UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to ______________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Shares registered pursuant to section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).
Yes
☐
As of May 15, 2023, there were shares of the registrant’s Common stock, $0.001 par value per share, issued and outstanding.
MGT CAPITAL INVESTMENTS, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2023
TABLE OF CONTENTS
| i |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MGT CAPITAL INVESTMENTS, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per-share amounts)
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Intangible digital assets | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Non-current assets | ||||||||
| Property and equipment, at cost, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other payables | ||||||||
| Contract liability | ||||||||
| Note payable | ||||||||
| Convertible note payable, net of discount | ||||||||
| Warrant derivative liability | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Security deposits | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies (Note 9) | ||||||||
| Stockholders’ Deficit | ||||||||
| Undesignated preferred stock, $ par value, shares authorized. shares issued and outstanding at March 31, 2023 and December 31, 2022. | ||||||||
| Series B preferred stock, $ par value, shares authorized. shares issued or outstanding at March 31, 2023 and December 31, 2022. | ||||||||
| Series C convertible preferred stock, $ par value, share authorized. and shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
| 1 |
MGT CAPITAL INVESTMENTS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per-share amounts)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | ||||||||
| Bitcoin mining | $ | $ | ||||||
| Hosting services | ||||||||
| Total revenue | ||||||||
| Operating expenses | ||||||||
| Cost of revenue | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other non-operating income (expense) | ||||||||
| Interest expense | ( | ) | ||||||
| Interest income | ||||||||
| Change in fair value of warrant derivative liability | ( | ) | ( | ) | ||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Loss on settlement of derivative | ( | ) | ( | ) | ||||
| Accretion of debt discount | ( | ) | ||||||
| Gain on exchange of property and equipment | ||||||||
| Total non-operating expense | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
| Deemed dividend | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Per-share data | ||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of common shares outstanding | ||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
| 2 |
MGT CAPITAL INVESTMENTS, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
(Dollars in thousands, except per-share amounts)
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ (Deficit) | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Cashless exercise of warrants and extinguishment of related warrant derivative liability | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at March 31, 2023 (unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Cashless exercise of warrants and extinguishment of related warrant derivative liability | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance at March 31, 2022 (unaudited) | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
| 3 |
MGT CAPITAL INVESTMENTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per-share amounts)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation | ||||||||
| Gain on exchange of property and equipment | ( | ) | ||||||
| Change in fair value of liability | ||||||||
| Loss on settlement of derivative | ||||||||
| Change in fair value of warrant derivative liability | ||||||||
| Accretion of debt discount | ||||||||
| Change in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Intangible digital assets | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Operating lease liability | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Contract liability | ( | ) | ||||||
| Security deposits | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Repayment of notes payable | ( | ) | ||||||
| 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 | ||||||||
| Cashless exercise of warrants and extinguishment of related warrant derivative liability | $ | $ | ||||||
Exchange of property and equipment | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
| 4 |
MGT CAPITAL INVESTMENTS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per–share amounts)
Note 1. Organization and Basis of Presentation
Organization
MGT Capital Investments, Inc. (“MGT” or the “Company”) is a Delaware corporation incorporated in 2000. MGT was originally incorporated in Utah in 1977. MGT’s corporate office is in LaFayette, Georgia.
Current Operations
Cryptocurrency mining
MGT conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility in LaFayette, Georgia. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts (MW) of electrical power, half of which is presently utilized by the Company. Business activities are comprised of self-mining operations and leasing space to third parties.
As of March 31, 2023 and May 15, 2023, the Company owned 35 Antminer S19 Pro miners. Due to unfavorable mining economics and various required repairs, all S17 miners were non-operational at December 31, 2022, and were exchanged along with loose hash boards, power supplies, and controller boards for the more efficient S19 miners in the first quarter of 2023.
MGT’s miners are housed in a modified shipping container on the Company’s owned property in Georgia. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition to expansion at its current property.
Leasing operations
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
Basis of presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10–Q and Rule 8 of Regulation S–X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. However, in the opinion of the management of the Company, all adjustments necessary for a fair presentation of the financial position and operating results have been included in these statements. These unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2022, as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023. Operating results for the three months ended March 31, 2023 and 2022 are not necessarily indicative of the results that may be expected for any subsequent quarters or for the year ending December 31, 2023.
COVID-19 Pandemic
While COVID-19 still occurs in the United States, it has essentially receded as a serious threat to our economy. The extent to which COVID-19 impacts our operations or our ability to obtain financing will depend on future developments which are uncertain and cannot be predicted.
Inflation
Electricity and other prices are vulnerable to inflation which may increase the Company’s mining costs and operating expenses including the cost of new state-of-the-art miners.
Note 2. Going Concern and Management’s Plans
The
accompanying unaudited condensed financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2023, the Company had incurred significant
operating losses since inception and continues to generate losses from operations. As of March 31, 2023, 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 as and when needed, or at terms deemed acceptable, if at all. The Company’s ability to raise additional capital is impacted by, among other things, the volatility of Bitcoin mining economics, inflation and high interest rates, the banking crisis, the war in Ukraine, the market for Bitcoin, regulatory developments with respect to cryptocurrencies generally, and the SEC’s ongoing enforcement action against our Chief Executive Officer, each of which are highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and financial condition.
| 5 |
Since January 2022, the Company has secured working capital through the issuance of a convertible note, the sale of equity and warrants, and the sale of assets.
Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance of these unaudited condensed financial statements. The accompanying unaudited condensed financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3. Summary of Significant Accounting Policies
Use of estimates and assumptions and critical accounting estimates and assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, determining the potential impairment of long-lived assets, the fair value of warrants issued, the fair value of conversion features, and the valuation allowance for deferred tax assets. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
Cash and cash equivalents
The
Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
The Company’s combined accounts were $
Cryptocurrencies
Cryptocurrencies, (including Bitcoin and Bitcoin Cash) are included in current assets in the accompanying balance sheets. Any cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company’s revenue recognition policy disclosed in this note.
Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured.
In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
Any purchases of cryptocurrencies by the Company are included within investing activities in the accompanying statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
| 6 |
The following table presents the activities of digital currencies for the periods ended March 31, 2023 and December 31, 2022:
| Digital currencies at January 1, 2022 | $ | |||
| Additions of digital currencies from mining | ||||
| Realized gain on sale of digital currencies | ( | ) | ||
| Sale of digital currencies | ( | ) | ||
| Digital currencies at December 31, 2022 | ||||
| Additions of digital currencies from mining | ||||
| Realized loss on sale of digital currencies | ||||
| Sale of digital currencies | ( | ) | ||
| Digital currencies at March 31, 2023 | $ |
Leases
The Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. Variable lease expenses, if any, are recorded when incurred.
Derivative Instruments
Derivative financial instruments are recorded in the accompanying balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company’s statements of operations.
| 7 |
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.
Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly as the company reviews financial information. The Company currently operates in the Digital Currency Blockchain segment with our mining facility located in the United States. The Company also provides hosting services which are also located in the United States. The Company has employees only in the United States and views its operations as one operating segment as management reviews financial information on a consolidated basis in making decisions regarding resource allocations and assessing performance.
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 |
| 8 |
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as may be 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 to the mining pool, 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 35 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 such computing power is the only performance obligation in the Company’s agreements with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration in the form of digital assets, 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 therefore variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s financial position and results from operations.
Hosting Revenues
We
receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized
$
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.
| 9 |
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 convertible debt and warrants, are not reflected in diluted net loss per share because such potential shares are anti–dilutive due to the Company’s net loss.
Accordingly, the computation of diluted loss per share for the three months ended March 31, 2023 excludes shares issuable upon the exercise of outstanding warrants and shares issuable upon the conversion of outstanding convertible debt. The computation of diluted loss per share for the three months ended March 31, 2022 excludes shares issuable upon the exercise of outstanding warrants.
Fair Value Measure and Disclosures
ASC 820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
| ● | Level 1 Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. | |
| ● | Level 3 Significant unobservable inputs that cannot be corroborated by market data. |
As of March 31, 2023 and December 31, 2022, the Company had Level 3 financial instruments related to derivative liabilities related to the issuance of warrants and convertible debt.
Management’s evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 11 – Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements.
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements, other than those disclosed below.
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements.
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.
| 10 |
Note 4. Property, Plant, and Equipment and Other Assets
Property and equipment consisted of the following:
| As of | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Land | $ | $ | ||||||
| Computer hardware and software | ||||||||
| Bitcoin mining machines | ||||||||
| Infrastructure | ||||||||
| Containers | ||||||||
| Property and equipment, gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
The
Company recorded depreciation expense of $
Other Assets consisted of the following:
| As of | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Security deposits | $ | $ | | |||||
| Other Assets | $ | $ | ||||||
The
Company paid $
Note 5. Notes Payable
September 2022 Note
On
September 12, 2022, the Company entered into a securities purchase agreement, pursuant to which the Company borrowed $
At
inception the Company recorded a debt discount of $
| 11 |
Additionally,
the Company issued to the lender three series of warrants (collectively, the “Warrants”). Each of the Series of Warrants
is exercisable into
| ● | ||
| ● | ||
| ● |
In addition to the warrants described above, the Company has previous warrants outstanding whereby it cannot conclude that it has enough authorized and unissued shares to satisfy the settlement requirements for those already outstanding warrants. As a result, the equity environment would be considered tainted, and the conversion feature and the attached warrants are treated as derivative liabilities.
Derivative Liabilities
The Company valued the derivative liability relating to the embedded conversion feature using the Monte Carlo Simulation Method because of the unknown stock price at the future time of conversion. The Monte Carlo Simulation was calculated using the following assumptions:
| March 31, 2023 | December 31, 2022 | |||||||
| Stock price | $ | $ | ||||||
| Term (years) | ||||||||
| Annual volatility | % | % | ||||||
| Annual expected return | % | % | ||||||
| Discount rate | % | % | ||||||
| Dividend yield | % | % | ||||||
The Company’s activity in its convertible debt related derivative liability was as follows for the three months ended March 31, 2023:
| Balance of derivative liability at January 1, 2022 | $ | |||
| Transfer in due to issuance of warrants with embedded conversion features | ||||
| Change in fair value of derivative liability | ( | ) | ||
| Balance of derivative liability at December 31, 2022 | ||||
| Change in fair value of derivative liability | ||||
| Balance of derivative liability at March 31, 2023 | $ |
As
of March 31, 2023, the fair value of the derivative liability was $
Warrant Derivative Liabilities
As
of March 31, 2023, the fair value of the warrant derivative liabilities was $
| 12 |
As
of December 31, 2022, the fair value of the warrant derivative liabilities was $
The Company’s activity in its warrant derivative liabilities was as follows for the three months ended March 31, 2023:
| Balance of warrant derivative liability at January 1, 2022 | $ | |||
| Transfer in due to issuance of warrants with embedded conversion features | ||||
| Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions | ( | ) | ||
| Change in fair value of warrant derivative liability | ( | ) | ||
| Balance of derivative liability at December 31, 2022 | ||||
| Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions | ( | ) | ||
| Change in fair value of warrant liability | ||||
| Balance of warrant derivative liabilities at March 31, 2023 | $ |
The
Company recorded loss on settlement of derivative liability in the amount of $
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.
| March 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liability | $ | $ | $ | $ | ||||||||||||
| Warrant derivative liability | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liability | $ | $ | $ | $ | ||||||||||||
| Warrant derivative liability | $ | $ | $ | $ | ||||||||||||
| 13 |
Note 6. Loans Payable
As
part of a payment to the City of LaFayette, the bank erroneously created a note payable in the amount of $
Note 7. Leases
In
December 2019, the Company entered a new office lease in connection with the relocation of its executive office to Raleigh, North Carolina.
The Company accounted for its new office lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease
is $
On
November 1, 2021, the Company entered into a lease agreement to lease a contiguous portion of land to its existing property, as a planting
area for trees intended to mitigate noise from the Company’s cryptocurrency mining operations.
The
Company recorded rent expense of $
Note 8. Common Stock and Preferred Stock
Common stock
Common Stock Issuances
On
August 5, 2022, the Company issued shares of common stock and
During the year ended December 31, 2022, warrants with an embedded conversion feature were exercised on a cashless basis for the issuance of shares of common stock.
During the three months ended March 31, 2023, warrants with an embedded conversion feature were exercised on a cashless basis for the issuance of shares of common stock.
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 $
| 14 |
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 was convertible into shares of the Company’s common stock on a variable rate basis. During 2019 and 2020, 190 Series C Preferred Shares were issued and subsequently converted into Common Shares. No shares of Series C Preferred Shares are currently issued and outstanding.
Each
Series C Preferred Share is convertible into shares of the Company’s common stock in an amount equal to the greater of:
Warrants
On
August 5, 2022, the Company sold shares of common stock and issued three warrants, each to purchase shares of common
stock for consideration of $
During
the year ended December 31, 2022, warrants were exercised on a cashless basis for the issuance of shares of common
stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $
During
the three months ended March 31, 2023, warrants were exercised on a cashless basis for the issuance of shares of
common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $
The following table summarizes information about shares issuable under warrants outstanding during the three months ended March 31, 2023:
| Warrant shares outstanding | Weighted price | Weighted average remaining life | Intrinsic value | |||||||||||||
| Outstanding at January 1, 2022 | $ | |||||||||||||||
| Issued | - | |||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Expired or cancelled | - | - | ||||||||||||||
| Outstanding and exercisable at December 31, 2022 | ||||||||||||||||
| Issued | - | |||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Expired or cancelled | - | - | ||||||||||||||
| Outstanding and exercisable at March 31, 2023 | $ | $ | ||||||||||||||
(*)
Of the and
shares issued during the three months ended March 31, 2023 and the year ended December 31, 2022, respectively and
and shares outstanding and exercisable at March 31, 2023 and December 31, 2022, respectively, the weighted average
exercise price and weighted average remaining life was not included for
| 15 |
Note 9. Commitments and Contingencies
On
March 16, 2023 the Company entered into a partnership agreement (the “Partnership Agreement”) and a property lease
agreement (the “Lease Agreement, and together with the Partnership Agreement, collectively, the “Agreement”) with
another cryptocurrency mining company (“Tenant”). Pursuant to the Lease Agreement, the Company agreed to lease to Tenant
portions of the Company’s six acre mining facility in Lafayette, GA in increments of up to 10 spaces that are 40 feet in
length and eight feet in height each (“Spaces”), together with related utilities access including electricity of up to
one megawatt (“MW”) per Space, for deploying mining equipment, in exchange for rental payments of $
Legal proceedings
From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K, as filed with the SEC on March 31, 2023.
Electricity Contract
MGT’s prior electricity agreement with the City of LaFayette expired on September 30, 2021. The Company and City of LaFayette are currently operating on a month-to-month basis without a contract.
Note 10. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified
employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of
up to
Note 11. Subsequent Events
On April 27, 2023, the Company issued shares of common stock to Minerset Farms in accordance with the terms of its previously disclosed Partnership Agreement.
| 16 |
Item 2. Management’s discussion and analysis of financial condition and results of operations
This Quarterly Report on Form 10–Q (this “Report”) 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, 2022 as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2023, 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
All dollar figures set forth in this Quarterly Report on Form 10-Q are in thousands, except per-share amounts.
Current Operations
MGT conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility in LaFayette, Georgia. Located adjacent to a utility substation, the several-acre property has access to about 20 megawatts (MW) of electrical power, half of which is presently utilized by the Company. Business activities are comprised of self-mining operations and leasing space to third parties.
As of March 31, 2023 and May 15, 2023, the Company owned 35 Antminer S19 Pro miners. Due to unfavorable mining economics and various required repairs, the Company’s prior Antminer S17 miners were non-operational at December 31, 2022, and the Company exchanged such prior miners along with loose hash boards, power supplies, and controller boards for the more efficient S19 miners in the first quarter of 2023.
MGT’s miners are housed in a modified shipping container on the Company’s owned property in Georgia. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore ways to maintain and grow our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition to expansion at its current property.
In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services for owners of cryptocurrency mining equipment. Management believes that these measures improve utilization of the electrical infrastructure and better insulate the Company against the volatility of Bitcoin mining.
| 17 |
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The notes to the unaudited condensed financial statements contained in this Quarterly Report describe our significant accounting policies used in the preparation of the unaudited condensed financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our unaudited condensed financial statements.
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.
| 18 |
The Company has entered into digital asset mining pools by agreeing to terms and conditions, as may be 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 to the mining pool, 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 35 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 such computing power is the only performance obligation in the Company’s agreements with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration in the form of digital assets, 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 therefore variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s financial position and results from operations.
Hosting Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized $86 and $192 from these sources during the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023 and 2022, two customers accounted for 100% and 91%, respectively, of hosting revenue.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight–line method on the various asset classes over their estimated useful lives, which range from one to ten years when placed in service. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. Deposits on property and equipment are initially classified as Other Assets and upon delivery, installation and full payment, the assets are classified as property and equipment on the balance sheet.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset may not be recoverable, should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.
| 19 |
Derivative Instruments
Derivative financial instruments are recorded in the accompanying balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company’s statements of operations.
Recent accounting pronouncements
See Note 3 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Report for Recent Accounting Pronouncements.
Results of operations
Three months ended March 31, 2023 and 2022
Revenues
Our revenues for the three months March 31, 2023 decreased by $148, or 58%, to $107, as compared to $255 for the three months ended March 31, 2022. Our revenue is derived from cryptocurrency mining, which totaled $21 for the three months ended March 31, 2023 and $63 during the three months ended March 31, 2022. The decrease in revenues from our hosting and renting activities for this period is due to a decrease in miners from the previous year.
We also receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized $86 and $192 during the months ended March 31, 2023 and 2022, respectively. The decrease in revenues for this period is due to a decrease in hosting customers from the previous year.
Because our revenue is dependent upon mining and related activities with respect to Bitcoin, and the price and market for Bitcoin and other cryptocurrencies remain volatile and uncertain due to numerous factors including the lack of widespread acceptance of Bitcoin, regulatory actions that have or may be implemented or considered with respect thereto, and general economic conditions including the potential for a recession in the near term, management cannot predict, estimate or advise with certainty the revenue trends that the Company may experience in its current or any future operations following the periods covered in this Report.
Operating Expenses
Operating expenses for the three months ended March 31, 2023 decreased by $333, or 35%, to $617, as compared to $950 for the three months ended March 31, 2022. The decrease in operating expenses was primarily due to a decrease in cost of revenue of $412, partially offset by an increase in general and administrative expenses of $79.
The decrease in cost of revenue of $412 or 75% to $134 for the three months ended March 31, 2023, as compared to $546 for the three months ended March 31, 2022 was primarily due to decreased electricity costs. The increase in general and administrative expenses of $79 or 20%, to $483 for the three months ended March 31, 2023, as compared to $404 for the three months ended March 31, 2022, was primarily due to an increase in legal and professional fees of $95, increase in consulting services of $12, offset by a decrease in Georgia costs of $11.
| 20 |
Other Income and Expense
For the three months ended March 31, 2023, non–operating expense of $3,288 consisted primarily of loss on the change in fair value of warrant derivative liabilities of $1,696, loss on the change in fair value of derivative liability of $1,347, accretion of debt discount of $123, loss on settlement of derivative of $169 and interest expense of $23, partially offset by non-operating income of gain on the sale of property and equipment of $70. During the comparable period ended March 31, 2022, non–operating expense of $823 consisted of loss on settlement of derivative of $417 and change in fair value of warrants derivative liability of $407, partially offset by interest income of $1.
Liquidity and capital resources
Sources of Liquidity
We have historically financed our business through the sale of debt and equity interests.
In September 2022, we raised $1,335 from the sale of a $1,500 Original Issue Discount Secured Convertible Promissory Note (the “Note”). The Note: (i) is convertible into 30% of the Company’s outstanding shares of the Company’s common stock on the conversion date of the Note on a post-conversion basis, (ii) matures December 31, 2023 and (iii) bears an interest rate of 6% per annum. In addition, the Company issued to the investor three series of warrants of which each of the warrants is exercisable into 60% of the Conversion Shares. In August 2022, the Company also issued to one investor 22,800,000 shares of common stock and 22,800,000 warrants to purchase common stock for consideration of $228. The Note provides for customary events of default, the occurrence of which would result in 110% the principal and other accrued amounts outstanding under the September 2022 Note to become immediately due and payable, with the interest rate increasing to 12%.
On March 16, 2023 the Company entered into a partnership agreement (the “Partnership Agreement”) and a property lease agreement (the “Lease Agreement, and together with the Partnership Agreement, collectively, the “Agreement”) with another cryptocurrency mining company (“Tenant”) pursuant to which the Company agreed to lease to Tenant portions of the Company’s six acre mining facility in Lafayette, GA in increments of up to 10 spaces that are 40 feet in length and eight feet in height each (“Spaces”), together with related utilities access including electricity of up to one megawatt (“MW”) per Space, for deploying mining equipment, in exchange for rental payments of $5 per Space per month (provided the Spaces are powered) and payment of the electricity costs and deposit requirements arising from the Spaces. In connection with the Lease Agreement, Tenant agreed to make an initial deposit of $229 for the initial electricity deployment for five MW. Further, pursuant to the Partnership Agreement, the Company provided Tenant with the option (the “Option”) to lend MGT up to $1 million. The Partnership Agreement has a term of 24 months.
We have incurred significant operating losses since inception and continue to generate losses from operations and as of March 31, 2023 have an accumulated deficit of $429,704. At March 31, 2023, our cash and cash equivalents were $317, and our working capital deficit was $8,176.
The Company will need to raise additional capital to pay the outstanding convertible note, fund operating losses, and maintain and grow its operations as intended over the next 12 months. 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, regulatory developments with respect to cryptocurrencies generally, inflation, high internet rates, the banking crisis, the war in Ukraine, the possibility of recession, and the ongoing SEC enforcement action against our Chief Executive Officer, all of which are highly uncertain, cannot be predicted and could have an adverse effect on the Company’s business and financial condition and its ability to raise capital. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance of these unaudited condensed financial statements. The accompanying unaudited condensed financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 21 |
The price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin have had a negative impact in our operating results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world. Since we record revenues partly based on the price of earned Bitcoin and we may retain such Bitcoin as an asset or as payment for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin we retain.
The high and low exchange rate per Bitcoin for the quarter ending March 31, 2023, as reported by Blockchain.info, were approximately $28 and $16 respectively. The high and low exchange rate per Bitcoin for the year ending December 31, 2022, as reported by Blockchain.info, were approximately $48 and $16 respectively.
Impact of Inflation
Beginning in 2022, there has been a sharp rise in inflation in the U.S. and globally. Given our Bitcoin mining operations, the most significant impact has been on electricity and mining equipment costs. Further, Federal Reserve interest rate increases and bank failures could result in a recession, which may have an adverse impact on our operations, be it directly and/or through third parties on which our operations and revenue depends.
Cryptocurrency Market Developments
Cryptocurrencies and related activities are characterized by numerous risks and uncertainties, including the possibility for adverse developments such as regulatory actions, bans or restrictions, declines in the price of, demand for or public perception of cryptocurrencies, theft, fraud, hacking, manipulation or malicious coding, price volatility, the potential for one cryptocurrency to branch into two, variations among and the potential for adverse changes to blockchain algorithms, and other external forces beyond our control. The cryptocurrency industry is characterized by a high level of volatility, and the collapse in the prices of most popular cryptocurrencies such as Bitcoin and Ethereum has cast doubt on the future of cryptocurrency-focused businesses such as ours. This trend was further impacted by the recent controversy and failure surrounding FTX, a cryptocurrency exchange that collapsed after its Chief Executive Officer was accused of fraud and misappropriation of corporate funds. Since then, certain other cryptocurrency-focused companies have filed for bankruptcy, and three major U.S. banks with involvement in cryptocurrencies collapsed. Further the ongoing litigation between the SEC and Coinbase may affect our business and prospects. These events have resulted in a decline in the cryptocurrency markets and in the public’s perception of the industry. In addition, following the FTX controversy, regulators began reviewing cryptocurrency-focused companies and their operations with greater scrutiny, and have brought enforcement actions seeking to restrict or cease such activities. Any of these trends may have contributed, and could in the future contribute further, to declines in the price of Bitcoin and the demand for cryptocurrency-related activities such as ours, which gives rise to uncertainty concerning our future revenue and expenses.
Cash Flows
| Three Months ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash used in | ||||||||
| Operating activities | $ | (21 | ) | $ | (529 | ) | ||
| Investing activities | - | (68 | ) | |||||
| Financing activities | (200 | ) | - | |||||
| Net decrease in cash and cash equivalents | $ | (221 | ) | $ | (597 | ) | ||
Operating activities
Net cash used in operating activities was $21 for the three months ended March 31, 2023 as compared to net cash used in operating activities of $529 for the three months ended March 31, 2022. Cash used in operating activities for the three months ended March 31, 2023 primarily consisted of a net loss of $3,798 offset by non-cash charges of $3,321 which includes depreciation of $56, loss on the change in fair value of derivative liability of $1,347, loss on the change in fair value of warrant derivative liability of $1,696, loss on settlement of derivative of $169 and accretion of debt discount of $123, offset by gain on sale of property and equipment of $70, and cash provided by working capital of $456.
Cash used in operating activities for the three months ended March 31, 2022 primarily consisted of a net loss of $1,518 offset by non-cash charges of $872 which includes depreciation of $48, loss on settlement of derivative of $417, change in fair value of derivative liability of $407, and cash provided by working capital of $117.
Investing activities
Net cash used in investing activities was $0 for the three months ended March 31, 2023.
Net cash used in investing activities was $68 for the three months ended March 31, 2022 which consisted of purchases of property and equipment of $68.
| 22 |
Financing activities
During the three months ended March 31, 2023, cash used in financing activities was $200 which consisted of the repayment of a bank loan.
During the three months ended March 31, 2022, there was no cash provided by or used in financing activities.
Off–balance sheet arrangements
As of March 31, 2023, 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
Not applicable.
Item 4. Controls and procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive officer and principal financial officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2023. Based on this evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective as March 31, 2023 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.
Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer and principal financial officer), we performed a complete documentation of the Company’s significant processes and key controls, and conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of March 31, 2023.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2023, there were no changes to internal control over financial reporting.
| 23 |
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, for the fiscal year ended December 31, 2022, as filed with the SEC on March 31, 2023.
Item 1A. Risk factors
There are no additional risk factors other than those discussed in our Annual Report on Form 10–K, as filed with the SEC on March 31, 2023.
Item 2. Unregistered sales of equity securities and use of proceeds
During the three months ended March 31, 2023, 4,157,044 warrants were exercised on a cashless basis for the issuance of 20,000,000 shares of common stock. In issuing the securities described above, the Company relied upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
On April 27, 2023, the Company issued 6,000,000 shares to Minerset Farms in accordance with the terms of the Agreement. In issuing the securities described above, the Company relied upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Item 3. Defaults upon senior securities
None.
Item 4. Mine safety disclosures
Not applicable.
Item 5. Other information
None.
Item 6. Exhibits
| 31 | Certification pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal Financial Officer* | |
| 32 | Certification pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 of Principal Executive Officer and Principal Financial Officer* | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema* | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File* | |
| * | Filed herewith |
| 24 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MGT CAPITAL INVESTMENTS, INC | ||
| Date: May 15, 2023 | By: | /s/ Robert B. Ladd |
| Robert B. Ladd | ||
| President, Chief Executive Officer and Acting Chief Financial Officer | ||
| (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | ||
| 25 |