UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Shares registered pursuant to section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).
Yes
☐
As of May 13, 2022, there were shares of the registrant’s Common stock, $0.001 par value per share, issued and outstanding.
MGT CAPITAL INVESTMENTS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022
TABLE OF CONTENTS
| i |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MGT CAPITAL INVESTMENTS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per-share amounts)
| March 31, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Intangible digital assets | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Property and equipment, at cost, net | ||||||||
| Right of use asset, operating lease, net of accumulated amortization | ||||||||
| Investment | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other payables | ||||||||
| Deferred revenue | - | |||||||
| Security deposit | ||||||||
| Operating lease liability | ||||||||
| Warrant derivative liability | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Operating lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ Equity | ||||||||
| Undesignated preferred stock, $ par value, shares authorized. shares issued and outstanding at March 31, 2022 and December 31, 2021. | - | - | ||||||
| Series B preferred stock, $par value, shares authorized. shares issued or outstanding at March 31, 2022 and December 31, 2021. | - | - | ||||||
| Series C convertible preferred stock, $ par value, share authorized. and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | - | - | ||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| 1 |
MGT CAPITAL INVESTMENTS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per-share amounts)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | ||||||||
| Bitcoin mining | $ | $ | ||||||
| Hosting services | ||||||||
| Total revenue | ||||||||
| Operating expenses | ||||||||
| Cost of revenue | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other non-operating income (expense) | ||||||||
| Interest expense | - | ( | ) | |||||
| Interest income | - | |||||||
| Change in fair value of warrant derivative liability | ( | ) | - | |||||
| Change in fair value of derivative liability | - | ( | ) | |||||
| Loss on settlement of derivative | ( | ) | - | |||||
| Accretion of debt discount | - | ( | ) | |||||
| Gain on sale of property and equipment | - | |||||||
| Other income | - | |||||||
| Total non-operating expense | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Per-share data | ||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding | ||||||||
| 2 |
MGT CAPITAL INVESTMENTS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Dollars in thousands, except per-share amounts)
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | | ||||||||||||||||||||
| Cashless exercise of warrants and extinguishment of related warrant derivative liability | - | - | - | |||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at March 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Common stock issued on conversion of Preferred C shares | ( | ) | - | ( | ) | - | - | |||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at March 31, 2021 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| 3 |
MGT CAPITAL INVESTMENTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per-share amounts)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation | ||||||||
| Gain on sale of property and equipment | - | ( | ) | |||||
| Change in fair value of derivative liability | ||||||||
| Loss on settlement of derivative | - | |||||||
| Amortization of note discount | - | |||||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | - | |||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Intangible digital assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | - | |||||
| Operating lease liability | - | |||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ||||||||
| Security deposit | - | |||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | - | |||||
| Proceeds from sale of property and equipment | - | |||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from convertible note payable | - | |||||||
| Net cash provided by financing activities | - | |||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Cashless exercise of warrants and extinguishment of related warrant derivative liability | $ | $ | ||||||
| Discount related to convertible promissory note | $ | $ | ||||||
| 4 |
MGT CAPITAL INVESTMENTS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per–share amounts)
Note 1. Organization and Basis of Presentation
Organization
MGT Capital Investments, Inc. (“MGT” or the “Company”) is a Delaware corporation incorporated in 2000. MGT was originally incorporated in Utah in 1977. MGT’s corporate office is in Raleigh, North Carolina.
Cryptocurrency mining
Current Operations
MGT conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility in LaFayette, Georgia. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts (MW) of electrical power, half of which is presently utilized by the Company. Business activities are comprised of self-mining operations and leasing space to third parties.
As of March 31, 2022 and May 13, 2022, the Company owned 430 S17 Antminer Pro (“S17 miners”) and 37 Antminer S19 Pro Bitcoin miners. All miners are located at our Georgia facility. Over three-quarters of the S17 miners require various repairs to be productive. We are in the process of selling our remaining S17 miners, as well as loose hash boards, power supplies, controller boards, and other parts.
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
MGT’s miners are housed in a modified shipping container on the Company’s owned property in Georgia. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition to expansion at its current property.
Basis of presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10–Q and Rule 8 of Regulation S–X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in these statements. These unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022. Operating results for the three months ended March 31, 2022 and 2021 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2022.
| 5 |
COVID-19 Pandemic
The COVID-19 pandemic has disrupted and may continue to disrupt our operations and those of our vendors, suppliers and other third parties on which we rely, and we may not be able to obtain new miners or replacement parts for our existing miners in a timely or cost-effective manner, which could materially and adversely affect our business and results of operations.
The extent to which COVID-19 impacts our operations or our ability to obtain financing will depend on future developments which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended period of time, financial markets may not be available to the Company for raising capital in order to fund future growth. Should the Company not be able to obtain financing in the amounts necessary or under terms which are economically feasible, we may be required to reduce planned future growth and/or the scope of our operations.
Note 2. Going Concern and Management’s Plans
The
accompanying unaudited condensed financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2022, the Company had incurred
significant operating losses since inception and continues to generate losses from operations. As of March 31, 2022, the Company had
an accumulated deficit of $
The Company will require additional funding to grow its operations. Further, depending upon operational profitability, the Company may also need to raise additional funding for ongoing working capital purposes. 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. The Company’s ability to raise additional capital is impacted by the volatility of Bitcoin mining economics and the SEC’s ongoing enforcement action against our Chief Executive Officer, both of which are highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and financial condition.
Since January 2021, the Company has secured working capital through the issuance of a convertible note, the sale of equity and warrants, and the sale of assets.
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 financial statements. The accompanying unaudited condensed 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
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, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, fair value of warrants issued, 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.
| 6 |
Cash and cash equivalents
The
Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
The Company’s combined accounts were $
Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As of March 31, 2022 and December 31, 2021, we did not believe we needed to reserve for any doubtful accounts, respectively.
Cryptocurrencies
Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying balance sheets. Any cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed in this note.
Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the 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.
Any purchases of cryptocurrencies by the Company are included within investing activities in the accompanying statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Halving – The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving.” A Halving for bitcoin occurred on May 12, 2020, with a revised reward payout of 6.25 Bitcoin per block. Many factors influence the price of Bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
The following table presents the activities of digital currencies for the periods ended March 31, 2022 and December 31, 2021:
| Digital currencies at January 1, 2021 | $ | |||
| Additions of digital currencies from mining | ||||
| Realized gain on sale of digital currencies | ||||
| Sale of digital currencies | ( | ) | ||
| Digital currencies at December 31, 2021 | ||||
| Additions of digital currencies from mining | ||||
| Realized gain on sale of digital currencies | ||||
| Sale of digital currencies | ( | ) | ||
| Digital currencies at March 31, 2022 | $ |
Investment
Available-for-sale securities are carried at fair value. Realized and unrealized gains and losses, if any, are calculated on the specific identification method and are included in other income in the statements of operations.
| 7 |
Revenue recognition
Cryptocurrency mining
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”). The core principle of the 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.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time, 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 terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process known as “solving a block”) 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 agreements 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.
| 8 |
Fair value of the cryptocurrency award received is determined using the quoted price 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 Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s financial position and results from operations.
Hosting Revenues
We
receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized
$
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, convertible preferred stock, stock warrants and stock options, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s net loss.
Accordingly, the computation of diluted loss per share for the three months ended March 31, 2022 excludes shares issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the three months ended March 31, 2021 excludes shares issuable under convertible debt.
Fair Value Measure and Disclosures
ASC 820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
| ● | Level 1 Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. | |
| ● | Level 3 Significant unobservable inputs that cannot be corroborated by market data. |
As of March 31, 2022 and December 31, 2021, the Company had a Level 3 financial instrument related to the derivative liability related to the issuance of warrants.
Management’s evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
Reclassification
Certain prior period balances have been reclassified to conform to current year presentation. These reclassifications had no effect on the reported results of operations.
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 financial statements, other than those disclosed below.
| 9 |
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), (“ASU 2021-04”). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU is effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 on January 1, 2022 did not have a material impact on the Company’s condensed financial statements or disclosures.
Note 4. Accounts receivable
Accounts
receivable balances of $
Note 5. Property, Plant, and Equipment and Other Assets
Property and equipment consisted of the following:
| As of | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Computer hardware and software | ||||||||
| Bitcoin mining machines | ||||||||
| Infrastructure | ||||||||
| Containers | ||||||||
| Leasehold improvements | ||||||||
| Property and equipment, gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
The
Company recorded depreciation expense of $
Other Assets consisted of the following:
| As of | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Security deposits | $ | $ | ||||||
| Interest receivable | ||||||||
| Other Assets | $ | $ | ||||||
The
Company has paid $
Note 6. Investment
In
December 2021, the Company invested $
| 10 |
Note 7. Notes Payable
December 2020 Note
On
December 8, 2020, the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note
(the “December 2020 Note”) in the principal amount of $
The
Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion
feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature’s
intrinsic value on December 8, 2020 and determined that the beneficial conversion feature was valued at $
On
June 15, 2021, the holder converted $
On
July 27, 2021, the holder converted the remaining $
March 2021 Note
On
March 5, 2021, the Company entered into a securities purchase agreement with Bucktown Capital, LLC (the “Investor”), pursuant
to which the Company issued a convertible promissory note in the original principal amount of $
The
March 2021 Note was to be funded in tranches, with the initial tranche of $
The
Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion
feature. The Company measured the beneficial conversion feature’s intrinsic value on March 5, 2021 and determined that the beneficial
conversion feature was valued at $
As
a result of the Company failing to meet certain registration requirements under the March 2021 Note, the outstanding balance of the March
2021 Note was automatically increased by
| 11 |
On
September 30, 2021, the Company entered into an exchange agreement with the March 2021 Note holder under which the outstanding principal
balance of $
Derivative Liabilities
The Company’s activity in its debt related derivative liability was as follows for the three months ended March 31, 2022:
| Balance of derivative liability at January 1, 2021 | $ | |||
| Transfer in due to issuance of warrants with embedded conversion features | ||||
| Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions | ( | ) | ||
| Change in fair value of warrant liability | ( | ) | ||
| Change in fair value of derivative liability | ||||
| Balance of derivative liability at December 31, 2021 | ||||
| Transfer out upon exercise of warrants | ( | ) | ||
| Change in fair value of warrant liability | ||||
| Balance of derivative liabilities at March 31, 2022 | $ |
The
Company recorded loss on settlement of derivative liability in the amount of $
As
of March 31, 2022, the fair value of the warrant derivative liability was $
As
of December 31, 2021, the fair value of the warrant derivative liability was $
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
| 12 |
The following table summarizes the Company’s debt related derivative liability as of March 31, 2022 and December 31, 2021:
| March 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| Liabilities | ||||||||||||||||
| Warrant derivative liability | $ | $ | $ | $ | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| Liabilities | ||||||||||||||||
| Warrant derivative liability | $ | $ | $ | $ | ||||||||||||
Note 8. Leases
In
December 2019, the Company entered an office lease in connection with the relocation of its executive office to Raleigh, North Carolina.
The Company accounted for this lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease is $
On
November 1, 2021, the Company entered into a lease agreement to lease a contiguous portion of land to its existing property, as a planting
area for trees intended to mitigate noise from the Company’s cryptocurrency mining operations.
Total future minimum payments required under the lease agreement are as follows:
| Amount | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted minimum future lease payments | $ | |||
| Less Imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-current portion | ||||
The
Company recorded rent expense of $
| 13 |
At
March 31, 2022 the weighted average interest rate for the operating lease was
Note 9. Common Stock and Preferred Stock
Common stock
Common Stock Issuances
In connection with the conversion of shares of Series C Preferred Stock during the year ended December 31, 2021 (see Preferred Stock below) the Company issued shares of common stock.
During
the year ended December 31, 2021, in connection with the conversions of $
On
July 21, 2021, as part of a corporate fundraising of $
During the year ended December 31, 2021, warrants with an embedded conversion feature were exercised on a cashless basis for the issuance of shares of common stock (see below).
During the three months ended March 31, 2022, warrants with an embedded conversion feature were exercised on a cashless basis for the issuance of shares of common stock (see below).
Preferred Stock
On
January 11, 2019, the Company’s Board of Directors approved the authorization of shares of Series B Preferred Stock with
a par value of $ and a Stated Value of $
On
April 12, 2019, the Company’s Board of Directors approved the authorization of Series C Preferred Shares with a par value of
$ (“Series C Preferred Shares”).
| 14 |
The
common shares issued upon conversion of the Series C Preferred Shares have been registered under the Company’s then-effective registration
statement on Form S-3. On April 12, 2019, the Company sold Series C Preferred Shares for $
Warrants
On
July 21, 2021, as part of a corporate fundraising, the Company issued shares of common stock and
On
September 30, 2021, the Company exchanged the outstanding principal of $
During
the year ended December 31, 2021, warrants were exercised on a cashless basis for the issuance of shares of common
stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $
During
the three months ended March 31, 2022, warrants were exercised on a cashless basis for the issuance of shares of
common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $
The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2022:
| Warrant shares outstanding | Weighted average exercise price | Weighted average remaining life | Intrinsic value | |||||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||||||
| Issued | - | |||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Expired or cancelled | - | - | ||||||||||||||
| Outstanding and exercisable at December 31, 2021 | ||||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Outstanding and exercisable at March 31, 2022 | $ | $ | ||||||||||||||
| 15 |
Note 10. Commitments and Contingencies
Legal proceedings
From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K, as filed with the SEC on March 31, 2022.
Bitcoin Production Equipment and Operations
In
August 2018, the Company entered a collaborative venture with Bit5ive, LLC to develop a fully contained crypto currency mining pod
(the “POD5 Agreement”) for a term of five years. In exchange for an initial capital investment as well as engineering
and design expertise, the Company receives royalty payments from Bit5ive, LLC. During the three months ended March 31, 2022 and
2021, the Company received royalties and recognized as other income in the Statement of Operations under this agreement of
$
Electricity Contract
MGT’s prior electricity agreement with the City of LaFayette expired on September 30, 2021. The Company and City of LaFayette are currently operating on a month-to-month basis without a contract.
Note 11. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified
employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of
up to
Note 12. Subsequent Events
On
April 28, 2022 the Company issued shares of common stock to satisfy a partial cashless exercise of warrants issued
on September 30, 2021, as detailed in Note 9. As a result of this exercise, the number of warrants outstanding was reduced to
| 16 |
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, 2021 as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022, 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” or the “Company”) is a Delaware corporation that was incorporated in Delaware in 2000. MGT was originally incorporated in Utah in 1977. MGT’s corporate office is in Raleigh, North Carolina.
All dollar figures set forth in this Quarterly Report on Form 10-Q are in thousands, except per-share amounts.
Current Operations
MGT conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility in LaFayette, Georgia. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts (MW) of electrical power, half of which is presently utilized by the Company. Business activities are comprised of self-mining operations and leasing space to third parties.
As of March 31, 2022 and May 13, 2022, the Company owned 430 Antminer S17 Pro (the “S17 miners”) and 37 Antminer S19 Pro Bitcoin miners. All miners are located at our Georgia facility. Over three-quarters of the S17 miners require various repairs to be productive. We are in the process of selling our remaining S17 miners, as well as loose hash boards, power supplies, controller boards, and other parts.
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
MGT’s miners are housed in a modified shipping container on the Company’s owned property in Georgia. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition to expansion at its current property.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our 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 financial statements contained in this Quarterly Report describe our significant accounting policies used in the preparation of the unaudited condensed 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 financial statements.
| 17 |
Revenue recognition
Cryptocurrency mining
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”). The core principle of the 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.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time, 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 terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process known as “solving a block”) 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 agreements 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.
| 18 |
Fair value of the cryptocurrency award received is determined using the quoted price 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 Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s financial position and results from operations.
Hosting Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized $192 and $0 from these sources during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, two customers accounted for 68% and 23% respectively of hosting revenue.
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. Deposits on property and equipment are initially classified as Other Assets and upon delivery, installation and full payment, the assets are classified as property and equipment on the balance sheet.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset may not be recoverable, should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.
Derivative Instruments
Derivative financial instruments are recorded in the accompanying balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company’s statements of operations.
Recent accounting pronouncements
See Note 3 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Quarterly Report for Recent Accounting Pronouncements.
| 19 |
Results of operations
Three months ended March 31, 2022 and 2021
Revenues
Our revenues for the three months March 31, 2022 decreased by $31, or 11%, to $255, as compared to $286 for the three months ended March 31, 2021. Our revenue is derived from cryptocurrency mining, which totaled $63 for the three months ended March 31, 2022 and $286 during the months ended March 31, 2021. The decrease in revenues for this period is due to a decrease in miners from the previous year.
We also receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The company recognized $192 and $0 during the months ended March 31, 2022 and 2021, respectively.
Operating Expenses
Operating expenses for the three months ended March 31, 2022 increased by $215, or 29%, to $950, as compared to $735 for the three months ended March 31, 2021. The increase in operating expenses was primarily due to an increase in cost of revenue of $296, partially offset by a decrease in general and administrative expenses of $81.
The increase in cost of revenue of $296 or 118% to $546, as compared to $250 for the three months ended March 31, 2021 was primarily due to increased electricity costs from hosting services. The decrease in general and administrative expenses of $81 or 17%, to $404, as compared to $485 for the three months ended March 31, 2021, was primarily due to a decrease in legal and professional fees of $132, offset by an increase in repairs and maintenance of $11, increase in Georgia costs of $11 and increase in consulting services of $35.
Other Income and Expense
For the three months ended March 31, 2022, non–operating expense of $823 consisted primarily of loss on settlement of derivative of $417 and change in fair value of warrants derivative liability of $407, partially offset by interest income of $1. During the comparable period ended March 31, 2021, non–operating expense of $132 consisted of change in fair value of derivative liability of $67, accretion of debt discount of $62 and interest expense of $11, partially offset by non-operating income of $7 and a gain on sale of property and equipment of $1.
Liquidity and capital resources
Sources of Liquidity
We have historically financed our business through the sale of debt and equity interests. We have incurred significant operating losses since inception and continue to generate losses from operations and as of March 31, 2022 have an accumulated deficit of $421,446. At March 31, 2022, our cash and cash equivalents were $633, and our working capital deficit was $302.
In January 2020, management completed the consolidation of its activities in a Company-owned and managed facility, after having terminated all management agreements with outside investors as well as all third-party hosting arrangements in 2019. The Company will need to raise additional capital to fund operating losses and grow its operations. 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. The Company’s ability to raise additional capital will also be impacted by the volatility of Bitcoin and the ongoing SEC enforcement action against our Chief Executive Officer, both of which are highly uncertain, cannot be predicted and could have an adverse effect on the Company’s business and financial condition. The issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. 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 financial statements. The accompanying unaudited condensed financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin have had a negative impact on our operating results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world. Since we record revenue based on the price of earned Bitcoin and we may retain such Bitcoin as an asset or as payment for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin we retain. During the period January 1, 2022 through March 31, 2022, the price of Bitcoin remained very volatile, with a low and high exchange price per Bitcoin of approximately $35 and $48, respectively.
| 20 |
The supply of Bitcoin is finite. Once 21 million Bitcoin are generated, the network will stop producing more. Currently, there are approximately 19 million Bitcoin in circulation, or 90% of the total supply of Bitcoin. Within the Bitcoin protocol is an event referred to as Halving where the Bitcoin reward provided upon mining a block is reduced by 50%. Halvings are scheduled to occur once every 210,000 blocks, or roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The most recent Halving occurred in May 2020, with a revised reward payout of 6.25 Bitcoin per block.
Given a stable hash rate, a Halving reduces the number of new Bitcoin being generated by the network. While the effect is to limit the supply of new coins, it has no impact on the quantity of total Bitcoin outstanding. As a result, the price of Bitcoin could rise or fall based on overall investor and consumer demand. Should the price of Bitcoin remain unchanged after the next Halving, the Company’s revenue would be reduced by 50%, with a much larger negative impact to profit.
Our primary source of operating funds has been through debt and equity financing.
COVID-19 pandemic:
The COVID-19 pandemic has disrupted and may continue to disrupt our operations and those of our vendors, suppliers and other third parties on which we rely, and we may not be able to obtain new miners or replacement parts for our existing miners in a timely or cost-effective manner, which could materially and adversely affect our business and results of operations.
The extent to which COVID-19 impacts our operations or our ability to obtain financing will depend on future developments which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended period of time, financial markets may not be available to the Company for raising capital in order to fund future growth. Should the Company not be able to obtain financing in the amounts necessary or under terms which are economically feasible, we may be required to reduce planned future growth and/or the scope of our operations.
Cash Flows
| Three Months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash provided by / (used in) | ||||||||
| Operating activities | $ | (529 | ) | $ | (179 | ) | ||
| Investing activities | (68 | ) | 131 | |||||
| Financing activities | - | 1,000 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | (597 | ) | $ | 952 | |||
Operating activities
Net cash used in operating activities was $529 for the three months ended March 31, 2022 as compared to net cash used in operating activities of $179 for the three months ended March 31, 2021. Cash used in operating activities for the three months ended March 31, 2022 primarily consisted of a net loss of $1,518 offset by non-cash charges of $872 which includes depreciation of $48, loss on settlement of derivative of $417, change in fair value of derivative liability of $407, and cash used in working capital of $117.
| 21 |
Net cash used in operating activities of $179 for the three months ended March 31, 2021 primarily consisted of a net loss of $581, offset by non-cash charges of $317 which includes depreciation of $189, accretion of debt discount of $62, change in the fair value of the derivative liability of $67 partially offset by a gain from sale of property and equipment of $1, and cash provided by a change in working capital of $85.
Investing activities
Net cash used in investing activities was $68 for the three months ended March 31, 2022 which consisted of purchases of property and equipment of $68.
Net cash provided by investing activities was $131 for the three months ended March 31, 2021 consisted of proceeds from the sale of property and equipment of $131.
Financing activities
During the three months ended March 31, 2022, there was no cash provided by or used in financing activities.
During the three months ended March 31, 2021, cash provided by financing activities totaled $1,000 from proceeds of the receipt of a convertible promissory note.
Off–balance sheet arrangements
As of March 31, 2022, 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.
Item 3. Quantitative and qualitative disclosures about market risk
The Company is not exposed to market risk related to interest rates on foreign currencies.
Item 4. Controls and procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive officer and principal financial officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2022. Based on this evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective as March 31, 2022 due to the following material weakness in our internal control over financial reporting: Our small number of employees does not allow for sufficient segregation of duties and independent review of duties performed.
Limitations on Internal Control over Financial Reporting
An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
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Management’s Quarterly Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process used to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer and principal financial officer), we performed a complete documentation of the Company’s significant processes and key controls, and conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2022, there were no changes to internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal proceedings
From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K, as filed with the SEC on March 31, 2022.
Item 1A. Risk factors
There are no additional risk factors other than those discussed in our Annual Report on Form 10–K, as filed with the SEC on March 31, 2022.
Item 2. Unregistered sales of equity securities and use of proceeds
During the three months ended March 31, 2022, 11,197,930 warrants were exercised on a cashless basis for the issuance of 34,000,000 shares of common stock. In issuing the securities described above, the Company relied upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Item 3. Defaults upon senior securities
None.
Item 4. Mine safety disclosures
Not applicable.
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Item 5. Other information
None.
Item 6. Exhibits
| 31 | Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal Financial Officer* | |
| 32 | Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal Financial Officer* | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File* | |
| * | Filed herewith |
| 24 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MGT CAPITAL INVESTMENTS, INC | ||
| Date: May 13, 2022 | By: | /s/ Robert B. Ladd |
| Robert B. Ladd | ||
| President, Chief Executive Officer and Acting Chief Financial Officer | ||
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | ||
| 25 |
Exhibit 31
CERTIFICATION PURSUANT TO SARBANES–OXLEY ACT OF 2002
I, Robert B. Ladd, certify that:
1. I have reviewed this quarterly report on Form 10–Q of MGT Capital Investments, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 13, 2022 | By: | /s/ Robert B. Ladd |
| Robert B. Ladd | ||
| President, Chief Executive Officer and Acting Chief Financial Officer | ||
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES–OXLEY ACT OF 2002
In connection with the Quarterly Report of MGT Capital Investments, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and | |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: May 13, 2022 | By: | /s/ Robert B. Ladd |
| Robert B. Ladd | ||
| President, Chief Executive Officer and Acting Chief Financial Officer | ||
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 2,500,000,000 | 2,500,000,000 |
| Common stock, shares issued | 640,970,903 | 606,970,903 |
| Common stock, shares outstanding | 640,970,903 | 606,970,903 |
| Undesignated Preferred Stock [Member] | ||
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 8,489,800 | 8,489,800 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Series B Preferred Stock [Member] | ||
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 10,000 | 10,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Series C Convertible Preferred Stock [Member] | ||
| Preferred stock, par value | $ 0.001 | $ 0.001 |
| Preferred stock, shares authorized | 200 | 200 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ / shares in Thousands, $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Revenue | ||
| Total revenue | $ 255 | $ 286 |
| Operating expenses | ||
| Cost of revenue | 546 | 250 |
| General and administrative | 404 | 485 |
| Total operating expenses | 950 | 735 |
| Operating loss | (695) | (449) |
| Other non-operating income (expense) | ||
| Interest expense | (11) | |
| Interest income | 1 | |
| Change in fair value of warrant derivative liability | (407) | |
| Change in fair value of derivative liability | (67) | |
| Loss on settlement of derivative | (417) | |
| Accretion of debt discount | (62) | |
| Gain on sale of property and equipment | 1 | |
| Other income | 7 | |
| Total non-operating expense | (823) | (132) |
| Net loss | $ (1,518) | $ (581) |
| Per-share data | ||
| Basic and diluted loss per share | $ (0) | $ (0) |
| Weighted average number of common shares outstanding | 625,037,570 | 528,684,542 |
| BitCoin Mining [Member]. | ||
| Revenue | ||
| Total revenue | $ 63 | $ 286 |
| Hosting Services [Member]. | ||
| Revenue | ||
| Total revenue | $ 192 | |
Organization and Basis of Presentation |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Organization and Basis of Presentation | Note 1. Organization and Basis of Presentation
Organization
MGT Capital Investments, Inc. (“MGT” or the “Company”) is a Delaware corporation incorporated in 2000. MGT was originally incorporated in Utah in 1977. MGT’s corporate office is in Raleigh, North Carolina.
Cryptocurrency mining
Current Operations
MGT conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility in LaFayette, Georgia. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts (MW) of electrical power, half of which is presently utilized by the Company. Business activities are comprised of self-mining operations and leasing space to third parties.
As of March 31, 2022 and May 13, 2022, the Company owned 430 S17 Antminer Pro (“S17 miners”) and 37 Antminer S19 Pro Bitcoin miners. All miners are located at our Georgia facility. Over three-quarters of the S17 miners require various repairs to be productive. We are in the process of selling our remaining S17 miners, as well as loose hash boards, power supplies, controller boards, and other parts.
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
MGT’s miners are housed in a modified shipping container on the Company’s owned property in Georgia. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition to expansion at its current property.
Basis of presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10–Q and Rule 8 of Regulation S–X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in these statements. These unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022. Operating results for the three months ended March 31, 2022 and 2021 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2022.
COVID-19 Pandemic
The COVID-19 pandemic has disrupted and may continue to disrupt our operations and those of our vendors, suppliers and other third parties on which we rely, and we may not be able to obtain new miners or replacement parts for our existing miners in a timely or cost-effective manner, which could materially and adversely affect our business and results of operations.
The extent to which COVID-19 impacts our operations or our ability to obtain financing will depend on future developments which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended period of time, financial markets may not be available to the Company for raising capital in order to fund future growth. Should the Company not be able to obtain financing in the amounts necessary or under terms which are economically feasible, we may be required to reduce planned future growth and/or the scope of our operations.
|
Going Concern and Management’s Plans |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Going Concern and Management’s Plans | Note 2. Going Concern and Management’s Plans
The accompanying unaudited condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2022, the Company had incurred significant operating losses since inception and continues to generate losses from operations. As of March 31, 2022, the Company had an accumulated deficit of $421,446. As of March 31, 2022 MGT’s cash and cash equivalents were $633.
The Company will require additional funding to grow its operations. Further, depending upon operational profitability, the Company may also need to raise additional funding for ongoing working capital purposes. 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. The Company’s ability to raise additional capital is impacted by the volatility of Bitcoin mining economics and the SEC’s ongoing enforcement action against our Chief Executive Officer, both of which are highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and financial condition.
Since January 2021, the Company has secured working capital through the issuance of a convertible note, the sale of equity and warrants, and the sale of assets.
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 financial statements. The accompanying unaudited condensed 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.
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Summary of Significant Accounting Policies |
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | Note 3. Summary of Significant Accounting Policies
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, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, fair value of warrants issued, 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.
Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents. The Company’s combined accounts were $633 and $1,230 as of March 31, 2022 and December 31, 2021, respectively. Accounts are insured by the FDIC up to $250 per financial institution. The Company has not experienced any losses in such accounts with these financial institutions. As of March 31, 2022, and December 31, 2021, the Company had $133 and $980, respectively, in excess of the FDIC insurance limit.
Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As of March 31, 2022 and December 31, 2021, we did not believe we needed to reserve for any doubtful accounts, respectively.
Cryptocurrencies
Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying balance sheets. Any cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed in this note.
Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the 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.
Any purchases of cryptocurrencies by the Company are included within investing activities in the accompanying statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Halving – The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving.” A Halving for bitcoin occurred on May 12, 2020, with a revised reward payout of 6.25 Bitcoin per block. Many factors influence the price of Bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
The following table presents the activities of digital currencies for the periods ended March 31, 2022 and December 31, 2021:
Investment
Available-for-sale securities are carried at fair value. Realized and unrealized gains and losses, if any, are calculated on the specific identification method and are included in other income in the statements of operations.
Revenue recognition
Cryptocurrency mining
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”). The core principle of the 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:
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 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.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time, 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 terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process known as “solving a block”) 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 agreements 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 quoted price 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 Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s financial position and results from operations.
Hosting Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized $192 and $0 from these sources during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, two customers accounted for 68% and 23% respectively of hosting revenue.
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, convertible preferred stock, stock warrants and stock options, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s net loss.
Accordingly, the computation of diluted loss per share for the three months ended March 31, 2022 excludes shares issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the three months ended March 31, 2021 excludes shares issuable under convertible debt.
Fair Value Measure and Disclosures
ASC 820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
As of March 31, 2022 and December 31, 2021, the Company had a Level 3 financial instrument related to the derivative liability related to the issuance of warrants.
Management’s evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
Reclassification
Certain prior period balances have been reclassified to conform to current year presentation. These reclassifications had no effect on the reported results of operations.
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 financial statements, other than those disclosed below.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), (“ASU 2021-04”). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU is effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 on January 1, 2022 did not have a material impact on the Company’s condensed financial statements or disclosures.
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Accounts receivable |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Receivables [Abstract] | |
| Accounts receivable | Note 4. Accounts receivable
Accounts receivable balances of $306 and $180 as of March 31, 2022 and December 31, 2021, respectively, from customers using the Company’s miner hosting and facility rental services. One customer makes up 96% of this balance.
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Property, Plant, and Equipment and Other Assets |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant, and Equipment and Other Assets | Note 5. Property, Plant, and Equipment and Other Assets
Property and equipment consisted of the following:
The Company recorded depreciation expense of $48 and $189 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, respectively, gains on sale of property and equipment of $ and $1, respectively, were recorded as other non-operating income. For the three months ended March 31, 2022 we disposed of a total of 50 S17 miners which were fully depreciated.
Other Assets consisted of the following:
The Company has paid $3 related to its office lease in Raleigh, NC.
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Investment |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Investments, All Other Investments [Abstract] | |
| Investment | Note 6. Investment
In December 2021, the Company invested $50 in the form of a convertible promissory note. The note bears annual interest of 8% and matures on December 31, 2024. The note contains certain anti-dilution features with an as-converted ownership of 5%. As of March 31, 2022, the Company determined that book value represented fair value with no adjustment necessary.
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Notes Payable |
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| Notes Payable | Note 7. Notes Payable
December 2020 Note
On December 8, 2020, the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note (the “December 2020 Note”) in the principal amount of $230 which is convertible, at the option of the holder, into shares of common stock at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the applicable conversion. The Company received consideration of $200 for the convertible promissory note. The note bears interest at a rate of 8% per annum and matures in twelve months.
The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature’s intrinsic value on December 8, 2020 and determined that the beneficial conversion feature was valued at $200 which was recorded as a debt discount, and together with the original issue discount of $30, in the aggregate of $230, is being amortized over the life of the loan. The Company measured the derivative liability’s fair value on December 8, 2020 and determined that the derivative liability was valued at $555 which exceeded the intrinsic value of the beneficial conversion feature by $355 and resulted in the Company recording non-cash interest expense of $355.
On June 15, 2021, the holder converted $120 of principal into shares of common stock valued at $238. As a result of this conversion, $172 of derivative liability was settled, $86 unamortized debt discount was settled and $32 was recorded as loss on settlement of debt.
On July 27, 2021, the holder converted the remaining $110 of principal and $11 of accrued interest into shares of common stock valued at $280. As a result of this conversion, $153 of derivative liability was settled, $66 unamortized debt discount was settled and $72 was recorded as loss on settlement of debt. As of December 31, 2021, this note had no outstanding balance.
March 2021 Note
On March 5, 2021, the Company entered into a securities purchase agreement with Bucktown Capital, LLC (the “Investor”), pursuant to which the Company issued a convertible promissory note in the original principal amount of $13,210 (the “March 2021 Note”). The March 2021 Note was convertible, at the option of the Investor, into shares of common stock of the Company at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the applicable conversion (the “Conversion Price”); provided, however, in no event was the Conversion Price to be less than $0.04 per share. The March 2021 Note bore interest at a rate of 8% per annum and will mature in twelve months.
The March 2021 Note was to be funded in tranches, with the initial tranche of $1,210 funded on March 5, 2021 for consideration of $1,000. Six subsequent tranches (five tranches, each for $1,200 and one tranche for $6,000) were to be funded upon the notice of effectiveness of a Registration Statement on Form S-1 covering the common stock issuable in connection with the March 2021 Note. Further, the final tranche required the mutual agreement of the Company and Investor. Until such time as Investor funded the subsequent tranches, the Company would hold a series of Investor Notes that offset any unfunded portion of the March 2021 Note.
The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature. The Company measured the beneficial conversion feature’s intrinsic value on March 5, 2021 and determined that the beneficial conversion feature was valued at $1,000 which was recorded as a debt discount, and together with the original issue discount of $210, in the aggregate of $1,210, is being amortized over the life of the loan.
As a result of the Company failing to meet certain registration requirements under the March 2021 Note, the outstanding balance of the March 2021 Note was automatically increased by 5% on each of July 5, 2021, August 5, 2021, and September 5, 2021 and as part of the exchange agreement an additional 5% on September 30, 2021, prior to the exchange. An additional $270 was recorded as outstanding principal, bringing the outstanding balance prior to the exchange to $1,481.
On September 30, 2021, the Company entered into an exchange agreement with the March 2021 Note holder under which the outstanding principal balance of $1,481 and $60 of accrued interest were exchanged for 53,500,000 warrants to purchase common stock (See Note 7), which were treated as a warrant derivative liability. Upon the exchange, the Company settled $1,481 of outstanding principal, $60 of accrued interest, $758 of debt discount, recorded a warrant liability in the amount of $1,221 resulting in a loss on settlement of debt of $438. The derivative was calculated using a share fair value of $ per share, a discount rate of 0.98%, remaining lives of 4.43 years and volatility of 176.1%. As of December 31, 2021, this note had no outstanding balance.
Derivative Liabilities
The Company’s activity in its debt related derivative liability was as follows for the three months ended March 31, 2022:
The Company recorded loss on settlement of derivative liability in the amount of $417 and $0 for the three months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, the fair value of the warrant derivative liability was $1,366 and for the three months ended March 31, 2022 the Company recorded a loss of $407 from the change in fair value of derivative warrant liability as non-operating income in the statements of operations. The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions as of March 31, 2022: 1) stock price of $, 2) exercise prices of $0.05, 3) remaining lives of 3.9 – 4.3 years, 4) dividend yields of 0%, 5) risk free rates of 2.42%, and 6) volatility of 174.5%.
As of December 31, 2021, the fair value of the warrant derivative liability was $1,130 and for the year ended December 31, 2021 the Company recorded a gain of $955 from the change in fair value of derivative warrant liability as non-operating income in the statements of operations. The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions as of December 31, 2021: 1) stock price of $, 2) exercise prices of $0.05, 3) remaining lives of 4.2 – 4.6 years, 4) dividend yields of 0%, 5) risk free rates of 1.26%, and 6) volatility of 175.5%.
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
The following table summarizes the Company’s debt related derivative liability as of March 31, 2022 and December 31, 2021:
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Leases |
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| Leases | Note 8. Leases
In December 2019, the Company entered an office lease in connection with the relocation of its executive office to Raleigh, North Carolina. The Company accounted for this lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease is $3 per month, with annual increases of 3% during the term. The Company used an incremental borrowing rate of 29.91% based on the weighted average effective interest rate of its outstanding debt. In December 2019, the Company recorded a Right of Use Asset of $79 and a corresponding Lease Liability of $79. The Right to Use Asset is accounted for as an operating lease and has a balance, net of amortization, of $27 as of March 31, 2022.
On November 1, 2021, the Company entered into a lease agreement to lease a contiguous portion of land to its existing property, as a planting area for trees intended to mitigate noise from the Company’s cryptocurrency mining operations. The agreement calls for yearly installments of $3 for the first five years, with an option to extend this lease for another five-year period at a rate not to exceed 105% of the current lease payment. On each anniversary date, the Company will pay $3 in advance, with payment for the first year paid upon execution of the lease. The Company used an incremental borrowing rate of 8.0% based on the interest rate of incorporated in the most recent promissory note. At lease inception, the Company recorded a Right of Use Asset of $22 and a corresponding Lease Liability of $22. The Right to Use Asset is accounted for as an operating lease and has a balance, net of amortization, of $21 as of March 31, 2022.
Total future minimum payments required under the lease agreement are as follows:
The Company recorded rent expense of $10 and $9 for the three months ended March 31, 2022 and 2021, respectively.
At March 31, 2022 the weighted average interest rate for the operating lease was 20.46%. At March 31, 2022, the weighted average remaining lease term for operating lease was 4.6 years. The Company’s lease agreement does not contain any material residual value guarantees or material restrictive covenants.
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Common Stock and Preferred Stock |
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| Common Stock and Preferred Stock | Note 9. Common Stock and Preferred Stock
Common stock
Common Stock Issuances
In connection with the conversion of shares of Series C Preferred Stock during the year ended December 31, 2021 (see Preferred Stock below) the Company issued shares of common stock.
During the year ended December 31, 2021, in connection with the conversions of $120 and $110, with accrued interest, of the December 2020 convertible note payable (see Note 7), the Company issued and shares of common stock, respectively.
On July 21, 2021, as part of a corporate fundraising of $990, net of issuance costs, the Company issued shares of common stock and 35,385,703 warrants to purchase common stock (see Warrants below).
During the year ended December 31, 2021, warrants with an embedded conversion feature were exercised on a cashless basis for the issuance of shares of common stock (see below).
During the three months ended March 31, 2022, warrants with an embedded conversion feature were exercised on a cashless basis for the issuance of shares of common stock (see below).
Preferred Stock
On January 11, 2019, the Company’s Board of Directors approved the authorization of shares of Series B Preferred Stock with a par value of $ and a Stated Value of $100 each (“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. No shares of Series B Preferred Shares have been issued or are outstanding.
On April 12, 2019, the Company’s Board of Directors approved the authorization of Series C Preferred Shares with a par value of $ (“Series C Preferred Shares”). The holders of the Series C Preferred Shares have no voting rights, receive no dividends, and are entitled to a liquidation preference equal to the stated value. At any time, the Company may redeem the Series C Preferred Shares at 1.2 times the stated value. Given the right of redemption is solely at the option of the Company, the Series C Preferred Shares are not considered mandatorily redeemable, and as such are classified in shareholders’ equity on the Company’s balance sheet.
Each Series C 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 Series C 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 common shares issued upon conversion of the Series C Preferred Shares have been registered under the Company’s then-effective registration statement on Form S-3. On April 12, 2019, the Company sold Series C Preferred Shares for $1,890, net of issuance costs and on July 15, 2019 sold Series C Preferred Shares for $100. During the second and third quarters of 2019, holders converted Series C Preferred Shares into shares of common stock and Series C Preferred Shares into shares of common stock, respectively. The remaining shares of Series C Preferred Stock were converted into shares of common stock during the year ended December 31, 2021.
Warrants
On July 21, 2021, as part of a corporate fundraising, the Company issued shares of common stock and 35,385,703 warrants to purchase common stock for net cash proceeds of $990 (see above). The warrants were valued at $1,271 which resulted in the recording of a warrant derivative liability in that amount. Non-operating expense of $306 was recorded in respect of the value warrant derivative liability of $1,271 in excess of the value of common shares issued of $990.
On September 30, 2021, the Company exchanged the outstanding principal of $1,481 and accrued interest of $60 of the March 2021 Note for 53,500,000 warrants to purchase common stock (see Note 7).
During the year ended December 31, 2021, warrants were exercised on a cashless basis for the issuance of shares of common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $406, compared it to the fair value of shares of $635 and recorded a loss on extinguishment of $228. The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions on the date of each exercise: 1) stock prices of $ - $, 2) exercise prices of $0.05, 3) remaining lives of 4.2 – 4.3 years, 4) dividend yields of 0%, 5) risk free rates of 1.19% - 1.33%, and 6) volatility of 175.7% - 177.2%.
During the three months ended March 31, 2022, warrants were exercised on a cashless basis for the issuance of shares of common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $171, compared it to the fair value of shares of $588 and recorded a loss on extinguishment of $417. The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions on the date of each exercise: 1) stock prices of $ - $, 2) exercise prices of $0.05, 3) remaining lives of 4.0 – 4.2 years, 4) dividend yields of 0%, 5) risk free rates of 1.53% - 2.10%, and 6) volatility of 174.0% - 175.6%.
The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2022:
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Commitments and Contingencies |
3 Months Ended |
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Mar. 31, 2022 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies | Note 10. Commitments and Contingencies
Legal proceedings
From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K, as filed with the SEC on March 31, 2022.
Bitcoin Production Equipment and Operations
In August 2018, the Company entered a collaborative venture with Bit5ive, LLC to develop a fully contained crypto currency mining pod (the “POD5 Agreement”) for a term of five years. In exchange for an initial capital investment as well as engineering and design expertise, the Company receives royalty payments from Bit5ive, LLC. During the three months ended March 31, 2022 and 2021, the Company received royalties and recognized as other income in the Statement of Operations under this agreement of $0 and $7, respectively pursuant to the POD5 Agreement.
Electricity Contract
MGT’s prior electricity agreement with the City of LaFayette expired on September 30, 2021. The Company and City of LaFayette are currently operating on a month-to-month basis without a contract.
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Employee Benefit Plans |
3 Months Ended |
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Mar. 31, 2022 | |
| Retirement Benefits [Abstract] | |
| Employee Benefit Plans | Note 11. Employee Benefit Plans
The Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of up to 100% of employee contributions. During the three months ended March 31, 2022 and 2021, the Company made contributions to the 401(k) Plan of $3 and $3, respectively.
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Subsequent Events |
3 Months Ended |
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Mar. 31, 2022 | |
| Subsequent Events [Abstract] | |
| Subsequent Events | Note 12. Subsequent Events
On April 28, 2022 the Company issued shares of common stock to satisfy a partial cashless exercise of warrants issued on September 30, 2021, as detailed in Note 9. As a result of this exercise, the number of warrants outstanding was reduced to 60,761,051. |
Summary of Significant Accounting Policies (Policies) |
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| Use of estimates and assumptions and critical accounting estimates and assumptions | 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, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, fair value of warrants issued, 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.
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| Cash and cash equivalents | Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents. The Company’s combined accounts were $633 and $1,230 as of March 31, 2022 and December 31, 2021, respectively. Accounts are insured by the FDIC up to $250 per financial institution. The Company has not experienced any losses in such accounts with these financial institutions. As of March 31, 2022, and December 31, 2021, the Company had $133 and $980, respectively, in excess of the FDIC insurance limit.
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| Accounts Receivable | Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As of March 31, 2022 and December 31, 2021, we did not believe we needed to reserve for any doubtful accounts, respectively.
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| Cryptocurrencies | Cryptocurrencies
Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying balance sheets. Any cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed in this note.
Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the 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.
Any purchases of cryptocurrencies by the Company are included within investing activities in the accompanying statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Halving – The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving.” A Halving for bitcoin occurred on May 12, 2020, with a revised reward payout of 6.25 Bitcoin per block. Many factors influence the price of Bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
The following table presents the activities of digital currencies for the periods ended March 31, 2022 and December 31, 2021:
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| Investment | Investment
Available-for-sale securities are carried at fair value. Realized and unrealized gains and losses, if any, are calculated on the specific identification method and are included in other income in the statements of operations.
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| Revenue recognition | Revenue recognition
Cryptocurrency mining
The Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC 606”). The core principle of the 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:
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 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.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time, 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 terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company’s fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm.
Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process known as “solving a block”) 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 agreements 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 quoted price 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 Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s financial position and results from operations.
Hosting Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized $192 and $0 from these sources during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, two customers accounted for 68% and 23% respectively of hosting revenue.
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| 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, convertible preferred stock, stock warrants and stock options, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s net loss.
Accordingly, the computation of diluted loss per share for the three months ended March 31, 2022 excludes shares issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the three months ended March 31, 2021 excludes shares issuable under convertible debt.
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| Fair Value Measure and Disclosures | Fair Value Measure and Disclosures
ASC 820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
As of March 31, 2022 and December 31, 2021, the Company had a Level 3 financial instrument related to the derivative liability related to the issuance of warrants.
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| Management’s evaluation of subsequent events | Management’s evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
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| Reclassification | Reclassification
Certain prior period balances have been reclassified to conform to current year presentation. These reclassifications had no effect on the reported results of operations.
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| Recent accounting pronouncements | 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 financial statements, other than those disclosed below.
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements. |
Summary of Significant Accounting Policies (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Digital Currencies | The following table presents the activities of digital currencies for the periods ended March 31, 2022 and December 31, 2021:
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Property, Plant, and Equipment and Other Assets (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Property and Equipment | Property and equipment consisted of the following:
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| Schedule of Other Assets | Other Assets consisted of the following:
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Notes Payable (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Derivative Liability Activity | The Company’s activity in its debt related derivative liability was as follows for the three months ended March 31, 2022:
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| Schedule of Derivative Liability Fair Value | The following table summarizes the Company’s debt related derivative liability as of March 31, 2022 and December 31, 2021:
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Leases (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Future Minimum Lease Payment | Total future minimum payments required under the lease agreement are as follows:
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Common Stock and Preferred Stock (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Warrants Outstanding | The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2022:
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Going Concern and Management’s Plans (Details Narrative) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||
| Accumulated deficit | $ 421,446 | $ 419,928 |
| Cash and cash equivalents | $ 633 | $ 1,230 |
Schedule of Digital Currencies (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
|---|---|---|
Mar. 31, 2022 |
Dec. 31, 2021 |
|
| Accounting Policies [Abstract] | ||
| Digital currencies, Beginning balance | $ 4 | |
| Additions of digital currencies from mining | 63 | 686 |
| Realized gain on sale of digital currencies | 3 | 1 |
| Sale of digital currencies | (64) | (691) |
| Digital currencies, Ending balance | $ 2 |
Accounts receivable (Details Narrative) - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Dec. 31, 2021 |
|
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Accounts Receivable, after Allowance for Credit Loss, Current | $ 306 | $ 180 |
| Accounts Receivable [Member] | Customer Concentration Risk [Member] | Customer [Member] | ||
| Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
| Concentration of customer percentage | 96.00% |
Schedule of Property and Equipment (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | $ 2,455 | $ 2,499 |
| Less: Accumulated depreciation | (1,206) | (1,270) |
| Property and equipment, net | 1,249 | 1,229 |
| Land [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 55 | 55 |
| Computer Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 10 | 10 |
| Bitcoin Mining Machines [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 798 | 910 |
| Infrastructures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 1,185 | 1,117 |
| Containers [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | 403 | 403 |
| Leasehold Improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Property and equipment, gross | $ 4 | $ 4 |
Schedule of Other Assets (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Property, Plant and Equipment [Abstract] | ||
| Security deposits | $ 3 | $ 3 |
| Interest receivable | 1 | |
| Other Assets | $ 4 | $ 3 |
Property, Plant, and Equipment and Other Assets (Details Narrative) - USD ($) $ in Thousands |
3 Months Ended | ||
|---|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
| Property, Plant and Equipment [Abstract] | |||
| Depreciation expense | $ 48 | $ 189 | |
| Gain on sale of property and equipment | $ 1 | ||
| Security deposits | $ 3 | $ 3 | |
Investment (Details Narrative) $ in Thousands |
12 Months Ended |
|---|---|
|
Dec. 31, 2021
USD ($)
| |
| Net Investment Income [Line Items] | |
| Debt Instrument, Maturity Date | Dec. 31, 2024 |
| Convertible Promissory Note [Member]. | |
| Net Investment Income [Line Items] | |
| Investment Owned, at Fair Value | $ 50 |
| Debt Instrument, Interest Rate, Stated Percentage | 8.00% |
| Investment Interest Rate | 5.00% |
Schedule of Derivative Liability Activity (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
|---|---|---|
Mar. 31, 2022 |
Dec. 31, 2021 |
|
| Debt Disclosure [Abstract] | ||
| Balance of derivative liabilities | $ 1,130 | $ 246 |
| Transfer in due to issuance of warrants with embedded conversion features | 2,492 | |
| Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions | (732) | |
| Change in fair value of warrant liability | 407 | (955) |
| Change in fair value of derivative liability | 79 | |
| Transfer out upon exercise of warrants | (171) | |
| Balance of derivative liabilities | $ 1,366 | $ 1,130 |
Schedule of Derivative Liability Fair Value (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Defined Benefit Plan Disclosure [Line Items] | ||
| Warrant derivative liability | $ 1,366 | $ 1,130 |
| Fair Value, Inputs, Level 1 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Warrant derivative liability | ||
| Fair Value, Inputs, Level 2 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Warrant derivative liability | ||
| Fair Value, Inputs, Level 3 [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Warrant derivative liability | $ 1,366 | $ 1,130 |
Schedule of Future Minimum Lease Payment (Details) - USD ($) $ in Thousands |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Leases | ||
| 2022 | $ 32 | |
| 2023 | 3 | |
| 2024 | 3 | |
| 2025 | 3 | |
| 2026 | 3 | |
| Thereafter | 13 | |
| Total undiscounted minimum future lease payments | 57 | |
| Less Imputed interest | (11) | |
| Present value of operating lease liabilities | 46 | |
| Current portion | 28 | $ 35 |
| Non-current portion | $ 18 | $ 17 |
Leases (Details Narrative) - USD ($) $ in Thousands |
1 Months Ended | 3 Months Ended | |||
|---|---|---|---|---|---|
Nov. 01, 2021 |
Dec. 31, 2019 |
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
| Lessee, Lease, Description [Line Items] | |||||
| Monthly rent | $ 10 | $ 9 | |||
| Operating lease, Weighted average interest rate, Percent | 20.46% | ||||
| Right of use asset | $ 48 | $ 55 | |||
| Lease liability | $ 46 | ||||
| Operating lease, weighted average remaining lease term | 4 years 7 months 6 days | ||||
| Lease Agreement [Member] | |||||
| Lessee, Lease, Description [Line Items] | |||||
| Operating lease, Weighted average interest rate, Percent | 8.00% | ||||
| Right of use asset | $ 22 | ||||
| Lease liability | $ 22 | ||||
| Amortization | $ 21 | ||||
| Lease description | The agreement calls for yearly installments of $3 for the first five years, with an option to extend this lease for another five-year period at a rate not to exceed 105% of the current lease payment. On each anniversary date, the Company will pay $3 in advance, with payment for the first year paid upon execution of the lease | ||||
| New Office Lease [Member] | |||||
| Lessee, Lease, Description [Line Items] | |||||
| Monthly rent | $ 3 | ||||
| Percentage of annual increases | 3.00% | ||||
| Operating lease term | 3 years | ||||
| Operating lease, Weighted average interest rate, Percent | 29.91% | ||||
| Right of use asset | $ 79 | ||||
| Lease liability | $ 79 | ||||
| Amortization | $ 27 | ||||
Commitments and Contingencies (Details Narrative) - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Revenue from Contract with Customer, Excluding Assessed Tax | $ 255 | $ 286 |
| POD5 Agreement [Member] | Bit5ive, LLC [Member] | ||
| Collaborative Arrangement and Arrangement Other than Collaborative [Line Items] | ||
| Revenue from Contract with Customer, Excluding Assessed Tax | $ 0 | $ 7 |
Employee Benefit Plans (Details Narrative) - 401(k) Plan [Member] - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Defined Benefit Plan Disclosure [Line Items] | ||
| Employee contribution amount | $ 3 | $ 3 |
| Maximum [Member] | ||
| Defined Benefit Plan Disclosure [Line Items] | ||
| Employee contribution percentage | 100.00% | |
Subsequent Events (Details Narrative) - shares |
1 Months Ended | |
|---|---|---|
Apr. 28, 2022 |
Sep. 30, 2021 |
|
| Subsequent Event [Line Items] | ||
| Warrants issued | 2,655,890 | |
| Subsequent Event [Member] | ||
| Subsequent Event [Line Items] | ||
| Warrant outstanding, shares | 60,761,051 | |
| Subsequent Event [Member] | Common Stock [Member] | ||
| Subsequent Event [Line Items] | ||
| Number of shares issued | 10,000,000 |