MGT CAPITAL INVESTMENTS, INC. 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 ofMarch 31, 2022 , the Company had incurred significant operating losses since inception and continues to generate losses from operations. As ofMarch 31, 2022 , the Company had an accumulated deficit of$421,446 . As ofMarch 31, 2022 MGT's cash and
cash equivalents were$633 . The Company will require additional funding to grow its operations. Further, depending upon operational profitability, the Company may also need to raise additional funding for ongoing working capital purposes. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. The Company's ability to raise additional capital is impacted by the volatility of Bitcoin mining economics and theSEC'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
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 withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, fair value of warrants issued, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary. 6 Cash and cash equivalents The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents. The Company's combined accounts were$633 and$1,230 as ofMarch 31, 2022 andDecember 31, 2021 , respectively. Accounts are insured by theFDIC up to$250 per financial institution. The Company has not experienced any losses in such accounts with these financial institutions. As ofMarch 31, 2022 , andDecember 31, 2021 , the Company had$133 and$980 , respectively, in excess of theFDIC insurance limit. Accounts Receivable Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management's evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. As ofMarch 31, 2022 andDecember 31, 2021 , we did not believe we needed to reserve for any doubtful
accounts, respectively. Cryptocurrencies Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying balance sheets. Any cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company's revenue recognition policy disclosed in this note. Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. Any purchases of cryptocurrencies by the Company are included within investing activities in the accompanying statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting. Halving - The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term "Halving." A Halving for bitcoin occurred onMay 12, 2020 , with a revised reward payout of 6.25 Bitcoin per block. Many factors influence the price of Bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
The following table presents the activities of digital currencies for the
periods ended
Schedule of Digital Currencies
Digital currencies at
(691 )
Digital currencies at December 31, 2021 -
Additions of digital currencies from mining 63 Realized gain on sale of digital currencies 3 Sale of digital currencies
(64 )
Digital currencies at
Investment
Available-for-sale securities are carried at fair value. Realized and unrealized
gains and losses, if any, are calculated on the specific identification method
and are included in other income in the statements of operations.
7
Revenue recognition
Cryptocurrency mining
The Company recognizes revenue under Accounting Standards Codification ("ASC")
606, Revenue from Contracts with Customers, ("ASC 606"). The core principle of
the revenue standard is that a company should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects
the consideration to which the Company expects to be entitled in exchange for
those goods or services. The following five steps are applied to achieve that
core principle:
? Step 1: Identify the contract with the customer
? Step 2: Identify the performance obligations in the contract
? Step 3: Determine the transaction price? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following: ? Variable consideration ? Constraining estimates of variable consideration ? The existence of a significant financing component in the contract ? Noncash consideration ? Consideration payable to a customer Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the Blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process known as "solving a block") is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's agreements with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. 8 Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by theFinancial Accounting Standards Board ("FASB"), the Company may be required to change its policies, which could have an effect on the Company's financial position and results from operations. Hosting Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized$192 and$0 from these sources during the three months endedMarch 31, 2022 and 2021, respectively. During the three months endedMarch 31, 2022 , two customers accounted for 68% and 23% respectively of hosting revenue. Loss per share Basic loss per share is calculated by dividing net loss applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing the net loss attributable to common shareholders by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period. Potential dilutive securities, comprised of unvested restricted shares, convertible debt, convertible preferred stock, stock warrants and stock options, are not reflected in diluted net loss per share because such potential shares are anti-dilutive due to the Company's net loss. Accordingly, the computation of diluted loss per share for the three months endedMarch 31, 2022 excludes 63,416,941 shares issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the three months endedMarch 31, 2021 excludes 34,285,714 shares issuable under convertible debt.
Fair Value Measure and Disclosures
ASC 820 "Fair Value Measurements and Disclosures" provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
? Level 1 Quoted prices in active markets for identical assets or liabilities.
? Level 2 Quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that
are not active, or other inputs that are observable, either directly or
indirectly.
? Level 3 Significant unobservable inputs that cannot be corroborated by market
data.
As of
Management's evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 - Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed financial statements. Reclassification
Certain prior period balances have been reclassified to conform to current year presentation. These reclassifications had no effect on the reported results
of operations.
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying financial statements, other than those disclosed below.
9 InAugust 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 inU.S. GAAP. The ASU's amendments are effective for fiscal years beginning afterDecember 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. InMay 2021 , the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40), ("ASU 2021-04"). This ASU reduces diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU is effective for all entities for fiscal years beginning afterDecember 15, 2021 . An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 onJanuary 1, 2022 did not have a material impact on the Company's condensed financial statements or disclosures.
Note 4. Accounts receivable
Accounts receivable balances of$306 and$180 as ofMarch 31, 2022 andDecember 31, 2021 , respectively, from customers using the Company's miner hosting and facility rental services. One customer makes up 96% of this balance.
Note 5. Property, Plant, and Equipment and Other Assets
Property and equipment consisted of the following:
Schedule of Property and Equipment
As of
March 31, December 31,
2022 2021
Land $ 55 $ 55
Computer hardware and software 10 10
Bitcoin mining machines 798 910
Infrastructure 1,185 1,117
Containers 403 403
Leasehold improvements 4 4
Property and equipment, gross 2,455 2,499
Less: Accumulated depreciation (1,206 ) (1,270 )
Property and equipment, net $ 1,249 $ 1,229
The Company recorded depreciation expense of $48 and $189 for the three months
ended March 31, 2022 and 2021, respectively. For the three months ended March
31, 2022 and 2021, respectively, gains on sale of property and equipment of $0
and $1 , respectively, were recorded as other non-operating income. For the three
months ended March 31, 2022 we disposed of a total of 50 S17 miners which were
fully depreciated.
Other Assets consisted of the following:
Schedule of Other Assets
As of
March 31, December 31,
2022 2021
Security deposits $ 3 $ 3
Interest receivable 1 -
Other Assets $ 4 $ 3
The Company has paid
Note 6. Investment InDecember 2021 , the Company invested$50 in the form of a convertible promissory note. The note bears annual interest of 8% and matures onDecember 31, 2024 . The note contains certain anti-dilution features with an as-converted ownership of 5%. As ofMarch 31, 2022 , the Company determined that book value represented fair value with no adjustment necessary. 10 Note 7. Notes PayableDecember 2020 Note OnDecember 8, 2020 , the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note (the "December 2020 Note") in the principal amount of$230 which is convertible, at the option of the holder, into shares of common stock at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the applicable conversion. The Company received consideration of$200 for the convertible promissory note. The note bears interest at a rate of 8% per annum and matures in twelve months. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature's intrinsic value onDecember 8, 2020 and determined that the beneficial conversion feature was valued at$200 which was recorded as a debt discount, and together with the original issue discount of$30 , in the aggregate of$230 , is being amortized over the life of the loan. The Company measured the derivative liability's fair value onDecember 8, 2020 and determined that the derivative liability was valued at$555 which exceeded the intrinsic value of the beneficial conversion feature by$355 and resulted in the Company recording non-cash interest expense of$355 . OnJune 15, 2021 , the holder converted$120 of principal into 4,761,905 shares of common stock valued at$238 . As a result of this conversion,$172 of derivative liability was settled,$86 unamortized debt discount was settled and $32was recorded as loss on settlement of debt. OnJuly 27, 2021 , the holder converted the remaining$110 of principal and$11 of accrued interest into 6,673,384 shares of common stock valued at$280 . As a result of this conversion,$153 of derivative liability was settled,$66 unamortized debt discount was settled and$72 was recorded as loss on settlement of debt. As ofDecember 31, 2021 , this note had no outstanding balance.March 2021 Note
OnMarch 5, 2021 , the Company entered into a securities purchase agreement withBucktown Capital, LLC (the "Investor"), pursuant to which the Company issued a convertible promissory note in the original principal amount of$13,210 (the "March 2021 Note"). TheMarch 2021 Note was convertible, at the option of the Investor, into shares of common stock of the Company at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the applicable conversion (the "Conversion Price"); provided, however, in no event was the Conversion Price to be less than$0.04 per share. TheMarch 2021 Note bore interest at a rate of 8% per annum and
will mature in twelve months.
TheMarch 2021 Note was to be funded in tranches, with the initial tranche of$1,210 funded onMarch 5, 2021 for consideration of$1,000 . Six subsequent tranches (five tranches, each for$1,200 and one tranche for$6,000 ) were to be funded upon the notice of effectiveness of a Registration Statement on Form S-1 covering the common stock issuable in connection with theMarch 2021 Note. Further, the final tranche required the mutual agreement of the Company and Investor. Until such time as Investor funded the subsequent tranches, the Company would hold a series of Investor Notes that offset any unfunded portion of theMarch 2021 Note. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature. The Company measured the beneficial conversion feature's intrinsic value onMarch 5, 2021 and determined that the beneficial conversion feature was valued at$1,000 which was recorded as a debt discount, and together with the original issue discount of$210 , in the aggregate of$1,210 , is being amortized over the life of the loan. As a result of the Company failing to meet certain registration requirements under theMarch 2021 Note, the outstanding balance of theMarch 2021 Note was automatically increased by 5% on each ofJuly 5, 2021 ,August 5, 2021 , andSeptember 5, 2021 and as part of the exchange agreement an additional 5% onSeptember 30, 2021 , prior to the exchange. An additional$270 was recorded as outstanding principal, bringing the outstanding balance prior to the exchange to$1,481 . 11
OnSeptember 30, 2021 , the Company entered into an exchange agreement with theMarch 2021 Note holder under which the outstanding principal balance of$1,481 and$60 of accrued interest were exchanged for 53,500,000 warrants to purchase common stock (See Note 7), which were treated as a warrant derivative liability. Upon the exchange, the Company settled$1,481 of outstanding principal,$60 of accrued interest,$758 of debt discount, recorded a warrant liability in the amount of$1,221 resulting in a loss on settlement of debt of$438 . The derivative was calculated using a share fair value of$0.025 per share, a discount rate of 0.98%, remaining lives of 4.43 years and volatility of 176.1%. As ofDecember 31, 2021 , this note had no outstanding balance. Derivative Liabilities
The Company's activity in its debt related derivative liability was as follows
for the three months ended
Schedule of Derivative Liability Activity
Balance of derivative liability atJanuary 1, 2021 $
246
Transfer in due to issuance of warrants with embedded conversion features
2,492
Transfer out upon conversion of convertible notes and warrants with embedded conversion provisions
(732 )
Change in fair value of warrant liability (955 )
Change in fair value of derivative liability 79
Balance of derivative liability atDecember 31, 2021
1,130
Transfer out upon exercise of warrants (171 ) Change in fair value of warrant liability
407
Balance of derivative liabilities atMarch 31, 2022 $
1,366
The Company recorded loss on settlement of derivative liability in the amount of
As ofMarch 31, 2022 , the fair value of the warrant derivative liability was$1,366 and for the three months endedMarch 31, 2022 the Company recorded a loss of$407 from the change in fair value of derivative warrant liability as non-operating income in the statements of operations. The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions as ofMarch 31, 2022 : 1) stock price of$0.024 , 2) exercise prices of$0.05 , 3) remaining lives of 3.9 - 4.3 years, 4) dividend yields of 0%, 5) risk free rates of 2.42%, and 6) volatility of 174.5%. As ofDecember 31, 2021 , the fair value of the warrant derivative liability was$1,130 and for the year endedDecember 31, 2021 the Company recorded a gain of$955 from the change in fair value of derivative warrant liability as non-operating income in the statements of operations. The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions as ofDecember 31, 2021 : 1) stock price of$0.017 , 2) exercise prices of$0.05 , 3) remaining lives of 4.2 - 4.6 years, 4) dividend yields of 0%, 5) risk free rates of 1.26%, and 6) volatility of 175.5%. Fluctuations in the Company's stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company's balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company's derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company's expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value. 12
The following table summarizes the Company's debt related derivative liability
as of
Schedule of Derivative Liability Fair Value
Level 1 Level 2 Level 3 Fair Value
March 31, 2022
Level 1 Level 2 Level 3 Fair Value
Liabilities
Warrant derivative liability $ - $ -
1,366
Level 1 Level 2 Level 3 Fair Value
December 31, 2021
Level 1 Level 2 Level 3 Fair Value
Liabilities
Warrant derivative liability $ - $ -
1,130 Note 8. Leases InDecember 2019 , the Company entered an office lease in connection with the relocation of its executive office toRaleigh, North Carolina . The Company accounted for this lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease is$3 per month, with annual increases of 3% during the three-year term. The Company used an incremental borrowing rate of 29.91% based on the weighted average effective interest rate of its outstanding debt. InDecember 2019 , the Company recorded a Right of Use Asset of $79and a corresponding Lease Liability of$79 . The Right to Use Asset is accounted for as an operating lease and has a balance, net of amortization, of$27 as ofMarch 31, 2022 .
OnNovember 1, 2021 , the Company entered into a lease agreement to lease a contiguous portion of land to its existing property, as a planting area for trees intended to mitigate noise from the Company's cryptocurrency mining operations. The agreement calls for yearly installments of$3 for the first five years, with an option to extend this lease for another five-year period at a rate not to exceed 105% of the current lease payment. On each anniversary date, the Company will pay$3 in advance, with payment for the first year paid upon execution of the lease. The Company used an incremental borrowing rate of 8.0% based on the interest rate of incorporated in the most recent promissory note. At lease inception, the Company recorded a Right of Use Asset of$22 and a corresponding Lease Liability of$22 . The Right to Use Asset is accounted for as an operating lease and has a balance, net of amortization, of$21 as ofMarch 31, 2022 .
Total future minimum payments required under the lease agreement are as follows:
Schedule of Future Minimum Lease Payment
Amount
2022 $ 32
2023 3
2024 3
2025 3
2026 3
Thereafter 13
Total undiscounted minimum future lease payments
(11 )
Present value of operating lease liabilities $ 46
Disclosed as:
Current portion $ 28
Non-current portion 18
The Company recorded rent expense of
13 AtMarch 31, 2022 the weighted average interest rate for the operating lease was 20.46%. AtMarch 31, 2022 , the weighted average remaining lease term for operating lease was 4.6 years. The Company's lease agreement does not contain any material residual value guarantees or material restrictive covenants.
Note 9. Common Stock and Preferred Stock
Common stock Common Stock Issuances
In connection with the conversion of 115 shares of Series C Preferred Stock
during the year ended
During the year ended
On
During the year ended
During the three months ended
Preferred Stock OnJanuary 11, 2019 , the Company's Board of Directors approved the authorization of 10,000 shares of Series B Preferred Stock with a par value of$0.001 and a Stated Value of$100 each ("Series B Preferred Shares"). The holders of the Series B Preferred Shares shall be entitled to receive, when, as, and if declared by the Board of Directors of the Company, out of funds legally available for such purpose, dividends in cash at the rate of 12% of the Stated Value per annum on each Series B Preferred Share. Such dividends shall be cumulative and shall accrue without interest from the date of issuance of the respective share of the Series B Preferred Shares. Each holder shall also be entitled to vote on all matters submitted to stockholders of the Company and shall be entitled to 55,000 votes for each Series B Preferred Share owned at the record date for the determination of stockholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. In the event of a liquidation event, any holders of the Series B Preferred Shares shall be entitled to receive, for each Series B Preferred Shares, the Stated Value in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders. The Series B Preferred Shares are not convertible into shares of the Company's common stock. No shares of Series B Preferred Shares have been issued or are outstanding. OnApril 12, 2019 , the Company's Board of Directors approved the authorization of 200 Series C Preferred Shares with a par value of$0.001 ("Series C Preferred Shares"). The holders of the Series C Preferred Shares have no voting rights, receive no dividends, and are entitled to a liquidation preference equal to the stated value. At any time, the Company may redeem the Series C Preferred Shares at 1.2 times the stated value. Given the right of redemption is solely at the option of the Company, the Series C Preferred Shares are not considered mandatorily redeemable, and as such are classified in shareholders' equity on the Company's balance sheet. Each Series C Preferred Share is convertible into shares of the Company's common stock in an amount equal to the greater of: (a) 200,000 shares of common stock or (b) the amount derived by dividing the stated value by the product of 0.7 times the market price of the Company's common stock, defined as the lowest trading price of the Company's common stock during the ten-day period preceding the conversion date. The holder may not convert any Series C Preferred Shares if the total amount of shares held, together with holdings of its affiliates, following a conversion exceeds 9.99% of the Company's common stock. 14 The common shares issued upon conversion of the Series C Preferred Shares have been registered under the Company's then-effective registration statement on Form S-3. OnApril 12, 2019 , the Company sold 190 Series C Preferred Shares for$1,890 , net of issuance costs and onJuly 15, 2019 sold 10 Series C Preferred Shares for$100 . During the second and third quarters of 2019, holders converted 50 Series C Preferred Shares into 14,077,092 shares of common stock and 35 Series C Preferred Shares into 13,528,575 shares of common stock, respectively. The remaining 115 shares of Series C Preferred Stock were converted into 29,870,130 shares of common stock during the year endedDecember 31, 2021 .
Warrants OnJuly 21, 2021 , as part of a corporate fundraising, the Company issued 35,385,703 shares of common stock and 35,385,703 warrants to purchase common stock for net cash proceeds of$990 (see above). The warrants were valued at$1,271 which resulted in the recording of a warrant derivative liability in that amount. Non-operating expense of$306 was recorded in respect of the value warrant derivative liability of$1,271 in excess of the value of common shares issued of$990 . OnSeptember 30, 2021 , the Company exchanged the outstanding principal of$1,481 and accrued interest of$60 of theMarch 2021 Note for 53,500,000 warrants to purchase common stock (see Note 7). During the year endedDecember 31, 2021 , 14,270,833 warrants were exercised on a cashless basis for the issuance of 23,500,000 shares of common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of$406 , compared it to the fair value of 23,500,000 shares of$635 and recorded a loss on extinguishment of$228 . The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions on the date of each exercise: 1) stock prices of$0.017 -$0.043 , 2) exercise prices of$0.05 , 3) remaining lives of 4.2 - 4.3 years, 4) dividend yields of 0%, 5) risk free rates of 1.19% - 1.33%, and 6) volatility of 175.7% - 177.2%. During the three months endedMarch 31, 2022 , 11,197,930 warrants were exercised on a cashless basis for the issuance of 34,000,000 shares of common stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of$171 , compared it to the fair value of 34,000,000 shares of$588 and recorded a loss on extinguishment of$417 . The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions on the date of each exercise: 1) stock prices of$0.013 -$0.019 , 2) exercise prices of$0.05 , 3) remaining lives of 4.0 - 4.2 years, 4) dividend yields of 0%, 5) risk free rates of 1.53% - 2.10%, and 6) volatility of 174.0% - 175.6%.
The following table summarizes information about shares issuable under warrants
outstanding during the three months ended
Summary of Warrants Outstanding
Warrant Weighted
shares average Weighted average
outstanding exercise price remaining life Intrinsic valueOutstanding at January 1, 2021 - $ -
- -
Issued 88,885,704 0.05 5.0 -
Exercised (14,270,833 ) 0.05 - -
Expired or cancelled - - - -
Outstanding and exercisable at
December 31, 2021 74,614,871 0.05 4.47 -
Exercised (11,197,930 ) 0.05 - -
Outstanding and exercisable at
March 31, 2022 63,416,941 $ 0.05 4.14 $ -
15
Note 10. Commitments and Contingencies
Legal proceedings From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K, as filed with theSEC onMarch 31, 2022 .
Bitcoin Production Equipment and Operations
InAugust 2018 , the Company entered a collaborative venture withBit5ive, 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 fromBit5ive, LLC . During the three months endedMarch 31, 2022 and 2021, the Company received royalties and recognized as other income in the Statement of Operations under this agreement of$0 and$7 , respectively pursuant to the POD5 Agreement. Electricity Contract
MGT's prior electricity agreement with the
Note 11. Employee Benefit Plans
The Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified employees of the Company (the "401(k) Plan"). Under the 401(k) Plan, the Company may make discretionary contributions of up to 100% of employee contributions. During the three months endedMarch 31, 2022 and 2021, the Company made contributions to the 401(k) Plan of$3 and$3 , respectively. Note 12. Subsequent Events OnApril 28, 2022 the Company issued 10,000,000 shares of common stock to satisfy a partial cashless exercise of 2,655,890 warrants issued onSeptember 30, 2021 , as detailed in Note 9. As a result of this exercise, the number of warrants outstanding was reduced to 60,761,051. 16
Item 2. Management's discussion and analysis of financial condition and results of operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "estimates," "should," "expect," "guidance," "project," "intend," "plan," "believe" and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 as filed with theSecurities and Exchange Commission ("SEC") onMarch 31, 2022 , in addition to other public reports we filed with theSEC . 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 summaryMGT Capital Investments, Inc. ("MGT" or the "Company") is aDelaware corporation that was incorporated inDelaware in 2000. MGT was originally incorporated inUtah in 1977. MGT's corporate office is inRaleigh, North Carolina .
All dollar figures set forth in this Quarterly Report on Form 10-Q are in thousands, except per-share amounts.
Current Operations MGT conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility inLaFayette, 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 ofMarch 31, 2022 andMay 13, 2022 , the Company owned 430 Antminer S17 Pro (the "S17 miners") and 37 Antminer S19 Pro Bitcoin miners. All miners are located at ourGeorgia facility. Over three-quarters of the S17 miners require various repairs to be productive. We are in the process of selling our remaining S17 miners, as well as loose hash boards, power supplies, controller boards, and other parts. In addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining. MGT's miners are housed in a modified shipping container on the Company's owned property inGeorgia . The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition to expansion at its current property.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The notes to the unaudited condensed financial statements contained in this Quarterly Report describe our significant accounting policies used in the preparation of the unaudited condensed financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates. We believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation of our unaudited condensed financial statements. 17 Revenue recognition Cryptocurrency mining The Company recognizes revenue under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, ("ASC 606"). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ? Step 1: Identify the contract with the customer ? Step 2: Identify the performance obligations in the contract ? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following: ? Variable consideration ? Constraining estimates of variable consideration ? The existence of a significant financing component in the contract ? Noncash consideration ? Consideration payable to a customer Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The Company has entered into digital asset mining pools by agreeing to terms and conditions, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the Blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin Blockchain (in a process known as "solving a block") is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's agreements with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. 18 Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by theFinancial Accounting Standards Board ("FASB"), the Company may be required to change its policies, which could have an effect on the Company's financial position and results from operations. Hosting Revenues
We receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The Company recognized$192 and$0 from these sources during the three months endedMarch 31, 2022 and 2021, respectively. During the three months endedMarch 31, 2022 , two customers accounted for 68% and 23% respectively of hosting revenue. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method on the various asset classes over their estimated useful lives, which range from one to ten years when placed in service. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. Deposits on property and equipment are initially classified as Other Assets and upon delivery, installation and full payment, the assets are classified as property and equipment on the balance sheet.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset may not be recoverable, should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss. Derivative Instruments Derivative financial instruments are recorded in the accompanying balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the "host contract"), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company's statements of operations.
Recent accounting pronouncements
See Note 3 to our unaudited condensed financial statements appearing in Part I, Item 1 of this Quarterly Report for Recent Accounting Pronouncements.
19 Results of operations
Three months ended
Revenues
Our revenues for the three monthsMarch 31, 2022 decreased by$31 , or 11%, to$255 , as compared to$286 for the three months endedMarch 31, 2021 . Our revenue is derived from cryptocurrency mining, which totaled$63 for the three months endedMarch 31, 2022 and$286 during the months endedMarch 31, 2021 . The decrease in revenues for this period is due to a decrease in miners from the previous year. We also receive revenues from third parties renting capacity at our facility and from hosting miners owned by others. The company recognized$192 and$0 during the months endedMarch 31, 2022 and 2021, respectively. Operating Expenses Operating expenses for the three months endedMarch 31, 2022 increased by$215 , or 29%, to$950 , as compared to$735 for the three months endedMarch 31, 2021 . The increase in operating expenses was primarily due to an increase in cost of revenue of$296 , partially offset by a decrease in general and administrative expenses of$81 . The increase in cost of revenue of$296 or 118% to$546 , as compared to$250 for the three months endedMarch 31, 2021 was primarily due to increased electricity costs from hosting services. The decrease in general and administrative expenses of$81 or 17%, to$404 , as compared to$485 for the three months endedMarch 31, 2021 , was primarily due to a decrease in legal and professional fees of$132 , offset by an increase in repairs and maintenance of$11 , increase inGeorgia costs of$11 and increase in consulting services of$35 . Other Income and Expense For the three months endedMarch 31, 2022 , non-operating expense of$823 consisted primarily of loss on settlement of derivative of$417 and change in fair value of warrants derivative liability of$407 , partially offset by interest income of$1 . During the comparable period endedMarch 31, 2021 , non-operating expense of$132 consisted of change in fair value of derivative liability of$67 , accretion of debt discount of$62 and interest expense of$11 , partially offset by non-operating income of$7 and a gain on sale of property and equipment of$1 .
Liquidity and capital resources
Sources of Liquidity We have historically financed our business through the sale of debt and equity interests. We have incurred significant operating losses since inception and continue to generate losses from operations and as ofMarch 31, 2022 have an accumulated deficit of$421,446 . AtMarch 31, 2022 , our cash and cash equivalents were$633 , and our working capital deficit was$302 . InJanuary 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 ongoingSEC enforcement action against our Chief Executive Officer, both of which are highly uncertain, cannot be predicted and could have an adverse effect on the Company's business and financial condition. The issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. Such factors raise substantial doubt about the Company's ability to sustain operations for at least one year from the issuance of these unaudited condensed financial statements. The accompanying unaudited condensed financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin have had a negative impact on our operating results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors, including, but not limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties around the world. Since we record revenue based on the price of earned Bitcoin and we may retain such Bitcoin as an asset or as payment for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin we retain. During the periodJanuary 1, 2022 throughMarch 31, 2022 , the price of Bitcoin remained very volatile, with a low and high exchange price per Bitcoin of approximately$35 and$48 , respectively. 20
The supply of Bitcoin is finite. Once 21 million Bitcoin are generated, the network will stop producing more. Currently, there are approximately 19 million Bitcoin in circulation, or 90% of the total supply of Bitcoin. Within the Bitcoin protocol is an event referred to as Halving where the Bitcoin reward provided upon mining a block is reduced by 50%. Halvings are scheduled to occur once every 210,000 blocks, or roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The most recent Halving occurred inMay 2020 , with a revised reward payout of 6.25 Bitcoin per block. Given a stable hash rate, a Halving reduces the number of new Bitcoin being generated by the network. While the effect is to limit the supply of new coins, it has no impact on the quantity of total Bitcoin outstanding. As a result, the price of Bitcoin could rise or fall based on overall investor and consumer demand. Should the price of Bitcoin remain unchanged after the next Halving, the Company's revenue would be reduced by 50%, with a much larger negative impact to profit.
Our primary source of operating funds has been through debt and equity financing.
COVID-19 pandemic:
The COVID-19 pandemic has disrupted and may continue to disrupt our operations
and those of our vendors, suppliers and other third parties on which we rely,
and we may not be able to obtain new miners or replacement parts for our
existing miners in a timely or cost-effective manner, which could materially and
adversely affect our business and results of operations.
The extent to which COVID-19 impacts our operations or our ability to obtain
financing will depend on future developments which are uncertain and cannot be
predicted, including new information which may emerge concerning the severity of
COVID-19 and the actions taken by governments and private businesses to contain
COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19
continue for an extended period of time, financial markets may not be available
to the Company for raising capital in order to fund future growth. Should the
Company not be able to obtain financing in the amounts necessary or under terms
which are economically feasible, we may be required to reduce planned future
growth and/or the scope of our operations.
Cash Flows
Three Months ended
March 31,
2022 2021
Cash provided by / (used in)
Operating activities $ (529 ) $ (179 )
Investing activities (68 ) 131
Financing activities - 1,000
Net increase (decrease) in cash and cash equivalents
Operating activities Net cash used in operating activities was$529 for the three months endedMarch 31, 2022 as compared to net cash used in operating activities of$179 for the three months endedMarch 31, 2021 . Cash used in operating activities for the three months endedMarch 31, 2022 primarily consisted of a net loss of$1,518 offset by non-cash charges of$872 which includes depreciation of$48 , loss on settlement of derivative of$417 , change in fair value of derivative liability of$407 , and cash used in working capital of$117 . 21 Net cash used in operating activities of$179 for the three months endedMarch 31, 2021 primarily consisted of a net loss of$581 , offset by non-cash charges of$317 which includes depreciation of$189 , accretion of debt discount of$62 , change in the fair value of the derivative liability of$67 partially offset by a gain from sale of property and equipment of$1 , and cash provided by a change in working capital of$85 . Investing activities
Net cash used in investing activities was
Net cash provided by investing activities was$131 for the three months endedMarch 31, 2021 consisted of proceeds from the sale of property and equipment of$131 . Financing activities
During the three months ended
During the three months ended
Off-balance sheet arrangements
As ofMarch 31, 2022 , we had no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
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