MGT CAPITAL INVESTMENTS, INC. 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 ofSeptember 30, 2021 , the Company had incurred significant operating losses since inception and continues to generate losses from operations. As ofSeptember 30, 2021 , the Company had an accumulated deficit of$420,009 . As ofSeptember 30, 2021 MGT's cash and cash equivalents were$1,257 . The Company will require additional funding to grow its operations. Further, depending upon operational profitability, the Company may also need to raise additional funding for ongoing working capital purposes. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. The Company's ability to raise additional capital is impacted by the volatility of Bitcoin mining economics and theSEC's ongoing enforcement action against our Chief Executive Officer, both of which are highly uncertain, cannot be predicted, and could have an adverse effect on the Company's business and financial condition.
Since
Such factors raise substantial doubt about the Company's ability to sustain operations for at least one year from the issuance of these unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 6
Note 3. Summary of Significant Accounting Policies
Principles of consolidation The unaudited condensed consolidated financial statements include the accounts ofMGT 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 withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to determining the estimated lives of long-lived assets, stock compensation, determining the potential impairment of long-lived assets, the fair value of conversion features, the recognition of revenue, the valuation allowance for deferred tax assets and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary. Revenue recognition Cryptocurrency mining The Company recognizes revenue under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, ("ASC 606"). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ? Step 1: Identify the contract with the customer ? Step 2: Identify the performance obligations in the contract ? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
? Variable consideration
? Constraining estimates of variable consideration
? The existence of a significant financing component in the contract
? Noncash consideration
? Consideration payable to a customer
7 Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as "solving a block") is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by theFinancial Accounting Standards Board ("FASB"), the Company may be required to change its policies, which could have an effect on the Company's consolidated financial position and results from operations. Other Revenues The Company also recognizes a royalty participation upon the sale of certain containers manufactured byBit5ive LLC ofMiami, Florida (the "Pod5ive Containers") under the terms of a five-year collaboration agreement entered
inAugust 2018 .
Lastly, the Company recognizes rental income paid by third parties wishing to
use the Company's facility in
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. 8 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 nine months endedSeptember 30, 2021 excludes 88,885,704 shares issuable upon the exercise of outstanding warrants. The computation of diluted loss per share for the nine months endedSeptember 30, 2020 excludes 66,667 unvested restricted shares and 126,373,626 shares issuable under convertible 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. 9
Fair Value Measure and Disclosures
ASC 820 "Fair Value Measurements and Disclosures" provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
? Level 1 Quoted prices in active markets for identical assets or liabilities.
? Level 2 Quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that
are not active, or other inputs that are observable, either directly or
indirectly.
? Level 3 Significant unobservable inputs that cannot be corroborated by market
data.
As of September 30, 2021 the Company had a Level 3 financial instrument related
to the derivative liability related to the issuance of warrants, and December
31, 2020 , the Company had a Level 3 financial instrument related to the
derivative liability related to the issuance of convertible notes.
Gain (Loss) on Modification/Extinguishment of Debt
In accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of the original instrument along with the recognition of a gain/loss. Additionally, under ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument along with the recognition of a gain/loss. Cash and cash equivalents The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents. The Company's combined accounts were$1,257 and$236 as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Accounts are insured by theFDIC up to$250 per financial institution. The Company has not experienced any losses in such accounts with these financial institutions. As ofSeptember 30, 2021 , andDecember 31, 2020 , the Company had$1,007 and$0 , respectively, in excess over theFDIC 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.
InAugust 2020 , the FASB issued Accounting Standards Update ("ASU") 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815 - 40)" ("ASU 2020-06"). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. The ASU is part of the FASB's simplification initiative, which aims to reduce unnecessary complexity inU.S. GAAP. The ASU's amendments are effective for fiscal years beginning afterDecember 15, 2023 , and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have
on its financial statements. 10 Derivative Instruments Derivative financial instruments are recorded in the accompanying consolidated balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the "host contract"), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying consolidated balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company's consolidated statements of operations.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset may not be recoverable. Should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.
Management's evaluation of subsequent events
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than what is described in Note 12 - Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the unaudited condensed consolidated financial
statements. Cryptocurrencies Cryptocurrencies, (including bitcoin and bitcoin cash) are included in current assets in the accompanying consolidated balance sheets. Any cryptocurrencies purchased are recorded at cost and cryptocurrencies awarded to the Company through its mining activities are accounted for in connection with the Company's revenue recognition policy disclosed in this note. Cryptocurrencies held are accounted for as intangible assets with indefinite useful lives. An intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the cryptocurrency at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. Any purchases of cryptocurrencies by the Company are included within investing activities in the accompanying consolidated statements of cash flows, while cryptocurrencies awarded to the Company through its mining activities are included within operating activities on the accompanying consolidated statements of cash flows. The sales of cryptocurrencies are included within investing activities in the accompanying consolidated statements of cash flows and any realized gains or losses from such sales are included in other income (expense) in the consolidated statements of operations. The Company accounts for its gains or losses in accordance with the first in first out (FIFO) method of accounting. Halving - The Bitcoin blockchain and the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a Proof-of-Work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term "Halving." A Halving for bitcoin occurred onMay 12, 2020 . Many factors influence the price of Bitcoin and potential increases or decreases in prices in advance of or following a future halving is unknown.
The following table presents the activities of digital currencies for the nine
months ended
Schedule of Digital Currencies
Digital currencies at December 31, 2020$ 4 Additions of digital currencies from mining 628
Payment of digital currencies to management partners - Realized gain on sale of digital currencies
(1 )
Unrealized value adjustment 4
Sale of digital currencies (635 )
Digital currencies at September 30, 2021 $ -
11
Note 4. Property, Plant, and Equipment and Other Assets
Property and equipment consisted of the following:
Schedule of Property and Equipment
As of
September 30, December 31,
2021 2020
Land $ 55 $ 57
Computer hardware and software 10 10
Bitcoin mining machines 1,023 1,206
Infrastructure 946 905
Containers 403 550
Leasehold improvements 4 4
Property and equipment, gross 2,441 2,732
Less: Accumulated depreciation (1,238 ) (860 )
Property and equipment, net $ 1,203 $ 1,872
The Company recorded depreciation expense of $169 and $548 for the three and
nine months ended September 30, 2021 , respectively. The Company recorded
depreciation expense of $244 and $902 for the three and nine months ended
September 30, 2020 , respectively. For the three and nine months ended September
30, 2021 , gains on sale of property and equipment of $254 and $264 , 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:
Schedule of Other Assets
As ofSeptember 30 ,December 31 ,
2021 2020
Security deposits $ 3 $ 123
Other Assets $ 3 $ 123
The Company has paid $120 in a security deposit related to its electrical
contract (see Note 9) and $3 related to its office lease in Raleigh, NC . During
the current year, the $120 security deposit was determined to be short-term in
nature and is now included in "Prepaid expenses and other current assets".Note 5. Notes PayableJune 2018 Note
OnJune 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 beginningAugust 1, 2018 , with an initial maturity date ofApril 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. During the year endedDecember 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 ofDecember 31, 2020 .December 2020 Note OnDecember 8, 2020 , the Company entered into a securities purchase agreement pursuant to which it issued a convertible promissory note (the "December 2020 Note") in the principal amount of$230 which is convertible, at the option of the holder, into shares of common stock at a conversion price equal to 70% of the lowest price for a share of common stock during the ten trading days immediately preceding the applicable conversion. The Company received consideration of$200 for the convertible promissory note. The note bears interest at a rate of 8% per annum and matures in twelve months. 12 The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature and a derivative liability which is accounted for separately. The Company measured the beneficial conversion feature's intrinsic value onDecember 8, 2020 and determined that the beneficial conversion feature was valued at$200 which was recorded as a debt discount, and together with the original issue discount of$30 , in the aggregate of$230 , is being amortized over the life of the loan. The Company measured the derivative liability's fair value onDecember 8, 2020 and determined that the derivative liability was valued at$555 which exceeded the intrinsic value of the beneficial conversion feature by$355 and resulted in the Company recording non-cash interest expense of$355 . OnJune 15, 2021 , the holder converted$120 of principal into 4,761,905 shares of common stock. As a result of this conversion,$172 of derivative liability was settled and$30 was recorded as loss on settlement of debt. OnJuly 27, 2021 , the holder converted the remaining$110 of principal and$11 of accrued interest into 6,673,384 shares of common stock. As a result of this conversion,$153 of derivative liability was settled and$72 was recorded as loss on settlement of debt. As ofSeptember 30, 2021 , this note had no outstanding balance.March 2021 Note
OnMarch 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"). TheMarch 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. TheMarch 2021 Note bears interest at a rate of 8% per annum and will mature in twelve months. TheMarch 2021 Note will be funded in tranches, with the initial tranche of$1,210 funded onMarch 5, 2021 for consideration of$1,000 . Six subsequent tranches (five tranches, each for$1,200 and one tranche for$6,000 ) will be funded upon the notice of effectiveness of a Registration Statement on Form S-1 covering the common stock issuable in connection with theMarch 2021 Note. Further, the final tranche 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 theMarch 2021 Note. The Company determined that the embedded conversion feature of the convertible promissory note meets the definition of a beneficial conversion feature. The Company measured the beneficial conversion feature's intrinsic value onMarch 5, 2021 and determined that the beneficial conversion feature was valued at$1,000 which was recorded as a debt discount, and together with the original issue discount of$210 , in the aggregate of$1,210 , is being amortized over the life of the loan. As a result of the Company failing to meet certain registration requirements under theMarch 2021 Note, the outstanding balance of theMarch 2021 Note was automatically increased by 5% on each ofJuly 5, 2021 andAugust 5, 2021 ,September 5, 2021 and as part of the exchange agreement an additional 5% onSeptember 30, 2021 , prior to the exchange. An additional$270 was recorded as outstanding principal, bringing the outstanding balance prior to the exchange to$1,480 .
OnSeptember 30, 2021 , the Company entered into an exchange agreement with theMarch 2021 Note lender 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 . As ofSeptember 30, 2021 , this note had no outstanding balance. 13 Derivative Liabilities
The Company's activity in its derivative liabilities was as follows for the nine
months ended
Schedule of Derivative Liability Activity
Balance of derivative liability at
2,492
Settlement upon conversion (325 )
Change in fair value of warrant liability (451 )
Change in fair value of derivative liability 79
Balance of derivative liabilities at
The Company did not have any derivative liability activity during the nine
months ended
Fluctuations in the Company's stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company's balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company's derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company's expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value. The following table summarizes the Company's derivative liabilities as ofSeptember 30, 2021 : September 30, 2021 Level 1 Level 2 Level 3 Fair Value Derivative liability - conversion feature $ - $ - $ - $ - Derivative liability - warrants 2,041 - - 2,041 Total$ 2,041 $ - $ -$ 2,041
The following table summarizes the Company's derivative liabilitiesas of
Schedule of Derivative Liability Fair Value
December 31, 2020
Level 1 Level 2 Level 3 Fair Value
Derivative liability - conversion
feature $ 246 $ - $ - $ 246
Derivative liability - warrants - -
- -
Total $ 246 $ - $ - $ 246 OnApril 16, 2020 , the Company entered into a promissory note withAquesta Bank for$108 (the "PPP Loan") in connection with the Paycheck Protection Program ("PPP") offered by theU.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 onNovember 1, 2021 through its maturity onApril 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, inJuly 2020 , the Company received$3 from the SBA as a COVID-19 Economic Injury Disaster Loan Advance (the "EIDL Advance") OnApril 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 inDecember 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 endedDecember 31, 2020 .
Notes payable consisted of the following:
As the remainder of theDecember 2020 Note was converted and theMarch 2021 Note was exchanged in the current quarter, there were no notes payable outstanding as ofSeptember 30, 2021 . Schedule of Notes Payable As of December 31, 2020 Principal Discount Net
Total notes payable-
5 14
During the three months ended
During the nine months ended
Note 6. Leases InDecember 2019 , the Company entered an office lease in connection with the relocation of its executive office toRaleigh, North Carolina . The Company accounted for this lease as an operating lease under the guidance of Topic 842. Rent expense under the new lease is$3 per month, with annual increases of 3% during the three-year term. The Company used an incremental borrowing rate of 29.91% based on the weighted average effective interest rate of its outstanding debt. InDecember 2019 , the Company recorded a Right of Use Asset of $79and a corresponding Lease Liability of$79 . The Right to Use Asset is accounted for as an operating lease and has a balance, net of amortization, of$40 as ofSeptember 30, 2021 .
Total future minimum payments required under the lease agreement are as follows:
Schedule of Future Minimum Lease Payment
Amount
Remainder of 2021 $ 38
2022 9
Total undiscounted minimum future lease payments
(8 )
Present value of operating lease liabilities $ 39
Disclosed as:
Current portion $ 30
Non-current portion 9
Total lease payment $ 39 The Company recorded rent expense of
AtSeptember 30, 2021 , the weighted average remaining lease term for operating lease was 1.3 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 Common Stock Issuances
In connection with the conversion of 115 shares of Series C Preferred Stock
during the nine months ended
In connection with the conversions of
On
Preferred Stock OnJanuary 11, 2019 , the Company's Board of Directors approved the authorization of 10,000 shares of Series B Preferred Stock with a par value of$0.001 and a Stated Value of$100 each ("Series B Preferred Shares"). The holders of the Series B Preferred Shares shall be entitled to receive, when, as, and if declared by the Board of Directors of the Company, out of funds legally available for such purpose, dividends in cash at the rate of 12% of the Stated Value per annum on each Series B Preferred Share. Such dividends shall be cumulative and shall accrue without interest from the date of issuance of the respective share of the Series B Preferred Shares. Each holder shall also be entitled to vote on all matters submitted to stockholders of the Company and shall be entitled to 55,000 votes for each Series B Preferred Share owned at the record date for the determination of stockholders entitled to vote on such matter or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. In the event of a liquidation event, any holders of the Series B Preferred Shares shall be entitled to receive, for each Series B Preferred Shares, the Stated Value in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders. The Series B Preferred Shares are not convertible into shares of the Company's common stock. No shares of Series B Preferred Shares have been issued or are outstanding. 15 OnApril 12, 2019 , the Company's Board of Directors approved the authorization of 200 Series C Preferred Shares with a par value of$0.001 ("Series C Preferred Shares"). The holders of the Series C Preferred Shares have no voting rights, receive no dividends, and are entitled to a liquidation preference equal to the stated value. At any time, the Company may redeem the Series C Preferred Shares at 1.2 times the stated value. Given the right of redemption is solely at the option of the Company, the Series C Preferred Shares are not considered mandatorily redeemable, and as such are classified in shareholders' equity on the Company's 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) 200,000shares 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. OnApril 12, 2019 , the Company sold 190 Series C Preferred Shares for$1,890 , net of issuance costs and onJuly 15, 2019 sold 10 Series C Preferred Shares for$100 . During the second and third quarters of 2019, holders converted 50 Series C Preferred Shares into 14,077,092 shares of common stock and 35 Series C Preferred Shares into 13,528,575 shares of common stock, respectively. 115 shares of Series C Preferred Stock were issued and outstanding as ofDecember 31, 2020 . OnJanuary 28, 2021 andFebruary 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 nine
months ended
Schedule of Restricted Common Stock Activity
Weighted average
Number of grant date fair
shares value
Non-vested at December 31, 2020 33,333 $ 0.04
Granted - $ -
Vested (33,333 ) $ 0.04
Non-vested at September 30, 2021 - $ -
16
For the three months ended September 30, 2021 and 2020, the Company has recorded
$0 and $1 , in employee and director stock-based compensation expense, which is a
component of general and administrative expenses in the consolidated statement
of operations.
For the nine months ended September 30, 2021 and 2020, the Company has recorded
$0 and $222 , 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
Stock options
Under the terms of the stock option agreement, all options expired on
Note 9. Warrants
On
OnSeptember 30, 2021 , the Company exchanged the outstanding principal of$1,481 and accrued interest of$60 of theMarch 2021 convertible note for 53,500,000 warrants to purchase common stock.
The following table summarized the warrant activity for the nine months ended
Schedule of Warrant Activity
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Warrants Shares Price Term ValueBalance Outstanding, December 31, 2020 - $ -
- $ -
Granted 88,885,704 0.05 5.00 -
Forfeited - - - -
Exercised - - - -
Expired - - - -
Balance Outstanding,
4.93 $ -
Exercisable, September 30, 2021 88,885,704$ 0.05
4.93 $ -
Warrant derivative liability
The exercise price and number of warrant shares issuable upon exercise of these warrants are subject to adjustment from time to time as set forth in the warrant agreements. The Company evaluated the terms and conditions of the warrant agreements and pursuant to ASC 815-15 Embedded Derivatives, were recorded as derivative liabilities on the issuance date and revalued at each reporting period. Fluctuations in the Company's stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases for each of the related derivative instruments, the value to the holder of the instrument generally increases, therefore increasing the liability on the Company's balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company's derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company's expected volatility. Increases in expected volatility would generally result in higher fair value measurement. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value. 17 The fair value of the derivative conversion features and warrant liabilities as ofSeptember 30, 2021 were calculated using the Black and Scholes method with the following assumptions: Schedule of Fair Value of the Derivative Conversion Features and Warrant Liabilities September 30, 2021 Dividend yield 0 % Expected volatility 176 % Risk free interest rate 0.98 % Contractual terms (in years) 4.43 - 4.81 Conversion/Exercise price $ 0.05 The table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months endedSeptember 30, 2021 : Schedule of Fair Value, Liabilities Measured on Unobservable Input Reconciliation Amount Balance on December 31, 2020 $ - Issuances 2,492
Change in fair value of warrant liabilities (451 )
Balance on
$ 2 , 041
Note 10. Commitments and Contingencies
Legal proceedings From time-to-time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. During the period covered by this report, there were no material changes to the description of legal proceedings set forth in our Annual Report on Form 10-K, as filed with theSEC onApril 15, 2021 .
Bitcoin Production Equipment and Operations
InAugust 2018 , the Company entered a collaborative venture withBit5ive, LLC to develop a fully contained crypto currency mining pod (the "POD5 Agreement") for a term of five years. In exchange for an initial capital investment as well as engineering and design expertise, the Company receives royalty payments fromBit5ive, LLC . During the three and nine months endedSeptember 30, 2021 , the Company received royalties and recorded revenues of$66 and$72 , respectively pursuant to the POD5 Agreement. For the three and nine months endedSeptember 30, 2020 , the Company received royalties and recognized revenue under this agreement of$0 and$3 , respectively. Electricity Contract InJune 2019 , the Company entered into a two-year contract for electric power with theCity of Lafayette, Georgia , a municipal corporation of theState of Georgia ("the City"). The Company makes monthly payments based upon electricity consumed, at a negotiated kilowatt per hour rate, inclusive of transmission charges and exclusive of state and local sales taxes. The Company is entitled to utilize a load of 10 megawatts. For each month, the Company estimates its expected electric load, and should the actual load drop below 90% of this estimate, the City reserves the right to impose a modest penalty to the hourly kilowatt rate for electricity consumed. In connection with this agreement, the Company paid a$154 security deposit, which was reduced to$120 inJune 2020 . The new amount is classified as a prepaid expense and other current asset in the Company's consolidated balance sheet asSeptember 30, 2021 .
This agreement expired onSeptember 30, 2021 , and the Company and City are operating on a month-to-month extension basis pending a new contract. There can be no assurance that that the Company and City will reach a new agreement with acceptable price and volume metrics, if at all. 18
Management Agreement Termination Liability
OnAugust 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 onAugust 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 and nine months endedSeptember 30, 2020 , the Company recognized a gain (loss) on the change in the fair value of ($12 ) and$26 , respectively, based on the change of Bitcoin price and Difficulty Rate, and along with the monthly Settlement Distributions valued at$22 , the liability was reduced to$0 as ofSeptember 30, 2020 . Based on the terms of the Settlement Agreements, Settlement Distributions terminated onSeptember 30, 2020 .
Note 11. Employee Benefit Plans
The Company maintains defined contribution benefit plans under Section 401(k) of the Internal Revenue Code covering substantially all qualified employees of the Company (the "401(k) Plan"). Under the 401(k) Plan, the Company may make discretionary contributions of up to 100% of employee contributions. During the nine months endedSeptember 30, 2021 and 2020, the Company made contributions to the 401(k) Plan of$8 and$9 , respectively. Note 12. Subsequent Events
On
Item 2. Management's discussion and analysis of financial condition and results of operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained herein that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "estimates," "should," "expect," "guidance," "project," "intend," "plan," "believe" and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 as filed with theSecurities and Exchange Commission ("SEC") onApril 15, 2021 , in addition to other public reports we filed with theSEC . The forward-looking statements set forth herein speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Executive summary
All dollar figures set forth in this Quarterly Report on Form 10-Q are in thousands, except per-share amounts.
19 Current Operations As ofSeptember 30, 2021 andNovember 11, 2021 , the Company owned 530 and 480 Antminer S17 Pro Bitcoin miners, respectively, all located at itsLaFayette, Georgia facility. As more fully described in the following paragraph, over three-quarters of these miners require various repairs to be productive. We purchased a total of 1,500 S17 Pro Bitcoin miners in the latter part of 2019 for an aggregate purchase price of approximately$2,768 , which was paid in full. All miners were purchased directly fromBitmaintech Pte. Ltd. , aSingapore limited company ("Bitmain"), with each capable of a hash rate of approximately 50 terahashes per second in computing power. FromMay 2020 throughNovember 11, 2021 , the Company sold a total of 923 of these miners, receiving aggregate gross proceeds of approximately$869 , and has scrapped 103 miners due to burning or other events that reduced their value to zero. During 2020, the Company began to suffer component issues, such as heat sinks detaching from hash boards, and failures of both power supplies and hash board temperature sensors. Although Bitmain has acknowledged manufacturing defects in various production runs of S17 Bitcoin miners, the Company was unsuccessful in obtaining any compensation from Bitmain. The manufacturing defects, combined with inadequate repair facilities has rendered approximately 400 of our remaining 480 miners in need of repair or replacement. The Company is using a third-party repair facility to repair its non-working hash boards and expects the process to be complete before yearend 2021. As ofNovember 11, 2021 , 300 of these bad hash boards (enough to power 100 miners) have been successfully repaired and approximately 200 more hash boards remain unused at our facility pending repair, replacement or sale as management may determine. In addition, a former vendor has yet to return an additional 200 hash boards entrusted to it for repair, and the Company has commenced litigation. It is not possible at the present time to estimate the total cost of repair or the overall success rate of repairs of defective hash boards. To date, we have incurred approximately$140 in costs of repairing or replacing the defective machines, and an estimated$1,200 in lost revenue. MGT's miners are housed in two modified shipping containers on property owned by the Company adjacent to an electrical substation. The entire facility, including the land and improvements, five 2500 KVA 3-phase transformers, the mining containers, and miners, are owned by MGT. We continue to explore ways to grow and maintain our current operations including but not limited to further potential equipment sales and raising capital to acquire the newest generation miners. The Company has also begun preliminary negotiations to acquire a second site approximately five miles fromLaFayette , although there can be no assurance that the parties will reach an acceptable agreement.
In addition to its self-mining operations, the Company is leasing its owned space to other Bitcoin miners. These improve utilization of the electrical infrastructure and better insulate us against the volatility of Bitcoin mining.
Critical accounting policies and estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe 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. 20 Revenue recognition Cryptocurrency mining The Company recognizes revenue under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, ("ASC 606"). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle: ? Step 1: Identify the contract with the customer ? Step 2: Identify the performance obligations in the contract ? Step 3: Determine the transaction price
? Step 4: Allocate the transaction price to the performance obligations in the
contract
? Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct" good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following: ? Variable consideration ? Constraining estimates of variable consideration ? The existence of a significant financing component in the contract ? Noncash consideration ? Consideration payable to a customer Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate. The Company has entered into digital asset mining pools by executing contracts, as amended from time to time, with the mining pool operators to provide computing power to the mining pool. The contracts are terminable at any time by either party and the Company's enforceable right to compensation only begins when the Company provides computing power to the mining pool operator. In exchange for providing computing power, the Company is entitled to a fractional share of the fixed cryptocurrency award the mining pool operator receives (less digital asset transaction fees to the mining pool operator which are recorded as a component of cost of revenues), for successfully adding a block to the blockchain. The terms of the agreement provide that neither party can dispute settlement terms after thirty-five days following settlement. The Company's fractional share is based on the proportion of computing power the Company contributed to the mining pool operator to the total computing power contributed by all mining pool participants in solving the current algorithm. Providing computing power to solve complex cryptographic algorithms in support of the Bitcoin blockchain (in a process known as "solving a block") is an output of the Company's ordinary activities. The provision of providing such computing power is the only performance obligation in the Company's contracts with mining pool operators. The transaction consideration the Company receives, if any, is noncash consideration, which the Company measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Company has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Company receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions. 21 Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by theFinancial Accounting Standards Board ("FASB"), the Company may be required to change its policies, which could have an effect on the Company's consolidated financial position and results from operations. Other Revenues The Company also recognizes a royalty participation upon the sale of certain containers manufactured byBit5ive LLC ofMiami, Florida (the "Pod5ive Containers") under the terms of a five-year collaboration agreement entered
inAugust 2018 .
Lastly, the Company recognizes rental income paid by third parties wishing to
use the Company's facility in
Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method on the various asset classes over their estimated useful lives, which range from one to ten years when placed in service. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. Deposits on property and equipment are initially classified as Other Assets and upon delivery, installation and full payment, the assets are classified as property and equipment on the consolidated balance sheet.
Impairment of long-lived assets
Long-lived assets are reviewed for impairment whenever facts or circumstances either internally or externally may suggest that the carrying value of an asset may not be recoverable, should there be an indication of impairment, we test for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. Any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss. Derivative Instruments Derivative financial instruments are recorded in the accompanying consolidated balance sheets at fair value in accordance with ASC 815. When the Company enters into a financial instrument such as a debt or equity agreement (the "host contract"), the Company assesses whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded in the accompanying consolidated balance sheets separately from the carrying value of the host contract. Subsequent changes in the estimated fair value of derivatives are recorded as a gain or loss in the Company's consolidated statements of operations. Stock-based compensation The Company recognizes compensation expense for all equity-based payments in accordance with ASC 718 "Compensation - Stock Compensation". Under fair value recognition provisions, the Company recognizes equity-based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award. 22 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
Revenues Our revenues for the three monthsSeptember 30, 2021 increased by$91 , or 60%, to$244 , as compared to$153 for the three months endedSeptember 30, 2020 . Our revenue is derived from cryptocurrency mining, including leasing excess capacity to third parties, and royalties on sales of Pod5ive Containers. The increase in revenues this period is due to an increase in hosting agreement revenue of$69 and an increase in royalties in the amount of$66 . Operating Expenses
Operating expenses for the three months endedSeptember 30, 2021 decreased by$152 , or 21%, to$577 , as compared to$729 for the three months endedSeptember 30, 2020 . The decrease in operating expenses was primarily due to decreases in general and administrative expenses of$77 and cost of revenue of$75 . The decrease in general and administrative expenses of$77 or 20%, to$313 , as compared to$390 for the three months endedSeptember 30, 2020 , was primarily due to a decrease in salary expense of$36 , and a decrease in legal and professional fees of$39 . The decrease in cost of revenue of$75 or 22% to$264 , as compared to$339 of the three months endedSeptember 30, 2020 was primarily due to the reimbursement of electricity costs of$77 . 23 Other Income and Expense
For the three months endedSeptember 30, 2021 , non-operating expense of$41 consisted primarily of accretion of debt discount of$256 , loss on settlement of debt of$511 , other expense of$306 , change in fair value of derivative liability of$46 and interest expense of$302 , partially offset by change in fair value of warrants derivative liability of$451 , gain on settlement of payables of$675 and a gain on sale of property and equipment of$254 . During the comparable period endedSeptember 30, 2020 , non-operating expense of$16 consisted of loss on sale of property and equipment of$123 , a loss from the change in the fair value of the liability associated with the termination of the management agreements of$12 offset by other income of$119 .
Nine months ended
Revenues
Our revenues for the nine months endedSeptember 30, 2021 decreased by$509 to$781 as compared to$1,290 for the nine months endedSeptember 30, 2020 . The decrease in revenues is a result of a lower number of Bitcoins mined resulting from fewer miners in operation and a higher network difficulty rate; the decrease was partially offset by increased Bitcoin prices and by increases in revenue from hosting activities and royalties. Operating Expenses Operating expenses for the nine months endedSeptember 30, 2021 decreased by$1,521 , or 43%, to$1,998 as compared to$3,519 for the nine months endedSeptember 30, 2020 . The decrease in operating expenses was due to decreases in general and administrative expenses of$796 and cost of revenue of$725 . The decrease in general and administrative expenses of$796 or 39% to$1,247 as compared to$2,043 for the nine months endedSeptember 30, 2020 , was primarily due to decreases in legal and professional fees of$424 and decrease in salary expense of$349 , and costs related to the Company's mining facility inGeorgia of$192 . The decrease in cost of revenue of$725 , or 49%, to$751 , as compared to$1,476 for the nine months endedSeptember 30, 2020 is due primarily to lower electricity usage of$288 from fewer bitcoin miners in operation, reduced depreciation of$355 and the reimbursement of electricity costs of$77 . Other Income and Expense For the nine months endedSeptember 30, 2021 , non-operating expenses of$403 consisted primarily of loss on settlement of debt of$541 , other expense of$306 , accretion of debt discount of$526 , change in fair value of derivative of$79 , and interest expense of$341 , partially offset by gain on settlement of payables of$675 , a gain on sale of property and equipment of$264 , and change of fair value of warrants liability of$451 . During the comparable period endedSeptember 30, 2020 , non-operating expense of$1,103 was comprised of accretion of debt discount of$877 , a loss on sale of property and equipment of$381 , partially offset by other income of$119 , a gain from the change in the fair value of the liability associated with the termination of the management agreements of$26 and interest income of$10 .
Liquidity and capital resources
Sources of Liquidity We have historically financed our business through the sale of debt and equity interests. We have incurred significant operating losses since inception and continue to generate losses from operations and as ofSeptember 30, 2021 have an accumulated deficit of$420,009 . AtSeptember 30, 2021 , our cash and cash equivalents were$1,257 , and our working capital deficit was$824 . InJanuary 2020 , management completed the consolidation of its activities in a Company-owned and managed facility, after having terminated all management agreements with outside investors as well as all third-party hosting arrangements in 2019. The Company will need to raise additional capital to fund operating losses and grow its operations. There can be no assurance however that the Company will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. The Company's ability to raise additional capital will also be impacted by the volatility of Bitcoin and the ongoingSEC enforcement action against our Chief Executive Officer, both of which are highly uncertain, cannot be predicted and could have an adverse effect on the Company's business and financial condition. The issuance of any additional shares of Common Stock, preferred stock or convertible securities could be substantially dilutive to our shareholders. Such factors raise substantial doubt about the Company's ability to sustain operations for at least one year from the issuance of these unaudited condensed 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. 24 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 endingDecember 31, 2020 , as reported by Blockchain.info, were approximately$5 and$29 respectively. During the periodJanuary 1, 2021 throughSeptember 30, 2021 , the price of Bitcoin remained very volatile, with a low and high exchange price per Bitcoin of approximately$29 and$63 , respectively.
The supply of Bitcoin is finite. Once 21 million Bitcoin are generated, the network will stop producing more. Currently, there are approximately 19 million Bitcoin in circulation, or 90% of the total supply of Bitcoin. Within the Bitcoin protocol is an event referred to as Halving where the Bitcoin reward provided upon mining a block is reduced by 50%. Halvings are scheduled to occur once every 210,000 blocks, or roughly every four years, until the maximum supply of 21 million Bitcoin is reached. The third Halving occurred onMay 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 inMarch 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. 25
OnApril 16, 2020 , we entered into a promissory note (the "PPP Loan") withAquesta Bank for$108 in connection with the Paycheck Protection Program ("PPP") offered by theU.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 onNovember 1, 2021 through its maturity onApril 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, inJuly 2020 , the Company received$3 from the SBA as a COVID-19 Economic Injury Disaster Loan Advance (the "EIDL Advance") OnApril 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 inDecember 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 endedDecember 31, 2020 .
Cash Flows
Nine Months ended
September 30,
2021 2020
Cash provided by / (used in)
Operating activities $ (1,354 ) $ (381 )
Investing activities 385 60
Financing activities 1,990 111
Net increase (decrease) in cash and cash equivalents
Operating activities Net cash used in operating activities was$1,354 for the nine months endedSeptember 30, 2021 as compared to net cash used in operating activities of$381 for the nine months endedSeptember 30, 2020 . Cash used in operating activities for the nine months endedSeptember 30, 2021 primarily consisted of a net loss of$1,620 , offset by non-cash charges of$880 which includes depreciation of$548 , accretion of debt discount of$526 , loss on settlement of debt of$541 , non-operating expenses of$306 , non-cash interest expense of$270 , offset by the change in fair value of derivative liability of$372 , gain on settlement of payables of$675 and a gain from sale of property and equipment of$264 , and cash used in working capital of$614 . Net cash used in operating activities of$381 for the nine months endedSeptember 30, 2020 primarily consisted of a net loss of$3,332 , offset by non-cash charges of$2,385 which includes depreciation of$902 , stock-based compensation of$222 , accretion of debt discount of$877 , a loss from sale of property and equipment of$410 , offset by the change in the fair value of the liability associated with the termination of the management agreements of$26 , and cash provided by a change in working capital of$566 . 26 Investing activities Net cash provided by investing activities was$385 for the nine months endedSeptember 30, 2021 which consisted of proceeds from the sale of property and equipment of$426 , offset by purchases of$41 .
Net cash provided by investing activities was
Financing activities
During the nine months ended
During the nine months ended
Off-balance sheet arrangements
As ofSeptember 30, 2021 , we had no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
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