Note
2. Going Concern and Management’s Plans
The
accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2021, the Company had incurred
significant operating losses since inception and continues to generate losses from operations. As of March 31, 2021, the Company had
an accumulated deficit of $418,970. As of March 31, 2021 MGT’s cash and cash equivalents were $1,188.
The
Company will require additional funding to grow its operations. Further, depending upon operational profitability, the Company may also
need to raise additional funding for ongoing working capital purposes. There can be no assurance however that the Company will be able
to raise additional capital when needed, or at terms deemed acceptable, if at all. The Company’s ability to raise additional capital
is impacted by the volatility of Bitcoin mining economics and the SEC’s ongoing enforcement action against our Chief Executive
Officer, both of which are highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and
financial condition.
Since
January 2021, the Company has secured working capital through the issuance of a convertible note, and the sale of assets.
Such
factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance of these
unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements do not
include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Note
3. Summary of Significant Accounting Policies
Principles
of consolidation
The
unaudited condensed consolidated financial statements include the accounts of MGT and MGT Sweden AB. All intercompany transactions and
balances have been eliminated.
Use
of estimates and assumptions and critical accounting estimates and assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements,
and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from
using such estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived
assets, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, the recognition
of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting
estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Revenue
recognition
The
Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving “blocks”
to be added to the blockchain and providing transaction verification services within the digital currency network of Bitcoin, commonly
termed “cryptocurrency mining.” In consideration for these services, the Company receives digital currency (“Coins”).
The Coins are recorded as revenue, using the average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance
sheet as an intangible digital asset valued at the lower of cost or net realizable value. Net realizable value adjustments, to adjust
the value of Coins to market value, are included in cost of revenue on the Company’s consolidated statement of operations. Further,
any gain or loss on the sale of Coins would be recorded to costs of revenue. Costs of revenue include electricity costs, equipment and
infrastructure depreciation, and net realizable value adjustments.
The
Company also recognizes a royalty participation upon the sale of certain containers manufactured by Bit5ive LLC of Miami, Florida (the
“Pod5ive Containers”) under the terms of a five-year collaboration agreement entered in August 2018.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight–line method on the
various asset classes over their estimated useful lives, which range from one to ten years when placed in service. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of,
the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the
year of disposition. Deposits on property and equipment are initially classified as Other Assets and upon delivery, installation and
full payment, the assets are classified as property and equipment on the consolidated balance sheet.
Income
taxes
The
Company accounts for income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 requires an asset and liability approach
for financial accounting and reporting for income taxes and established for all the entities a minimum threshold for financial statement
recognition of the benefit of tax positions and requires certain expanded disclosures. The provision for income taxes is based upon income
or loss after adjustment for those permanent items that are not considered in the determination of taxable income. Deferred income taxes
represent the tax effects of differences between the financial reporting and tax basis of the Company’s assets and liabilities
at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability
of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax
assets will not be realized. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit
and cause changes to previous estimates of tax liability. In management’s opinion, adequate provisions for income taxes have been
made. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Accordingly,
the computation of diluted loss per share for the three months ended March 31, 2021 excludes 34,285,714 shares issuable upon conversion
of convertible debt. The computation of diluted loss per share for the three months ended March 31, 2020 excludes 266,667 unvested restricted
shares, 68,904,286 shares issuable upon conversion of convertible debt, and 126,373,626 shares issuable under preferred stock.
Stock–based
compensation
The
Company applies ASC 718-10, “Share- Based Payment,” which requires the measurement and recognition of compensation expenses
for all share based payment awards made to employees and directors including employee stock options under the Company’s stock plans
and equity awards issued to non-employees based on estimated fair values.
ASC
718-10 requires companies to estimate the fair value of equity-based option awards on the date of grant using an option-pricing model.
The fair value of the award is recognized as an expense on a straight-line basis over the requisite service periods in the Company’s
consolidated statements of comprehensive loss.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company (the “Board of
Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods,
typically over a 12 to 24-month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair
market value of a share of the Company’s common stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock
volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected
forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected
term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate
term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards require the input of the subjective
assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s
best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate
the expected forfeiture rate and recognize expense only for those shares expected to vest.
Fair
Value Measure and Disclosures
ASC
820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority
to unobservable inputs (Level 3 measurements).
Fair
value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a
liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on
assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize
the inputs in measuring fair value as follows:
|
|
●
|
Level
1 Quoted prices in active markets for identical assets or liabilities.
|
|
|
●
|
Level
2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable, either directly or indirectly.
|
|
|
●
|
Level
3 Significant unobservable inputs that cannot be corroborated by market data.
|
As
of March 31, 2021, and December 31, 2020, the Company had a Level 3 financial instrument related to the derivative liability related
to the issuance of convertible notes.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Gain
(Loss) on Modification/Extinguishment of Debt
In
accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive
at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of
the original instrument along with the recognition of a gain/loss. Additionally, under ASC 470, a substantive modification of a debt
instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash
flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows
under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument
along with the recognition of a gain/loss.
Cash
and cash equivalents
The
Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
The Company’s combined accounts were $1,188 and $236 as of March 31, 2021 and December 31, 2020, respectively. Accounts are insured
by the FDIC up to $250,000 per financial institution. The Company has not experienced any losses in such accounts with these financial
institutions. As of March 31, 2021, and December 31, 2020, the Company had $938 and $0, respectively, in excess over the FDIC insurance
limit.
Recent
accounting pronouncements
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect
on the accompanying consolidated financial statements, other than those disclosed below.
In
August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt – Debt with Conversion and
Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)”
(“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities
and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification
initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will
have on its financial statements.
Derivative
Instruments
Derivative
financial instruments are recorded in the accompanying consolidated balance sheets at fair value in accordance with ASC 815. When the
Company enters into a financial instrument such as a debt or equity agreement (the “host contract”), the Company assesses
whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics
of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are
not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument
with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the
host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying
consolidated balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of
derivatives are recorded as a gain or loss in the Company’s consolidated statements of operations.
Impairment
of long-lived assets
Long-lived
assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value
of an asset may not be recoverable. Should there be an indication of impairment, we test for recoverability by comparing the estimated
undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess
of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Management’s
evaluation of subsequent events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the
review, other than what is described in Note 11 – Subsequent Events, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial statements.
Digital
Currencies
Digital
currencies are included in current assets in the condensed consolidated balance sheets. Digital currencies are recorded at the lower
of cost or net realizable value.
Net
realizable value adjustments, to adjust the value of Coins to market value, are included in cost of revenue on the Company’s consolidated
statement of operations. Further, any gain or loss on the sale of Coins would be recorded to costs of revenue. Costs of revenue include
hosting fees, equipment and infrastructure depreciation, net realizable value adjustments, and electricity costs.
Halving
– The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving
is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus
algorithm. At a predetermined block, the mining reward is cut in half, hence the term “Halving.” A Halving for bitcoin occurred
on May 12, 2020. Many factors influence the price of Bitcoin and potential increases or decreases in prices in advance of or following
a future halving is unknown.
The
following table presents the activities of digital currencies for the three months ended March 31, 2021:
|
Digital currencies at December 31, 2020
|
|
$
|
4
|
|
|
Additions of digital currencies from mining
|
|
|
286
|
|
|
Payment of digital currencies to management partners
|
|
|
-
|
|
|
Realized gain on sale of digital currencies
|
|
|
(6
|
)
|
|
Net realizable value adjustment
|
|
|
(1
|
)
|
|
Sale of digital currencies
|
|
|
(277
|
)
|
|
Digital currencies at March 31, 2021
|
|
$
|
6
|
|
Note
4. Property, Plant, and Equipment and Other Assets
Property
and equipment consisted of the following:
|
|
|
As of
|
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
Land
|
|
$
|
55
|
|
|
$
|
57
|
|
|
Computer hardware and software
|
|
|
10
|
|
|
|
10
|
|
|
Bitcoin mining machines
|
|
|
1,180
|
|
|
|
1,206
|
|
|
Infrastructure
|
|
|
905
|
|
|
|
905
|
|
|
Containers
|
|
|
403
|
|
|
|
550
|
|
|
Leasehold improvements
|
|
|
4
|
|
|
|
4
|
|
|
Property and equipment, gross
|
|
|
2,557
|
|
|
|
2,732
|
|
|
Less: Accumulated depreciation
|
|
|
(1,004
|
)
|
|
|
(860
|
)
|
|
Property and equipment, net
|
|
$
|
1,553
|
|
|
$
|
1,872
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
The
Company recorded depreciation expense of $189 and $342 for the three months ended March 31, 2021 and 2020, respectively. For the three
months ended March 31, 2021 and 2020, gains on sale of property and equipment of $1 and $30, respectively were recorded as other non-operating
expenses relating to the sale and disposition of Antminer S17 Pro and S9 Bitcoin miners and a container.
Other
Assets consisted of the following:
|
|
|
As of
|
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Security deposits
|
|
$
|
123
|
|
|
$
|
123
|
|
|
Other Assets
|
|
$
|
123
|
|
|
$
|
123
|
|
The
Company has paid $120 in security deposits related to its electrical contract, see Note 9, and $3 related to its office lease in Raleigh,
NC.
Note
5. Notes Payable
June
2018 Note
On
June 1, 2018, the Company entered into a note purchase agreement with an accredited investor, pursuant to which the Company issued an
unsecured promissory note in the amount of $3,600 (the “June 2018 Note”) for consideration of $3,000. The outstanding balance
was to be made in nine equal monthly installments beginning August 1, 2018, with an initial maturity date of April 1, 2019, with no prepayment
penalty. Upon an event of default, the outstanding balance of the promissory note would immediately increase by 120% and become immediately
due and payable. Prior to 2020, this note was amended 5 times.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
During
the year ended December 31, 2020, the Company issued 93,078,492 shares of its common stock upon the conversion of $929 in outstanding
principal, reducing the outstanding principal balance to $0 as of December 31, 2020.
December
2020 Note
On
December 8, 2020, the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note
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.
As
of March 31, 2021, the fair value of the derivative liability was $313 and for the three months ended March 31, 2021 the Company recorded
a loss of $67 from the change in fair value of derivative liability as non-operating expense in the consolidated statements of operations.
As of December 31, 2020, the fair value of the derivative liability was $246.
The Company valued the derivative liability using the Black-Scholes option pricing model using the following assumptions as of March
31, 2021 and December 31, 2020, respectively: 1) stock prices of $0.075 and $0.04, 2) conversion prices of $0.042 and $0.025, 3) remaining
lives of .69 and 0.94 years, 4) dividend yields of 0%, 5) risk free rates of 0.05% and 0.10%, and 6) volatility of 237.34% and 167.36%.
March
2021 Note
On
March 5, 2021, the Company entered into a securities purchase agreement, pursuant to which the Company issued a convertible promissory
note in the original principal amount of $13,210 (the “March 2021 Note”). The March 2021 Note is 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 shall the Conversion Price be less than $0.04 per share. The March 2021 Note bears interest at a rate of 8% per annum and
will mature in twelve months.
The
March 2021 Note will 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) will 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
requires the mutual agreement of the Company and Investor. Until such time as Investor has funded the subsequent tranches, the Company
will hold a series of Investor Notes that offset any unfunded portion of the March 2021 Note.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
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.
Derivative
Liabilities
The
Company’s activity in its derivative liability was as follows for the three months ended March 31, 2021:
|
Balance of derivative liability at December 31, 2020
|
|
$
|
246
|
|
|
Change in fair value recognized in non-operating expense
|
|
|
67
|
|
|
Balance of derivative liability at March 31, 2021
|
|
$
|
313
|
|
The
Company did not have any derivative liability activity during the three months ended March 31, 2020.
Fluctuations
in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As
the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases,
therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant
unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value
of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally
result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not
result in a material change in our Level 3 fair value.
The
following table summarizes the Company’s derivative as of March 31, 2021:
|
|
|
March 31, 2021
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
313
|
|
|
$
|
313
|
|
The
following table summarizes the Company’s derivative as of December 31, 2020:
|
|
|
December 31, 2020
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
246
|
|
|
$
|
246
|
|
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
U.S.
Small Business Administration-Paycheck Protection Plan
On
April 16, 2020, we entered into a promissory note with Aquesta Bank for $108 (the “PPP Loan”) in connection with the Paycheck
Protection Program (“PPP”) offered by the U.S. Small Business Administration (the “SBA”). The PPP Loan had terms
including an interest rate of 1% per annum, with monthly installments of $6 commencing on November 1, 2021 through its maturity on April
1, 2023. The principal amount of the PPP Loan is forgiven if the loan proceeds are used to pay for payroll costs, rent and utilities
costs over the 24-week period after the loan is made. Not more than 40% of the forgiven amount may be used for non-payroll costs. In
addition, in July 2020, the Company received $3 from the SBA as a COVID-19 Economic Injury Disaster Loan Advance (the “EIDL Advance”)
On
April 1, 2021, the Company received notice of forgiveness from the SBA in the amount of $108 in relation to the PPP Loan as the Company
used all proceeds from the PPP Loan to maintain payroll and other allowable expenses. Further, pursuant to an SBA Procedural Notice in
December 2020, the EIDL Advance was also forgiven. The Company has concluded that the PPP Loan and EIDL Advance represent, in substance,
a government grant that is forgiven in its entirety. As such, in accordance with International Accounting Standards (“IAS”)
20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company has recognized the entire PPP
Loan and EIDL Advance amount of $111 as grant income, which is included in other non-operating income (expense) in the consolidated statement
of operations for the year ended December 31, 2020.
Notes
payable consisted of the following:
|
|
|
As of March 31, 2021
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
December 2020 Note
|
|
$
|
230
|
|
|
$
|
(201
|
)
|
|
$
|
29
|
|
|
March 2021 Note
|
|
|
1,210
|
|
|
|
(1,172
|
)
|
|
|
38
|
|
|
Total notes payable
|
|
$
|
1,460
|
|
|
$
|
(1,373
|
)
|
|
$
|
67
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
Total notes payable-December 2020 Note
|
|
$
|
230
|
|
|
$
|
(225
|
)
|
|
$
|
5
|
|
During
the three months ended March 31, 2021 and 2020, the Company recorded accretion of debt discount of $62 and $0, respectively.
Note
6. Leases
In
December 2019, the Company entered an office lease in connection with the relocation of its executive office to Raleigh, North Carolina.
The Company accounted for this lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease is $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 $51 as of March 31, 2021.
Total
future minimum payments required under the lease agreement are as follows:
|
|
|
Amount
|
|
|
Remainder of 2021
|
|
$
|
28
|
|
|
2022
|
|
|
38
|
|
|
Total undiscounted minimum future lease payments
|
|
$
|
66
|
|
|
Less Imputed interest
|
|
|
(15
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
51
|
|
|
Disclosed as:
|
|
|
|
|
|
Current portion
|
|
$
|
26
|
|
|
Non-current portion
|
|
|
25
|
|
|
|
|
$
|
51
|
|
The
Company recorded rent expense of $9 and $9 for the three months ended March 31, 2021 and 2020, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
At
March 31, 2021, the weighted average remaining lease term for operating lease was 1.7 years. The Company’s lease agreement does
not contain any material residual value guarantees or material restrictive covenants.
Note
7. Common Stock and Preferred Stock
Common
stock
Other
Common Stock Issuances
In
connection with the conversion of 115 shares of Series C Preferred Stock during the three months ended March 31, 2021 (see Preferred
Stock below) the Company issued 29,870,130 shares of common stock.
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 consolidated 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.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
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.
115 shares of Series C Preferred Stock were issued and outstanding as of December 31, 2020.
On
January 28, 2021 and February 18, 2021, the Company issued 2,597,403 and 27,272,727 shares of the Company’s common stock, respectively,
in connection with the conversion of 10 and 105 shares of the Company’s Series C Convertible Preferred Stock. Following these conversions,
the Company has no Series C Preferred issued or outstanding.
Note
8. Stock–Based Compensation
Issuance
of restricted common stock – directors, officers and employees
The
Company’s activity in restricted common stock was as follows for the three months ended March 31, 2021:
|
|
|
Number of shares
|
|
|
Weighted average
grant date fair
value
|
|
|
Non–vested at December 31, 2020
|
|
|
33,333
|
|
|
$
|
0.04
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
Vested
|
|
|
(33,333
|
)
|
|
$
|
0.04
|
|
|
Non–vested at March 31, 2021
|
|
|
-
|
|
|
$
|
-
|
|
For
the three months ended March 31, 2021 and 2020, the Company has recorded $0 and $220, in employee and director stock–based compensation
expense, which is a component of general and administrative expenses in the consolidated statement of operations.
As
of March 31, 2021, there was no unamortized stock-based compensation costs related to restricted share arrangements.
Stock
options
Under
the terms of the stock option agreement, all options expired on January 31, 2020. As of March 31, 2021, there are no outstanding or exercisable
stock options.
Note
9. Commitments and Contingencies
Legal
proceedings
The
Company is subject, from time to time, to various legal proceedings that are incidental to the conduct of its business. The Company is
not involved in any pending legal proceeding that it believes would reasonably be expected to have a material adverse effect on its financial
condition or results of operations, except as previously disclosed in our Annual Report on Form 10-K, as filed with the SEC on April
15, 2021.
Bitcoin
Production Equipment and Operations
On
August 14, 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. Pursuant to the POD5 Agreement, the Company assists with the design and
development of the POD5 Containers. The Company retains naming rights to the pods and receives royalty payments from Bit5ive, LLC in
exchange for an initial capital investment as well as engineering and design expertise. During the three months ended March 31, 2021
and 2020 the Company received royalties and recognized revenue under this agreement of $7 and $3, respectively.
MGT
CAPITAL INVESTMENTS, INC. AND SUBSIDIARY
NOTES
TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per–share amounts)
Electricity
Contract
In
June 2019, the Company entered into a two-year contract for electric power with the City of Lafayette, Georgia, a municipal corporation
of the State of Georgia (“the City”). The Company makes monthly payments based upon electricity consumed, at a negotiated
kilowatt per hour rate, inclusive of transmission charges and exclusive of state and local sales taxes. Over time, the Company is entitled
to utilize a load of 10 megawatts. For each month, the Company estimates its expected electric load, and should the actual load drop
below 90% of this estimate, the City reserves the right to impose a modest penalty to the hourly kilowatt rate for electricity consumed.
In
connection with this agreement, the Company paid a $154 security deposit, which was reduced to $120 in June 2020. The new amount is classified
as Other Assets in the Company’s consolidated balance sheet as March 31, 2021.
This
agreement expires on September 30, 2021, and the Company has begun negotiations for an extension or new contract. There can be no assurance
that that the Company and City will reach agreement with acceptable price and volume metrics, if at all.
Management
Agreement Termination Liability
On
August 31, 2019, the Company entered into two Settlement and Termination Agreements (the “Settlement Agreements”) to management
agreements it entered in 2017 with two accredited investors (together the “Users”). Under the terms of the Settlement Agreements,
the Company paid the Users a percentage of profits (“Settlement Distribution”) of Bitcoin mining as defined in the
Settlement Agreements. The estimated present value of the Settlement Distributions of $337 was recorded as termination expense with an
offsetting liability on August 31, 2019. Since two of the components of the Settlement Distribution, Bitcoin price and Difficulty Rate,
as defined in the Settlement Agreements, are based on market conditions, the liability was adjusted to fair value on a quarterly
basis and any changes were recorded in the statement of operations. As such, the liability is considered a Level 3 financial instrument.
During the three months ended March 31, 2020, the Company recognized a gain on the change in the
fair value of $15 based on the change of Bitcoin price and Difficulty Rate, and along with the monthly Settlement Distributions valued
at $43, the liability was reduced to $58 as of March 31, 2020. Based on the terms of the Settlement Agreements, Settlement Distributions
terminated on September 30, 2020.
Note
10. Employee Benefit Plans
The
Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified
employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company may make discretionary contributions of
up to 100% of employee contributions. During the three months ended March 31, 2021 and 2020, the Company made contributions to the 401(k)
Plan of $3 and $4, respectively.
Note
11. Subsequent Events
On
April 1, 2021, the Company received notice from the SBA that the Company’s PPP Loan was forgiven in its entirety in the amount
of $108.
Item
2. Management’s discussion and analysis of financial condition and results of operations
This
Quarterly Report on Form 10–Q contains forward–looking statements that involve risks and uncertainties, as well as assumptions
that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such
forward–looking statements. The statements contained herein that are not purely historical are forward–looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Forward–looking statements are often identified by the use of words such as, but not
limited to, “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,”
“intend,” “plan,” “believe” and similar expressions or variations intended to identify forward–looking
statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management.
Such forward–looking statements are subject to risks, uncertainties and other important factors that could cause actual results
and the timing of certain events to differ materially from future results expressed or implied by such forward–looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed
in the section titled “Risk Factors” included in our Annual Report on Form 10–K for the fiscal year ended December
31, 2020 as filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021, in addition to other public reports
we filed with the SEC. The forward–looking statements set forth herein speak only as of the date of this report. Except as required
by law, we undertake no obligation to update any forward–looking statements to reflect events or circumstances after the date of
such statements.
Executive
summary
MGT
Capital Investments, Inc. (“MGT” or the “Company”) was incorporated in Delaware in 2000. MGT was originally incorporated
in Utah in 1977. MGT is comprised of the parent company and its wholly owned subsidiary MGT Sweden AB. MGT’s corporate office is
in Raleigh, North Carolina.
All
dollar figures set forth in this Quarterly Report on Form 10-Q are in thousands, except per-share amounts.
Current
Operations
The
Company owned approximately 649 Antminer S17 Pro Bitcoin miners at its Company-owned and managed facility located in LaFayette, GA as
of May 24, 2021. All miners were purchased from Bitmaintech Pte. Ltd., a Singapore limited company (“Bitmain”), and are collectively
rated at approximately 30 Ph/s in computing power. Bitmain has acknowledged manufacturing defects, combined with inadequate repair facilities,
rendering approximately one half of our miners in need of repair or replacement. The Company has begun using a third party repair facility
to repair its non-working hash boards and expects the process to be complete in the third calendar quarter of this year. While initial
batches of repaired hash boards have shown a very high success rate, there can be no guaranty that all future repairs will be as successful.
The Company’s miners are housed in three modified shipping containers. A utility substation, adjacent to the several acre property,
has access to over 20 megawatts (MW) of low-cost power. The Company’s current electrical load is estimated at slightly under 1.0
MW. The entire facility, including the land, two 2500 KVA 3-phase transformers, the mining containers, and miners, are owned by MGT.
As the Company is presently using only a portion of the built-out available electrical load, it is exploring ways to grow and maintain
its current operations including but not limited to further equipment sales, leasing space to other Bitcoin miners, and raising capital
to acquire newest generation miners.
Critical
accounting policies and estimates
Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The notes to the unaudited condensed consolidated financial statements contained in this Quarterly Report describe our significant accounting
policies used in the preparation of the unaudited condensed consolidated financial statements. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. We continually evaluate our critical accounting policies and estimates.
We
believe the critical accounting policies listed below reflect significant judgments, estimates and assumptions used in the preparation
of our unaudited condensed consolidated financial statements.
Revenue
recognition
The
Company’s primary revenue stream is related to the mining of digital currencies. The Company derives its revenue by solving “blocks”
to be added to the blockchain and providing transaction verification services within the digital currency network of Bitcoin, commonly
termed “cryptocurrency mining.” In consideration for these services, the Company receives digital currency (“Coins”).
The Coins are recorded as revenue, using the average spot price of Bitcoin on the date of receipt. The Coins are recorded on the balance
sheet as an intangible digital asset valued at the lower of cost or net realizable value. Net realizable value adjustments, to adjust
the value of Coins to market value, are included in cost of revenue on the Company’s consolidated statement of operations. Further,
any gain or loss on the sale of Coins would be recorded to costs of revenue. Costs of revenue include electricity costs, equipment and
infrastructure depreciation, and net realizable value adjustments.
The
Company also recognizes a royalty participation upon the sale of certain containers manufactured by Bit5ive LLC of Miami, Florida (the
“Pod5ive Containers”) under the terms of a collaboration agreement entered in August 2018.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight–line method on the
various asset classes over their estimated useful lives, which range from one to ten years when placed in service. The cost of repairs
and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of,
the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the
year of disposition. Deposits on property and equipment are initially classified as Other Assets and upon delivery, installation and
full payment, the assets are classified as property and equipment on the consolidated balance sheet.
Impairment
of long-lived assets
Long-lived
assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value
of an asset may not be recoverable, should there be an indication of impairment, we test for recoverability by comparing the estimated
undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess
of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.
Stock–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock
Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated
forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company (the “Board of
Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods,
typically over a 12 to 24-month period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair
market value of a share of the Company’s common stock on the grant date.
The
fair value of an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock
volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected
forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected
term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate
term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective
assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s
best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate
the expected forfeiture rate and recognize expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 718-10, “Share-Based Payment,”
which requires the measurement and recognition of compensation expenses for all share based payment awards made to employees
and directors including employee stock options under the Company’s stock plans and equity awards issued to non-employees based
on estimated fair values.
ASC 718-10 requires companies
to estimate the fair value of equity-based option awards on the date of grant using an option-pricing model. The fair value of the award
is recognized as an expense on a straight-line basis over the requisite service periods in the Company’s consolidated statements
of comprehensive loss.
Recent
accounting pronouncements
See
Note 3 to our unaudited condensed consolidated financial statements appearing in Part I, Item 1 of this Quarterly Report for Recent Accounting
Pronouncements.
Results
of operations
Three
months ended March 31, 2021 and 2020
Revenues
Our
revenues for the three months ended March 31, 2021 decreased by $384, or 57%, to $293, as compared to $677 for the three months ended
March 31, 2020. Our revenue is primarily derived from cryptocurrency mining. The decrease in revenues is a result of lower Bitcoins mined
due to fewer miners in operations and higher difficulty rate, offset by increased Bitcoin prices.
The
Company is also entitled to a royalty from the sale of the Pod5ive Containers. During March 31, 2021 and 2020, the Company recognized
$7 and $3 respectively, in royalties under this agreement due to a higher number of Pod5ive Container sales.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2021 decreased by $900, or 55%, to $735, as compared to $1,635 for the three months ended
March 31, 2020. The decrease in operating expenses was primarily due to a decrease in general and administrative expenses of $545,
primarily from a decrease in legal and professional fees, as well as a decrease of $355 in cost of revenue from lower electricity
usage.
The
decrease in general and administrative expenses of $545 or 53%, to $485, as compared to $1,030 for the three months ended March 31, 2020,
was primarily due to a decrease in stock-based compensation of $220 based on fewer shares issued or vested, a decrease in payroll and
related expenses of $123, a decrease in consulting fees in the amount of $82, and a decrease of legal and professional fees in the amount
of $397. The decrease of $355 in cost of revenue is primarily from lower electricity usage due to having fewer bitcoin miners in operation.
Other
Income and Expense
For
the three months ended March 31, 2021, non–operating income and expenses consisted primarily interest expense of $11, accretion
of debt discount of $62 and change in fair value of derivative of $67, and a gain on sale of property and equipment of $1. During the
comparable period ended March 31, 2020, non–operating income and expenses consisted of interest income of $10, accretion of debt
discount of $421, a gain from the change in the fair value of the liability associated with the termination of the management agreements
of $15 and a gain on sale of property and equipment of $30.
Liquidity
and capital resources
Sources
of Liquidity
We
have historically financed our business through the sale of debt and equity interests. We have incurred significant operating losses
since inception and continue to generate losses from operations and as of March 31, 2021 have an accumulated deficit of $418,970.
At March 31, 2021, our cash and cash equivalents were $1,188, and our working capital deficit was $792. As of March 31, 2021,
we had $1,440 of convertible promissory notes outstanding.
In
January 2020, management completed the initial phase of its plan to consolidate its activities in Company-owned and managed facilities,
executing on its expansion model to secure low cost power and grow its cryptocurrency assets. In connection with this plan, the Company
terminated its management agreements and its third-party hosting arrangements in 2019. The Company will need to raise additional funding
to grow its operations and to pay current maturities of debt. There can be no assurance however that the Company will be able to raise
additional capital when needed, or at terms deemed acceptable, if at all. The Company’s ability to raise additional capital will
also be impacted by the volatility of Bitcoin and the ongoing SEC enforcement action against our Chief Executive Officer, both of which
are highly uncertain, cannot be predicted and could have an adverse effect on the Company’s business and financial condition. The
issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders.
Such factors raise substantial doubt about the Company’s ability to sustain operations for at least one year from the issuance
of these unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements
do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities
that might be necessary should the Company be unable to continue as a going concern.
The
price of Bitcoin is volatile, and fluctuations are expected. Declines in the price of Bitcoin have had a negative impact on our operating
results and liquidity and could harm the price of our common stock. Movements may be influenced by various factors, including, but not
limited to, government regulation, security breaches experienced by service providers, as well as political and economic uncertainties
around the world. Since we record revenue based on the price of earned Bitcoin and we may retain such Bitcoin as an asset or as payment
for future expenses, the relative value of such revenues may fluctuate, as will the value of any Bitcoin we retain. The low and high
exchange price per Bitcoin for the year ending December 31, 2020, as reported by Blockchain.info, were approximately $5 and $29 respectively.
During the period January 1, 2021 through March 31, 2021, the price of Bitcoin remained very volatile, with a low and high exchange price
per Bitcoin of approximately $31 and $61, respectively.
The
supply of Bitcoin is finite. Once 21 million Bitcoin are generated, the network will stop producing more. Currently, there are approximately
19 million Bitcoin in circulation, or 90% of the total supply of Bitcoin. Within the Bitcoin protocol is an event referred to as Halving
where the Bitcoin reward provided upon mining a block is reduced by 50%. Halvings are scheduled to occur once every 210,000 blocks, or
roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The third Halving occurred on May 11, 2020, with
a revised reward payout of 6.25 Bitcoin per block, down from the previous reward payout of 12.5 Bitcoin per block
Given
a stable hash rate, a Halving reduces the number of new Bitcoin being generated by the network. While the effect is to limit the supply
of new coins, it has no impact on the quantity of total Bitcoin outstanding. As a result, the price of Bitcoin could rise or fall based
on overall investor and consumer demand. Should the price of Bitcoin remain unchanged after the next Halving, the Company’s revenue
would be reduced by 50%, with a much larger negative impact to profit.
Our
primary source of operating funds has been through debt and equity financing.
COVID-19
pandemic:
The
COVID-19 pandemic represents a fluid situation that presents a wide range of potential impacts of varying durations for different global
geographies, including locations where we have offices, employees, customers, vendors and other suppliers and business partners.
Like
most US-based businesses, the COVID-19 pandemic and efforts to mitigate the same began to have impacts on our business in March 2020.
By that time, much of our first fiscal quarter was completed.
In
light of broader macro-economic risks and already known impacts on certain industries, we have taken, and continue to take targeted steps
to lower our operating expenses because of the COVID-19 pandemic. We continue to monitor the impacts of COVID-19 on our operations closely
and this situation could change based on a significant number of factors that are not entirely within our control and are discussed in
this and other sections of this quarterly report on Form 10-Q.
To
date, travel restrictions and border closures have not materially impacted our ability to operate. However, if such restrictions become
more severe, they could negatively impact those activities in a way that would harm our business over the long term. Travel restrictions
impacting people can restrain our ability to operate, but at present we do not expect these restrictions on personal travel to be material
to our business operations or financial results.
Like
most companies, we have taken a range of actions with respect to how we operate to assure we comply with government restrictions and
guidelines as well as best practices to protect the health and well-being of our employees. However, the impacts of COVID-19 and efforts
to mitigate the same have remained unpredictable and it remains possible that challenges may arise in the future.
U.S.
Small Business Administration-Paycheck Protection Plan
On
April 16, 2020, we entered into a promissory note (the “PPP Loan”) with Aquesta Bank for $108 in connection with the Paycheck
Protection Program (“PPP”) offered by the U.S. Small Business Administration (the “SBA”). The PPP Loan had terms
including an interest rate of 1% per annum, with monthly installments of $6 commencing on November 1, 2021 through its maturity on April
1, 2023. The principal amount of the PPP Loan is forgiven if the loan proceeds are used to pay for payroll costs, rent and utilities
costs over the 24-week period after the loan is made. Not more than 40% of the forgiven amount may be used for non-payroll costs. In
addition, in July 2020, the Company received $3 from the SBA as a COVID-19 Economic Injury Disaster Loan Advance (the “EIDL Advance”)
On
April 1, 2021, the Company received notice of forgiveness from the SBA in the amount of $108 in relation to the PPP Loan as the Company
used all proceeds from the PPP Loan to maintain payroll and other allowable expenses. Further, pursuant to an SBA Procedural Notice in
December 2020, the EIDL Advance was also forgiven. The Company has concluded that the PPP Loan and EIDL Advance represent, in substance,
a government grant that is forgiven in its entirety. As such, in accordance with International Accounting Standards (“IAS”)
20, “Accounting for Government Grants and Disclosure of Government Assistance,” the Company has recognized the entire PPP
Loan and EIDL Advance amount of $111 as grant income, which is included in other non-operating income (expense) in the consolidated statement
of operations for the year ended December 31, 2020.
Cash
Flows
|
|
|
Three Months ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Cash provided by / (used in)
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(179
|
)
|
|
$
|
183
|
|
|
Investing activities
|
|
|
131
|
|
|
|
(381
|
)
|
|
Financing activities
|
|
|
1,000
|
|
|
|
-
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
952
|
|
|
$
|
(198
|
)
|
Operating
activities
Net
cash used in operating activities was $179 for the three months ended March 31, 2021 as compared to net cash provided by operating activities
of $183 for the three months ended March 31, 2020. Cash used in operating activities for the three months ended March 31, 2021 primarily
consisted of a net loss of $581, offset by non-cash charges of $317 which includes depreciation of $189, change in fair
value of derivative liability of $67, amortization of note discount of $62, offset by a gain from sale of property and equipment
of $1, and cash provided by a change in working capital of $85.
Net
cash provided by operating activities of $183 for the three months ended March 31, 2020 primarily consisted of a net loss of $1,324,
offset by non-cash charges of $938, which includes depreciation of $342, stock-based compensation of $220 and amortization of note discount
of $421, partially offset by a change in fair value of derivative liability of $15 and a gain from sale of property and equipment of
$30, and cash provided by a change in working capital of $569.
Investing
activities
Net
cash provided by investing activities was $131 for the three months ended March 31, 2021 which consisted of proceeds from the sale of
property and equipment.
Net
cash used in investing activities was $381 for the three months ended March 31, 2020 which consisted of purchases of property and equipment
of $343 and deposits made on property and equipment of $38.
Financing
activities
During
the three months ended March 31, 2021, cash provided by financing activities totaled $1,000 from proceeds of the issuance of a convertible
promissory note.
During
the three months ended March 31, 2020 there was no cash provided by or used in financing activities.
Off–balance
sheet arrangements
As
of March 31, 2021, we had no obligations, assets or liabilities which would be considered off–balance sheet arrangements. We do
not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as
variable interest entities, which would have been established for the purpose of facilitating off–balance sheet arrangements.