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 September 30, 2019, the Company had incurred
significant operating losses since inception and continues to generate losses from operations. As of September 30, 2019, the Company
had an accumulated deficit of $413,303. As of September 30, 2019 and October 31, 2019, MGT’s cash and cash equivalents
were $2,113 and $1,077, respectively.
Management’s
plans include the consolidation of its activities in Company-owned and managed facilities, executing on its expansion model to
secure low cost power and grow its cryptocurrency assets. 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 unaudited 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 consolidation of its activities in Company-owned and managed facilities, 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.
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 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 (as defined in Note
5) 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
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
network of Bitcoin, 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 adjust the value of Coins to market value, is included in cost of revenue on the Company’s
consolidated statement of operations. Further, any gain or loss on the sale of Coins would be recorded to costs of revenue. Costs
of revenue include hosting fees, equipment and infrastructure depreciation, rent, net realizable value adjustments, and electricity
costs.
The
Company also recognized revenue from its management agreements through their termination in August and September 2019, as further
described in Note 9. The Company received a fee from each management agreement based on the amount of Bitcoin mined and was reimbursed
for any electricity costs incurred to run the Bitcoin mining machines it managed in its facility.
Additionally, the
Company has machines located in facilities in Ohio and Colorado. The Company receives an allocation of profits
from the Ohio facility. For the Colorado location, the Company recognizes Bitcoin revenue and recognizes hosting fees as
cost of revenue. The Company also has machines in a temporary facility in Georgia whereby the Company recognizes
Bitcoin revenue and recognizes hosting fees as cost of revenue. These machines will be moved to MGT’s permanent location in
LaFayette, GA during Q4 2019.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight–line method
on the various asset classes over their estimated useful lives, which range from one to ten years when placed in service. The
cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses
are included in income in the year of disposition.
In
connection with the Company’s plans to consolidate its activities in Company-owned and managed facilities, the Company has
entered into agreements to acquire Bitcoin mining machines and containers to house the mining machines requiring upfront deposits.
Deposits on such purchases are classified as Other Assets. Upon delivery, installation and full payment, the assets will be classified
as property and equipment on the consolidated balance sheet.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
Income
taxes
The
Company accounts for income taxes in accordance with 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- and nine-month periods ended September 30, 2019 excludes 850,000 unvested
restricted shares, 6,000,000 shares issuable under stock options, 97,575,510 shares issuable upon the conversion of convertible
debt, and 68,452,381 shares under preferred stock. The computation of diluted loss per share for the three and nine months
ended September 30, 2018 excludes 3,555,000 unvested restricted shares, 6,000,000 shares issuable under stock options, and 6,227,975
shares issuable under warrants.
Stock–based
compensation
The
Company recognizes compensation expense 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
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 or eliminates a conversion option that was
substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as
extinguishment of the original instrument along with the recognition of a gain/loss. Additionally, under ASC 470, a substantive
modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if
the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present
value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an
extinguishment of the original instrument along with the recognition of a gain/loss.
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 Accounting Standards Update (“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 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. On January 1, 2019, the Company adopted ASU 2018-07, which has not had a material effect on the Company’s
financial statements.
In
February 2016, the FASB issued ASU 2016-02 Leases 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. In July 2018, the FASB issued ASU 2018-10 Leases,
Codification Improvements and ASU 2018-11 Leases, Targeted Improvements, to provide additional guidance for the adoption of ASU
2016-02. 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 ASU 2016-02. ASU 2016-02, ASU 2018-10, ASU 2018-11, (collectively,
“Topic 842”) are effective for fiscal years beginning after December 15, 2018, with early adoption permitted.
On
January 1, 2019, the Company adopted Topic 842 and 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.
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
3. Summary of Significant Accounting Policies, continued
On
January 1, 2019, the Company recorded a Right of Use Asset of $87, 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”), which 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 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.
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 11 – 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. Property, Plant, and Equipment and Other Assets
Property
and equipment consisted of the following:
|
|
|
As
of
|
|
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Land
|
|
$
|
57
|
|
|
$
|
-
|
|
|
Computer
hardware and software
|
|
|
17
|
|
|
|
17
|
|
|
Bitcoin
mining machines
|
|
|
359
|
|
|
|
-
|
|
|
Infrastructure
|
|
|
451
|
|
|
|
-
|
|
|
Property
and equipment, gross
|
|
|
884
|
|
|
|
17
|
|
|
Less:
Accumulated depreciation
|
|
|
(44
|
)
|
|
|
(17
|
)
|
|
Property
and equipment, net
|
|
$
|
840
|
|
|
$
|
-
|
|
The
Company recorded depreciation expense of $27 and $1,429 for the three months ended September 30, 2019 and 2018, respectively.
The Company recorded depreciation expense of $27 and $2,618 for the nine months ended September 30, 2019 and 2018, respectively.
Other
Assets consisted of the following:
|
|
|
As
of
|
|
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Deposits
on Bitcoin mining machines
|
|
$
|
1,473
|
|
|
$
|
-
|
|
|
Deposits
on containers
|
|
|
344
|
|
|
|
-
|
|
|
Security
deposits-hosted arrangements
|
|
|
83
|
|
|
|
-
|
|
|
Other
Assets
|
|
$
|
1,900
|
|
|
$
|
-
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
4. Property, Plant, and Equipment and Other Assets, continued
During
the three months ended September 30, 2019, the Company entered into a purchase agreement with Bitmaintech Pte. Ltd, a Singapore
private limited company, to purchase 1,100 Antminer-S-17 Bitcoin mining machines for an aggregate purchase price of approximately
$2,770, subject to adjustments, with delivery expected in November 2019 to the Company’s facility in Lafayette, GA. $1,385
was paid as a deposit and the remaining balance is due upon delivery. The Company has paid deposits of $88 on other Bitcoin mining
machines with expected delivery in November 2019. Once these Bitcoin mining machines are delivered and installed, the cost of
the mining machines will be reclassified to property and equipment and depreciated over their estimate useful lives of 2 years
using the straight-line method.
Also,
during the three months ended September 30, 2019, the Company entered in agreements to purchase containers to house the Bitcoin
mining machines, with expected delivery in late October and early November 2019. Once these containers are delivered and installed,
the cost of containers will be reclassified to property and equipment and depreciated over their estimate useful lives of 5 years
using the straight-line method. The security deposits relate to hosted arrangements further described in Note 9.
Note
5. 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
(Dollars
in thousands, except per–share amounts)
Note
5. 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.
On
April 9, 2019, the Company entered an amendment to one of its May 2018 Notes to (a) forego the installment payments due on February
23, 2019 and March 23, 2019, (b) extend the maturity date of the note to August 15, 2019, and (c) include a substantial conversion
feature allowing the debt holder, in its sole discretion, to have the right to convert the April 15, 2019 monthly payment, and
each payment thereafter, into shares of the Company’s common stock. The number of shares to be issued will be based on the
lower of: i) 70% of the lowest intra-day price of the Company’s common stock during the preceding twenty (20) trading days,
or ii) any lower price that is made available to any other holder of the Company’s securities, whether by sale or conversion,
on the date of a conversion notice. In exchange for the amendment, the Company compensated the holder of the note by increasing
the outstanding principal due by $50. The Company accounted for this amendment as an extinguishment of debt and recorded a gain
of $127.
On
May 10, 2019, the original holders of the Company’s May 2018 Notes assigned and sold all notes to Oasis Capital, LLC (“Oasis
Capital”). On the same date, the Company and Oasis Capital executed a letter agreement to amend the terms of the May 2018
Notes allowing Oasis Capital to convert the total outstanding principal amount of $421 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 eliminated 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.
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
Note allowing 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 period 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 extends 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. The Company accounted for this amendment as an extinguishment of debt and recorded
a gain of $1,004.
During
the three months ended September 30, 2019, the Company issued 16,654,170 shares of its common stock upon the conversion of $450
in outstanding principal by the holder and during the nine months ended September 30, 2019 issued 63,310,326 shares of its common
stock upon the conversion of $1,725 in outstanding principal by the holder reducing the outstanding principal to $1,434 as of
September 30, 2019.
The
holder of the June 2018 Note also acquired 17,500,000 shares of the Company’s common stock on April 12, 2019, is an affiliate
of the acquirer of 150 shares of the Preferred Shares acquired on April 12, 2019 and acquired 10 shares of the Preferred Shares
on July 15, 2019, see Note 7 below, and are collectively subject to a maximum beneficial ownership of 9.99%. Of the 160 shares
of Preferred Stock acquired by the affiliate, 115 shares are issued and outstanding as of September 30, 2019.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
5. Notes Payable, continued
Notes
payable consisted of the following:
|
|
|
As
of September 30, 2019
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
June
2018 Note
|
|
$
|
1,434
|
|
|
$
|
(495
|
)
|
|
$
|
939
|
|
|
Total
notes payable
|
|
$
|
1,434
|
|
|
$
|
(495
|
)
|
|
$
|
939
|
|
|
|
|
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 September 30, 2019 and 2018, the Company recorded accretion of debt discount of $946 and $0, respectively.
During the nine months ended September 30, 2019 and 2018, the Company recorded accretion of debt discount of $4,768 and $0, respectively.
Note
6. 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 $60 and $36 during the nine months ended September 30, 2019 and 2018, respectively, and $20 and $20 during
the three months ended September 30, 2019 and 2018, respectively.
Total
future minimum payments required under the sublease agreement are as follows:
|
Years
ended December 31,
|
|
Amount
|
|
|
2019
|
|
$
|
21
|
|
|
2020
|
|
|
7
|
|
|
Total
undiscounted minimum future lease payments
|
|
$
|
28
|
|
|
Less
imputed interest
|
|
|
-
|
|
|
Present
value of operating lease liabilities
|
|
$
|
28
|
|
At
September 30, 2019, the weighted average remaining lease term and discount rate for operating leases was 0.33 years and 10.8%,
respectively. The Company’s lease agreement does not contain any material residual value guarantees or material restrictive
covenants.
Right
of use asset
The
Company has recognized a right of use asset of $32 in the unaudited condensed consolidated Balance Sheet as of September 30, 2019.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants
Common
stock
Equity
Purchase Agreement under Form S-3
From
January 1, 2019 through April 16, 2019, the Company sold shares of its common stock pursuant to an equity purchase agreement with
Oasis Capital. The equity purchase agreement was entered on August 30, 2018 and was amended on November 30, 2018, whereby the
Company could issue and sell to Oasis Capital from time to time up to $50,000 of the Company’s common stock that was registered
with the SEC under a registration statement on Form S–3. Subject to the terms of the equity purchase agreement, the Company
provided notice (a “Put Notice”) requiring Oasis Capital to purchase a number of shares (the “Put Shares”)
of the common stock 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 terms also provided the purchase price for such Put Shares to be the
lowest traded price on a 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, multiplied by 95.0%.
During
the three and nine months ended September 30, 2019, the Company issued 23,900,000 and 67,000,000 shares of its common stock in
exchange for $1,575 and $3,731, respectively. Of the proceeds received during the three months ended March 31, 2019, $354 was
applied directly as payment against the December 2018 Note.
On
April 16, 2019, the Company became ineligible to issue shares under its registration statement on Form S-3 as the aggregate market
value of the Company’s common stock held by non-affiliates was below the regulatory threshold of $75,000. In connection
with this ineligibility, the equity purchase agreement was terminated.
Equity
Purchase Agreement under Form S-1
On
June 3, 2019, the Company entered into an equity purchase agreement with Oasis Capital, whereby the Company shall have the right,
but not the obligation, to direct Oasis Capital to purchase shares of the Company’s common stock (the “New Put Shares”)
in an amount in each instance up to the lesser of $1,000 or 250% of the average daily trading volume by delivering a notice to
Oasis Capital (the “New Put Notice”). The purchase price (the “Purchase Price”) for the New Put Shares
shall equal 95% of the one lowest daily volume weighted average price on a principal market during the five trading days immediately
following the date Oasis receives the New Put Shares via DWAC associated with the applicable New Put Notice (the “Valuation
Period”). The closing of a New Put Notice shall occur within one trading day following the end of the respective Valuation
Period, whereby (i) Oasis shall deliver the Investment Amount (as defined below) to the Company by wire transfer of immediately
available funds and (ii) Oasis shall return surplus New Put Shares if the value of the New Put Shares delivered to Oasis causes
the Company to exceed the maximum commitment amount. The Company shall not deliver another New Put Notice to Oasis within ten
trading days of a prior New Put Notice. The “Investment Amount” means the aggregate Purchase Price for the New Put
Shares purchased by Oasis, minus clearing costs payable to Oasis’s broker or to the Company’s transfer agent for the
issuance of the New Put Shares. The shares issuable under the equity purchase agreement are registered with the SEC under a registration
statement on Form S-1 that was declared effective on June 25, 2019 and are subject to a maximum beneficial ownership by Oasis
Capital of 9.99%.
During
the three months ended September 30, 2019, the Company issued 40,000,000 shares of its common stock in exchange for $1,442, net
of deferred offering costs of $71. No shares were issued under the Form S-1 prior to July 1, 2019.
Other
Common Stock Sales and Issuances
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 then-effective 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 acquirer of 150 shares of the Preferred Shares acquired
on April 12, 2019 described below.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants, continued
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 based upon the value of the shares issued of $60. No shares were issued to consultants during the second
and third quarters of 2019. During the three and nine months ended September 30, 2018, the Company issued 360,500 and 1,539,051
shares of its common stock, respectively, to consultants in exchange for services. These services were valued based upon the value
of the shares issued of $322 and $2,036, respectively.
In
connection with the termination of its management agreements, see Note 9 below, the Company issued 10,250,000
shares
of its common stock to acquire 2,000 S9 miners from its former partners. The S9 miners were valued at $312, based on the trading
value of the Company’s common stock on the date each management agreement was terminated.
Preferred
Stock
On
January 11, 2019, the Company’s Board of Directors approved the authorization of 10,000 shares of Series B Preferred Stock
with a par value of $0.001 (“Series B Preferred Shares”). The holders of the Series B Preferred Shares shall be entitled
to receive, when, as, and if declared by the Board of Directors of the Company, out of funds legally available for such purpose,
dividends in cash at the rate of 12% of the stated value per annum on each Series B Preferred Share. Such dividends shall be cumulative
and shall accrue without interest from the date of issuance of the respective share of the Series B Preferred Shares. Each holder
shall also be entitled to vote on all matters submitted to stockholders of the Company and shall be entitled to 55,000 votes for
each Series B Preferred Share owned at the record date for the determination of stockholders entitled to vote on such matter or,
if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. In
the event of a liquidation event, any holders of the Series B Preferred Shares shall be entitled to receive, for each Series B
Preferred Shares, the stated value in cash out of the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders. The Series B Preferred Shares are not convertible into shares of the Company’s common
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 have no voting rights, receive no dividends, and are entitled to a liquidation preference equal to the stated
value. 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 held, together with
holdings of its affiliates, following a conversion exceeds 9.99% of the Company’s common stock. The Company has accounted
for the beneficial conversion feature of the Preferred Shares, convertible at 0.7 times the market price of the Company’s
common stock, as a deemed dividend of $859 for the three months ended June 20, 2019 and $46 for the three months ended September
30, 2019, measured as the difference between the conversion price of the Preferred Shares and the fair value of the underlying
common stock.
The
common shares issued upon conversion have been registered under the Company’s then-effective registration statement on Form
S-3. On April 12, 2019, the Company sold 190 Preferred Shares for $1,890, net of issuance costs and on July 15, 2019 sold 10 Preferred
Shares for $100. During the three months ended June 30, 2019, holders of the preferred shares converted 50 of their Preferred
Shares into 14,077,092 shares of common stock. During the three months ended September 30, 2019, the holder of the preferred stock
converted 35 of their shares Preferred Shares into 13,528,575 shares of common stock. Given the right of redemption is solely
at the option of the Company, the Preferred Shares are not considered mandatorily redeemable, and as such are classified in shareholders’
equity on the Company’s condensed consolidated balance sheet.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
7. Common Stock, Preferred Stock and Warrants, continued
Warrants
The
following table summarizes information about shares issuable under warrants outstanding during the nine months ended September
30, 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
|
|
|
(4,000,000
|
)
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
Expired
or cancelled
|
|
|
(1,477,975
|
)
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at September 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
On
June 5, 2019, the Company entered into an agreement with a holder of a warrant for 10,000 shares of common stock, whereby the
holder agreed to sell the warrant back to the Company for a nominal amount. The Company subsequently cancelled the warrant.
On
May 9, 2019, the Company entered into a modification agreement with the holder of six separate warrants. Under the terms of the
initial warrant agreements, the holder was entitled to purchase 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 through September 2022. Under the terms of the modification agreement,
the holder was permitted to exercise all 4,000,000 warrants at a price of $0.03 per share, or $120. The Company accounted for
this modification as a down-round feature under the guidance of ASC 260-10-30, whereby the change in fair value of the warrants
before and after the down-round was triggered was recorded as a deemed dividend in the amount of $101.
During
the three months ended September 30, 2019, the Company entered into agreements with three holders of warrants for 1,450,000 shares
of common stock, whereby the holders agreed to sell the warrants back to the Company for $14. The Company subsequently canceled
the warrants.
Note
8. 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 nine months ended September 30, 2019:
|
|
|
Number
of shares
|
|
|
Weighted
average
grant date fair
value
|
|
|
Non–vested
at January 1, 2019
|
|
|
3,355,000
|
|
|
$
|
1.46
|
|
|
Granted
|
|
|
100,000
|
|
|
$
|
0.04
|
|
|
Vested
|
|
|
(2,605,000
|
)
|
|
$
|
1.30
|
|
|
Non–vested
at September 30, 2019
|
|
|
850,000
|
|
|
$
|
1.24
|
|
For
the three months ended September 30, 2019 and 2018, the Company has recorded $312 and $1,114, in employee and director
stock–based compensation expense, which is a component of general and administrative expenses in the consolidated
statement of operations. For the three months ended September 30, 2019 and 2018, the Company recognized $0 and $322 in
stock-based compensation related to stock issued to consultants for services provided. 100,000 restricted shares granted to
an employee on July 29, 2019 were issued subsequent to September 30, 2019.
For
the nine months ended September 30, 2019 and 2018, the Company has recorded $1,936 and $3,448 in employee and director
stock–based compensation expense, which is a component of general and administrative expenses in the consolidated statement
of operations. For the nine months ended September 30, 2019 and 2018, the Company recognized $60 and $2,036 in stock-based
compensation related to stock issued to consultants for services provided.
As
of September 30, 2019, unamortized stock-based compensation costs related to restricted share arrangements was $535 and will be
recognized over a weighted average period of 0.56 years.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except 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 nine months ended September 30, 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
– September 30, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
0.34
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
– September 30, 2019
|
|
|
6,000,000
|
|
|
$
|
0.71
|
|
|
$
|
1.29
|
|
|
|
0.34
|
|
|
$
|
–
|
|
As
of September 30, 2019, there were no unrecognized compensation costs, as all outstanding stock options are fully vested.
Note
9. Commitments and Contingencies
Bitcoin
Mining Agreements
On
May 20, 2019, the Company entered into an agreement with a third-party consultant whereby the consultant would advise and consult
with the Company on certain business and financial matters relating to crypto-currency mining. The Company engaged the consultant
to: (1) assist in locating at least 5 acres of real property in Georgia within close proximity to a fully operational electric
substation with a minimum of 15 MW of available capacity, subject to approval by the power company, (2) negotiate a power rate
between the Company and a power company, (3) assist in the identification, purchase, and delivery of transformers required to
serve the containerized mining systems, (4) successfully install the aforementioned transformers, and (5) obtain an electrical
permit and successfully inspect all electrical infrastructure between the container and substation. The consulting agreement was
valued at $400 and such amount was transferred to a third-party escrow account, payable to the consultant upon successful achievement
of defined milestones. Upon achievement, the value of the milestone is recorded as a component of general and administrative expenses
with an offsetting reduction to prepaid expense. During the second and third quarters of 2019, $200 and $50 in milestone achievements
were earned, respectively, and the remaining $150 is recorded as a prepaid expense as of September 30, 2019.
On
October 23, 2018, the Company entered into a hosting agreement (“Colorado Hosting Agreement”) with a hosting facility
in Colorado, whereby the service provider provides a facility to host Bitcoin computing servers. The Colorado Hosting Agreement
has been amended several times and currently provides for the hosting of 1,200 miners, a reduction of a security deposit from
$204 to $66 and a termination date of December 3, 2020. Because the price of Bitcoin steadily decreased in 2018 and throughout
the first quarter 2019, the Company decided it was not economically responsible to commence mining under this hosting arrangement
until May 2019 when Bitcoin mining economics started to improve.
On
May 10, 2019, the Company, entered into a hosting agreement (“Ohio Hosting Agreement”) 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 uneconomical. The Ohio
Hosting Agreement was amended in September 2019 and currently provides for the hosting of 576 miners and a reduction of the security
deposit from $240 to $80. Under the terms of the Ohio Hosting Agreement, the Company agreed to provide the necessary hardware
to conduct Bitcoin mining at the Facility. The service provider agreed, among other things, to provide necessary hosting capacity,
equipment, infrastructure and electricity to operate the mining hardware at the Facility. A third-party operator agreed, among
other things, to and maintain the Facility in accordance with prudent industry standards and to maintain the hardware.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
9. Commitments and Contingencies, continued
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 Ohio Hosting Agreement) to the operator; (iii) the Net Profits (as defined in the Ohio Hosting
Agreement) such that 10% of all Gross Profits (as defined in the Ohio Hosting Agreement) 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.
During
the three and nine months ended September 30, 2019, the Company recognized $78 and $148 under these agreements, respectively,
a portion of which was accounted for under the management agreements that were terminated during the three months ended September
30, 2019.
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 were reconnected, and mining Bitcoin was resumed 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.
The
Company entered into two Settlement and Termination Agreements (the “Settlement Agreements”) to its existing management
agreements with the Users on August 31, 2019. Under the terms of the Settlement Agreements, the Company will pay the Users a percentage
of profits (“User Distribution”) of Bitcoin mining as defined in the Settlement Agreements for a period not to exceed
16 months. The estimated present value of the User Distributions of $337 was recorded as termination expense with an offsetting
liability on August 31, 2019. Since two of the components of the User Distribution, Bitcoin price and Difficulty, as defined in
the Settlement Agreements, are based on market conditions, the liability will be marked-to-market on a quarterly basis and any
changes will be recorded in the statement of operations. As of September 30, 2019, the Company recognized a gain on the change
in the fair value of $135 based on a reduction of Bitcoin price and an increase in Difficulty, reducing the liability to $194.
Beginning
on December 31, 2019 and for a period of 12 months thereafter and conditioned on other events as defined in the Settlement Agreements,
the parties may unilaterally terminate the Settlement Agreements for a one-time payment of $270,000, collectively, by the Company.
Additionally, the Company acquired the 1,800 Antminer S-9 Bitcoin miners owned by the Users for 9,000,000 restricted shares of
the Company’s common stock valued at $279.
On
September 30, 2019, the Company terminated its remaining management agreement with a third party for a one-time payment of $27
and the acquisition of 200 Antminer S-9 Bitcoin miners owned by the third party for 1,250,000 restricted shares of the Company’s
commons stock valued at $33.
On
August 14, 2018, the Company entered into a collaborative venture with a third-party cryptocurrency miner to develop a fully contained
crypto currency mining pod (the “POD5 Agreement”). Pursuant to the POD5 Agreement, the Company will assist with the
design and development of the pods (“POD5 containers”). The Company will retain naming rights to the pods and receive
royalty payments from the third party in exchange for providing capital as well as engineering and design expertise. During the
three and nine months ended September 30, 2019, the Company received royalties and recognized revenue of $7 under this agreement.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Note
9. Commitments and Contingencies, continued
Legal
On
August 28, 2019, a shareholder derivative action was filed by shareholder Tyler Tomczak against the Company and certain of its
directors, officers and shareholders in New York state court, alleging breach of fiduciary duties, waste and unjust enrichment
and seeking declaratory relief and damages (the “Tomczak Derivative Action”). The underlying allegations in the Tomczak
Derivative Action largely repeat the allegations of wrongdoing in the 2018 Securities Class Actions (as defined below). The Company-related
defendants’ time to respond to the Tomczak Derivative Action has been extended until December 31, 2019.
On
September 11, 2019, a shareholder derivative action was filed by shareholder Arthur Aviles against the Company and certain of
its directors, officers and shareholders in New York state court, alleging breach of fiduciary duties, waste and unjust enrichment
and seeking declaratory relief and damages (the “Aviles Derivative Action”). The underlying allegations in the Aviles
Derivative Action largely repeat the allegations of wrongdoing in the 2018 Securities Class Actions. The Company-related defendants’
time to respond to the Aviles Derivative Action has been extended until December 31, 2019.
In
September 2018 and October 2018, various shareholders of the Company filed putative class action lawsuits against
the Company, its then former Chief Executive Officer and certain of its individual officers and shareholders, alleging
violations of federal securities laws and seeking damages (the “2018 Securities Class Actions”). The 2018
Securities Class Action followed and referenced the allegations made against the Company’s then former Chief Executive
Officer and others in the SEC Action. The first putative class action lawsuit was filed on September 28, 2018, in the United
States District Court for the District of New Jersey, and alleges that the named defendants engaged in a pump-and-dump scheme
to artificially inflate the price of the Company’s stock and that, as a result, defendants’ statements about the
Company’s business and prospects were materially false and misleading and/or lacked a reasonable basis at relevant
times. The second putative class action was filed on October 9, 2018, in the United States District Court for the Southern
District of New York and makes similar allegations. On May 28, 2019, the parties to the Class Actions entered into a binding
settlement term sheet, and on September 24, 2019, the parties entered into a stipulation of settlement. On August 7, 2019,
the lead plaintiff in the first class action filed a notice and order of voluntary dismissal with prejudice, and on October
11, 2019, the lead plaintiff in the second class action filed an unopposed motion for preliminary approval of the proposed
class action settlement.
On
January 24, 2017, the Company was served with a summons and complaint filed by plaintiff shareholder Atul Ojha in New York state
court against certain officers and directors of the Company, and naming the Company as a nominal defendant. The lawsuit is styled
as a derivative action (the “Ojha Derivative Action”) and was originally filed (but not served on any defendant) on
October 15, 2016. The Ojha Derivative Action substantively alleges that the defendants, collectively or individually, inadequately
managed the business and assets of the Company resulting in the deterioration of the Company’s financial condition. The
Ojha Derivative Action asserts claims including, but not limited to, breach of fiduciary duties, unjust enrichment and waste of
corporate assets. On February 27, 2017, the parties to the Ojha Derivative Action executed a stipulated stay of proceedings pending
resolution of a class action filed in 2016 (the “2016 Securities Class Action”). Shortly after issuance of the February
27, 2018, ruling dismissing the 2016 Securities Class Action, the parties to the Ojha Derivative Action agreed to extend the stay
indefinitely, with the plaintiff having the option to vacate the stay on thirty days’ notice. On October, 28, 2019, the
parties agreed to extend the stay indefinitely, with the plaintiff having the option to vacate the stay on thirty days’
notice. Should the plaintiff seek to vacate the stay, the Company will address and defend the Ojha Derivative Action.
On
December 12, 2018, a shareholder derivative action was filed by shareholder Bob Thomas against the Company and certain of its
current and former directors, officers and shareholders in New York state court, alleging breach of fiduciary duties, unjust enrichment,
abuse of control, gross mismanagement, and waste and seeking declaratory relief and damages (the “Thomas Derivative Action”).
The underlying allegations in the Thomas Derivative Action largely repeat the allegations of wrongdoing in the 2018 Securities
Class Actions. Based on communications between the Company’s counsel and plaintiff’s counsel in the Thomas Derivative
Action, plaintiff intended to seek consolidation of this case with the Ojha Derivative Action, and then to stay the consolidated
derivative action pending resolution of the 2018 Securities Class Actions. The Company-related defendants’ time to respond
to the Thomas Derivative Action has been extended until thirty days after the Court rules on plaintiff’s motion. On October
18, 2019 counsel for the plaintiffs in the Ojha Derivative Action advised the Company that plaintiffs had filed such a motion,
and the court had denied it, but neither the motion nor the decision were ever served on the Company. Counsel for the Company
is currently engaged in discussions with the counsel for plaintiffs about setting a new deadline for the Company-related defendants
to respond to the complaint.
On October 31, 2019,
the Company, and its current officers and directors, received subpoenas from the SEC requesting information, including but not
limited to, with respect to risk factors contained in certain of the Company’s filings with the SEC, any investigations
by any government agency into Robert B. Ladd and certain other matters related to the Company’s securities. The time period
covered by the subpoenas is January 1, 2019 through the date of issuance of the subpoenas. The Company and its current officers
and directors are cooperating with the SEC’s request. The Company is unable to predict what action, if any, might be taken
in the future by the SEC or any other governmental authority as a result of the subpoenas.
The
Company believes the claims in the actions filed against the Company are without merit and intends to vigorously defend against
these actions.
Note
10. 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 nine months ended September 30, 2019 and 2018, the Company made
contributions to the 401(k) Plan of $15 and $18, respectively.
Note
11. Subsequent Events
The
Company has evaluated the impacts of subsequent events through November 14, 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.
Through
November 14, 2019, the Company issued 15,000,000 shares of its common stock under the equity purchase agreement for gross proceeds
of $264.
Through
November 14, 2019, the holder of the June 2018 Note converted $125 of debt principle into 8,503,401 shares of common stock, reducing
the outstanding principal to $1,309.
On
October 29, 2019, the Company purchased 320 Bitmain S17 Pro Antminers which were received in early November 2019. The purchase
of the S17 Pro Antminers is in addition to the previously announced purchase of 1,100 Bitmain S17 Antminers. The Company expects
delivery of that batch prior to mid-December of this year. The containers to house these 1,100 miners include two POD5 containers
and are expected onsite by the end of November 2019. Due to contractual provisions of the 1,100 Bitmain S17 order, MGT took advantage
of a material price reduction, and chose to allocate some of the savings to the new order of S17 Pro Antminers.
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 for the fiscal year ended December 31, 2018 as 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 per-share amounts.
Following
a review of its Bitcoin mining operations in early 2019, the Company determined to consolidate its activities in Company-owned
and managed facilities. Central to this strategy was the purchase of land in LaFayette, GA and the entry into a favorable contract
for electricity there in the second quarter of 2019. Located adjacent to a utility substation, the several acre property has access
to over 20 megawatts (MW) of low-cost power. The facility will accommodate shipping containers racked with miners with individual
capacities of up to 1 MW.
The Company began Bitcoin
mining at its LaFayette facility in late September 2019, using a newly designed container solution with a capacity of 456 Bitmain
S9 miners or 300 Bitmain S17 miners. The property now has three of these containers onsite, awaiting the deployment
of 320 S17 Pro miners that have been delivered by Bitmain, as well as MGT’s previously ordered 1,100 S17 miners expected
by mid-December 2019. By the end of November 2019, the Company expects delivery of two POD5 containers, each able to house 360
S17 miners. Including all hardware to date, MGT projects a total of 1,475 new generation Bitcoin miners to be in operation in
five containers at year end 2019. The machines collectively are rated at a total of approximately 80 Ph/s in computational power
and will require an electric load of 4.0 MW. Phase one of the physical facility in LaFayette is substantially complete with five
transformers installed with 12.5 MW of total load capacity and property improvements in place, such as access roads, security
fencing, workshop, network wiring and underground high voltage electrical feeder lines.
Our
agreements with third-party hosting facilities have been reduced to 1,200 S9 miners in Colorado Springs, and a location in Coshocton,
Ohio, where MGT operates 576 S9 miners housed in the first production model of the Pod5ive container.
In
September 2019, we also terminated all third-party management agreements. With the ongoing transition to the new generation of Bitcoin miners, the Company has been selling its
inventory of S9 miners, rather than enter into short term uneconomic hosting arrangements. To date, we have sold approximately
2,500 units.
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
network of Bitcoin, 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 adjust the value of Coins to market value, is included in cost of revenue on the Company’s
consolidated statement of operations. Further, any gain or loss on the sale of Coins would be recorded to costs of revenue. Costs
of revenue include hosting fees, equipment depreciation, rent, net realizable value adjustments, and electricity costs.
Additionally,
the Company has machines located in facilities in Ohio and Colorado. The Company receives an allocation of profits from
the Ohio facility. For the Colorado location, the Company recognizes Bitcoin revenue and recognizes hosting fees
as cost of revenue. The Company also has machines in a temporary facility in Georgia whereby the Company recognizes
Bitcoin revenue and recognizes hosting fees as cost of revenue. These machines will be moved to MGT’s permanent location in LaFayette,
GA during Q4 2019.
The
Company also recognized revenue from its management agreements through their termination in August and September 2019. The Company
received a fee from each management agreement based on the amount of Bitcoin mined and was reimbursed for any electricity costs
incurred to run the Bitcoin mining machines it managed 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 September 30, 2019 and 2018
Revenues
Our
revenues for the three months ended September 30, 2019 decreased by $497, or 84%, to $92 as compared to $589 for the three months
ended September 30, 2018. Our revenue is derived from cryptocurrency mining. The decrease in revenues is a result of the Company’s
initiative to consolidate its activities in Company-owned and managed facilities, including a reduction in operating S9 miners
in our third-party hosting facilities in Colorado Springs, CO and Coshocton, Ohio.
Operating
Expenses
Operating
expenses for the three months ended September 30, 2019 decreased by $6,050, or 75%, to $1,973 as compared to $8,023 for the three
months ended September 30, 2018. The decrease in operating expenses was primarily due to a decrease in general and administrative
expenses of $1,001, the absence in 2019 of a fixed asset impairment charge in 2018 of $3,668, and a decrease of $1,381 in cost
of sales from cryptocurrency mining operations resulting from a reduction in operating S9 miners.
The
decrease in general and administrative expenses of $1,001 or 35% to $1,884 as compared to $2,885 for the three months ended September
30, 2018, was primarily due to a decrease in stock-based compensation of $1,123 based on less shares issued or vested and
a lower stock price in 2019 compared to 2018, a decrease in payroll and related expenses of $122, a decrease in administrative
and travel costs to operate the Sweden facility of $429 resulting from the Company’s exit from Sweden , offset by an increase
in legal and professional fees of $259, an increase in costs related to build-out of Company’s mining facility in Georgia
of $149, and the expenses related to the termination of the management agreements of $423 in the third quarter of 2019.
Other
Income and Expense
For
the three months ended September 30, 2019, non–operating expenses consisted of interest income of $7, accretion of debt
discount of $946, a gain on sale of property and equipment of $431 and a mark-to-market gain related the management agreements
termination liability of $135. During the comparable period ended September 30, 2018, non–operating expenses consisted of
interest expense of $339.
Nine
months ended September 30, 2019 and 2018
Revenues
Our
revenues for the nine months ended September 30, 2019 decreased by $1,764, or 90%, to $190 as compared to $1,954 for the nine
months ended September 30, 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 the decreased price of Bitcoin and increased
difficulty from January 2019 through May 2019. The decrease in revenues is also a result of the Company’s initiative to
consolidate its activities in Company-owned and managed facilities, including a reduction in operating S9 miners in our third-party
hosting facilities in Colorado Springs, CO and Coshocton, Ohio.
Operating
Expenses
Operating
expenses for the nine months ended September 30, 2019 decreased by $13,945, or 70%, to $6,067 as compared to $20,012 for the nine
months ended September 30, 2018. The decrease in operating expenses was primarily due to a decrease in general and administrative
expenses of $4,503, the absence in 2019 of the 2018 Sweden restructuring charge of $2,499 and a 2018 fixed asset impairment charge
of $3,668, and a decrease of $3,173 in cost of sales from cryptocurrency mining operations resulting from a reduction in operating
S9 miners.
The
decrease in general and administrative expenses of $4,503, or 43% to $5,874 as compared to $10,377 for the nine months ended September
30, 2018, was primarily due to a decrease in stock-based compensation of $3,426 and a decrease in payroll and related expenses
of $551, a decrease in administrative and travel costs to operate the Sweden facility of $1,569 resulting from the Company’s
exit from, a decrease in consulting expense of $148, offset by an increase in legal and professional fees of $512, an increase
in costs related to build-out of Company’s facility in Georgia of $306 and the expense related to the termination of the
management agreements of $423 in the third quarter of 2019.
Other
Income and Expense
For
the nine months ended September 30, 2019, non–operating expenses consisted of interest income of $7, accretion of debt discount
of $4,768, a gain on extinguishment of debt of $2,406, a gain on sale of property and equipment of $513 and a mark-to-market gain
related the management agreements termination liability of $135. During the comparable period ended September 30, 2018, non–operating
expenses consisted of interest expense of $456, 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 instruments. We have incurred significant operating
losses since inception with an accumulated deficit of $413,303 as of September 30, 2019 and continue to generate losses
from operations. At September 30, 2019, our cash and cash equivalents were $2,113 and our working capital was $538. As of September
30, 2019, we had notes payable outstanding with a face value of $1,434. As of September 30, 2019 and October 31, 2019, MGT’s
cash and cash equivalents were $2,113 and $1,077, respectively.
Management’s
plans include the consolidation of its activities in Company-owned and managed facilities, executing on its expansion model to
secure low cost power and grow its cryptocurrency assets. 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 unaudited 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 consolidation of its activities in Company-owned and managed facilities, 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. 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 nine months ended September 30, 2019, as reported by Blockchain.info, were approximately
$3 and $13 respectively.
The
Company’s primary source of operating funds has been through debt and equity financing.
Equity
Purchase Agreements
On
August 30, 2018, and further amended on December 3, 2018, the Company and Oasis Capital, LLC (“Oasis Capital”) entered
into an equity purchase agreement pursuant to which the Company issued and sold to Oasis Capital from time to time 100,650,000
shares of the Company’s common stock, registered with the SEC under a registration statement on a Form S–3, for gross
proceeds of $6,491. 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.
On
June 4, 2019, the Company and Oasis Capital entered into a new equity purchase agreement pursuant to which the Company may issue
and sell from time to time to Oasis Capital up 76,558,643 shares of the Company’s common stock that are registered with
the SEC under a registration statement on Form S-1 that went effective on June 25, 2019. 40,000,000 shares were issued or sold
under this registration statement during the three months ended September 30, 2019 for proceeds of $1,442, net of deferred offering
costs of $70. Subsequent to September 30, 2019, 15,000,000 shares of the Company’s common stock were issued
and sold for gross proceeds of $264. 21,558,643 shares are available for sale under the Form S-1.
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 and July 15, 2019,
the Company sold 190 Preferred Shares for $1,890 and 10 Preferred Shares for $100, respectively.
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 acquirer of 160 shares of the Preferred Shares of which 115 are issued
and outstanding as of September 30, 2019.
Property
and Equipment Acquisitions and Commitments
In
connection with management’s plans to consolidate its activities in Company-owned and managed facilities, the Company took
the following actions as of September 30, 2019:
|
|
●
|
Acquired
6 acres of land in Lafayette, Georgia in May 2019 for $57.
|
|
|
●
|
Acquired Bitcoin miners valued
at $359 and in July 2019 entered into an agreement to purchase 1,100 Antminer- S17 Bitcoin miners for $2,768, of which $1,384
was paid as a deposit and the remaining balance to be paid upon delivery expected in mid-December 2019. As a result
of contractual price protection, the Company presently expects to owe $382 on delivery.
|
|
|
●
|
Paid
as a deposit $344 for container equipment to house the Bitcoin miners. The remaining balance of $384 will be paid upon delivery
expected in November 2019.
|
|
|
●
|
Paid
$450 in infrastructure costs, including transformers and related equipment, land preparation, fencing, electrical contracting,
permits, design and architectural fees. Subsequent to September 30, 2019, management estimates another $200 will
be needed to complete phase one of the project.
|
Additionally, on
October 29, 2019, the Company purchased 320 Bitmain S17 Pro Antminers which were received in early November. The Company
anticipates the funding requirements for the aforementioned commitments will be provided from cash on hand,
proceeds from its equity purchase agreement and sales of its S9 Bitcoin miners.
|
|
|
Nine Months ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cash (used in) / provided by
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(3,224
|
)
|
|
$
|
(7,168
|
)
|
|
Investing activities
|
|
|
(1,942
|
)
|
|
|
(6,507
|
)
|
|
Financing activities
|
|
|
7,183
|
|
|
|
4,431
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
2,017
|
|
|
$
|
(9,244
|
)
|
Cash
Flows
Operating
activities
Net
cash used in operating activities was $3,224 for the nine months ended September 30, 2019 as compared to $7,168 for the nine months
ended September 30, 2018. Cash used in operating activities for the nine months ended September 30, 2019 primarily consisted of
a net loss of $7,584, partially offset by stock-based compensation of $1,991, amortization of note discounts of $4,768, net loss
on termination of management agreements of $364, less a non-cash gain on extinguishment of $2,406, gain on sale or property and
equipment $513, with a change in working capital of $88.
Net
cash used in operating activities of $7,168 for the nine months ended September 30, 2018 primarily consisted of a net loss of
$18,827, partially offset by non-cash stock-based compensation of $5,417, depreciation expense of $2,618, non-cash property and
equipment impairment charge of $3,668, amortization of note discounts of $455, net loss on sale of assets $174 and an increase
in working capital of $812.
Investing
activities
Net
cash used in investing activities was $1,942 for the nine months ended September 30, 2019 as compared to net cash used in investing
activities of $6,507 for the nine months ended September 30, 2018. During the nine months ended September 30, 2019, the Company
acquired $556 of property and equipment and paid $1,817 of deposits for property and equipment in connection with the build-out
of its mining facility in Georgia and received $431 from the sale of fully depreciated Bitcoin miners.
During
the nine months ended September 30, 2018, the Company used $6,507 in the purchase of property and equipment, primary Bitcoin miners,
and realized $60 in proceeds from sales of its cybersecurity assets and $427 from the sale of property and equipment.
Financing
activities
During
the nine months ended September 30, 2019, cash provided by financing activities totaled $7,183, which includes $525 from the sale
of common stock under registered direct placements, $4,842 of net proceeds from the sale of stock under our equity purchase agreement,
payment of deferred offering costs of $70, sale of preferred stock of $1,990 and proceeds of $120 from the exercise of warrants,
offset by $210 in repayments of notes payable.
During
the nine months ended September 30, 2018, cash provided by financing activities totaled $4,431 comprised of $4,700 from the net
proceeds of notes payable, $80 from private placements of our common stock and $907 from the exercise of stock purchase warrants
and $365 of net proceeds from the sale of stock under our equity purchase agreement, offset by $1,480 repayments of notes payable
and $141 in paid deferred offering costs.
Off–balance
sheet arrangements
As
of September 30, 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.