019 primarily consisted of
a net loss of $1,709, partially offset by non-cash stock-based compensation of $949, amortization of note discounts
of $1,091 less a non-cash gain on extinguishment of $1,275 and a decrease in working capital of $83. Cash
used in operating activities for the three months ended March 31, 2018 primarily consisted of a net loss of $4,549 partially offset
by non-cash stock-based compensation of $2,227, and depreciation expense of $481, less a decrease in working capital of $1,391.
Investing
activities
Net
cash used in investing activities was $0 for the three months ended March 31, 2019 as compared to net cash used in investing activities
of $6,500 for the three months ended March 31, 2018. During the three months ended March 31, 2018, the Company used $6,987 in
the purchase of property and equipment, and realized $60 in proceeds from sales of our cybersecurity assets and $427 from the
sale of property and equipment.
Financing
activities
During
the three months ended March 31, 2019, cash provided by financing activities totaled $1,375, which includes $1,457 from
the sale of stock under our equity purchase agreement, offset by $82 in repayments of notes payable. During the three months
ended March 31, 2018, cash provided by financing activities totaled $361, comprised of $80 from private placements of our common
stock and $281 from the exercise of stock purchase warrants.
Off–balance
sheet arrangements
As
of March 31, 2019 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.