Mgt Capital Investments, Inc 10-Q for FY2021 Q3
Mgt Capital Investments, Inc. (MGTI)
About this 10-Q
Mgt Capital Investments, Inc filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $244K
- up 59.5% from $153K a year earlier
- Net loss
- $374K
- compared with a net loss of $592K a year earlier
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 November 11, 2021, 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 SEPTEMBER 30, 2021
TABLE OF CONTENTS
| i |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per-share amounts)
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses and other current assets | ||||||||
| Intangible digital assets | - | |||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Property and equipment, at cost, net | ||||||||
| Right of use asset, operating lease, net of accumulated amortization | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other payables | ||||||||
| Convertible note payable, net of discount | - | |||||||
| Operating lease liability | ||||||||
| Warrant derivative liability | ||||||||
| Derivative liability | - | |||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Operating lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 10) | - | - | ||||||
| Stockholders’ Equity | ||||||||
| Undesignated preferred stock, $ par value, shares authorized. shares issued and outstanding at September 30, 2021 and December 31, 2020. | - | - | ||||||
| Series B preferred stock, $ par value, shares authorized. shares issued or outstanding at September 30, 2021 and December 31, 2020. | - | - | ||||||
Series C convertible preferred stock, $ par value, share authorized. and shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | - | - | ||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| 1 |
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per-share amounts)
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other non-operating income (expense) | ||||||||||||||||
| Interest (expense) income | ( | ) | - | ( | ) | |||||||||||
| Change in fair value of liability | - | ( | ) | - | ||||||||||||
| Change in fair value of warrant derivative liability | ||||||||||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||||||||||
| Accretion of debt discount | ( | ) | ( | ) | ( | ) | ||||||||||
| Other income (expense) | ( | ) | ( | ) | ||||||||||||
| Gain on settlement of payables | ||||||||||||||||
| Loss on settlement of debt | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on sale of property and equipment | ( | ) | ( | ) | ||||||||||||
| Total non-operating expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| - | ||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Per-share data | ||||||||||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| 2 |
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Dollars in thousands, except per-share amounts)
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | In Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Issuance of common stock and warrants | ||||||||||||||||||||||||||||
| Issuance of common stock and warrants, shares | ||||||||||||||||||||||||||||
| Common stock issued on conversion of notes payable | ||||||||||||||||||||||||||||
| Common stock issued on conversion of notes payable, shares | ||||||||||||||||||||||||||||
| Stock based compensation - employee restricted stock | - | - | - | - | - | |||||||||||||||||||||||
| Common stock issued on conversion of Preferred C shares | ( | ) | - | ( | ) | - | - | |||||||||||||||||||||
| Beneficial conversion feature | ||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at March 31, 2021 (unaudited) | - | ( | ) | |||||||||||||||||||||||||
| Common stock issued on conversion of notes payable | - | - | - | |||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2021 (unaudited) | - | ( | ) | |||||||||||||||||||||||||
| Issuance of common stock and warrants | - | - | ( | ) | - | |||||||||||||||||||||||
| Common stock issued on conversion of notes payable | - | - | - | |||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at September 30, 2021 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | In Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Stock based compensation - employee restricted stock | - | - | - | - | ||||||||||||||||||||||||
| Common stock issued on conversion of note payable | - | - | - | |||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at March 31, 2020 (unaudited) | - | ( | ) | |||||||||||||||||||||||||
| Stock based compensation - employee restricted stock | - | - | - | - | - | |||||||||||||||||||||||
| Common stock issued on conversion of notes payable | - | - | - | |||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at June 30, 2020 (unaudited) | - | ( | ) | |||||||||||||||||||||||||
| Stock based compensation - employee restricted stock | - | - | - | - | - | |||||||||||||||||||||||
| Common stock issued on conversion of notes payable | - | - | - | |||||||||||||||||||||||||
| Net Loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2020 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| 3 |
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per-share amounts)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation | ||||||||
| Gain (loss) on sale of property and equipment | ( | ) | ||||||
| Loss on settlement of debt | - | |||||||
| Change in fair value of warrant derivative liability | ( | ) | - | |||||
| Change in fair value of derivative liability | - | |||||||
| Change in fair value of liability | - | ( | ) | |||||
| Stock-based compensation expense | - | |||||||
| Amortization of note discount | ||||||||
| Gain on settlement of payables | ( | ) | - | |||||
| Non-operating expense | - | |||||||
| Non-cash interest expense | - | |||||||
| Change in operating assets and liabilities | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Intangible digital assets | ||||||||
| Management agreement termination liability | - | ( | ) | |||||
| Operating lease liability | ( | ) | - | |||||
| Other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Deposits made on property and equipment | - | ( | ) | |||||
| Refund of security deposit | - | |||||||
| Net cash provided by investing activities | ||||||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from convertible note payable | - | |||||||
| Proceeds from sale of stock under equity purchase agreement, net of issuance costs | - | |||||||
| Proceeds from SBA PPP bank loan | - | |||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| 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 | ||||||||
| Conversion of notes payable into common stock | $ | $ | ||||||
| Exchange of notes payable to warrants | $ | $ | - | |||||
| 4 |
MGT CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED 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”) was incorporated in Delaware in 2000. MGT was originally incorporated in Utah in 1977. MGT is comprised of the parent company and its wholly owned subsidiary MGT Sweden AB. MGT’s corporate office is in Raleigh, North Carolina.
Cryptocurrency mining
Current Operations
As
of September 30, 2021 and November 11, 2021, the Company owned 530 and 480 Antminer S17 Pro Bitcoin miners, respectively, all located
at its LaFayette, Georgia facility. As more fully described in the following paragraph, over three-quarters of these miners require various
repairs to be productive. We purchased a total of 1,500 S17 Pro Bitcoin miners in the latter part of 2019 for an aggregate purchase price
of approximately $
During
2020, the Company began to suffer component issues, such as heat sinks detaching from hash boards, and failures of both power supplies
and hash board temperature sensors. Although Bitmain has acknowledged manufacturing defects in various production runs of S17 Bitcoin
miners, the Company was unsuccessful in obtaining any compensation from Bitmain. The manufacturing defects, combined with inadequate
repair facilities has rendered approximately 400 of our remaining 480 miners in need of repair or replacement. The Company is using a
third-party repair facility to repair its non-working hash boards and expects the process to be complete before yearend 2021. As of November
11, 2021, 300 of these bad hash boards (enough to power 100 miners) have been successfully repaired and approximately 200 more hash boards
remain unused at our facility pending repair, replacement or sale as management may determine. In addition, a former vendor has yet to
return an additional 200 hash boards entrusted to it for repair, and the Company has commenced litigation. It is not possible at the
present time to estimate the total cost of repair or the overall success rate of repairs of defective hash boards. To date, we have incurred
approximately $
MGT’s miners are housed in two modified shipping containers on property owned by the Company adjacent to an electrical substation. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, the 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 has also begun preliminary negotiations to acquire a second site approximately five miles from LaFayette, although there can be assurance that the parties will reach an acceptable agreement.
In addition to its self-mining operations, the Company is leasing its owned space to other Bitcoin miners. These improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
Basis of presentation
The accompanying unaudited condensed consolidated 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021. Operating results for the three and nine months ended September 30, 2021 and 2020 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2021.
| 5 |
COVID-19 Pandemic
The COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.
Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020. By that time, much of our first fiscal quarter was completed.
In light of broader macro-economic risks and already known impacts on certain industries, we have taken, and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic. We continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number of factors that are not entirely within our control and are discussed in this and other sections of this Quarterly Report on Form 10-Q.
To date, travel restrictions and border closures have not materially impacted our ability to operate. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to operate, but at present we do not expect these restrictions on personal travel to be material to our business operations or financial results.
Like most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.
Note 2. Going Concern and Management’s Plans
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2021, the Company had
incurred significant operating losses since inception and continues to generate losses from operations. As of September 30, 2021, 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 consolidated financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 6 |
Note 3. Summary of Significant Accounting Policies
Principles of consolidation
The unaudited condensed consolidated financial statements include the accounts of MGT and MGT Sweden AB. All intercompany transactions and balances have been eliminated.
Use of estimates and assumptions and critical accounting estimates and assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
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 |
| 7 |
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 executing contracts, 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 contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the 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 consolidated financial position and results from operations.
Other Revenues
The Company also recognizes a royalty participation upon the sale of certain containers manufactured by Bit5ive LLC of Miami, Florida (the “Pod5ive Containers”) under the terms of a five-year collaboration agreement entered in August 2018.
Lastly, the Company recognizes rental income paid by third parties wishing to use the Company’s facility in LaFayette, GA.
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
Income taxes
The Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and established for all the entities a minimum threshold for financial statement recognition of the benefit of tax positions and requires certain expanded disclosures. The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been made. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
| 8 |
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 nine months ended September 30, 2021 excludes shares issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the nine months ended September 30, 2020 excludes unvested restricted shares and shares issuable under convertible preferred stock.
The Company applies ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors including employee stock options under the Company’s stock plans and equity awards issued to non-employees based on estimated fair values.
ASC 718-10 requires companies to estimate the fair value of equity-based option awards on the date of grant using an option-pricing model. The fair value of the award is recognized as an expense on a straight-line basis over the requisite service periods in the Company’s consolidated statements of comprehensive loss.
Restricted stock awards are granted at the discretion of the compensation committee of the board of directors of the Company (the “Board of Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a to -month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s common stock on the grant date.
The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards require the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
| 9 |
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 September 30, 2021 the Company had a Level 3 financial instrument related to the derivative liability related to the issuance of warrants, and December 31, 2020, the Company had a Level 3 financial instrument related to the derivative liability related to the issuance of convertible notes.
Gain (Loss) on Modification/Extinguishment of Debt
In accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of the original instrument along with the recognition of a gain/loss. Additionally, under ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument along with the recognition of a gain/loss.
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 $
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 consolidated 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.
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Derivative Instruments
Derivative financial instruments are recorded in the accompanying consolidated 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 consolidated 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 consolidated statements of operations.
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.
Management’s evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.
Cryptocurrencies
Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying consolidated 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 consolidated statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated 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. 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 nine months ended September 30, 2021:
Schedule of Digital Currencies
| Digital currencies at December 31, 2020 | $ | |||
| Additions of digital currencies from mining | ||||
| Payment of digital currencies to management partners | ||||
| Realized gain on sale of digital currencies | ( | ) | ||
| Unrealized value adjustment | ||||
| Sale of digital currencies | ( | ) | ||
| Digital currencies at September 30, 2021 | $ |
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Note 4. Property, Plant, and Equipment and Other Assets
Property and equipment consisted of the following:
Schedule of Property and Equipment
| As of | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| 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:
Schedule of Other Assets
| As of | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Security deposits | $ | | $ | | ||||
| Other Assets | $ | $ | ||||||
The
Company has paid $
Note 5. Notes Payable
June 2018 Note
On
June 1, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company issued an
unsecured promissory note in the amount of $
During the year ended December 31, 2020, the Company issued shares of its common stock upon the conversion of $ in outstanding principal, reducing the outstanding principal balance to $ as of December 31, 2020.
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 $
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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, pursuant to which the Company issued a convertible promissory
note in the original principal amount of $
The
March 2021 Note will 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
On
September 30, 2021, the Company entered into an exchange agreement with the March 2021 Note lender under which the outstanding principal
balance of $
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Derivative Liabilities
The Company’s activity in its derivative liabilities was as follows for the nine months ended September 30, 2021:
Schedule of Derivative Liability Activity
| Balance of derivative liability at December 31, 2020 | $ | |||
| Issuance of Warrants | ||||
| Settlement upon conversion | ( | ) | ||
| Change in fair value of warrant liability | ( | ) | ||
| Change in fair value of derivative liability | ||||
| Balance of derivative liabilities at September 30, 2021 | $ |
The Company did not have any derivative liability activity during the nine months ended September 30, 2020.
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 derivative liabilities as of September 30, 2021:
| September 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| Derivative liability – conversion feature | $ | $ | $ | $ | ||||||||||||
| Derivative liability - warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table summarizes the Company’s derivative liabilities as of December 31, 2020:
Schedule of Derivative Liability Fair Value
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| Derivative liability - conversion feature | $ | $ | $ | $ | ||||||||||||
| Derivative liability - warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
U.S. Small Business Administration-Paycheck Protection Plan
On
April 16, 2020, the Company entered into a promissory note with Aquesta Bank for $
On
April 1, 2021, the Company received notice of forgiveness from the SBA in the amount of $
Notes payable consisted of the following:
As the remainder of the December 2020 Note was converted and the March 2021 Note was exchanged in the current quarter, there were no notes payable outstanding as of September 30, 2021.
Schedule of Notes Payable
| As of December 31, 2020 | ||||||||||||
| Principal | Discount | Net | ||||||||||
| Total notes payable-December 2020 Note | $ | $ | ( | ) | $ | |||||||
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During
the three months ended September 30, 2021 and 2020, the Company recorded accretion of debt discount of $
During
the nine months ended September 30, 2021 and 2020, the Company recorded accretion of debt discount of $
Note 6. 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 $
Total future minimum payments required under the lease agreement are as follows:
Schedule of Future Minimum Lease Payment
| Amount | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| Total undiscounted minimum future lease payments | $ | |||
| Less Imputed interest | ( | ) | ||
| Present value of operating lease liabilities | $ | |||
| Disclosed as: | ||||
| Current portion | $ | |||
| Non-current portion | ||||
| Total lease payment | $ | |||
The
Company recorded rent expense of $
At
September 30, 2021, the weighted average remaining lease term for operating lease was
Note 7. Common Stock and Preferred Stock
Common stock
Common Stock Issuances
In connection with the conversion of shares of Series C Preferred Stock during the nine months ended September 30, 2021 (see Preferred Stock below) the Company issued shares of common stock.
In
connection with the conversions of $
On
July 21, 2021, as part of a corporate fundraising of $
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 $
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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”).
Each
Series C Preferred Share is convertible into shares of the Company’s common stock in an amount equal to the greater of: (a)
shares of common stock or (b)
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 $
On January 28, 2021 and February 18, 2021, the Company issued and shares of the Company’s common stock, respectively, in connection with the conversion of and shares of the Company’s Series C Convertible Preferred Stock. Following these conversions, the Company has no Series C Preferred issued or outstanding.
Issuance of restricted common stock – directors, officers and employees
The Company’s activity in restricted common stock was as follows for the nine months ended September 30, 2021:
Schedule of Restricted Common Stock Activity
| Number of shares | Weighted average grant date fair value | |||||||
| Non–vested at December 31, 2020 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Non–vested at September 30, 2021 | $ | |||||||
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For the three months ended September 30, 2021 and 2020, the Company has recorded $ and $, in employee and director stock–based compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations.
For the nine months ended September 30, 2021 and 2020, the Company has recorded $ and $, in employee and director stock–based compensation expense, which is a component of general and administrative expenses in the consolidated statement of operations.
As of September 30, 2021, there were no unamortized stock-based compensation costs related to restricted share arrangements.
Stock options
Under the terms of the stock option agreement, all options expired on . As of September 30, 2021, there are no outstanding or exercisable stock options.
Note 9. 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 $
The following table summarized the warrant activity for the nine months ended September 30, 2021:
Schedule of Warrant Activity
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Warrants | Shares | Price | Term | Value | ||||||||||||
| Balance Outstanding, December 31, 2020 | $ | $ | - | |||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Exercised | ||||||||||||||||
| Expired | ||||||||||||||||
| Balance Outstanding, September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2021 | $ | $ | ||||||||||||||
Warrant derivative liability
The exercise price and number of warrant shares issuable upon exercise of these warrants are subject to adjustment from time to time as set forth in the warrant agreements. The Company evaluated the terms and conditions of the warrant agreements and pursuant to ASC 815-15 Embedded Derivatives, were recorded as derivative liabilities on the issuance date and revalued at each reporting period.
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.
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The fair value of the derivative conversion features and warrant liabilities as of September 30, 2021 were calculated using the Black and Scholes method with the following assumptions:
Schedule of Fair Value of the Derivative Conversion Features and Warrant Liabilities
| September 30, 2021 | ||||
| Dividend yield | % | |||
| Expected volatility | % | |||
| Risk free interest rate | % | |||
| Contractual terms (in years) | ||||
| Conversion/Exercise price | $ | |||
The table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2021:
Schedule of Fair Value, Liabilities Measured on Unobservable Input Reconciliation
| Amount | ||||
| Balance on December 31, 2020 | $ | |||
| Issuances | ||||
| Change in fair value of warrant liabilities | ( | ) | ||
| Balance on September 30, 2021 | $ | |||
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 April 15, 2021.
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 and nine months ended September 30, 2021, the Company
received royalties and recorded revenues of $
Electricity Contract
In June 2019, the Company entered into a two-year contract for electric power with the City of Lafayette, Georgia, a municipal corporation of the State of Georgia (“the City”). The Company makes monthly payments based upon electricity consumed, at a negotiated kilowatt per hour rate, inclusive of transmission charges and exclusive of state and local sales taxes. The Company is entitled to utilize a load of 10 megawatts. For each month, the Company estimates its expected electric load, and should the actual load drop below 90% of this estimate, the City reserves the right to impose a modest penalty to the hourly kilowatt rate for electricity consumed.
In
connection with this agreement, the Company paid a $
This agreement expired on September 30, 2021, and the Company and City are operating on a month-to-month extension basis pending a new contract. There can be no assurance that that the Company and City will reach a new agreement with acceptable price and volume metrics, if at all.
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Management Agreement Termination Liability
On
August 31, 2019, the Company entered into two Settlement and Termination Agreements (the “Settlement Agreements”) to management
agreements it entered in 2017 with two accredited investors (together the “Users”). Under the terms of the Settlement Agreements,
the Company paid the Users a percentage of profits (“Settlement Distribution”) of Bitcoin mining as defined in the Settlement
Agreements. The estimated present value of the Settlement Distributions of $
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
November 4, 2021, the Company issued shares of common stock to satisfy a partial cashless exercise of the 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
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, 2020 as filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021, 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”) was incorporated in Delaware in 2000. MGT was originally incorporated in Utah in 1977. MGT is comprised of the parent company and its wholly owned subsidiary MGT Sweden AB. 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.
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Current Operations
As of September 30, 2021 and November 11, 2021, the Company owned 530 and 480 Antminer S17 Pro Bitcoin miners, respectively, all located at its LaFayette, Georgia facility. As more fully described in the following paragraph, over three-quarters of these miners require various repairs to be productive. We purchased a total of 1,500 S17 Pro Bitcoin miners in the latter part of 2019 for an aggregate purchase price of approximately $2,768, which was paid in full. All miners were purchased directly from Bitmaintech Pte. Ltd., a Singapore limited company (“Bitmain”), with each capable of a hash rate of approximately 50 terahashes per second in computing power. From May 2020 through November 11, 2021, the Company sold a total of 923 of these miners, receiving aggregate gross proceeds of approximately $869, and has scrapped 103 miners due to burning or other events that reduced their value to zero.
During 2020, the Company began to suffer component issues, such as heat sinks detaching from hash boards, and failures of both power supplies and hash board temperature sensors. Although Bitmain has acknowledged manufacturing defects in various production runs of S17 Bitcoin miners, the Company was unsuccessful in obtaining any compensation from Bitmain. The manufacturing defects, combined with inadequate repair facilities has rendered approximately 400 of our remaining 480 miners in need of repair or replacement. The Company is using a third-party repair facility to repair its non-working hash boards and expects the process to be complete before yearend 2021. As of November 11, 2021, 300 of these bad hash boards (enough to power 100 miners) have been successfully repaired and approximately 200 more hash boards remain unused at our facility pending repair, replacement or sale as management may determine. In addition, a former vendor has yet to return an additional 200 hash boards entrusted to it for repair, and the Company has commenced litigation. It is not possible at the present time to estimate the total cost of repair or the overall success rate of repairs of defective hash boards. To date, we have incurred approximately $140 in costs of repairing or replacing the defective machines, and an estimated $1,200 in lost revenue.
MGT’s miners are housed in two modified shipping containers on property owned by the Company adjacent to an electrical substation. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, the 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 has also begun preliminary negotiations to acquire a second site approximately five miles from LaFayette, although there can be no assurance that the parties will reach an acceptable agreement.
In addition to its self-mining operations, the Company is leasing its owned space to other Bitcoin miners. These improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The notes to the unaudited condensed consolidated financial statements contained in this Quarterly Report describe our significant accounting policies used in the preparation of the unaudited condensed consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our unaudited condensed consolidated financial statements.
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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 executing contracts, 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 contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
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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 consolidated financial position and results from operations.
Other Revenues
The Company also recognizes a royalty participation upon the sale of certain containers manufactured by Bit5ive LLC of Miami, Florida (the “Pod5ive Containers”) under the terms of a five-year collaboration agreement entered in August 2018.
Lastly, the Company recognizes rental income paid by third parties wishing to use the Company’s facility in LaFayette, GA.
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 consolidated 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 consolidated 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 consolidated 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 consolidated statements of operations.
Stock–based compensation
The Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
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Restricted stock awards are granted at the discretion of the compensation committee of the board of directors of the Company (the “Board of Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a 12 to 24-month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s common stock on the grant date.
The fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.
The Company accounts for share–based payments granted to non–employees in accordance with ASC 718-10, “Share-Based Payment,” which requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors including employee stock options under the Company’s stock plans and equity awards issued to non-employees based on estimated fair values.
ASC 718-10 requires companies to estimate the fair value of equity-based option awards on the date of grant using an option-pricing model. The fair value of the award is recognized as an expense on a straight-line basis over the requisite service periods in the Company’s consolidated statements of comprehensive loss.
Recent accounting pronouncements
See Note 3 to our unaudited condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report for Recent Accounting Pronouncements.
Results of operations
Three months ended September 30, 2021 and 2020
Revenues
Our revenues for the three months September 30, 2021 increased by $91, or 60%, to $244, as compared to $153 for the three months ended September 30, 2020. Our revenue is derived from cryptocurrency mining, including leasing excess capacity to third parties, and royalties on sales of Pod5ive Containers. The increase in revenues this period is due to an increase in hosting agreement revenue of $69 and an increase in royalties in the amount of $66.
Operating Expenses
Operating expenses for the three months ended September 30, 2021 decreased by $152, or 21%, to $577, as compared to $729 for the three months ended September 30, 2020. The decrease in operating expenses was primarily due to decreases in general and administrative expenses of $77 and cost of revenue of $75.
The decrease in general and administrative expenses of $77 or 20%, to $313, as compared to $390 for the three months ended September 30, 2020, was primarily due to a decrease in salary expense of $36, and a decrease in legal and professional fees of $39. The decrease in cost of revenue of $75 or 22% to $264, as compared to $339 of the three months ended September 30, 2020 was primarily due to the reimbursement of electricity costs of $77.
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Other Income and Expense
For the three months ended September 30, 2021, non–operating expense of $41 consisted primarily of accretion of debt discount of $256, loss on settlement of debt of $511, other expense of $306, change in fair value of derivative liability of $46 and interest expense of $302, partially offset by change in fair value of warrants derivative liability of $451, gain on settlement of payables of $675 and a gain on sale of property and equipment of $254. During the comparable period ended September 30, 2020, non–operating expense of $16 consisted of loss on sale of property and equipment of $123, a loss from the change in the fair value of the liability associated with the termination of the management agreements of $12 offset by other income of $119.
Nine months ended September 30, 2021 and 2020
Revenues
Our revenues for the nine months ended September 30, 2021 decreased by $509 to $781 as compared to $1,290 for the nine months ended September 30, 2020. The decrease in revenues is a result of a lower number of Bitcoins mined resulting from fewer miners in operation and a higher network difficulty rate; the decrease was partially offset by increased Bitcoin prices and by increases in revenue from hosting activities and royalties.
Operating Expenses
Operating expenses for the nine months ended September 30, 2021 decreased by $1,521, or 43%, to $1,998 as compared to $3,519 for the nine months ended September 30, 2020. The decrease in operating expenses was due to decreases in general and administrative expenses of $796 and cost of revenue of $725.
The decrease in general and administrative expenses of $796 or 39% to $1,247 as compared to $2,043 for the nine months ended September 30, 2020, was primarily due to decreases in legal and professional fees of $424 and decrease in salary expense of $349, and costs related to the Company’s mining facility in Georgia of $192. The decrease in cost of revenue of $725, or 49%, to $751, as compared to $1,476 for the nine months ended September 30, 2020 is due primarily to lower electricity usage of $288 from fewer bitcoin miners in operation, reduced depreciation of $355 and the reimbursement of electricity costs of $77.
Other Income and Expense
For the nine months ended September 30, 2021, non–operating expenses of $403 consisted primarily of loss on settlement of debt of $541, other expense of $306, accretion of debt discount of $526, change in fair value of derivative of $79, and interest expense of $341, partially offset by gain on settlement of payables of $675, a gain on sale of property and equipment of $264, and change of fair value of warrants liability of $451. During the comparable period ended September 30, 2020, non–operating expense of $1,103 was comprised of accretion of debt discount of $877, a loss on sale of property and equipment of $381, partially offset by other income of $119, a gain from the change in the fair value of the liability associated with the termination of the management agreements of $26 and interest income of $10.
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 September 30, 2021 have an accumulated deficit of $420,009. At September 30, 2021, our cash and cash equivalents were $1,257, and our working capital deficit was $824.
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 consolidated financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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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. The low and high exchange price per Bitcoin for the year ending December 31, 2020, as reported by Blockchain.info, were approximately $5 and $29 respectively. During the period January 1, 2021 through September 30, 2021, the price of Bitcoin remained very volatile, with a low and high exchange price per Bitcoin of approximately $29 and $63, respectively.
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 third Halving occurred on May 11, 2020, with a revised reward payout of 6.25 Bitcoin per block, down from the previous reward payout of 12.5 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 represents a fluid situation that presents a wide range of potential impacts of varying durations for different global geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.
Like most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020. By that time, much of our first fiscal quarter was completed.
In light of broader macro-economic risks and already known impacts on certain industries, we have taken, and continue to take targeted steps to lower our operating expenses because of the COVID-19 pandemic. We continue to monitor the impacts of COVID-19 on our operations closely and this situation could change based on a significant number of factors that are not entirely within our control and are discussed in this and other sections of this quarterly report on Form 10-Q.
To date, travel restrictions and border closures have not materially impacted our ability to operate. However, if such restrictions become more severe, they could negatively impact those activities in a way that would harm our business over the long term. Travel restrictions impacting people can restrain our ability to operate, but at present we do not expect these restrictions on personal travel to be material to our business operations or financial results.
Like most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and guidelines as well as best practices to protect the health and well-being of our employees. However, the impacts of COVID-19 and efforts to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.
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U.S. Small Business Administration-Paycheck Protection Plan
On April 16, 2020, we entered into a promissory note (the “PPP Loan”) with Aquesta Bank for $108 in connection with the Paycheck Protection Program (“PPP”) offered by the U.S. Small Business Administration (the “SBA”). The PPP Loan had terms including an interest rate of 1% per annum, with monthly installments of $6 commencing on November 1, 2021 through its maturity on April 1, 2023. The principal amount of the PPP Loan is forgiven if the loan proceeds are used to pay for payroll costs, rent and utilities costs over the 24-week period after the loan is made. Not more than 40% of the forgiven amount may be used for non-payroll costs. In addition, in July 2020, the Company received $3 from the SBA as a COVID-19 Economic Injury Disaster Loan Advance (the “EIDL Advance”)
On April 1, 2021, the Company received notice of forgiveness from the SBA in the amount of $108 in relation to the PPP Loan as the Company used all proceeds from the PPP Loan to maintain payroll and other allowable expenses. Further, pursuant to an SBA Procedural Notice in December 2020, the EIDL Advance was also forgiven. The Company has concluded that the PPP Loan and EIDL Advance represent, in substance, a government grant that is forgiven in its entirety. As such, in accordance with International Accounting Standards (“IAS”) 20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company has recognized the entire PPP Loan and EIDL Advance amount of $111 as grant income, which is included in other non-operating income (expense) in the consolidated statement of operations for the year ended December 31, 2020.
Cash Flows
| Nine Months ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash provided by / (used in) | ||||||||
| Operating activities | $ | (1,354 | ) | $ | (381 | ) | ||
| Investing activities | 385 | 60 | ||||||
| Financing activities | 1,990 | 111 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 1,021 | $ | (210 | ) | |||
Operating activities
Net cash used in operating activities was $1,354 for the nine months ended September 30, 2021 as compared to net cash used in operating activities of $381 for the nine months ended September 30, 2020. Cash used in operating activities for the nine months ended September 30, 2021 primarily consisted of a net loss of $1,620, offset by non-cash charges of $880 which includes depreciation of $548, accretion of debt discount of $526, loss on settlement of debt of $541, non-operating expenses of $306, non-cash interest expense of $270, offset by the change in fair value of derivative liability of $372, gain on settlement of payables of $675 and a gain from sale of property and equipment of $264, and cash used in working capital of $614.
Net cash used in operating activities of $381 for the nine months ended September 30, 2020 primarily consisted of a net loss of $3,332, offset by non-cash charges of $2,385 which includes depreciation of $902, stock-based compensation of $222, accretion of debt discount of $877, a loss from sale of property and equipment of $410, offset by the change in the fair value of the liability associated with the termination of the management agreements of $26, and cash provided by a change in working capital of $566.
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Investing activities
Net cash provided by investing activities was $385 for the nine months ended September 30, 2021 which consisted of proceeds from the sale of property and equipment of $426, offset by purchases of $41.
Net cash provided by investing activities was $60 for the nine months ended September 30, 2020, consisting of proceeds from the sale of property and equipment of $439 and refund of a security deposit of $34, offset by purchases of property and equipment of $375 and payment of a security deposit of $38.
Financing activities
During the nine months ended September 30, 2021, cash provided by financing activities totaled $1,990 from proceeds of the issuance of a convertible promissory note, common stock and warrants.
During the nine months ended September 30, 2020, cash provided by financing activities totaled $111 from proceeds of the PPP loan.
Off–balance sheet arrangements
As of September 30, 2021, 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) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021. 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 September 30, 2021 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.
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.
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Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive 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 September 30, 2021.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2021, 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 April 15, 2021.
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 April 15, 2021.
Item 2. Unregistered sales of equity securities and use of proceeds
On July 21, 2021, the Company entered into a securities purchase agreement with Streeterville Capital, LLC, pursuant to which the Company (i) sold 35,385,704 shares of common stock, and (ii) issued a warrant to purchase 35,385,704 shares of common stock for consideration of $1,000, less $10 for the investor’s legal, due diligence and other transactional expenses.
On July 27, 2021, the Company issued 6,673,384 shares of common stock, to Bucktown Capital, LLC, in connection with the conversion of $121 in principal amount under that certain Convertible Promissory Note, dated December 8, 2020 in the original principal amount of $230. Following this conversion, the outstanding principal balance of the note is zero.
In issuing the securities described above, the Company relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.
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On September 30, 2021, the Company entered into an exchange agreement with Bucktown Capital, LLC, pursuant to which it exchanged its Convertible Promissory Note, dated March 5, 2021 in the original principal amount of $13,210 for a warrant to purchase 53,500,000 shares of common stock.
The issuance of these securities is being made in reliance upon an exemption from registration provided under 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.
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 | XBRL Instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema* | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File* | |
| * | Filed herewith | |
| ** | The schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of such schedules and exhibits, or any section thereof, to the SEC upon request. |
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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: November 12, 2021 | 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) | ||
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