The discussion and analysis below includes certain forward-looking statements
that are subject to risks, uncertainties and other factors, as described in
"Risk Factors" and elsewhere in this Annual Report on Form 10-K, that could
cause our actual growth, results of operations, performance, financial position
and business prospects and opportunities for this fiscal year and the periods
that follow to differ materially from those expressed in, or implied by, those
forward-looking statements. See also "Forward-Looking Statements" on page 8 of
this report.
RESULTS OF OPERATIONS
Management's plans and basis of presentation:
The Company has experienced recurring losses and negative cash flows from
operations. At December 31, 2019, the Company had approximate balances of cash
and cash equivalents of $7.4 million, working capital of $9.3 million, total
stockholders' equity of $26.2 million and an accumulated deficit of $217.2
million. To date, the Company has in large part relied on debt and equity
financing to fund its operations.
The Company's current focus is on its cryptocurrency mining operation, which has
recently been upgraded with the purchase of 4,000 S17 Pro Antminers from
Bitmain. The Company's current strategy will continue to expose the Company to
the numerous risks and volatility associated within this sector.
The Company expects to continue to incur losses from operations for the
near-term and these losses could be significant as the Company incurs costs and
expenses associated with potential future acquisitions, as well as public
company, legal and administrative related expenses being incurred. The Company
is closely monitoring its cash balances, cash needs and expense levels.
Management's strategic plans include the following:
• continuing expansion of cryptocurrency mining operations relative to the
price of cryptocurrencies;
• continuing to evaluate opportunities for acquisitions in the blockchain and
cryptocurrency sector;
• exploring other possible strategic options and financing opportunities
available to the Company;
• evaluating options to monetize, partner or license the Company's assets;
and
• continuing to implement cost control initiatives to conserve cash.
2019 Compared to 2018
Revenues
Cryptocurrency mining revenues for the years ended December 31, 2019 and 2018,
totaled approximately $6.7 million and $7.7 million, respectively. Other revenue
consisted of license payments of approximately $0.1 million in each period.
Revenues from cryptocurrency mining are impacted significantly from period to
period changes in cryptocurrency prices as well as, the system wide quantity of
miners working to solve current algorithm (hash rates) and the difficulty index
currently associated with the algorithm as they are being solved.
From early 2018 to the end of 2019 the system wide hash rate increased over 600%
which is attributable to factors such as increased number of miners on the
bitcoin network, combined with efficiency improvements of new ASIC miners. For
years ended December 31, 2019 and 2018, the system wide hash rate was 98.67 EH/s
and 40.16 EH/s, respectively. Further, the difficulty index increased over 200%
in the past two fiscal years. The cumulative difficulty index increase for each
of years ended December 31, 2019 and 2018, is 97.67% and 109.47%, respectfully.
Cost of Revenues
Cost of revenue for the year ended December 31, 2019 of approximately $6.1
million consisted primarily of direct production costs of the mining operations,
including rent and utilities, but excluding depreciation and amortization which
are separately stated. The cost of revenue for the year ended December 31, 2018
was approximately $5.8 million. The approximate increase of $0.3 million arose
primarily from increases in mining compensation in 2019 as compared to 2018.
32
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
2019 totaled approximately $9.2 million, which is an approximately $11.7
million, or a 56.1% decrease, as compared to $20.9 million in the 2018 period.
Compensation related expense decreased by approximately $0.6 million due
primarily to staff reductions during 2019, net of severance costs. Stock-based
compensation decreased by approximately $4.5 million for the year ended December
31, 2019, as compared to the 2018 period due to no equity awards in 2019 until
those granted in December 2019. Consulting fees decreased approximately $3.9
million due to the final expense recognized in 2018 for the consulting fees paid
in early 2018 for services related to our miners. Investor, public relations and
public company expenses reduced by $0.4 million for the year ended December 31,
2019 following the termination of the majority of such service agreements during
2018. Legal fees decreased by approximately $2.2 million due to legal matters
associated primarily with the fees for the class action and derivative suits and
special SEC related matters being higher in the 2018 period when such activities
commenced. Audit fees increased approximately $0.4 million due to the increased
level of financial activities and the audit of internal controls over financial
reporting for the year ended December 31, 2018, which were primarily incurred in
the 2019 period.
Depreciation and Amortization
Depreciation and amortization expenses in the year ended December 31, 2019
totaled approximately $0.1 million, which is a decrease of approximately $5.2
million, compared to $5.3 million during the year ended December 31, 2018. The
decrease is primarily due to, lower depreciation expenses recognized for our
cryptocurrency mining equipment which was substantially impaired during 2018.
Asset Impairment Charges
Asset impairment charges of $1.5 million were recognized during the year ended
December 31, 2019 and were related to $0.8 million for the impairment of our
cryptocurrencies accounted for as intangible assets and $0.7 million related to
our intangible assets acquired in connection with our RiotX / Logical Brokerage
business. The impairment charges during the year ended December 31, 2018
consisted of approximately $29.2 million related to impairments of our
cryptocurrency mining equipment, $3.5 million related to the impairment of our
cryptocurrencies accounted for as intangible assets, $2.1 million consisting of
the impairment charges of $0.8 million of goodwill and $1.3 million for the
impairment of intangible rights acquired of associated with the Tess Investment,
and impairment charges of $0.4 million of goodwill related to our original
acquisition of the legacy business.
Other Income and Expense
During the year ended December 31, 2019, we recognized losses related to the
fair value of the issuance of our Senior Secured Convertible Notes (the "Notes")
of approximately $6.2 million. We also recognized expenses totaling
approximately $6.8 million to revalue the Notes and the related warrant
liability to fair value during the year ended December 31, 2019.
During the year ended December 31, 2019, we recorded a gain of approximately
$1.1 million on the deconsolidation of Tess, due to our reduced ownership
interest from 50.2% to 8.8%.
Interest expense totaled approximately $0.1 million for the years ended December
31, 2019 and 2018, respectively.
For the year ended December 31, 2018, the Company recorded a loss of $0.3
million related to the amendment of the Blockchain Mining Supply & Services Ltd.
("BMSS") deferred purchase price which was recorded as a loss on extinguishment
of debt.
Other income was approximately $0.9 million for the year ended December 31,
2019, due to a $0.4 million gain on forgiveness of our payable and interest in
connection with our agreement with BMSS, and a $0.5 million gain on forgiveness
of various accounts payable balances. There was no other income recognized for
the year ended December 31, 2018.
For the year ended December 31, 2019 we recorded a gain on sale of
cryptocurrencies of approximately $0.7 million. For the year ended December 31,
2018 the gain on sale of cryptocurrencies was nominal.
For the year ended December 31, 2019 our investment income was nominal. For the
year ended December 31, 2018 we recorded investment income of approximately $0.1
million.
For the year ended December 31, 2018, the Company recorded other expenses of
approximately $1.4 million, which is primarily related to the penalty accrual
for our registration rights agreement associated with our private placement on
December 19, 2017. The agreement provided that the Company register our
securities by the effectiveness date of March 5, 2018. The registration rights
were not registered by the effectiveness date and the Company recognized a
contingency.
Income Taxes
For the year ended December 31, 2019, the Company recorded an income tax benefit
of $0.1 million in connection with our decision not to pursue our Logical
Brokerage business. For the year ended December 31, 2018, the Company recorded
an income tax benefit of $0.7 million resulting from the difference in book and
tax basis of the Kairos mining equipment and its deprecation and impairment
expense.
33
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2019, we had working capital of approximately $9.3 million,
which included cash and cash equivalents of $7.4 million. We reported a net loss
of $20.3 million during the year ended December 31, 2019. The net loss included
$14.7 million in non-cash items consisting of, a loss on the issuance of our
convertible notes of $6.2 million, the change in fair value of our convertible
notes and the related warrant liability of $6.8 million, amortization of our
right of use assets of $2.3 million, stock-based compensation totaling $0.7
million, impairment to our cryptocurrencies of $0.8 million, an impairment of
intangible assets acquired of $0.7 million related to our decision not to pursue
our Logical Brokerage business, and depreciation and amortization totaling $0.1
million, offset by a $1.1 million gain recognized on the deconsolidation of
Tess, a $0.9 million gain on the extinguishment of notes, interest and accounts
payable, other income of approximately $0.1 million, primarily related to the
amortization of our deferred revenue related to our legacy animal health
business and a $0.7 million related to the gain from the sale of
cryptocurrencies.
Effective November 29, 2018, Kairos entered into the second amendment to the
lease agreement for the approximate 107,600 square foot warehouse located in
Oklahoma City, Oklahoma, including improvements thereon. The amendment extended
the lease term to August 2019, provided renewal options to February 15, 2020
(which were executed in 2019), revises the monthly rent to a base rent,
currently $190,000 per month and includes an electrical cost based upon actual
usage. On January 8, 2020, the Company entered into the third amendment to the
lease which extends the lease term to May 15, 2020, with all other terms
remaining substantially the same in the second amendment.
During December 2019, the Company purchased 4,000 next generation Bitmain S17
Pro Antminers for approximately $6.4 million from BitmainTech PTE. LTD.
("Bitmain"). In December 2019, 3,000 miners were received at the Company's
Oklahoma City facility, and the remaining 1,000 were received in January 2020.
Subsequent to December 31, 2019, in connection with the Company's Sales
Agreement with H.C. Wainwright, the Company received gross proceeds of
approximately $9.5 million from the sale of 5,995,559 shares of common stock.
We expect to continue to incur losses from operations for the near-term and
these losses could be significant as we incur costs and expenses associated with
recent and potential future acquisitions, as well as public company, legal and
administrative related expenses being incurred. We are closely monitoring our
cash balances, cash needs and expense levels.
Funding our operations on a go-forward basis will rely significantly on our
ability to continue to mine cryptocurrency and the spot or market price of the
cryptocurrency we mine. We expect to generate ongoing revenues from the
production of cryptocurrencies, primarily bitcoin currency rewards, for example,
in our mining facilities and our ability to liquidate bitcoin currency rewards
at future values will be evaluated from time to time to generate cash for
operations. Generating bitcoin currency rewards, for example, which exceed our
production and overhead costs will determine our ability to report profit
margins related to such mining operations, although accounting for our reported
profitability is significantly complex. Furthermore, regardless of our ability
to generate revenue from the sale of our cryptocurrency assets, we will need to
raise additional capital in the form of equity or debt to fund our operations
and pursue our business strategy.
The ability to raise funds as equity, debt or conversion of cryptocurrency to
maintain our operations is subject to many risks and uncertainties and, even if
we were successful, future equity issuances would result in dilution to our
existing stockholders and any future debt or debt securities may contain
covenants that limit our operations or ability to enter into certain
transactions. Our ability to realize revenue through bitcoin production and
successfully convert bitcoin into cash or fund overhead with bitcoin is subject
to a number of risks, including regulatory, financial and business risks, many
of which are beyond our control. Additionally, the value of bitcoin currency
rewards has been extremely volatile recently and such volatility has recently
been lower and future prices cannot be predicted.
If we are unable to generate sufficient revenue from our bitcoin production when
needed or secure additional sources of funding, it may be necessary to
significantly reduce our current rate of spending or explore other strategic
alternatives.
The Company has been named a defendant in several class action and other
investor related lawsuits as more fully described in Part II - Item 1. Legal
Proceedings, of this report. While the Company maintains policies of insurance,
such policies may not cover all of the costs or expenses associated with
responding to such matters or any liability or settlement associated with any
lawsuits and are subject to significant deductible or retention amounts.
The Company's registration statement on Form S-3 (SEC File No. 333-226111),
including the accompanying prospectus and any related prospectus supplement (the
"ATM Offering"), is subject to the provisions of General Instruction I.B.6 of
Form S-3, which provides that the Company may not sell securities in a public
primary offering with a value exceeding one-third of its public float in any
twelve-month period unless its public float is at least $75 million. As of March
24, 2020, the Company's public float (i.e., the aggregate market value of its
outstanding equity securities held by non-affiliates) was approximately $24.5
million, based on the closing price per share of the Company's common stock, no
par value, as reported on the Nasdaq Capital Market on March 20, 2020, as
calculated in accordance with General Instruction I.B.6 of Form S-3. The Company
has not sold any securities pursuant to General Instruction I.B.6 of Form S-3
during the twelve calendar months immediately prior to the date of this Annual
Report on Form 10-K. If the Company's public float meets or exceeds $75 million
at any time, the Company will no longer be subject to the restrictions set forth
in General Instruction I.B.6 of Form S-3, at least until the filing of its next
Section 10(a)(3) update as required under the Securities Act.
34
Operating Activities
Net cash consumed by operating activities was $16.9 million during the year
ended December 31, 2019. Cash was consumed from the net loss of $20.3 million,
less non-cash items of $14.7 million, including a loss on the issuance of our
convertible notes of $6.2 million, the change in fair value of our convertible
notes and the related warrant liability of $6.8 million, amortization of our
right of use assets of $2.3 million, stock-based compensation totaling $0.7
million, impairment to our cryptocurrencies of $0.8 million, an impairment of
intangible assets acquired of $0.7 million related to our decision not to pursue
our Logical Brokerage business, net of deferred income tax benefit of $0.1
million, and depreciation and amortization totaling $0.1 million, offset by a
$1.1 million gain recognized on the deconsolidation of Tess, a $0.9 million gain
on the extinguishment of notes, interest and accounts payable, other income of
approximately $0.1 million, primarily related to the amortization of our
deferred revenue related to our legacy animal health business and a $0.7 million
related to the gain from the sale of cryptocurrencies. Cryptocurrencies
increased by $6.6 million and deposits increased $1.4 million for the purchase
of our cryptocurrency miners not yet received, offset by, a decrease in our
lease liability of $2.3 million and a decrease in accounts payable and accrued
expenses of $0.8 million.
Net cash consumed by operating activities was $19.1 million, consisting of $19.0
million from continuing operations and $0.1 million from discontinued operations
during the year ended December 31, 2018. Cash was consumed from continuing
operations by the loss of $60.3 million, less non-cash items of $35.3 million
consisting of an asset impairment for the Company's miners of $29.2 million,
impairment of our cryptocurrencies of $3.5 million, impairment of acquired
intangible rights of $1.3 million, the write-off of goodwill of $1.2 million,
depreciation and amortization totaling $5.3 million, stock-based compensation
totaling $4.7 million, stock issued for the extinguishment of the BMSS payable
of $0.3 million and common stock issued for services totaling $0.4 million, net
of deferred income tax benefit of $0.7 million, amortization of license fee
revenue totaling $0.1 million and the realized gain on sale of cryptocurrencies
of $26,000. Prepaid expenses and other current assets increased $0.8 million due
primarily to increases in prepaid insurance premiums, cryptocurrencies increased
$7.7 million and accounts payable and accrued expenses increased $4.7 million
related to the significant expansion of the Company's operating activities in
2018.
Investing Activities
Net cash consumed by investing activities during the year ended December 31,
2019 was $1.8 million, consisting of proceeds from the sale of cryptocurrencies
of $3.2 million, offset by $5.0 million for the purchase of our next generation
Bitmain S17 Pro Antminers and $37,000 for the amortization of patent costs.
Net cash consumed by investing activities during the year ended December 31,
2018 was $24.9 million primarily consisting of purchases of cryptocurrencies of
$5.6 million, purchases of property and equipment of $20.2 million related to
the Company's cryptocurrency miners, an additional investment in Coinsquare of
$6.4 million, security deposits of $0.7 million, purchases of patent and
trademark application costs of $60,000, an investment in Logical Brokerage of
$0.5 million and a purchase of developed technology of $0.6 million, offset by
proceeds from the sale of cryptocurrencies of $9.2 million.
Financing Activities
Net cash inflows from financing activities was $25.9 million during the year
ended December 31, 2019, which consisted of net proceeds from the issuance of
our common stock pursuant to General Instruction I.B.1 of Form S-3 in connection
with our ATM Offering of $23.8 million, the proceeds received from the issuance
of our Notes and Warrants of $3.0 million, offset by the repayment of the
principal balance related to our agreement with BMSS of $0.9 million, net of the
$0.4 million gain recorded on extinguishment of the BMSS balance.
Net cash inflows from financing activities was $2.5 million during the year
ended December 31, 2018, primarily consisting of $1.7 million of proceeds from a
convertible demand note issued by Tess, $0.4 million from the exercise of
warrants, $0.5 million from the sale of the Company's shares of common stock
held by Tess, $0.2 million from the sale of common shares by Tess, $0.1 million
from the exercise of stock options and $0.1 million from a refund of previously
escrowed dividend, offset by $0.3 million for payments made related to our BMSS
Agreement and $0.1 million used in scheduled payments under debt agreements.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to
make estimates and assumptions about future events that affect the amounts
reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results
inevitably will differ from those estimates, and such differences may be
material to the financial statements. The most significant accounting estimates
inherent in the preparation of our financial statements include estimates
associated with revenue recognition, investments, intangible assets, stock-based
compensation and business combinations.
The Company's financial position, results of operations and cash flows are
impacted by the accounting policies the Company has adopted. In order to get a
full understanding of the Company's financial statements, one must have a clear
understanding of the accounting policies employed. A summary of the Company's
critical accounting policies follows:
35
Long Term Investments
As described in our consolidated financial statements, effective January 1,
2018, the Company adopted Accounting Standards Update ("ASU") 2016-01 and
related ASU 2018-03 concerning recognition and measurement of financial assets
and financial liabilities. In adopting this new guidance, the Company has made
an accounting policy election to adopt a new measurement alternative for
investments in equity securities without readily determinable fair values.
For equity investments that qualify to use the measurement alternative, the
Company initially records such equity investments at cost but will be required
to adjust the carrying value through earnings when there is an observable
transaction involving the same or a similar investment with the same issuer or
upon an impairment.
Cryptocurrencies
Cryptocurrencies, (including bitcoin, bitcoin cash and litecoin) are included in
current assets in the consolidated balance sheets as intangible assets with
indefinite useful lives. Cryptocurrencies are recorded at cost less impairment.
An intangible asset with an indefinite useful life is not amortized but assessed
for impairment annually, or more frequently, when events or changes in
circumstances occur indicating that it is more likely than not that the
indefinite-lived asset is impaired. Impairment exists when the carrying amount
exceeds its fair value, which is measured using the quoted price of the
cryptocurrency at the time its fair value is being measured. In testing for
impairment, the Company has the option to first perform a qualitative assessment
to determine whether it is more likely than not that an impairment exists. If it
is determined that it is not more likely than not that an impairment exists, a
quantitative impairment test is not necessary. If the Company concludes
otherwise, it is required to perform a quantitative impairment test. To the
extent an impairment loss is recognized, the loss establishes the new cost basis
of the asset. Subsequent reversal of impairment losses is not permitted.
Impairment of long-lived assets
Management reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted expected future
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by comparing the
amount by which the carrying amount of the assets to their fair value. Based on
its reviews, management determined that its cryptocurrency miners were impaired
by a total of $29.3 million based upon an assessment as of December 31, 2018,
including consideration of the decline in bitcoin values which occurred
commencing in late December 2017 and into 2018.
Intangible assets acquired in the Tess business combination consist primarily of
in-process research and development ("IPR&D") assets. The value attributable to
IPR&D projects at the time of acquisition was capitalized as an indefinite-lived
intangible asset and tested for impairment until the project is completed or
abandoned. Upon completion of the project, the indefinite-lived intangible asset
will be accounted for as a finite-lived intangible asset and amortized on a
straight-line basis over its estimated useful life. If the project is abandoned,
the indefinite-lived intangible asset will be charged to expense. During the
year ended December 31, 2018, management determined based upon an assessment of
the operations and cash needs of Tess, that the intangible assets related to the
Tess Investment were impaired and recorded an impairment charge of $1.3 million
as of December 31, 2018.
The Company made the decision, effective as of December 31, 2019 not to pursue
its RiotX / Logical Brokerage business development plan, and recorded an
impairment of intangible assets acquired of approximately $0.7 million.
Sequencing
On January 28, 2019, the Company adopted a sequencing policy under Accounting
Standards Codification ("ASC") 815-40-35 Derivatives and Hedging ("ASC 815")
whereby in the event that reclassification of contracts from equity to assets or
liabilities is necessary pursuant to ASC 815 due to the Company's inability to
demonstrate it has sufficient authorized shares as a result of certain
securities convertible or exchangeable for a potentially indeterminable number
of shares, shares will be allocated on the basis of the earliest issuance date
of potentially dilutive instruments, with the earliest grants receiving the
first allocation of shares. Pursuant to ASC 815, issuances of securities to the
Company's employees or directors are not subject to the sequencing policy.
Notes Payable Fair Value Option
In January 2019, the Company issued Senior Secured Promissory Notes (the
"Notes") to Oasis Capital, LLC, Harbor Gates Capital, LLC and SG3 Capital, LLC
(each an "Investor" and collectively, the "Investors") in the aggregate
principal amount of $3.4 million. The Company has elected the fair value option
to account for these Notes due to the complexity and number of embedded
features. The fair value of the Notes is classified within Level 3 of the fair
value hierarchy because the fair values were estimated utilizing a Monte Carlo
simulation model. Accordingly, the Company recorded these Notes at fair value
with changes in fair value recorded in the statement of operations. As a result
of applying the fair value option, direct costs and fees related to the Notes
were recognized in earnings as incurred and were not deferred. The change in
fair value of the Notes has been presented as change in value of convertible
notes payable on the unaudited condensed interim consolidated statements of
operations.
As of September 30, 2019, all of the Notes were converted into 1,813,500 shares
of the Company's common stock valued at their estimated fair value at the time
of conversion totaling approximately $10.2 million.
36
Warrant Liability
The Company issued Warrants to purchase 1,908,144 shares of its common stock in
connection with the Notes issued to the Investors in January 2019, and recorded
these outstanding Warrants as a liability at fair value utilizing a Monte Carlo
simulation model. This liability is subject to re-measurement at each balance
sheet date, and any change in fair value is recognized in the Company's
condensed interim consolidated statements of operations. As of June 25, 2019,
the Company's Notes had been converted in their entirety and the warrant
liability was revalued and reclassified to equity, because the Warrants are no
longer subject to the Company's sequencing policy as described above.
Leases
Effective January 1, 2019, the Company accounts for its leases under ASC 842,
Leases ("ASC 842"). Under this guidance, arrangements meeting the definition of
a lease are classified as operating or financing leases, and are recorded on the
consolidated balance sheet as both a right of use asset and lease liability,
calculated by discounting fixed lease payments over the lease term at the rate
implicit in the lease or the Company's incremental borrowing rate. Lease
liabilities are increased by interest and reduced by payments each period, and
the right of use asset is amortized over the lease term. For operating leases,
interest on the lease liability and the amortization of the right of use asset
result in straight-line rent expense over the lease term.
In calculating the right of use asset and lease liability, the Company elects to
combine lease and non-lease components as permitted under ASC 842. The Company
excludes short-term leases having initial terms of 12 months or less from the
new guidance as an accounting policy election and recognizes rent expense on a
straight-line basis over the lease term.
The Company continues to account for leases in the prior period financial
statements under ASC Topic 840.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenue from Contracts with
Customers. The core principle of the new revenue standard is that a company
should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. The following
five steps are applied to achieve that core principle:
· Step 1: Identify the contract with the customer
· Step 2: Identify the performance obligations in the contract
· Step 3: Determine the transaction price
· Step 4: Allocate the transaction price to the performance obligations in the
contract
· Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer,
a company must assess the promised goods or services in the contract and
identify each promised good or service that is distinct. A performance
obligation meets ASC 606's definition of a "distinct" good or service (or bundle
of goods or services) if both of the following criteria are met: The customer
can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (i.e., the good or service
is capable of being distinct), and the entity's promise to transfer the good or
service to the customer is separately identifiable from other promises in the
contract (i.e., the promise to transfer the good or service is distinct within
the context of the contract).
If a good or service is not distinct, the good or service is combined with other
promised goods or services until a bundle of goods or services is identified
that is distinct.
The transaction price is the amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services to a
customer. The consideration promised in a contract with a customer may include
fixed amounts, variable amounts, or both. When determining the transaction
price, an entity must consider the effects of all of the following:
• Variable consideration
• Constraining estimates of variable consideration
• The existence of a significant financing component in the contract
• Noncash consideration
• Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent
that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the
variable consideration is subsequently resolved. The transaction price is
allocated to each performance obligation on a relative standalone selling price
basis. The transaction price allocated to each performance obligation is
recognized when that performance obligation is satisfied, at a point in time or
over time as appropriate.
37
The Company has entered into digital asset mining pools by executing contracts
with the mining pool operators to provide computing power to the mining pool.
The contracts are terminable at any time by either party and the Company's
enforceable right to compensation only begins when the Company provides
computing power to the mining pool operator. In exchange for providing computing
power, the Company is entitled to a fractional share of the fixed cryptocurrency
award the mining pool operator receives (less digital asset transaction fees to
the mining pool operator which are recorded as a component of cost of revenues),
for successfully adding a block to the blockchain. The Company's factional share
is based on the proportion of computing power the Company contributed to the
mining pool operator to the total computing power contributed by all mining pool
participants in solving the current algorithm.
Providing computing power in digital asset transaction verification services is
an output of the Company's ordinary activities. The provision of providing such
computing power is the only performance obligation in the Company's contracts
with mining pool operators. The transaction consideration the Company receives,
if any, is noncash consideration, which the Company measures at fair value on
the date received, which is not materially different than the fair value at
contract inception or the time the Company has earned the award from the pools.
The consideration is all variable. Because it is not probable that a significant
reversal of cumulative revenue will not occur, the consideration is constrained
until the mining pool operator successfully places a block (by being the first
to solve an algorithm) and the Company receives confirmation of the
consideration it will receive, at which time revenue is recognized. There is no
significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the market
rate of the related cryptocurrency at the time of receipt.
There is currently no specific definitive guidance under GAAP or alternative
accounting framework for the accounting for cryptocurrencies recognized as
revenue or held, and management has exercised significant judgment in
determining the appropriate accounting treatment. In the event authoritative
guidance is enacted by the FASB, the Company may be required to change its
policies, which could have an effect on the Company's consolidated financial
position and results from operations.
Stock-based Compensation
The Company accounts for share-based payment awards exchanged for services at
the estimated grant date fair value of the award. Stock options issued under the
Company's long-term incentive plans are granted with an exercise price equal to
no less than the market price of the Company's stock at the date of grant and
expire up to ten years from the date of grant. These options generally vest on
the grant date or over a one- year period.
The Company estimates the fair value of stock option grants using the
Black-Scholes option pricing model and the assumptions used in calculating the
fair value of stock-based awards represent management's best estimates and
involve inherent uncertainties and the application of management's judgment.
Expected Term - The expected term of options represents the period that the
Company's stock-based awards are expected to be outstanding based on the
simplified method, which is the half-life from vesting to the end of its
contractual term.
Expected Volatility - The Company computes stock price volatility over expected
terms based on its historical common stock trading prices.
Risk-Free Interest Rate - The Company bases the risk-free interest rate on the
implied yield available on U. S. Treasury zero-coupon issues with an equivalent
remaining term.
Expected Dividend - The Company has never declared or paid any cash dividends on
its common shares and does not plan to pay cash dividends in the foreseeable
future, and, therefore, uses an expected dividend yield of zero in its valuation
models.
Effective January 1, 2017, the Company elected to account for forfeited awards
as they occur, as permitted by Accounting Standards Update ("ASU") 2016-09.
Ultimately, the actual expenses recognized over the vesting period will be for
those shares that vested. Prior to making this election, the Company estimated a
forfeiture rate for awards at 0%, as the Company did not have a significant
history of forfeitures.
Loss per share
Basic net loss per share ("EPS") of common stock is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The Company excludes its unvested restricted
shares and escrow shares from the net loss per share calculation. The escrow
shares are excluded due to their related contingencies, the inclusion of which
would result in anti-dilution.
38
Business Combinations
The Company applies the provisions of ASC 805 in the accounting for
acquisitions. ASC 805 requires us to recognize separately from goodwill the
assets acquired and the liabilities assumed at their acquisition date fair
values. Goodwill as of the acquisition date is measured as the excess of
consideration transferred over the net of the acquisition date fair values of
the assets acquired and the liabilities assumed. While we use our best estimates
and assumptions to accurately apply preliminary value to assets acquired and
liabilities assumed at the acquisition date as well as contingent consideration,
where applicable, these estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may be up to one
year from the acquisition date, we record adjustments to the assets and acquired
liabilities assumed with the corresponding offset to goodwill in the current
period, rather than a revision to a prior period. Upon the conclusion of the
measurement period or final determination of the values of the assets acquired
or liabilities assumed, whichever comes first, any subsequent adjustments are
recorded in our Consolidated Statements of Operations. Accounting for business
combinations requires management to make significant estimates and assumptions,
especially at the acquisition date, including estimates for intangible assets,
contractual obligations assumed, restructuring liabilities, pre-acquisition
contingencies, and contingent consideration, where applicable. Although we
believe the assumptions and estimates we have made have been reasonable and
appropriate, they are based in part on historical experience and information
obtained from management of the acquired companies and are inherently uncertain.
Critical estimates in valuing certain of the intangible assets we have acquired
include; future expected cash flows from product sales; customer contracts and
acquired technologies; expected costs to develop in-process research and
development into commercially viable products and estimated cash flows from the
projects when completed; and discount rates. Unanticipated events and
circumstances may occur that may affect the accuracy or validity of such
assumptions, estimates, or actual results.
Recently issued and adopted accounting pronouncements
The Company continually assesses any new accounting pronouncements to determine
their applicability. When it is determined that a new accounting pronouncement
affects the Company's financial reporting, the Company undertakes a review to
determine the consequences of the change to its financial statements and
believes that there are proper controls in place to ascertain that the Company's
financial statements properly reflect the change.
We have considered recently issued accounting pronouncements and do not believe
the adoption of such pronouncements will have a material impact on our
consolidated financial statements.
See Note 3 to our financial statements beginning on page F-1 of this Form 10-K
for a description of recent accounting pronouncements applicable to our
financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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RIOT PLATFORMS, INC. 
