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 June 30, 2022, the Company had incurred significant
operating losses since inception and continues to generate losses from operations. As of June 30, 2022, the Company had an accumulated
deficit of $421,411.
As of June 30, 2022 MGT’s cash and cash equivalents were $313.
The
Company will require additional funding to grow its operations. Further, depending upon operational profitability, the Company may also
need to raise additional funding for ongoing working capital purposes. There can be no assurance however that the Company will be able
to raise additional capital when needed, or at terms deemed acceptable, if at all. The Company’s ability to raise additional capital
is impacted by the volatility of Bitcoin mining economics and the SEC’s ongoing enforcement action against our Chief Executive
Officer, both of which are highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and
financial condition.
Since
January 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, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, fair value
of warrants issued, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies.
The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become
evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are
determined to be necessary.
Cash
and cash equivalents
The
Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
The Company’s combined accounts were $313
and $1,230
as of June 30, 2022 and December 31, 2021, respectively.
Accounts are insured by the FDIC up to $250
per financial institution. The Company has not
experienced any losses in such accounts with these financial institutions. As of June 30, 2022, and December 31, 2021, the Company had
$0 and
$980,
respectively, in excess of the FDIC insurance limit.
Accounts
Receivable
Accounts
receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding
invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been
exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for
doubtful accounts. As of June 30, 2022 and December 31, 2021, we did not believe we needed to reserve for any doubtful accounts, respectively.
Cryptocurrencies
Cryptocurrencies,
(including bitcoin and bitcoin cash) are included in current assets in the accompanying balance sheets. Any cryptocurrencies purchased
are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the
Company’s revenue recognition policy disclosed in this note.
Cryptocurrencies
held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized
but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely
than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured
using the quoted price of the cryptocurrency at the time its fair value is being measured.
In
testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than
not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment
test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an
impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not
permitted.
Any
purchases of cryptocurrencies by the Company are included within investing activities in the accompanying statements of cash flows, while
cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying statements
of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying statements of cash flows and
any realized gains or losses from such sales are included in other income (expense) in the statements of operations. The Company accounts
for its gains or losses in accordance with the first in first out (FIFO) method of accounting.
Halving
– The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving
is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus
algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving.” A Halving for bitcoin occurred
on May 12, 2020, with a revised reward payout of 6.25 Bitcoin per block. Many factors influence
the price of Bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
The
following table presents the activities of digital currencies for the periods ended June 30, 2022 and December 31, 2021:
Schedule
of Digital Currencies
| Digital
currencies at January 1, 2021 | |
$ | 4 | |
| Additions
of digital currencies from mining | |
| 686 | |
| Realized
gain on sale of digital currencies | |
| 1 | |
| Sale
of digital currencies | |
| (691 | ) |
| Digital
currencies at December 31, 2021 | |
| - | |
| Additions
of digital currencies from mining | |
| 125 | |
| Realized
gain on sale of digital currencies | |
| (3 | ) |
| Sale
of digital currencies | |
| (115 | ) |
| Digital
currencies at June 30, 2022 | |
$ | 7 | |
Investment
Available-for-sale
securities are carried at fair value. Realized and unrealized gains and losses, if any, are calculated on the specific identification
method and are included in other income in the statements of operations.
Revenue
recognition
Cryptocurrency
mining
The
Company recognizes revenue under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“ASC
606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for
those goods or services. The following five steps are applied to achieve that core principle:
| |
● |
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.
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
$222
and $414
from these sources during the three and six months
ended June 30, 2022, respectively. There were no
hosting revenues for the six months ended June
30, 2021. During the three and six months ended June 30, 2022, two customers accounted for 89%
and 90%,
respectively of hosting revenue.
Other
Income
Other
income for the three and six months ended June 30, 2022 consisted of a commercial vendor settlement. Other income for the three and six
months ended June 30, 2021 consisted of POD5 royalties.
Common
stock to be issued
Common
stock to be issued represents shares of common stock that have been ordered for issuance in respect of the cashless exercise of outstanding
warrants but have not yet been issued.
Income (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 and six months ended June 30, 2022 excludes 59,052,044
shares issuable upon the exercise of outstanding
warrants and 10,000,000
of common stock to be issued. The computation
of diluted loss per share for the three and six months ended June 30, 2021 excludes 35,546,533
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 June 30, 2022 and December 31, 2021, the Company had a Level 3 financial instrument related to the derivative liability related to
the issuance of warrants.
Management’s
evaluation of subsequent events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the
review, other than what is described in Note 13 – 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 years balances have been reclassified to conform to current year presentation. These reclassifications had no effect on the reported
results of operations.
Recent
accounting pronouncements
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect
on the accompanying financial statements, other than those disclosed below.
In
August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)”
(“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities
and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification
initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will
have on its financial statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock
Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), (“ASU 2021-04”).
This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call
options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification
or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically
addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified
written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification
or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange;
and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option
that remains equity classified after modification or exchange. This ASU is effective for all entities for fiscal years beginning after
December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective
date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 on January
1, 2022 did not have a material impact on the Company’s condensed financial statements or disclosures.
Note
4. Accounts receivable
Accounts
receivable balances of $87 and
$180 as
of June 30, 2022 and December 31, 2021, respectively, are from customers using the Company’s miner hosting and facility rental
services. Two customers make up 83%
of this balance as of June 30, 2022.
Note
5. Property, Plant, and Equipment and Other Assets
Property
and equipment consisted of the following:
Schedule
of Property and Equipment
| | |
| | |
| |
| | |
As
of | |
| | |
June
30,
2022 | | |
December
31,
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 | |
| (1,255 | ) | |
| (1,270 | ) |
| Property
and equipment, net | |
$ | 1,200 | | |
$ | 1,229 | |
The
Company recorded depreciation expense of $49
and $97
for the three and six months ended June 30, 2022,
respectively. The Company recorded depreciation expense of $190
and $379
for the three and six months ended June 30, 2021,
respectively. For the three and six months ended June 30, 2021, gains on sale of property and equipment of $9
and $10,
respectively, were recorded as other non-operating income. There were no
sales of equipment in the six month period ended
June 30, 2022. For the three and six months ended June 30, 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 | |
| | |
June
30,
2022 | | |
December
31,
2021 | |
| | |
| | |
| |
| Security
deposits | |
$ | 3 | | |
$ | 3 | |
| Interest
receivable | |
| 2 | | |
| - | |
| Other
Assets | |
$ | 5 | | |
$ | 3 | |
The
Company has paid $3 as a security deposit for its office lease in Raleigh, NC.
Note
6. Investment
In
December 2021, the Company invested $50 in the form of a convertible promissory note. The note bears annual interest of 8% and matures
on December 31, 2024. The note contains certain anti-dilution features with an as-converted ownership of 5%. As of June 30, 2022, the
Company determined that book value represented fair value with no adjustment necessary.
Note
7. Notes Payable
December
2020 Note
On
December 8, 2020, the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note
(the “December 2020 Note”) in the principal amount of $230 which is convertible, at the option of the holder, into shares
of common stock at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately
preceding the applicable conversion. The Company received consideration of $200 for the convertible promissory note. The note bears interest
at a rate of 8% per annum and matures in twelve months.
The
Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion
feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature’s
intrinsic value on December 8, 2020 and determined that the beneficial conversion feature was valued at $200 which was recorded as a
debt discount, and together with the original issue discount of $30, in the aggregate of $230, is being amortized over the life of the
loan. The Company measured the derivative liability’s fair value on December 8, 2020 and determined that the derivative liability
was valued at $555 which exceeded the intrinsic value of the beneficial conversion feature by $355 and resulted in the Company recording
non-cash interest expense of $355.
On
June 15, 2021, the holder converted $120 of principal into 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 $32 was recorded as loss on settlement of debt.
On
July 27, 2021, the holder converted the remaining $110 of principal and $11 of accrued interest into 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 of December 31, 2021, this note had no outstanding balance.
March
2021 Note
On
March 5, 2021, the Company entered into a securities purchase agreement with Bucktown Capital, LLC (the “Investor”), pursuant
to which the Company issued a convertible promissory note in the original principal amount of $13,210 (the “March 2021 Note”).
The March 2021 Note was convertible, at the option of the Investor, into shares of common stock of the Company at a conversion price
equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the applicable conversion
(the “Conversion Price”); provided, however, in no event was the Conversion Price to be less than $0.04 per share. The March
2021 Note bore interest at a rate of 8% per annum and will mature in twelve months.
The
March 2021 Note was to be funded in tranches, with the initial tranche of $1,210 funded on March 5, 2021 for consideration of $1,000.
Six subsequent tranches (five tranches, each for $1,200 and one tranche for $6,000) were to be funded upon the notice of effectiveness
of a Registration Statement on Form S-1 covering the common stock issuable in connection with the March 2021 Note. Further, the final
tranche required the mutual agreement of the Company and Investor. Until such time as Investor funded the subsequent tranches, the Company
would hold a series of Investor Notes that offset any unfunded portion of the March 2021 Note.
The
Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion
feature. The Company measured the beneficial conversion feature’s intrinsic value on March 5, 2021 and determined that the beneficial
conversion feature was valued at $1,000 which was recorded as a debt discount, and together with the original issue discount of $210,
in the aggregate of $1,210, is being amortized over the life of the loan.
As
a result of the Company failing to meet certain registration requirements under the March 2021 Note, the outstanding balance of the March
2021 Note was automatically increased by 5% on each of July 5, 2021, August 5, 2021, and September 5, 2021 and as part of the exchange
agreement an additional 5% on September 30, 2021, prior to the exchange. An additional $270 was recorded as outstanding principal, bringing
the outstanding balance prior to the exchange to $1,481.
On
September 30, 2021, the Company entered into an exchange agreement with the March 2021 Note holder under which the outstanding principal
balance of $1,481 and $60 of accrued interest were exchanged for 53,500,000 warrants to purchase common stock (See Note 7), which were
treated as a warrant derivative liability. Upon the exchange, the Company settled $1,481 of outstanding principal, $60 of accrued interest,
$758 of debt discount, recorded a warrant liability in the amount of $1,221 resulting in a loss on settlement of debt of $438. The derivative
was calculated using a share fair value of $0.025 per share, a discount rate of 0.98%, remaining lives of 4.43 years and volatility of
176.1%. As of December 31, 2021, this note had no outstanding balance.
Derivative
Liabilities
The
Company’s activity in its debt related derivative liability was as follows for the three and six months ended June 30, 2022:
Schedule of Derivative Liability Activity
| Balance
of derivative liability at January 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 at December 31, 2021 | |
| 1,130 | |
| Transfer
out upon exercise of warrants | |
| (171 | ) |
| Change
in fair value of warrant liability | |
| 407 | |
| Balance
of derivative liabilities at March 31, 2022 | |
$ | 1,366 | |
| Transfer
out upon exercise of warrants | |
| (38 | ) |
| Change
in fair value of warrant liability | |
| (999 | ) |
| Balance
of derivative liabilities at June 30, 2022 | |
| 329 | |
The
Company recorded loss on settlement of derivative liability in the amount of $162 and $579 for the three and six months ended June 30,
2022, respectively. The Company recorded loss on settlement of derivative liability in the amount of $30 and $30 for the three and six
months ended June 30, 2021, respectively.
As
of June 30, 2022, the fair value of the warrant derivative liability was $329 and for the three and six months ended June 30, 2022 the
Company recorded gains of $999 and $592, respectively, from the change in fair value of derivative warrant liability as non-operating
income in the statements of operations. The Company valued the warrant derivative liability using the Black-Scholes option pricing model
using the following assumptions as of June 30, 2022: 1) stock price of $0.007, 2) exercise prices of $0.05, 3) remaining lives of 3.7
– 4.1 years, 4) dividend yields of 0%, 5) risk free rates of 2.99-3.01%, and 6) volatility of 171.8%.
As
of December 31, 2021, the fair value of the warrant derivative liability was $1,130 and for the year ended December 31, 2021 the Company
recorded a gain of $955 from the change in fair value of derivative warrant liability as non-operating income in the statements of operations.
The Company valued the warrant derivative liability using the Black-Scholes option pricing model using the following assumptions as of
December 31, 2021: 1) stock price of $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.
The
following table summarizes the Company’s debt related derivative liability as of June 30, 2022 and December 31, 2021:
Schedule of Derivative Liability Fair Value
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Fair
Value | |
| | |
June
30, 2022 | |
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Fair
Value | |
| | |
| | |
| | |
| | |
| |
| Liabilities | |
| | | |
| | | |
| | | |
| | |
| Warrant
derivative liability | |
$ | - | | |
$ | - | | |
$ | 329 | | |
$ | 329 | |
| | |
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 | | |
$ | 1,130 | |
Note
8. Loans Payable
The
Company received $71 from loans payable on June 30, 2022. The loans bear annual interest of 7% and the maturity date has not yet been
determined.
Note
9. Leases
In
December 2019, the Company entered an office lease in connection with the relocation of its executive office to Raleigh, North Carolina.
The Company accounted for this lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease is $3 per
month, with annual increases of 3% during the 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. In December 2019, the Company recorded a Right of Use Asset of $79
and a corresponding Lease Liability of $79. The Right to Use Asset is accounted for as an operating lease and has a balance, net of amortization,
of $20 as of June 30, 2022.
On
November 1, 2021, the Company entered into a lease agreement to lease a contiguous portion of land to its existing property, as a planting
area for trees intended to mitigate noise from the Company’s cryptocurrency mining operations. The agreement calls for yearly installments
of $3 for the first five years, with an option to extend this lease for another five-year period at a rate not to exceed 105% of the
current lease payment. On each anniversary date, the Company will pay $3 in advance, with payment for the first year paid upon execution
of the lease. The Company used an incremental borrowing rate of 8.0% based on the interest rate of incorporated in the most recent promissory
note. At lease inception, the Company recorded a Right of Use Asset of $22 and a corresponding Lease Liability of $22. The Right to Use
Asset is accounted for as an operating lease and has a balance, net of amortization, of $21 as of June 30, 2022.
Total
future minimum payments required under the lease agreement are as follows:
Schedule of Future Minimum Lease Payment
| | |
Amount | |
| 2022 | |
$ | 22 | |
| 2023 | |
| 3 | |
| 2024 | |
| 3 | |
| 2025 | |
| 3 | |
| 2026 | |
| 3 | |
| Thereafter | |
| 12 | |
| Total
undiscounted minimum future lease payments | |
$ | 46 | |
| Less
Imputed interest | |
| (9 | ) |
| Present
value of operating lease liabilities | |
$ | 37 | |
| Disclosed
as: | |
| | |
| Current
portion | |
$ | 19 | |
| Non-current
portion | |
| 18 | |
The
Company recorded rent expense of $10 and $9 for the three months ended June 30, 2022 and 2021, respectively, and $20 and $18 for the
six months ended June 30, 2022 and 2021, respectively.
At
June 30, 2022 the weighted average interest rate for the operating lease was 18.35%. At June 30, 2022, the weighted average remaining
lease term for operating lease was 5.2 years. The Company’s lease agreement does not contain any material residual value guarantees
or material restrictive covenants.
Note
10. 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 December 31, 2021 (see Preferred Stock
below) the Company issued 29,870,130 shares of common stock.
During
the year ended December 31, 2021, in connection with the conversions of $120 and $110, with accrued interest, of the December 2020 convertible
note payable (see Note 7), the Company issued 4,761,905 and 6,673,384 shares of common stock, respectively.
On
July 21, 2021, as part of a corporate fundraising of $990, net of issuance costs, the Company issued 35,385,703 shares of common stock
and 35,385,703 warrants to purchase common stock (see Warrants below).
During
the year ended December 31, 2021, 14,270,833 warrants with an embedded conversion feature were exercised on a cashless basis for the
issuance of 23,500,000 shares of common stock (see below).
During
the three months ended March 31, 2022, 11,197,930 warrants with an embedded conversion feature were exercised on a cashless basis for
the issuance of 34,000,000 shares of common stock (see below).
During
the three months ended June 30, 2022, 4,364,897 warrants with an embedded conversion feature were exercised on a cashless basis for the
issuance of 20,000,000 shares of common stock (see below). Of those shares, 10,000,000 were ordered on June 30, 2022, but issued on July 5,
2022, and classified on the balance sheet as common stock to be issued.
Preferred
Stock
On
January 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.
On
April 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.
The
common shares issued upon conversion of the Series C Preferred Shares have been registered under the Company’s then-effective registration
statement on Form S-3. On April 12, 2019, the Company sold 190 Series C Preferred Shares for $1,890, net of issuance costs and on July
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 ended December
31, 2021.
Warrants
On
July 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.
On
September 30, 2021, the Company exchanged the outstanding principal of $1,481 and accrued interest of $60 of the March 2021 Note for
53,500,000 warrants to purchase common stock (see Note 7).
During
the year ended December 31, 2021, 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 six months ended June 30, 2022, 15,562,827 warrants were exercised on a cashless basis for the issuance of 54,000,000 shares of common
stock. Upon cashless exercise, the Company calculated the fair value of derivative liability on warrants of $209, compared it to the
fair value of 54,000,000 shares of $788 and recorded a loss on extinguishment of $579. 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 $0.007
- $0.019, 2) exercise prices of $0.05, 3) remaining lives of 3.7 – 4.2 years, 4) dividend yields of 0%, 5) risk free rates of 1.53%
- 2.99%, and 6) volatility of 171.8% - 175.6%.
The
following table summarizes information about shares issuable under warrants outstanding during the six months ended June 30, 2022:
Summary of Warrants Outstanding
| | |
Warrant
shares
outstanding | | |
Weighted
average
exercise price | | |
Weighted
average remaining life | | |
Intrinsic
value | |
| | |
| - | | |
| - | | |
| - | | |
| - | |
| Outstanding
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 | |
| (15,562,827 | ) | |
| 0.05 | | |
| - | | |
| - | |
| Outstanding
and exercisable at June 30, 2022 | |
| 59,052,044 | | |
$ | 0.05 | | |
| 3.91 | | |
$ | - | |
Note
11. Commitments and Contingencies
Legal
proceedings
From
time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During
the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report
on Form 10-K, as filed with the SEC on March 31, 2022.
Bitcoin
Production Equipment and Operations
In
August 2018, the Company entered a collaborative venture with Bit5ive, LLC to develop a fully contained crypto currency mining pod (the
“POD5 Agreement”) for a term of five years. In exchange for an initial capital investment as well as engineering and design
expertise, the Company receives royalty payments from Bit5ive, LLC. During the three and six months ended June 30, 2022, the Company
received no royalties under this agreement. During the three and six months ended June 30, 2021, the Company received royalties and recorded
other income of $6 and $13, respectively.
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
12. 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 six months ended June 30, 2022 and 2021, the Company made contributions to the 401(k)
Plan of $6 and $6, respectively.
Note
13. Subsequent Events
On
August 5, 2022, the Company sold 22.8 million shares of common stock to an accredited investor for $228. The investor also received warrants
to acquire an equal number of common shares at exercise prices of $0.03 per share to $0.12 per share.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as assumptions
that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such
forward–looking statements. The statements contained herein that are not purely historical are forward–looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of words such as, but not
limited to, “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,”
“intend,” “plan,” “believe” and similar expressions or variations intended to identify forward–looking
statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management.
Such forward–looking statements are subject to risks, uncertainties and other important factors that could cause actual results
and the timing of certain events to differ materially from future results expressed or implied by such forward–looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed
in the section titled “Risk Factors” included in our Annual Report on Form 10–K for the fiscal year ended December
31, 2021 as filed with the Securities and Exchange Commission (“SEC”) on March 31, 2022, in addition to other public reports
we filed with the SEC. The forward–looking statements set forth herein speak only as of the date of this report. Except as required
by law, we undertake no obligation to update any forward–looking statements to reflect events or circumstances after the date of
such statements.
Executive
summary
MGT
Capital Investments, Inc. (“MGT” or the “Company”) is a Delaware corporation that was incorporated in
Delaware in 2000. MGT was originally incorporated in Utah in 1977. MGT’s corporate office is in Raleigh, North Carolina.
All
dollar figures set forth in this Quarterly Report on Form 10-Q are in thousands, except per-share amounts.
Current
Operations
MGT
conducts cryptocurrency activities at a company-owned and managed Bitcoin mining facility in LaFayette, Georgia. Located adjacent to
a utility substation, the several-acre property has access to about 20 megawatts (MW) of electrical power, half of which is presently
utilized by the Company. Business activities are comprised of self-mining operations and leasing space to third parties.
As
of June 30, 2022 and August 15, 2022, the Company owned 430 Antminer S17 Pro (the “S17 miners”) and 37 Antminer S19 Pro Bitcoin
miners. All miners are located at our Georgia facility. Over three-quarters of the S17 miners require various repairs to be productive.
We are in the process of selling our remaining S17 miners, as well as loose hash boards, power supplies, controller boards, and other
parts.
In
addition to its self-mining operations, the Company leases its owned space to other Bitcoin miners and also provides hosting services
for owners of mining equipment. These measures improve utilization of the electrical infrastructure and better insulate us against the
volatility of Bitcoin mining.
MGT’s
miners are housed in a modified shipping container on the Company’s owned property in Georgia. The entire facility, including the
land and improvements, five 2500 KVA 3-phase transformers, three mining containers, and miners, are owned by MGT. We continue to explore
ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to
acquire the newest generation miners. The Company is also investigating other sites to develop into Bitcoin mining facilities in addition
to expansion at its current property.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The notes to the
unaudited condensed financial statements contained in this Quarterly Report describe our significant accounting policies used in the
preparation of the unaudited condensed financial statements. The preparation of these financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our unaudited condensed financial statements.
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.
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
$222 and $414 from these sources during the three and six months ended June 30, 2022, respectively. During
the three and six months ended June 30, 2022, two customers accounted for 89% and 90%, respectively, of hosting revenue. There
were no hosting revenues for the six months ended June 30, 2021.
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.
Results
of operations
Three
months ended June 30, 2022 and 2021
Revenues
Our
revenues for the three months June 30, 2022 increased by $46, or 19%, to $284 as compared to $238 for the three months ended June 30,
2021. Our revenue is derived from cryptocurrency mining, which totaled $62 for the three months ended June 30, 2022 and $238 during the
three months ended June 30, 2021. The decrease in mining revenues for this period is due to a decrease in the number of 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 has recognized
$222 and $0 during the three months ended June 30, 2022 and 2021, respectively.
Operating
Expenses
Operating
expenses for the three months ended June 30, 2022 increased by $449, or 65%, to $1,135, as compared to $686 for the three months ended
June 30, 2021. The increase in operating expenses was primarily due to an increase in cost of revenue of $516, partially offset by a
decrease in general and administrative expenses of $67.
The
increase in cost of revenue of $516 or 218% to $753, as compared to $237 for the three months ended June 30, 2021 was primarily due to
increased electricity costs from hosting services. The decrease in general and administrative expenses of $67 or 15%, to $382, as compared
to $449 for the three months ended June 30, 2021, was primarily due to a decrease in legal and professional fees of $48 and decrease
in salaries of $22.
Other
Income and Expense
For
the three months ended June 30, 2022, non–operating income of $886 consisted primarily of a gain on change in fair value of warrants
derivative liability of $999, other income of $48 and interest income of $1, partially offset by loss on settlement of derivative of
$162. Other income of $48 consisted of an amount settled with a vendor. During the comparable period ended June 30, 2021, non–operating
expense of $217 consisted of loss on settlement of derivative of $30, accretion of debt discount of $208 and interest expense of $29,
partially offset by change in fair value of derivative liability of $35 non-operating income of $6 and a gain on sale of property and
equipment of $9.
Six
months ended June 30, 2022 and 2021
Revenues
Our
revenues for the six months ended June 30, 2022 increased by $15, or 3%, to $539 as compared to $524 for the six months ended June 30,
2021. Our revenue is derived from cryptocurrency mining, which totaled $125 for the six months ended June 30, 2022 and $524 during the
six months ended June 30, 2021. The decrease in mining revenues is due to a decrease in the number of 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
$414 and $0 during the six months ended June 30, 2022 and 2021, respectively.
Operating
Expenses
Operating
expenses for the six months ended June 30, 2022 increased by $664, or 47%, to $2,085 as compared to $1,421 for the six months ended June
30, 2021. The increase in operating expenses was due to increases in cost of revenue of $812, offset by decreases in general and administrative
expenses of $148.
The
increase in cost of revenue of $812, or 167%, to $1,299, as compared to $487 for the six months ended June 30, 2021 was primarily due
to increased electricity costs from hosting services. The decrease in general and administrative expenses of $148 or 16% to $786 as compared
to $934 for the six months ended June 30, 2021, was primarily due to decreases in legal and professional fees of $181 and decrease in
salary expense of $24.
Other
Income and Expense
For
the six months ended June 30, 2022, non–operating income of $63 consisted primarily of gain on change in fair value of derivative
of $592, commercial vendor settlement of $48 and interest income of $2, partially offset by loss on settlement of derivative
of $579. During the comparable period ended June 30, 2021, non–operating expenses of $349 consisted primarily of accretion of debt
discount of $270, change in fair value of derivative of $33, a loss on settlement of derivative of $30, and interest expense of $39,
partially offset by a gain on sale of property and equipment of $10 and non-operating income of $13.
Liquidity
and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt and equity interests. We have incurred significant operating losses
since inception and continue to generate losses from operations and as of June 30, 2022 have an accumulated deficit of $421,411. At June
30, 2022, our cash and cash equivalents were $313, and our working capital deficit was $844.
In
January 2020, management completed the consolidation of its activities in a Company-owned and managed facility, after having terminated
all management agreements with outside investors as well as all third-party hosting arrangements in 2019. The Company will need to raise
additional capital to fund operating losses and grow its operations. There can be no assurance however that the Company will be able
to raise additional capital when needed, or at terms deemed acceptable, if at all. The Company’s ability to raise additional capital
will also be impacted by the volatility of Bitcoin and the ongoing SEC enforcement action against our Chief Executive Officer, both of
which are highly uncertain, cannot be predicted and could have an adverse effect on the Company’s business and financial condition.
The issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our
shareholders. Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from
the issuance of these unaudited condensed financial statements. The accompanying unaudited condensed financial statements do not include
any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The
price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin have had a negative impact on our operating
results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors, including, but not
limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties
around the world. Since we record revenue based on the price of earned Bitcoin and we may retain such Bitcoin as an asset or as payment
for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin we retain. During the period
January 1, 2022 through June 30, 2022, the price of Bitcoin remained very volatile, with a low and high exchange price per Bitcoin of
approximately $18 and $48, respectively.
The
supply of Bitcoin is finite. Once 21 million Bitcoin are generated, the network will stop producing more. Currently, there are approximately
19 million Bitcoin in circulation, or 90% of the total supply of Bitcoin. Within the Bitcoin protocol is an event referred to as Halving
where the Bitcoin reward provided upon mining a block is reduced by 50%. Halvings are scheduled to occur once every 210,000 blocks, or
roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The most recent Halving occurred in May 2020, with
a revised reward payout of 6.25 Bitcoin per block.
Given
a stable hash rate, a Halving reduces the number of new Bitcoin being generated by the network. While the effect is to limit the supply
of new coins, it has no impact on the quantity of total Bitcoin outstanding. As a result, the price of Bitcoin could rise or fall based
on overall investor and consumer demand. Should the price of Bitcoin remain unchanged after the next Halving, the Company’s revenue
would be reduced by 50%, with a much larger negative impact to profit.
Our
primary source of operating funds has been through debt and equity financing.
COVID-19
pandemic:
The
COVID-19 pandemic has disrupted and may continue to disrupt our operations and those of our vendors, suppliers and other third parties
on which we rely, and we may not be able to obtain new miners or replacement parts for our existing miners in a timely or cost-effective
manner, which could materially and adversely affect our business and results of operations.
The
extent to which COVID-19 impacts our operations or our ability to obtain financing will depend on future developments which are uncertain
and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments
and private businesses to contain COVID-19 to treat its impact, among others. If the disruptions posed by COVID-19 continue for an extended
period of time, financial markets may not be available to the Company for raising capital in order to fund future growth. Should the
Company not be able to obtain financing in the amounts necessary or under terms which are economically feasible, we may be required to
reduce planned future growth and/or the scope of our operations.
Inflation
Electricity
and other prices are vulnerable to inflation.
Cash
Flows
| | |
Six
Months ended
June 30, | |
| | |
2022 | | |
2021 | |
| Cash
provided by / (used in) | |
| | | |
| | |
| Operating
activities | |
$ | (882 | ) | |
$ | (638 | ) |
| Investing
activities | |
| (68 | ) | |
| 141 | |
| Financing
activities | |
| 33 | | |
| 1,000 | |
| Net
increase (decrease) in cash and cash equivalents | |
$ | (917 | ) | |
$ | 503 | |
Operating
activities
Net
cash used in operating activities was $882 for the six months ended June 30, 2022 as compared to net cash used in operating activities
of $638 for the six months ended June 30, 2021. Cash used in operating activities for the six months ended June 30, 2022 primarily consisted
of a net loss of $1,483 offset by non-cash charges of $84 which includes depreciation of $97, loss on settlement of derivative of $579,
partially offset by change in fair value of derivative liability of $592, and cash provided by changes in working capital of $517.
Investing
activities
Net
cash used in investing activities was $68 for the six months ended June 30, 2022 which consisted of purchases of property and equipment
of $68.
Net
cash provided by investing activities was $141 for the six months ended June 30, 2021 consisted of proceeds from the sale of property
and equipment of $141.
Financing
activities
Net
cash provided by financing activities was $33 for the six months ended June 30, 2022 which consisted of proceeds from loans payable.
During
the six months ended June 30, 2021, cash provided by financing activities totaled $1,000 from proceeds of the receipt of a convertible
promissory note.
Off–balance
sheet arrangements
As
of June 30, 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.